What is Levelized Cost of Energy (LCOE)?

The levelized cost of energy or LCOE is a term that describes the cost of the power produced by solar over a period of time, typically the warranted life of the system. By purchasing solar you are essentially creating a hedge against rising utility costs by fixing the per kWh rate at a known cost.

Another term used to describe LCOE is the kWh price over the life the system.

A simple way to look at LCOE is that it is a measure of the cost of power. Essentially, you're just breaking down the cost of solar into the same terms that you pay on your electric bill every month. i.e. cost per kWh.

How is it calculated?

Calculating LCOE requires knowing two key variables:

1. System cost, this should include financing costs and deduct any incentives received, such as tax credits and deprecation. 

2. The lifespan of the project, which we call the comparable value.

First, figure out your Net System Cost:

• Total System Cost: $125,000 (50 kW solar system)

• Less Tax Benefits: -$75,000

NET SYSTEM COST: $50,000

Next, figure out the Total kWh Production over the period you wish to calculate LCOE for. We'll use the 25 year warranty period:

kWh Produced Annually less degraded production x 25 Years (NOTE: All of the estimates we create include degradation over the warranted period)

62,500 kWh / Year

62,500 * 25 Years = 1,562,500 TOTAL kWh PRODUCED

Last, figure LCOE by using the two figures above. Divide the NET SYSTEM COST by the TOTAL kWh PRODUCED:

$50,000 (net cost) / 1,562,500 (total kWh production) = .032 per kWh