What is LCOE?

The Levelised cost of electricity (LCOE) is also the levelised cost of energy(LCOE) or the levelised energy cost (LEC)

How many methods?

Marcial T. Ocampo, (2009)How to Calculate the Levelized Cost of Energy – a simplified approach, April 28th, 2009 , Energy Technology Expert

In the case where the effect of income tax and depreciation needs to be considered, the RP MTO formula developed by Engr. Marcial T. Ocampo is shown:
Net COE = Total Cost / ((1 – g) * (1 – t)), in US $/kWh or US cents/kWh
where Total Cost = ( ICC * CRF + (FixO&M + VarO&M + DOE + Fuel) * (1 – t) – t * DEPN ) / AEPnet
ICC = (Capacity, kW) * (Overnight Cost, $/kW)
Overnight Cost = Installed Cost + Interest During Construction
CRF = capital recovery factor, 1/yr = int / (1 – (1 + int)^-Life)
AEPnet = Net Annual Energy Production, kWh/yr (net of plant own use)= (kW capacity) * (capacity factor) * (hours/year)
FixO&M = (Fixed O&M, $/kW/yr) * (Capacity, kW)
VarO&M = (Variable O&M, $/kWh) * AEPnet
DOE = (PhP 0.10 / kWh) / (Exchange Rate, PhP / US $) * AEPnet Fuel = (net Heat Rate) * AEPnet * (Price of fuel)= (3600 / Efficiency, kJ/kWh net) * AEPnet * (Price, $/kJ net)
DEPN = Depreciation, $ / yr = ICC / Life
g = Franchise Tax + Business Tax = 2.5% + 0.005% = 2.005%
t = Income Tax = 35%
int = Interest Rate, %
Life = Economic Life or Project Life, yrs

Please note that when the RP MTO formula of Marcial is simplified by disregarding depreciation, franchise tax & business tax and income tax, the RP MTO formula becomes similar to the US NREL formula:
Net COE = ICC * CRF / APEnet + (FixO&M + VarO&M + DOE + Fuel) / AEPnet
where the last term (FixO&M + VarO&M + DOE + Fuel) / AEPnet are unit costs per kWh.

Levelised Cost of Energy
It can be defined in a single formula as:

where

• LEC = Average lifetime levelized electricity generation cost
• It = Investment expenditures in the year t
• Mt = Operations and maintenance expenditures in the year t
• Ft = Fuel expenditures in the year t
• Et = Electricity generation in the year t
• r = Discount rate
• n = Life of the system
• W. Short, D. Packey, T. Holt, "A Manual for economic evaluation of Energy Efficiency and Renewable Energy Technologies", National Renewable Energy Laboratory- March 1995, pp1 -120, http://web.archive.org/web/20160303182003/http://www.nrel.gov/csp/troughnet/pdfs/5173.pdf

This manual is a guide for analyzing the economics of energy efficiency and renewable energy (EE) technologies and projects.

Important Issues

Cost of Capital & Incentives

Financing Dearth Holds Solar Back in U.S.(2010)

MATT DAILY and SARAH McBRIDE, Financing Dearth Holds Solar Back in U.S.(2010),New York Times,October 17, 2010

• Commercial Solar PV plants struggle to find financing to benefit from economies of scale and rival Germany

Chipping away at levelized costs: SunPods, Sunsonix seek lower solar LCOE in field and fabs

Tom Cheyney - 01 July 2010

• The solar photovoltaic metric du jour is levelized cost of energy, commonly referred to by its initials, LCOE.
• First Solar's Kii Miller put it this way: "To focus on anything else [other than LCOE] would be a mistake."
• "One day, these two upstart companies—SunPods and Sunsonix—may see their contributions to lowering solar power's levelized cost of energy coexist in an elegant synergy, as decontaminated, degradation-resistant cells nestle in modules racked up in preassembled plug-and-play PV systems."

Effect of financial and fiscal incentives on the effective capital cost of solar energy technologies to the user.[not solar PV case study]

Chandrasekar, B., and Tara. C. Kandpal. 2005. Effect of financial and fiscal incentives on the effective capital cost of solar energy technologies to the user. Solar Energy 78, no. 2 (February): 147-156. doi:10.1016/j.solener.2004.05.003.^[1]

AbstractDevelopment and dissemination of solar energy technologies in India has been aided by a variety of policy and support measures. One of the promotional measures is the provision of financial and fiscal incentives such as capital subsidy, low interest loan and accelerated depreciation related income tax benefits to the users on the purchase of solar energy technologies. In this study an attempt has been made to determine the effective capital cost of solar energy technologies to the user with the provision of financial and/or fiscal incentives. Results of exemplifying calculations for a domestic and an industrial solar water heating system, a solar home lighting system and a solar drying system have been presented and discussed.

• financial and fiscal incentives:
• Captial Subsidy
  
• Low Interest Loan (Interest Subsidy)
  
• Accelerated Depreciation related income tax benefits
  
• Income tax benefits on capital gain related investments
  
• Income tax benefits on interest paid on the loan availed for the purchase of a solar energy system
  
• combinations of the above
  
• Mathematical expressions for determining the effective present value of the capital cost to the end user in each of the above cases are presented in Appendix A.
• the provision of income tax benefit on the amount of investment made by the user on the purchase and installation of renewable energy system is likely to be more attractive than the provision of low interest loan.

Effect of economic parameters on power generation expansion planning

Sevilgen, Süleyman Hakan, Hasan Hüseyin Erdem, Burhanettin Cetin, Ali Volkan Akkaya, and Ahmet Dagdas. 2005. Effect of economic parameters on power generation expansion planning. Energy Conversion and Management 46, no. 11-12 (July): 1780-1789.^[2]

AbstractThe increasing consumption of electricity within time forces countries to build additional power plants. Because of technical and economic differences of the additional power plants, economic methodologies are used to determine the best technology for the additional capacity. The annual levelized cost method is used for this purpose, and the technology giving the minimum value for the additional load range is chosen. However, the economic parameters such as interest rate, construction escalation, fuel escalation, maintenance escalation and discount factor can affect the annual levelized cost considerably and change the economic range of the plants. Determining the values of the economical parameters in the future is very difficult, especially in developing countries. For this reason, the analysis of the changing rates of the mentioned values is of great importance for the planners of the additional capacity.

In this study, the changing rates of the economic parameters that influence the annual levelized cost of the alternative power plant types are discussed. The alternative power plants considered for the electricity generation sector of Turkey and the economic parameters dominating each plant type are determined. It is clearly seen that the annual levelized cost for additional power plants varies with the economic parameters. The results show that the economic parameters variation has to be taken into consideration in electricity generation planning.

• equations given
• no solar
• the construction escalation and interest rate have increased the annual levelized costs of the plants considerably having the higher capital costs and the longer construction time.

Subsidies

Subsidies by the government to various sectors decrease the price paid by consumers. The grid is currently largely subsidized (especially fossil fuels), so that it is difficult to simply compare electricity generated from solar PV and other renewables to the grid, without acknowledging that they are not subsidized equally.

Investors: Renewables Growth is Slower but Steady

Stephen Lacey, 2010. Investors: Renewables Growth is Slower but Steady, RenewableEnergyWorld.com,July 5, 2010^[3]

• "Solar PV will be the fastest growing industry, as it is less capital intensive, is faster to build out and does not face many of the same regulatory challenges as wind, geothermal and concentrating solar power."
• "..Solar PV will be the fastest growing industry, as it is less capital intensive, is faster to build out and does not face many of the same regulatory challenges as wind, geothermal and concentrating solar power.."IEA (2010):Energy Subsidies: Getting the Prices Right, 7,June, 2010