1: Levelized Cost of Energy

Calculation
Methodology and Sensitivity

What is LCOE?

Levelized Cost of Energy (LCOE) is the constant unit cost (per kWh
or MWh) of a payment stream that has the same present value as the
total cost of building and operating a generating plant over its life.
Initial Investment and Annual Costs
$150

$1,000,000
LCOE

$100

20

18

16

14

12

10

$50
6

$0
4

$75

$250,000

LCOE ($/MWh)

$500,000

Year
-2

$125

Equity Investment
Debt Service
Operating Expenses
Taxes
LCOE

Annual Cost ($)

$750,000

Why Use LCOE?

Very useful in comparing technologies with different

operating characteristics
LCOE Range based on Capacity Factor Range
Solar Thermal

Solar PV

Wind - Offshore Deep

Typically, LCOEs are

calculated over 20 to 40
year life, and are given
in the units of currency
per kWh or MWh

Wind - Offshore
Shallow
Wind - Onshore
0

-3

0.5
1
1.5
Levelized Cost of Energy (RMB/kWh)

Different Ways to Calculate LCOE.

Simplified LCOE Approach
1. Using a discount rate i, the capital
recovery factor (CRF) is:
i(1 + i) n

CRF =

[(1 + i) n]-1
2.

The sLCOE is the minimum price at

which energy must be sold for an
energy project to break even (or
have present value of zero)
sLCOE =
[(capital cost * CRF)+ fixed O&M cost]
(8.76 * capacity factor)

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Discount rate

Used to convert future

costs to present value.

Typically based on market

interest rates or weighted
cost of capital (WACC),
with or without adjustments
for risk and uncertainty.

Can vary depending on the

entity.

Can be Real or Nominal

+ (variable O&M cost * output )

Different Ways to Calculate LCOE.

Cost of Generation Calculator
All inputs are in blue.

T echnology Assumptions
Project Capacity (MW)
Capital Cost ($/kW)
Fixed O&M ($/kW)
Fixed O&M Escalation
Variable O&M ($/MWh)
Variable O&M Escalation
Fuel Cost ($/MBtu)
Fuel Cost Escalation
Heat Rate (Btu/kWh)
Capacity Factor
Misc Revenue ($/MWh)
Misc Escalation
Degradation
Year

3,066
$139.35
$0.00
$427,249

3,035
$139.35
$0.00
$422,976

3,005
$139.35
$0.00
$418,746

2,975
$139.35
$0.00
$414,559

2,945
$139.35
$0.00
$410,413

$50,000
$0
$0
$50,000

$51,250
$0
$0
$51,250

$52,531
$0
$0
$52,531

$53,845
$0
$0
$53,845

$55,191
$0
$0
$55,191

$80,000
$36,830
$116,830

$77,054
$39,776
$116,830

$73,872
$42,958
$116,830

$70,435
$46,395
$116,830

$66,723
$50,106
$116,830

5
7
15
20

$0
$0
$0
$75,000
$222,249
$0
$111,124

$0
$0
$0
$144,380
$150,292
$0
$75,146

$0
$0
$0
$133,540
$158,804
$0
$79,402

$0
$0
$0
$123,540
$166,739
$0
$83,370

$0
$0
$0
$114,260
$174,239
$0
$87,120

(1,000,000)

149,295

179,750

169,984

160,515

151,273

Fixed O&M
Variable O&M
Fuel Cost
Operating Expenses
Interest Payment
Principal Payment
Debt Service
Tax Depreciation
Tax Depreciation
Tax Depreciation
Tax Depreciation
Taxable Income
PTC
T axes

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Financial Model Approach

50%
8.00%
15
25
0%
0%
0%
100%
0.0%
50%
14.00%
9.000%

Annual Generation (MW h)

LCOE
Misc Revenue
T otal Operating Revenue

Total

Financial/Economic Asumptions
Debt Percentage
Debt Rate
Debt Term (years)
Economic Life (years)
Percent 5-year MACRS
Percent 7-year MACRS
Percent 15-year MACRS
Percent 20-year MACRS
Energy Price Escalation
Tax Rate
Cost of Equity
Discount Rate

1
$2,000
$50
2.5%
$0
2.5%
$0
2.5%
0
35%
$0
2.5%
1%

N
A
IN L
F
LE ODE
P
AM M

AL
I
C

Financial model that solves for

the required revenue (LCOE) to
achieve a certain internal rate of
return (IRR).

Captures impacts of tax

incentives and depreciation.

Captures more complex

financing assumptions and
revenue requirements for an IPP

Real or Nominal LCOE?

1.

Real LCOE (2010 RMB/kWh) Constant stream of values denoted in todays

currency (Real)

2.

Real LCOE (with Inflation) (RMB/kWh) Nominal path that maintains Real
value constant (Nominal)

3.

Nominal LCOE (RMB/kWh) Constant stream of values in nominal currency.

(Nominal)
Nominal vs. Real LCOE
0.90

Nominal (RMB/kWh)

0.80

0.8

0.70

0.7
3.) Nominal LCOE

0.60

0.50

0.6

0.5
1.) Real LCOE
(2010RMB)

0.40
Year
-6

20

19

18

17

16

15

14

13

12

11

10

0.4

Real (2010RMB/kWh)

0.9
2.) Real LCOE
with Inflation
(Nominal)

Inflation = 2.5%
Discount Rate = 10%

Real or Nominal LCOE?

Real LCOE

Removes effects of inflation

associated with O&M and fuel
costs

Uses Real Discount Rate

Analogous to the Year 1 price of

a PPA/FIT that increases with
inflation each year.

Preferred by government/policy
makers

Nominal LCOE

Incorporates assumptions
regarding inflation

Uses Nominal Discount Rate

Analogous to a PPA/FIT price

that is the constant each year or
flat across economic life of
project.

Preferred by developers/project
owners

Example: Real LCOE = 0.50 RMB/kWh and Nominal LCOE = 0.59 RMB/kWh
With 2.5% inflation, Nominal LCOE is 18% higher than Real LCOE

Either LCOE is acceptable, but must be clearly communicated.

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General Inputs to LCOE Calculation

Determine representative size of

projects and locations to
estimate remaining projectrelated inputs

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For example, 10 MW wind farm

vs. 200 MW wind farm

Establish boundaries of system

Capital, O&M, fuel cost

Performance/resource
characteristics

Cost of capital (debt/equity) and

discount rate

Taxes, depreciation and tax

incentives (if applicable)

Inflation (optional)

Transmission/integration costs
(optional)

Externality costs (optional)

Making Good Assumptions

Use current data (preferably within the past year)

Take the median of data sources

Apply method of developing assumptions consistently

across technologies

Survey market participants

Reflect tax conditions and incentives in the country

Discuss and agree upon assumptions through stakeholder

meetings

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Sample Base Case Assumptions and LCOE

Capital Cost
O&M
(RMB/kW) (RMB/kW-yr)

Capacity
Factor

LCOE
(RMB/kWh)

Onshore
Wind

9,000

250

40%

0.54

Solar PV

20,000

200

15%

1.72

Solar CSP

30,000

300

28%

1.66

Economic Life

20 years

Discount Rate

10%

Tax Life for

Depreciation

20 years

Tax Rate

30%

WACC

8%

O&M
Escalation

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2.5%

Sensitivity of LCOE to Assumptions

LCOE of renewable energy can be highly sensitive to input

assumptions

Different assumptions can change LCOE by 50% or more.

Some of the key assumptions are:

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Capacity factor (performance)

Weighted Cost of capital (WACC)

Capital cost

Important to select assumptions in a consistent manner

across technologies

Sensitivity of LCOE (Busbar Cost) to Assumptions

for Wind
Onshore Wind LCOE Sensitivity
Base Case
Absolute LCOE (RMB/kWh)
0.3

0.4

Capacity Factor

20%

Costequity-WACC

0.7

0.8

40%

12%

8%

7,200 9,000 10,800

O&M (RMB/kW)

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0.6

30%

6%

Capital Cost (RMB/MW)

-0.2

0.5

200
-0.1

250

300

0.0
0.1
LCOE relative to Base Case (RMB/kWh)

Low

0.2

High

0.3

Sensitivity of LCOE (Busbar Cost) to Assumptions

for Solar PV
Solar PV LCOE Sensitivity
Absolute LCOE (RMB/kWh)

Base Case
1.3

1.4

1.5

1.6

Cost equity-WACC

6%

Capital Cost (RMB/MW)

16,000

18%

O&M (RMB/kW)

160

200

-0.2

1.9

-0.1

0.0

2.0

2.1

2.2

2.3

12%

24,000

20,000

16%

-0.3

1.8

8%

Capacity Factor

-0.4

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1.7

20%

240

Low

High

0.1
0.2
0.3
0.4
0.5
LCOE relative to Base Case (RMB/MWh)

0.6

Sensitivity of LCOE (Busbar Cost) to Assumptions

for Solar CSP
Solar CSP LCOE Sensitivity
Base Case
Absolute LCOE (RMB/kWh)
1.3

1.4

1.5

1.6

Costequity-WACC

6%

Capital Cost (RMB/MW)

24,000

1.8

30,000

26% 28% 30%

O&M (RMB/kW)

240 300 360

-0.3

-0.2

1.9

2.0

2.1

2.2

2.3

2.4

12%

8%

Capacity Factor

-0.4

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1.7

36,000

-0.1
0.0
0.1
0.2
0.3
0.4
LCOE relative to Base Case (RMB/kWh)

Low

0.5

High

0.6

0.7

Cost vs. Value Concepts for LCOE

Busbar Cost

+
Transmission Cost
+
Integration Cost
Capacity Value
Energy Value

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Busbar Cost

Delivered Cost

Adjusted Delivered
Cost

Summary

LCOE is the constant unit cost (per kWh or MWh) of a

payment stream that has the same present value as the
total cost of a generating plant over its life.

There are multiple ways to calculate LCOE, depending on

the level of financial detail

LCOE can be Real or Nominal

Establishing boundaries of each system for assumptions is

important

Assumptions can have significant impact on the resulting

LCOE, so consistent assumptions across technologies are
important

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