The Levelised Cost of Electricity (LCOE) represents the average revenue per unit of electricity generated that would be required to cover the costs of developing and operating a generating plant during an estimated financial life and duty cycle. This contains elements like:
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Upfront expenses;
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Maintenance;
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Deterioration with time;
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Financing;
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How many people will truly utilise it;
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Market changes.
The LCOE also serves as a useful tool for large-scale energy developers to contrast various energy sources. They use it to contrast solar energy with other energy sources, such as coal and wind.
For solar to be a practical energy source, it must be economically viable. To increase the return on a solar investment and make this economic equation work, there are two main levers to pull: either lower the cost of the solar system hardware or raise output from the installed solar power system.
It is important for assessing the financial and cost-effectiveness of energy projects. It demonstrates an economic metric that compares projects based on various technologies without any framework constraints influencing the evaluation.
The financial viability of the project can be determined by comparing the LCOE with the potential selling price for the generated electricity. If LCOE is less than the price at which production may be sold, the project is at least marginally profitable and should be further examined to determine whether it is a realistic investment. On the other hand, if LCOE exceeds the selling price of the output power, the project is not a wise long-term investment.
When we use LCOE to compare various projects, the process becomes complicated because the projects may have extremely diverse designs and other features, such as R&D structures, markets, tax benefits, government subsidies, environmental impacts, impacts on public health, and the potential for environmental damage, among others.
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