TAHA Engineering Toolsby TAHA Knowledge Lab

Energy & Renewables

Levelized Cost of Energy (LCOE) Calculator

Levelized cost of energy per kWh: present value of lifetime costs ÷ present value of lifetime energy, with degradation and cost escalation.

Inputs

A timeline with the capital cost at year 0 and discounted yearly costs and energy for years 1 to 6.0C₀123456costsenergyeach year × 1 ÷ (1 + r)ᵗLCOE = PV of costs ÷ PV of energy
The capital cost is paid at year 0. Each year’s running costs (bars above the line) and energy (below) count at the end of that year and are discounted by 1 ÷ (1 + r)ᵗ, so later years weigh less. Diagram not to scale.

Any label, for example PKR, USD or EUR. No conversion is done.

Equipment, installation and commissioning, paid at the start.

0 or empty for solar, wind and hydro.

For example about 0.5%/year for many solar modules. 0 = none.

Use 0 if the discount rate is a real rate and costs are in today’s money.

Result

Levelized cost of energy (LCOE)
0.747523per kWh
LCOE with currency
0.747523 PKR per kWh
Present value of capital cost
100,000
Present value of O&M costs
15,443.5
Present value of fuel costs
0
Present value of all lifetime costs
115,443
Present value (discounted) of lifetime energy
154,435kWh
Lifetime energy (undiscounted)
200,000kWh
Lifetime costs (undiscounted)
120,000
Cost breakdown (present value)
Capital 100,000 PKR (86.6225%); O&M 15,443.5 PKR (13.3775%); fuel 0 PKR (0%)
Year-by-year (first and last years)
Year 1: energy 20,000 kWh, costs 2,000 PKR, discount factor 0.952381 Year 2: energy 20,000 kWh, costs 2,000 PKR, discount factor 0.907029 Year 3: energy 20,000 kWh, costs 2,000 PKR, discount factor 0.863838 … Year 9: energy 20,000 kWh, costs 2,000 PKR, discount factor 0.644609 Year 10: energy 20,000 kWh, costs 2,000 PKR, discount factor 0.613913
Working
Discount factor DF(t) = 1 ÷ (1 + 0.05)^t, end-of-year convention; capital at year 0 (DF = 1) PV costs = 100,000 + Σ (O&M + fuel)(t) × DF(t) = 100,000 + 15,443.5 = 115,443 PKR PV energy = Σ E(t) × DF(t) = 154,435 kWh (undiscounted 200,000 kWh) LCOE = 115,443 ÷ 154,435 = 0.747523 PKR per kWh

The levelized cost of energy is 0.747523 PKR per kWh: present value of costs 115,443 over 154,435 kWh of discounted energy.

  • Not included: taxes, financing structure (loan interest, debt/equity), subsidies or incentives, insurance unless part of O&M, equipment replacement (for example inverters or batteries), salvage value and decommissioning. Add them to the costs if they matter.
  • Use a real discount rate with costs in today’s money (escalation 0), or a nominal rate with escalating costs — not a mix. Degradation is applied to energy only and escalation to costs only, each once.

Educational estimate — check the assumptions below.

About this calculator

The levelized cost of energy (LCOE) is the constant price per kWh that would exactly pay back all the costs of a project over its lifetime, taking the time value of money into account. It lets you compare projects with different capital and running costs, such as solar, wind, hydro or a diesel generator.

Both the costs and the energy are discounted to present value with the same discount rate, then divided. This calculator uses the common end-of-year convention: the capital cost is paid at year 0, and each year’s costs and energy count at the end of that year. Energy can decline with a degradation rate, and running costs can grow with an escalation rate.

Formula

LCOE = [ C0 + Σt=1..N (OMt + Ft) ÷ (1 + r)t ] ÷ Σt=1..N Et ÷ (1 + r)t

Et = E1 × (1 − d)t−1    OMt = OM1 × (1 + e)t−1    Ft = F1 × (1 + e)t−1    discount factor DFt = 1 ÷ (1 + r)t

C0 = capital cost (year 0), OM = operation and maintenance cost, F = fuel cost, E = energy produced (kWh), N = lifetime (years), r = discount rate, d = degradation rate, e = cost escalation rate.

Worked example

  • Capital 100 000, O&M 2 000 per year, 20 000 kWh per year, 10 years, 5%, no degradation: Σ DF = (1 − 1.05−10) ÷ 0.05 = 7.72173.
  • PV of O&M = 2 000 × 7.72173 = 15 443.47; PV of costs = 115 443.47; PV of energy = 20 000 × 7.72173 = 154 434.7 kWh.
  • LCOE = 115 443.47 ÷ 154 434.7 = 0.7475 per kWh. Undiscounted, the same project costs 120 000 for 200 000 kWh = 0.60 per kWh — discounting matters.

Assumptions and limitations

  • End-of-year convention: capital at year 0, yearly costs and energy at the end of years 1 to N.
  • The same discount rate is used for costs and energy. Degradation applies to energy only, escalation to O&M and fuel only, each once.
  • Excluded: taxes, financing, subsidies, replacement costs, salvage value and decommissioning, unless you include them in the inputs.
  • The currency label is for display only; no exchange rate is applied, and no country is assumed.
  • An economic estimate only, not financial or investment advice.

References

  • NREL, Short, W., Packey, D. J. and Holt, T. (1995), A Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies, NREL/TP-462-5173 — levelized cost of energy.
  • IEA / NEA, Projected Costs of Generating Electricity — LCOE methodology.