Replacement Cost and LCOE

One of the advantages of using LCOE to screen and do preliminary analysis of investments and strategy is that you can evaluate projects that have different operating lives. For example in the case of batteries, the life of the battery will surely be different from the life of a solar panel and how can you compute the cost of both the battery and the panel. On this page I demonstrate how the LCOE addresses this issue and the more tricky issue of what happens where there is a learning rate and the replacement cost is lower than the original cost in real terms. For example, what is the overall levelised cost when the cost of the second battery replacement is a lot smaller than the initial battery.

Case Where the Replacement Cost Does Not Change

In the screenshot below I demonstrate that if the cost of the replacement does not change, that you can measure the LCOE using the shorter life and you get the same financial results (i.e. the IRR) as if you would make the replacement.

Replacement Cost with Learning

When you include learning you can give credit to the LCOE for the expected lower cost of replacement. You cannot simply use the average of the replacement cost because the replacement cost of the replacement cost has a lower value. To do this you can determine the weighted average cost of replacement with the lower future replacement. To get to the weighted average you can compute the

The screenshot below illustrates the effect of the learning.