The possibility for long-term profit is a crucial consideration to consider when deciding whether or not to invest in an energy project. To find an answer to this question, the levelized cost of energy (LCOE) must be calculated. LCOE takes into account not only the initial expenditure, but also the ongoing costs associated with a project.
- What is Levelized Cost of Energy (LCOE)?
- What exactly does LCOE do?
- How do you calculate the LCOE (Levelized Cost of Energy)?
- A comparison of the LCOE (Levelized Cost of Energy) of solar energy and others
What is Levelized Cost of Energy (LCOE)?
The cost of the energy generated by a solar system during its lifetime is evaluated by its levelized cost of energy (LCOE). This is an important factor in the age of grid parity for renewable energy. The LCOE was developed as a timer until renewables could stand on their own in merchant markets.
Simply said, the better your whole system, the cheaper your levelized cost of energy (LCOE).
What exactly does LCOE do?
Comparison indicator for investors
LCOE evaluations can help inform large and small strategic choices. Because it acts as a comparative indicator, the LCOE is a decision element for investors. Investors are expected to submit answers to a wide range of difficult issues. They must make numerous options, one of which is whether to use high-quality, cutting-edge technology items or less expensive alternatives. They can use LCOE to make a decision.
Indicator of minimum revenues
During the early assessment phase, an investor or developer must first determine the viability of a project. Second, it allows you to calculate how much money you'll need to recoup your investment. As a result, it acts as a high-level overview of the required sales plan.
Indicator of the costs of different generation technologies
The Life Cycle Cost of Energy (LCOE) method aids in evaluating projects and energy sources to identify which are the most cost-effective.The calculation enables project developers and financiers to evaluate power options such as solar, wind, nuclear, gas, and coal while taking project lifespans, capital costs, fuel costs, capacity size, and risk into account.
It provides policymakers with a worldwide view on the relative costs of various generation methods. This type of study is required for subsidy allocation decisions. For example, governments made significant investments in renewable energy technology while LCOE costs were high, with the goal of supporting the development of specialized technologies.
How do you calculate the LCOE (Levelized Cost of Energy)?
To calculate LCOE, we add the plant's capital and operational expenses and divide the acquired energy production by the estimated lifetime.
CAPEX, also known as capital expenditure, refers to the initial investment necessary for a solar system, which includes component, labor, and other additional costs.
Operating expenses, often known as OPEX, include a variety of costs involved with a company's day-to-day operations. These expenses are often related to utilization, maintenance, taxes, and other similar expenditures.
Acquired energy production (AEP) is the amount of energy that a system may acquire and use during its operational lifespan.
The entire price will cover all important components such as the original investment, ongoing maintenance, and gasoline. The discount rate will be examined, as will any applicable subsidies or tax incentives. In this context, "output" refers to the entire amount of power produced by the facility. A solar energy system has a normal operational life of 25-30 years.
A typical levelized electricity cost for a solar photovoltaic system might be as follows:
Initial investment: $65,000
Tax break: $12,000
The total cost is $59,000.
Annual electricity output average: 62,500kWh
PV equipment warranty period: 30 years
Total electricity generated: 1,875,000kWh
$59,000 / 1,875,000 = $0.03147/kWh LCOE
Profitability is determined by selling generated power for more than $0.03147/kWh. However, if the power price is less than $0.03147/kWh, the project will lose money throughout its 30-year lifespan.
A comparison of the LCOE ( Levelized Cost of Energy) of solar energy and others
The levelized cost of electricity (LCOE) from utility-scale PV is already competitive when compared to alternative energy sources such as wind, coal, and gas.This points to ongoing and healthy growth in the PV industry.
The LCOE range for utility-scale PV in 2021 was fairly narrow, ranging between $30/MWh and $41/MWh. In 2023, it ranged from $24/MWh to $96/MWh. Despite the increase, the LCOE remains the lowest of any similar alternative. According to Lazard, peaking gas costs between $115 and $221 per megawatt-hour, nuclear costs between $141 and $221 per megawatt-hour, coal costs between $68 and $166 per megawatt-hour, and gas combined cycle costs between $39 and $101 per megawatt-hour.
So, what exactly does LCOE stand for? To earn a profit, gas and coal plants must charge more for electricity than solar and wind farms.
The cost of gas, coal, or nuclear fuel, as well as the cost of operations and maintenance (O&M), all have a role in the overall cost of traditional fossil fuel and nuclear power plants. Renewable energy solutions reduce operation and maintenance expenses while also saving money on gasoline. Because the sun and wind are free, renewable energy sources have no fixed expenses. Solar maintenance costs have fallen in recent years due to advancements in inverter reliability, remote monitoring technology, and cleaner solar panels.
As a result of the present energy crisis, the cost of oil and gasoline has risen, making renewables even more competitive in terms of LCOE. The levelized cost of energy (LCOE) for fossil-fuel power plants has grown, while renewable energy's LCOE has remained stable. As a result, rising power rates favor renewable energy generators more than fossil fuel generators, who must also account for rising fuel costs.
Overall, the levelized cost of electricity (LCOE) is an important indicator for determining the financial feasibility of a photovoltaic (PV) system and the effectiveness of its constituent components. Nonetheless, the constraints of the Levelized Cost of Electricity (LCOE) urge care when using this statistic primarily for investment decision-making.
Maysun Solar has been producing high-quality photovoltaic modules since 2008. Choose from a wide range of half-cut, MBB, IBC, and Shingled solar panels in full black, black frame, silver, and glass-glass finishes. These panels offer great performance as well as stylish styles that may be readily integrated into any building. Maysun Solar has established offices, warehouses, and long-term agreements with top installers in numerous countries. Please contact us if you have any queries about PV or would want the most recent module quotes. We are eager to assist you.
Solarity. (2022, April 7).What does LCOE mean? Solarity.
Kanellakopoulou, M. (2022). Levelised Cost of Energy (LCOE) – An overview. Pexapark.
Santos, B. (2023, April 14). Average solar LCOE increases for first time this year. Pv Magazine International.
Rodríguez, L. (2022, August 17). What is LCOE and why is it important?
You may also like: