LCOE & ROI definition


The Levelized Cost Of Energy (LCOE) is a standard methodology used by utilities, policy-maker, and industry to calculate  the cost of electricity produced by a generator over its lifetime. It is the ratio of the initial capital cost plus the present value of all future operational costs (administration, maintenance and fuel) to the present value of all the energy produced during the anticipated lifetime of the project.
For a solar project, the fuel (the sun) is free and without administration costs, the LCOE formula is:

LCOE Formula
LCOE  is in  $/MWh
CapInit = Initial Capital Cost = cost per watt * 106
Mi =  Maintenance cost at year i taking into account inflation (cpi) and calculated at mid-year.  Mi = mY1 * (1+cpi) (i-0.5)
mY1= Maintenance costs $/MW in the first year
cpi = Consumer Price Index
Ei = Energy produced at year I taking into account  annual PV modules derating = enY1 *( 1 – (lid + (dr25 – lid)/lt*(i – 1)))
cpw = Cost per Watt ($/Wp)
enY1 = Energy produced the first year
lid = PV first light induced degradation
dr25= PV total derating after 25 years 
lt = project lifetime
PV = present value : PV(x) = x * (1+bnkr) –(i-0.5)  calculated at mid-year
bnkr = Discount ( or sometimes called bank) rate


The Return on investment (ROI) is a simple, basic financial benchmark: (Total gain from investment – Total cost of investment) / Total cost of Investment.
In the case of a solar plant, the formula is the following:

ROI Formula
ROI Formula


  • p = ROI period
  • TRFi = Tariff of electricity paid at year i
  • Ei = Energy produced in year i (derated by 20% over 25 years)
  • OMi = O&M cost during year i
  • CAPinit = Initial capital cost
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