The most common benchmarks of a solar installation profitability are: Levelized Cost of Energy (LCOE), Internal rate of Return (IRR) and Return on Investment (ROI). LCOE) is widely used to define the cost of electricity generated over the lifetime of the solar power plant (typically 25 years).
The internal rate of return (IRR) and ROI are calculated from the initial capital cost and the cash flow during the period for which a return is expected.
Calculate a solar plant’s LCOE, IRR and ROI with the solar financial calculator
LCOE
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:
where:
- 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
IRR
The internal rate of return (IRR) is the annual rate of growth that an investment is expected to generate. It is the annual return that makes the net present value (NPV) equal to zero. For a solar plant, it calculates the investment return.
ROI
The Return on investment (ROI) is a simple, basic financial benchmark: (Total gain from investment – Total cost of investment) / Total cost of Investment.
For solar installation, the formula is the following:
where:
- 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