Levelized Cost of Energy (LCOE)

The LCOE is the total cost of installing and operating a project expressed in dollars per kilowatt-hour of electricity generated by the system over its life. It accounts for:

Installation costs

Financing costs

Taxes

Operation and maintenance costs

Salvage value

Incentives

Revenue requirements (for utility financing options only)

Quantity of electricity the system generates over its life

The LCOE in SAM depends on the following assumptions:

The quantity of electricity generated by the system for each year in the analysis period, shown as Energy in the cash flow table. The performance model calculates the annual energy for Year one based on the hourly simulations. SAM adjusts this value by the factors that you specify on the Performance Adjustment page.

Installation and operating costs on the System Costs page

Financial assumptions on the Financing page

Incentives on the Incentives page

Depreciation assumptions on the Depreciation page

To use the LCOE for evaluating project options, it must be comparable to cost per energy values for alternative options:

For residential or commercial projects, SAM assumes that the renewable energy system meets all or part of a building's electric load, so the LCOE is comparable to a $/kWh retail electricity rate representing cost of the alternative option to meet all the building's load by purchasing electricity from the grid at retail rates. To be economically viable, the project's LCOE must be equal to or less than the average retail electric rate.

For utility (and commercial PPA) projects, SAM assumes that the project sells all of the electricity generated by the system at a price negotiated through a power purchase agreement (PPA). For these projects the LCOE is comparable to the power price. A financially viable project must have an LCOE that is equal to or greater than the available PPA price to cover project costs and meet internal rate of return requirements.

Real and Nominal LCOE

For all financing options, SAM calculates both a real and nominal LCOE value. The real LCOE is a constant dollar, inflation-adjusted value. The nominal LCOE is a current dollar value.

The choice of real or nominal LCOE depends on the analysis. Real (constant) dollars may be appropriate for long-term analyses to account for many years of inflation over the project life, while nominal (current) dollars may be more appropriate for short-term analyses.

Some industries prefer to use one form over the other. For example, when discussing LCOE for parabolic trough projects, analysts have tended to use the nominal LCOE (see Current and Future Costs for Parabolic Trough and Power Tower Systems in the US Market), while the U.S. Department of Energy has used the real LCOE in its comparative analysis of photovoltaic project costs (Solar Energy Technologies Program Multi-Year Program Plan 2007-2011).

Be sure to use the same form of the LCOE when comparing costs for different alternatives: Never compare a real LCOE of one alternative with a nominal LCOE of another.

LCOE Without Incentives

SAM displays a value labeled "LCOE (real-w/o incentives)" on some graphs. This value of the LCOE is calculated in the same way as the other forms of the LCOE described below, but excludes any tax credits or cash incentives that you specify on the Incentives page.

If you remove all incentives from your analysis, then the LCOE values with and without incentives are identical.

Additional Resources

You can explore the LCOE methodology for the residential, commercial, commercial PPA, and utility IPP financing options by downloading the spreadsheets from the SAM website at https://sam.nrel.gov/financial, or from SAM's Help menu. Each of the five spreadsheets duplicates SAM's cash flow equations using Excel formulas.

For more information about the levelized cost of energy and other economic metrics for renewable energy projects, see Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies. (Short 1995) http://www.nrel.gov/docs/legosti/old/5173.pdf.

Click to expand or collapseLCOE Definition

This description of the LCOE uses the vocabulary and equations described in the Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies. (Short 1995) http://www.nrel.gov/docs/legosti/old/5173.pdf.

By definition, a project's equivalent annual cost Cn is the product of the LCOE and the quantity of electricity generated by the system in that year, Qn:

Cn = Qn × LCOE

Project costs Cn include installation, operation and maintenance, financial costs and fees, and taxes, and also account for incentives and salvage value. SAM's performance model calculates the annual energy Qn for n = 1. For n > 1, Qn decreases from year to year if the Year-to-year decline in output value on the Performance Adjustment page is greater than zero.

That equation must be valid for all years in the project's life, so to calculate the LCOE, we must first calculate the total lifecycle cost, TLCC, which is the present value of project costs over its life N discounted at rate d:

EQ_LCOEDef-tlcc

The following equation shows the relationship between the LCOE and TLCC:

EQ_LCOEDef-definition

 

Combining the two equations above gives:

EQ_LCOEDef-equate

Notes.
 
The analysis period on the Financing page is equivalent to the project lifetime N.
 
The annual cost Cn includes the effect of inflation, so the nominal discount rate is the correct form to use on the right side of the equation.
 
The correct form of the discount rate on the left side of the equation depends on whether the LCOE is a real or nominal value.
 
The summation in the left hand term begins at n = 1, which is the first year that the system produces energy. The right hand summation begins at n = 0 to include investment costs in the calculation.

Solving for LCOE gives:

EQ_LCOEDef-lcoe

Note. This equation makes it appear that the energy term in the denominator is discounted. That is a result of the algebraic solution of the equation, not an indication of the physical performance of the system.

Click to expand or collapseLCOE for Residential and Commercial Financing

For a project using either the residential or commercial (except Commercial PPA) financing option, the LCOE is the cost of financing, installing, and operating a system per unit of electricity it generates over the analysis period, accounting for incentives and salvage value. (This differs from the LCOE for commercial PPA and utility financing options, which includes a margin for profits defined by the internal rate of return (IRR) that is not available for residential or commercial projects.)

Note. For the Residential and Commercial financing options, the retail electricity prices from the Utility Rate page do not affect the LCOE. The LCOE is a measure of the cost of installing and operating the system, not of the value of electricity purchases avoided by the system. The project NPV is a measure of both the project costs and energy value.

For residential and commercial projects, you can compare a project's LCOE to the electricity rate that the residence or commercial entity would pay to an electric service provider if the project were not installed.

For the real LCOE, the real discount rate appears in the denominator's total energy output term:

EQ_LCOE-real-residential-commercial

Similarly, for the nominal LCOE, the nominal discount rate appears in the denominator's total energy output term:

EQ_LCOE-nominal-residential-commercial

Where,

Qn (kWh)

Electricity generated by the system in year n shown in the Energy row in the project cash flow. The performance model calculates this value based on weather data and system performance parameters. It includes the effect of factors that you specify on the Performance Adjustment page.

N

Analysis period in years as defined on the Financing page

C0

The project's initial cost, shown in the Year zero column of the After Tax Cost row of the cash flow table.

CAfterTax

The annual project cost in Year n, shown in the After Tax Cost row of the cash flow table.

Note. The "After Tax Cost" values in the cash flow table are different from the "After Tax Cashflow" values used in the project NPV equation. The cost does not include the value of electricity generated by the system.

dreal

The real discount rate defined on the Financing page. This is the discount rate without inflation.  See LCOE Definition for an explanation of discount rates in the LCOE calculation.

dnominal

The nominal discount rate shown on the Financing page. This is the discount rate with inflation.

Click to expand or collapseLCOE for Utility and Commercial PPA Financing

For a project with the commercial PPA or one of the utility financing options, the LCOE represents the amount that the project must receive for each unit of electricity it sells to cover financing, installation, and operating costs, and to meet the financial constraints on the Financing page, accounting for salvage value and incentives.

SAM assumes that these projects are power generation projects installed on the utility side of consumer power meters. The projects sell electricity at a price negotiated by the project and electricity purchaser.

For these projects, the LCOE is effectively a levelized price of electricity because it is based on the present worth of the project's revenue stream, which you can see in the project cash flow as either

Energy Value for

Commercial PPA,

Utility IPP,

or Total PPA Revenue for

Single Owner,

All Equity Partnership Flip,

Leveraged Partnership Flip,

Sale Leaseback.

The following table shows the relationship between PPA price, nominal LCOE, and real LCOE. It is for a 64 MW sample wind farm that generates 176 GWh of electricity in its first year with a total installed cost of $2,000/kW and a 2.2 cent/kWh production tax credit. The shades of color in the table show the relative magnitude of the values (higher values are darker than lower values):

IMG_Financing-LCOErealnomPPA

The table shows the following:

When the inflation rate and PPA price escalation rate are both zero, the PPA Price, nominal LCOE and real LCOE are equal.

When the inflation rate is zero, the real and nominal LCOE are equal.

When the PPA price escalation rate is zero, the PPA price and nominal LCOE are equal.

Note. Because the LCOE for the commercial PPA and utility financing options depends on the PPA price, it can be very sensitive to the values that you specify for the target PPA price or target IRR and other assumptions on the Financing page. In some cases, it is possible to specify constraints that make the project capital investment a relatively insignificant factor in the LCOE calculation.

SAM uses the real and nominal discount rates from the Financing page to calculate the present worth of future costs. The real discount rate accounts for the time value of money and the relative degree of risk for alternative investments.

For the real LCOE, the real discount rate appears in the denominator's total energy output term:

EQ_LCOE-real-utility

Similarly, for the nominal LCOE, the nominal discount rate appears in the total energy output term:

EQ_LCOE-nominal-utility

Where,

Qn (kWh)

Electricity generated by the project in year n, calculated by the performance model based on weather data and system performance parameters. The first year output is reported in the Metrics table on the Results page and in the year one column of the project cash flow. Year two and subsequent output is the first year output reduced by the amount specified for the Year-to-year decline in output rate on the Performance Adjustment page.

N

Analysis period in years as defined on the Financing page.

Rn

Project revenue from electricity sales in year n , equal to the system's annual electric output multiplied by the annual PPA price. For the commercial PPA and utility IPP financing options, SAM displays the value in the cash flow as Energy Value, for the single owner, partnership flip, and sale leaseback options, as Total PPA Revenue.

dreal

The real discount rate defined on the Financing page. This is the discount rate without inflation. See LCOE Definition for an explanation of discount rates in the LCOE calculation.

dnominal

The nominal discount rate shown on the Financing page. This is the discount rate with inflation.

Click to expand or collapseReplicating LCOE Calculations in Excel

If you would like to better understand SAM's LCOE calculations, you can follow the procedures described below to replicate the calculations using a spreadsheet program.

You can also use the Send to Excel with Equations button to create a spreadsheet populated with Excel formulas that replicate SAM's calculations.

For the residential, commercial, commercial PPA, and utiilty IPP financing options, you can download the spreadsheets on the Financial Models page of the SAM website (https://sam.nrel.gov/financial) to see how SAM calculates the LCOE and NPV.

Note for Mac users. SAM can not exchange data with Microsoft Excel on Mac computers. This means that the Excel Exchange feature is disabled on Mac versions of the software, and that SAM cannot directly export data to Excel workbooks.
 
To use the SAM data in Excel or another spreadsheet program, you can export the data to a comma-separated text file (CSV), and then import the CSV file to the spreadsheet program.

To replicate LCOE calculation in Excel:

1.On the Results page, click Cash Flows to display the project cash flow.

2.Click Send to Excel to export the cash flow table to an Excel worksheet, or click Save as CSV to save the data as a text file then open it in Excel.

3.Type the project's discount rate and inflation rates as percentages into two blank cells in the worksheet. You can find these values on SAM's Financing page.

4.Type the following formula into a third empty cell to calculate the nominal discount rate:

=(1+[inflation rate])*(1+[real discount rate])-1

Replace the words in brackets with cell references to the appropriate values in the worksheet.

This value should be equivalent to the nominal discount rate that SAM displays as a calculated value on the Financing page.

5.Type the following formula into a blank cell to calculate the real LCOE:

=NPV([nominal discount rate],[energy value or total ppa revenue])/NPV([real discount rate],[energy])

The energy value and energy are series of values from Year One to the final year in the analysis period. Energy is in the first row at the top of the table, and energy value is in the third row.

6.Use the following formula to calculate the nominal LCOE:

=NPV([nominal discount rate],[energy value or total ppa revenue])/NPV([nominal discount rate],[energy])

 

Notes.
 
You can also replicate the calculations in Excel using the summations shown in the equations above in place of the NPV formulas.
 
The Cash Flows table displays the intermediate values for the LCOE calculation in the rows under the heading "LCOE," near the top of the table for the residential, commercial, utility IPP, and commercial PPA financing options, and near the middle of the table for the single owner, leveraged partnership flip, all equity partnership flip, and sale leaseback options.