The LCOE (Levelized Cost of Energy) is the most widely used economic indicator for evaluating and comparing power generation projects. It helps answer a fundamental question: How much does it actually cost to produce each MWh over the entire lifespan of a facility? Its calculation combines investment, operations, financing, and production into a single figure expressed in €/MWh, making it the standard benchmark for analysts, developers, and engineers in the renewable energy sector.
What is LCOE, and what role does it play in the evaluation of energy projects?
The levelized cost of energy It is the minimum price at which a facility must sell its electricity to recoup the entire investment made over its useful life, covering both capital and operating costs. It is a comparative metric, not a market price metric: It allows technologies with very different investment and production profiles—such as solar photovoltaics and onshore wind power—to be compared on an equal footing.
It is widely used in project finance, in pre-investment feasibility analyses, and in industry benchmark reports published by organizations such as IRENA or Lazard.
The LCOE Formula Explained Step by Step
The LCOE formula It is conceptually simple: it divides the total present value of the project by the total present value of the energy it produces over its useful life.
LCOE = Σ (Total costs in year t / (1+r)^t) / Σ (Energy produced in year t / (1+r)^t)
Where r is the discount rate and t is each year of the project's useful life. In practical terms: all costs (initial investment plus year-by-year operation and maintenance) are discounted to present value and then divided by the total energy produced, which is also discounted.
Illustrative example: A 10 MW solar plant with an investment of 7 M€, O&M costs of 120,000€/year, a capacity factor of 18%, and a useful life of 25 years with a discount rate of 5% has an approximate LCOE of 45–55 €/MWh. These figures are for illustrative purposes only; actual values depend on the site, the technology, and the financing terms.
Variables that most influence the result
CAPEX and OPEX
The CAPEX (initial investment) and the OPEX (operating and maintenance costs) are the two cost components in the numerator. In renewable energy, CAPEX is the dominant factor: it accounts for 70–85% of the total LCOE. The decline in the cost of photovoltaic panels and wind turbines is the main reason why the LCOE of renewable energy has fallen by more than 80% over the past decade.
Capacity Factor and Service Life
The capacity factor measures the percentage of time the facility operates at full capacity. A plant with a higher capacity factor spreads the same CAPEX over a greater number of MWh generated, thereby reducing the LCOE. Useful life has a similar effect: extending the asset's life beyond the standard 25 years significantly improves the levelized cost.
Discount Rate (WACC)
The discount rate It reflects the cost of capital used to finance the project. In the renewable energy sector, it is one of the most sensitive factors: a 2-percentage-point difference in the discount rate can cause the LCOE to vary between 15 and 25%. Reducing project risk to secure cheaper financing is one of the most effective ways to improve the LCOE.
Degradation, Replacement, and Dismantling
Solar panels degrade by approximately 0.5% per year. Wind turbines require component replacement halfway through their useful life. Ignoring these costs when calculating the LCOE results in overly optimistic estimates that do not reflect the actual cost of the project.
Practical Example: LCOE of a Solar Power Plant vs. a Wind Farm
For the same installed capacity, solar and wind power have different LCOE profiles. Solar power has lower CAPEX per MW but a lower capacity factor. Wind power has higher CAPEX but higher capacity factors, especially at good sites. The final LCOE depends on a combination of location, resource, and financing conditions, not technology in the abstract.
LCOE, LCOS, and LCOH: When to Use Each Metric
The LCOE is not the only levelized cost indicator. The LCOS (Levelized Cost of Storage) applies the same logic to energy storage. The LCOH (Levelized Cost of Hydrogen) does the same for green hydrogen. Each metric answers the same question but for its respective technology: How much does it cost to produce a unit of energy or fuel over the entire useful life of the asset?
Limitations of the LCOE: curtailment, capture prices, and system costs
The LCOE has significant limitations that are worth noting. It does not capture the value of energy based on when it is produced: A solar power plant with a low LCOE can have a low actual capture price if it generates electricity when there is excess solar generation on the grid. Curtailment (energy that cannot be fed into the grid) is also not included in the standard calculation.
Common Mistakes When Comparing Projects Using the LCOE
The most common mistakes are comparing projects with different discount rates as if they were equivalent, ignoring decommissioning costs, using theoretical capacity factors instead of actual site data, and failing to include grid connection costs. A well-calculated LCOE is a powerful tool; a poorly calculated one is a source of poor decisions.
Which organizations conduct financial evaluations of renewable energy projects?
Energy Investment Analyst
Energy investment analysts develop financial models for projects, calculate the LCOE and IRR, and advise funds and investors. This is the role that works most directly with this metric on a day-to-day basis.
Project Development Engineer
The development engineer combines technical knowledge of the resource and the facility with the ability to translate that knowledge into economic parameters. He is the one who links the actual production data to the financial model, and its accuracy in estimating the capacity factor is critical to the reliability of the LCOE.
Project Finance Specialist
The project finance specialist structures the project's financing to optimize the discount rate. Their work has a direct impact on the final LCOE because Reducing the cost of capital is one of the most effective ways to improve the project's viability.
How to Get Training in the Economic Evaluation of Energy Projects
The economic evaluation of energy projects combines engineering, finance, and knowledge of the electricity market. Structuralia incorporates this subject into its renewable energy and energy efficiency programs, with instructors from development companies, infrastructure funds, and project finance institutions.
Frequently Asked Questions About the LCOE
It depends on the technology and the market. In 2025, a solar LCOE in Spain below 35–45 €/MWh is considered competitive. Onshore wind power at good sites can fall within similar ranges. The benchmark figures published by IRENA and Lazard are the most up-to-date source.
The LCOE is the developer's production cost. The price of electricity is what the buyer pays on the market. A project is viable when the expected selling price exceeds the LCOE by a sufficient margin to justify the risk.
The standard LCOE does not include the costs of storage or grid integration. For projects that include storage, the LCOS is calculated separately, and both metrics are combined.
There are standard spreadsheets published by IRENA and NREL. For more complex projects, tools such as Homer, RETScreen, or proprietary models from project finance firms are used. The calculator in this article is a rough guide to understanding the sensitivity of the variables.
