The Expert's Guide to Build an LCoE & LCoS Model Using Excel Best Practices in 2022 - Video 01 

Glad it was helpful!

Hi Litha. The LCOE is an economic methodology and not a financial one. To calculate it, you "only" need the project costs and therefore the results are not influenced by debt and equity ratios. In the example you gave, by adding leverage to the project, the LCOE will keep the same, as the costs have not changed. What is most likely to change is the Equity IRR and/or the final tariff to the client. This is already an Financial Analysis that I can go through in future videos. Let me know if I clarified your question.

Hi @tintin1er . Your question is a very valid one and we all should ask it! This shows that you not only understands how LCOEs are calculated, but also you understand the meaning of the formula and its results. Anyone can argue, as you mentioned, that a MWh in 20 years time worths more that a MWh today. So, to this point then you can definitely calculate the LCOE as the NPV of the Costs divided by the summation of generation. Another approach is to calculate the NPV of the costs discounted at nominal rates and the NPV of the generation discounted at real rates. In my opinion, you can only use LCOE for 3 reasons: 1. comparing different design for the same project (for example, is it better to design a solar PV optimizing for winter with no curtailment or for summer with curtailment)? 2. comparing projects of different technologies. 3. comparing costs overtime So, as long as you use the same methodology to compare projects or technology, you will be fine. I will make a video on this topic as this is an important point that many do not understand. Best,

@@bankrun2023 Can you clarify the difference in what you mean by discounted at the nominal rates verse the generation discounted at the "real rates"? When you say real rate, could we instead use the anticipated degradation of the asset/project with the best information available? I like your point about just keeping it consistent between comparisons. Let us know when you post the video to go deeper into this.

You actually are not discounting the energy, although it looks like it. If you multiply both sides by the denominator on the right, you see that the left term is sum(LCOE*Energy_k/(1+r)^k), which is just the PV of the cost of energy. We're trying to isolate this constant (but artificial) metric LCOE, so we bring the term sum(Energy_k/(1+r)^k) over to the right by putting it in the denominator. Why do I say artificial metric? Because in reality, the price of energy is not constant over all years, it varies year by year. LCOE is what an average energy cost would be so that it takes into account all the costs used to produce it.

Corporate Tax is not included in the model of this video, but this is something that you can definitely add. Typically, during the design stage (e.g., sizing the power plant facility), I calculate the Levelized Cost of Energy (LCOE) solely based on costs, as demonstrated in the video. The objective is to determine the project size that yields the lowest LCOE. Once the project size is chosen, I input the numbers into a Financial Model to calculate the LCOE after Tax, factoring in payable taxes and debt. It's important to note that the LCOE serves as a useful metric for comparing different project options. As long as you consistently apply the same calculation methodology across projects, whether or not tax, debt, depreciation, etc. is included, you should achieve comparable results. The exception is when the LCOE is calculated for companies / developers. As they may have different access to debt with varying interest rates, depreciation schedules, equity returns hurdle rates, etc., these differences will produce differences in their LCOE (including tax and debt). I hope that helps. Best.

Replacement cost is a distinct category that deserves its own consideration. While capital expenditure (CAPEX) encompasses the costs incurred before the start of operations, replacement cost specifically refers to capital expenditure incurred during the operational phase. For the LCOE model you can group Replacement into CAPEX, but for a financial model, you will need to separate it as the Replacement will need to be funded and you will need to demonstrated in the financial model how the replacement will be financed!

For 25 year solar panel battery need to be replaced after 10 years , so can I add battery replacement charge in capax at the 11 th year.

You can add the CAPEX at year (end) 10 and the generation from the 11th year.