08 Sep What does LCOE mean?
Imagine that you want to buy a new car and you want to know which model is most bang for your buck. A sure method to find out, is to choose the vehicle that costs you the least for every km you run. A cheap car would obviously cost less for starters, but this would come with frequent trips to the mechanic because of shorter warranty times and higher fuel consumption.
As time goes on you would eventually realize that you are paying more for every km you run compared to buying a high quality, but more expensive machine.
Similarly, to this example, LCOE or Levelized cost of energy is the cost of power produced by solar energy over the lifetime of the PV system. In other words, the lower the (LCOE) cost you must pay for the energy the better your overall system is.
How is LCOE calculated?
LCOE could be calculated as the following formula:
|LCOE =||CAPEX + OPEX|
CAPEX or capital expenditure is your initial investment, including the cost of components, labor and additional costs the solar system entails.
OPEX or operating expenditure are costs such as utilization, maintenance, taxes etc.
Yield or energy production is the amount of energy your system harvests during its use.
Let’s take a look back at the buying a new car question, CAPEX is the price of the car itself, OPEX is fuel, road tax, and other garage services fees, Yield is the number of kms your car runs.
Why is it an important indicator?
Predicting the market trending
In relation to the bigger picture, a LCOE is an extremely useful indicator to demonstrate solar energy or renewable energy feasibility compared to other sources of electricity. The reputed Fraunhofer Institute conducted a study called Levelized Cost of Electricity- Renewable Energy Technologies, where it is stated that the LCOE from PV utility-scale is now competitive compared to other sources of energy such as wind, coal or gas. This is an indicator of positive and durable growth for the PV market.
Comparative indicator for decision-makers
For investors, LCOE is a comparative indicator which helps finalize their decision. Investors are expected to answer a variety of problematic queries. One of them is whether they should use high quality, advanced technology products, or whether they should choose more cost-effective alternatives. LCOE can help them to make up their mind.
PV module case
1 MW PV system: Comparison between Canadian Solar HiKu CS3W-405P & standard size Poly 300W module. All other components of the system are similar.
Notice on the chart above that even if the cost for HiKu is higher than for the normal Poly, the cost required for the mounting system, installation, and solar cables is lower. This leads to a lower CAPEX for the system using the HiKu module. A lower number of modules also reduces the maintenance cost over time (OPEX). Moreover, HiKu’s advanced technology is more efficient, degrades less over time, and can harvest more yield. All of these factors add up to a lower LCOE and indicate that HiKu is the cheaper system in this case.
90 kW PV system: Comparison between a SolarEdge and a traditional string inverter.
All other components of the system are similar
At first glance, the SolarEdge inverter with optimizers usually seems much more expensive than the traditional string inverter. However, since SolarEdge strings can be longer and no combiner boxes are required, the BOS cost of the system is reduced significantly. As a result, the final CAPEX of the SolarEdge system is lower than for the traditional string inverter.
Furthermore, the SolarEdge inverter and optimizers are resilient and provide module-level monitoring (more information here). These features help to reduce the OPEX cost of the system. SolarEdge optimizers also provide maximum power point tracking on each module on the system, which in return reduces the losses and harvest more yield during the system lifetime. All those factors combined result in a lower LCOE for the SolarEdge system and make it the better solution out of the two.
Don’t be misled! LCOE limitations...
One must always keep in mind that LCOE is a single figure, it simplifies the complexity of comparing two differing solutions and provides a rapid and efficient assessment of different alternatives. However, it could oversimplify and misrepresent comparative figures because of the multitude of varying assumptions (project lifetime, discount rate, degradation rate, mean time to failure of product etc.) involved in the calculation. LCOE also does not consider the discrepancies associated with long-term utilization due to seasonal and daily generation. Finally, this method is also unable to replace an overreaching financial calculation, which considers vital factors such as income and expenditure.
LCOE is an important indicator to help the decision-maker to decide if the PV system is the right choice to invest in and if the components used in that system cohesively make up the best possible combination. Yet valuable, LCOE has limitations and decision-makers shouldn’t ignore other indicators to have an insight into their investment.
- Study: Levelized Cost of Electricity- Renewable Energy Technologies
- International Technology Roadmap for Photovoltaic
- SolarEdge PROSPECTUS
- A. Gilbert, Spark Library, “9 Reasons Why LCOE Can Mislead,” 2016