LCOE Is the Only Number That Matters for Energy Investing (Here's How to Calculate It)

The One Number That Rules Energy Investing

There's one number that matters for energy investing: LCOE.

Levelized Cost of Energy. $/MWh over the project lifetime.

It's how you compare:

• Solar to wind
• Onshore to offshore
• New build to retrofit
• Any energy source to any other

Everything else is noise.

The Formula

LCOE = Total Lifecycle Cost (NPV) / Total Lifetime Energy (NPV)

That's it. Total cost divided by total energy, both discounted to present value.

What Goes Into the Calculation

Costs:

• CAPEX - Upfront capital investment
• Annual O&M - Operations and maintenance costs each year
• Fuel costs - Zero for renewables, significant for gas/coal
• Decommissioning - End-of-life costs (often overlooked)

Energy:

• Annual generation - MWh produced per year
• Degradation - Solar panels lose ~0.5% efficiency annually
• Capacity factor - Actual output vs. rated capacity

Financial:

• Discount rate - Your cost of capital (typically 6-10%)
• Project lifetime - Usually 20-30 years for renewables

A Real Example

Result: LCOE = ~$42/MWh

That's your target to beat. If another project has a higher LCOE, you need a good reason to choose it.

Why LCOE Matters More Than Other Metrics

vs. IRR

IRR tells you the return, but not whether the project is the best use of capital. LCOE tells you if you're producing energy efficiently.

vs. NPV

NPV is scale-dependent. A 1GW project will have higher NPV than a 100MW project, but that doesn't mean it's more efficient. LCOE normalizes for scale.

vs. Payback Period

Payback period ignores what happens after payback. A project that pays back in 5 years but produces expensive energy for 20 more years is worse than one that pays back in 7 years with cheap energy.

The Sensitivity Analysis

LCOE is sensitive to a few key inputs:

• Discount rate: +1% discount rate ≈ +$3-4/MWh
• Capacity factor: -5% capacity factor ≈ +$2-3/MWh
• CAPEX: +10% CAPEX ≈ +$4-5/MWh
• O&M costs: Less sensitive, but compounds over 25 years

Understanding these sensitivities helps you assess project risk.

Our Open-Source LCOE Calculator

We built an open-source LCOE calculator that runs entirely in Python. No dependencies. Takes JSON in, gives analysis out.

It also does:

• Sensitivity analysis - What if discount rate changes?
• Project comparison - Which site wins?
• Technology breakdown - Solar vs wind vs storage
• Annual cash flow - See costs year by year

The Bottom Line

If you're evaluating energy projects and not leading with LCOE, you're doing it wrong.

Everything else is context. LCOE is the decision.

Use it, fork it, improve it. Our LCOE calculator is open source and free to use.