LCOE Explained for Solar Projects

LCOE, or levelized cost of electricity, estimates how much each lifecycle kWh costs after considering investment, operating cost, and production.

Basic idea

For a solar project, LCOE divides total lifecycle cost by total lifecycle generation. Many models discount both future costs and future electricity production to present value. This lets the user compare projects with different lifetimes, cost timing, degradation rates, and production profiles.

What belongs in cost

Cost should include the initial system investment and expected operating expenses. Depending on the model purpose, it may also include land rent, insurance, replacement parts, inverter replacement, taxes, interconnection fees, and debt service. PV Yield uses a simplified annual operating cost and tax assumption for screening.

What belongs in generation

Generation should reflect irradiation, module capacity, orientation, tilt, loss assumptions, and degradation. A project with low installation cost can still have a weak LCOE if shading, soiling, equipment downtime, or poor orientation reduces output.

How LCOE differs from payback

Payback asks how many years it takes to recover the investment. LCOE asks how expensive the generated electricity is across the project life. A project with a longer payback can still have a reasonable LCOE if it produces stable electricity for many years after payback.

When LCOE is useful

• Comparing two solar designs with different cost and generation.
• Checking whether a high-efficiency module is worth a higher price.
• Comparing rooftop solar cost to grid retail electricity price.
• Understanding how degradation affects lifecycle economics.

LCOE is not the same as bill savings. A solar project can have low LCOE but poor owner economics if export prices are low and self-consumption is small.