# Degradation in Levelised Cost Calculation

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There is degradation of the total output which requires a kind of reverse inflation. This can be done by making a separate calculation of the real or nominal IRR just for the calculation of O&M expenses.

For inflation analysis when adjusting the O&M from real to level nominal, then you use PV of O&M with real/PV of O&M with nominal. You can use the PV formula in excel, not the NPV formula.

PV(real rate, life, O&M)/PV(nominal rate, life, O&M).

This factor will be above 1.0 if the inflation rate is positive and the real rate is below the nominal rate.

I wrote some notes, but here is the step by step approach. Note that there are different calculations for nominal LCOE and Real LCOE. Note that when you make adjustments to the rates for PMT and for PV calculations, you should be careful with the denominator.

Step 2: Apply the Adjusted Nominal Rate in the PMT function

Step 3: Adjust the Initial O&M. This is confusing. The O&M goes up because it should inflate and it goes up further because of degradation. So there are two adjustments to the O&M for nominal levelization. You compute a PV factor adjustment and use the real rate in the numerator and the nominal rate adjusted for degradation in the denominator

Compute the nominal rate adjusted for degradation. This produces a higher rate

If you have not computed it, compute or find the real unadjusted rate. This will be the rate adjusted for inflat

Real IRR = (1+Nominal Unadjusted IRR)/(1-Inflation Rate) – 1

Step 4: Then you can compute an adjustment factor using the PV function. To do this, compute the PV factor using the PV of at the Real Rate on the top and using the adjusted nominal rate at the bottom.

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Step 5: Apply the adjustment factor to the O&M

Starting O&M in financial Model subject to adjustment = base O&M x (inflation index) * (degradation index)

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Step 1: Compute Real Rate as (1-Nominal Rate)/(1+Inflation Rate) – 1

Step 2: Compute Real Rate with overall degradation effect:

This adjusted rate is applied to the PMT function and to the O&M function for overall degradation.

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## Inclusion of Degradation in the Levelised Cost using adjustments to both Carrying Charges and O&M Costs

The formulas below evaluate levelised cost when the quantity of the units change. Different amount of units affects the weighting of the levelised price. For example, if the number of units is half of the units when the units start and if the price changes, then weighted average price changes. Without discounting, the screenshot below is 13.33. The price is not the average of 15.00 because you should give less weight to the price when there is less generation.

You should make changes to both nominal and real LCOE and you should make operating expense adjustments. The adjustments are represented by the following equations: