Illustration of Solar Analysis with Four Factors
To make a LCOE analysis, all you have to do is set-up a little table where you input the four factors. The excerpts below demonstrate how the drivers of LCOE for solar and demonstrate how to compute LCOE on a nominal basis and a real inflation adjusted basis. The first excerpt demonstrates the three factors other than the carrying charge rate.
The trikiest factor to explain is the carrying charge that converts an one-time cost into an annual cost and recovers return of capital, return on capital (depreciation), taxes, decommissioning costs and other items. The carrying charge should be computed so that the real on nominal rates are the same over the life of the plant. Hence the name level. An illustration of how to compute carrying charge using the PMT function is shown below. The real rate is computed as (1+nominal cost of capital)/(1+inflation) -1.
Finally, the LCOE can be computed per the formulas above. For the solar project, the LCOE comes all from fixed costs as illustrated below.
The two files below include an exercise where you can work through these equations using a very simple PMT function.
You can work through this example in the file to be downloaded below. The first file has blanks that you can fill-in. The second file has completed data that you can use to verify the results.
To compute LCOE you should account for generation and the PV factor. You could compute the weighted average of the NPV of generation or you could use the formula. The equivalence of these methods is demonstrated in the screen shot below.