Levelised
Cost of Energy (LCOE)


The
various inputs into this calculator are in green.


The
results are two levelized cost calculations. One is a "simple" one, which ignores
tax and financing structure. The other is a "leveraged" one, which differs in the following ways:


• a
cost benefit is produced via the tax handling of depreciation

• a
cost benefit is produced via the tax handling of interest on debt

•
effective operating costs are reduced by their offset against tax

•
annual costs are increased to pay back the debt raised to pay the initial
costs

• the
costs accrued immediately by the project are decreased (they represent
the equity portion required upfront)


(Note
that setting both the debt amount and tax rates to zero removes these
tax and financing effects and so results in the leveraged LCOE result being
identical to that of the simple LCOE).


Both
calculations take into account the input annual degradation rate, and both
assume a lifetime (analysis period) of 20 years.


In
italics, after installed cost, O&M cost, fuel cost and debt amount are
calculated some simple, commonlyused metrics (such as $ per W for
installed cost) as a "sanity check".


The
chart below the calculator shows a simple
representation of the various lifetime costs and lifetime revenues (all
brought back to present value), along with  in dark blue  the difference
between them. So the blue bar above the line means net present value (NPV)
positive, below the line means net present value positive. The various
bars are derived from the leveraged case (or both cases if as mentioned
above, there is no debt or tax included in the calculation).


The
revenue (dark green bar) is derived from the input sale price. This sale
price remains unchanged over the twenty year analysis period (we haven't
included inflation or other pricing impacts in this simple calculator).


Note
that if the input sale price exactly matches the leveraged LCOE, the blue bar
in the chart disappears. That's because the lifetime costs and lifetime
revenues exactly match (in present value terms). This illustrates the idea
that one way to think about LCOE is not as a cost, but as a breakeven price that a power plant must achieve over the project
lifetime such that its revenues will exactly match its costs (in present
value terms, so dependent on a particular choice of discount rate). If the
actual price it can achieve is higher, the project will make money (blue bar
above the line); if the actual price it can achieve is lower, the project
will lose money (blue bar below the line).


What
should become clear after a short time of playing around with different
inputs, is how much it is possible to vary the result of a LCOE calculation
by changing the assumptions behind it!


Key
learning takeaway: read LCOE numbers with a large
dose of caution...
