Levelized Cost of Electricity (LCOE) is a valuable metric. LCOE allocates the costs of an energy plant across its useful life, to give an effective price per each unit of energy (kWh). In other words, it’s like averaging the up-front costs across production over a long period of time. The nice thing about LCOE is that it gives a single metric that can be used to compare different types of systems – from renewable projects, where the up-front capital cost is high and the "fuel" cost is near zero, to a natural gas plant, where the capital cost is lower, but the fuel cost is higher. And it can even be compared against the price you pay on your utility bill ($/kWh).
However, LCOE is also feared – mainly because it can be complex. I’m going to try to change that here.
Instead of just giving a single overview of an LCOE model, I’m going to show a few different levels of detail, so you can matches the level of model complexity with what you’re trying to accomplish. You can follow along by downloading the attached document, “Simple LCOE Model."
Level 1: Back of the Envelope: This is minimum amount of analysis needed to get to a number that even looks like an LCOE. You only need four numbers:
Level 2 – If you want to include all assumptions that are significant, you need three more:
Level 3 – Three more variables will make you sound more credible when talking to people in the industry:
If you want to learn more about each of the assumptions, here is a summary of typical ranges, with further reading where possible:
|Metric||Low value||Average value||High value||Further information|
|System Cost ($/watt)||Residential: $5.00
|Watt-hours per watt-peak||1,400-1,600||1,700 – 1,900||2,000-2,200||http://rredc.nrel.gov/solar/old_data/nsrdb/redbook/|
|Time horizon||NA||20 years||25 years|
|De-rating||77%||80-82%||85%||PVWatts model from NREL: http://rredc.nrel.gov/solar/calculators/PVWATTS/version1/derate.cgi|
|Discount rate||7-8%||9-12%||13-15%||Ask a banker|
|Incentives||30% Federal Tax Credit||DSIRE (Database of State Incentives for Renewable Energy): http://www.dsireusa.org/|
|Inverter replacement year||7||10||15|
|Inverter replacement cost ($/watt)||$0.30||$0.35-$0.45||$0.55|
Finally, keep in mind that the variables above still leave out a ton of complexity. The system cost depends on hundreds of design decisions; the solar module’s production depends on its tilt angle and temperature (among other things). But if you’re starting from scratch, this is a good place to start.
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