LCOE

What LCOE measures

Levelised Cost of Energy (LCOE) is the average cost of producing one unit of electricity from a power plant over its entire operating life, expressed in rupees per kWh. It combines all the capital and operating costs of the plant over 25 to 30 years and divides by the total energy the plant will produce in that time, using a discount rate to bring future cash flows to today’s value.

LCOE is the most widely used metric for comparing the cost of different power generation technologies. It lets analysts compare solar to coal, wind to gas, and nuclear to hydropower on a level playing field. It also lets investors and developers see how their project compares to industry benchmarks.

For Indian solar, LCOE has fallen by more than 80% over the past 15 years, transforming solar from an expensive niche to one of the lowest-cost generation sources in the country.

How LCOE is calculated

The full formula:

LCOE = sum_t [CAPEX_t + OPEX_t + Fuel_t] / (1 + r)^t
       divided by
       sum_t [Energy_t] / (1 + r)^t

Where:

• t is each year of the project life
• CAPEX_t is the capital cost in year t (typically only year 0)
• OPEX_t is operating cost in year t (cleaning, maintenance, insurance, replacements)
• Fuel_t is fuel cost (zero for solar)
• Energy_t is annual energy production
• r is the discount rate (cost of capital)

For solar, fuel cost is zero, so LCOE is essentially CAPEX plus discounted lifetime OPEX divided by discounted lifetime energy.

A simplified worked example for a 1 MWp utility-scale solar plant in Rajasthan:

• CAPEX: Rs 4.5 crore
• Annual OPEX: Rs 6 lakh
• Project life: 25 years
• Annual generation: 17,50,000 kWh (CUF 20%)
• Discount rate: 9%
• Module degradation: 0.55% per year

Calculating present values:

• Discounted lifetime OPEX: Rs 58 lakh
• Total discounted costs: Rs 5.08 crore
• Discounted lifetime energy: 1.65 crore kWh

LCOE = 5.08 crore / 1.65 crore kWh = Rs 3.08 per kWh

This is on the higher end for utility solar because the example uses fixed tilt at 20% CUF. With tracker and bifacial pushing CUF to 25%, LCOE drops to around Rs 2.45 per kWh.

What drives LCOE

The main levers are CAPEX, CUF, discount rate, and project life. Smaller contributors are OPEX, degradation, and inverter replacement costs.

CAPEX: The dominant input. A 10% reduction in CAPEX reduces LCOE by roughly 8% to 9%. Module prices have fallen most aggressively over the past decade, driving the bulk of LCOE decline.

CUF: Higher CUF means more energy per kWp installed. A 25% improvement in CUF (from 20% to 25%) reduces LCOE by approximately 20%. Trackers and bifacial modules raise CUF and lower LCOE.

Discount rate: Higher cost of capital raises LCOE. A 9% discount rate versus 7% increases LCOE by roughly 12% for the same project.

Project life: Longer life amortises CAPEX over more energy. Moving from 25-year to 30-year project life reduces LCOE by 5% to 8%.

OPEX: Annual operating cost typically runs Rs 4 to Rs 8 lakh per MW per year for utility-scale and Rs 8 to Rs 12 lakh per MW for rooftop. Lower OPEX reduces LCOE proportionally.

Degradation: A higher annual degradation rate reduces lifetime energy. A reduction from 0.7% to 0.4% annual degradation reduces LCOE by 2% to 3%.

Indian LCOE benchmarks in 2026

These figures change continuously. Module cost, financing cost, tariff orders, and tender bidding all push the numbers up or down.

LCOE and tariff in solar auctions

In competitive solar auctions like SECI, the discovered tariff is close to the lowest-LCOE-plus-equity-return that a developer is willing to bid. Developers calculate their breakeven LCOE for the proposed site (including transmission, land, financing) and bid a tariff slightly above it.

The 2024 SECI tender that discovered a tariff of Rs 2.18 per kWh for utility-scale solar implied an LCOE of approximately Rs 1.90 to Rs 2.00 per kWh after stripping return on equity. Developers achieving this LCOE typically used trackers, bifacial modules, large project scale, and the lowest available cost of debt.

For rooftop and commercial projects, tariffs in PPAs negotiated bilaterally with C&I customers reflect LCOE plus a developer margin of 10% to 25%.

LCOE versus other metrics

LCOE is one of several economic metrics used in solar projects.

LCOE: Cost per unit of energy. Best for comparing technologies.

IRR (Internal Rate of Return): Return on investor’s equity. Best for evaluating project viability.

NPV (Net Present Value): Total project value in today’s rupees. Best for go/no-go decisions.

Payback period: Years to recover CAPEX. Best for residential customers comparing solar to grid bill.

Tariff: Selling price per unit. Used in PPAs and government auctions.

For a solar project, these metrics are related but distinct. LCOE is the cost; tariff is the revenue; IRR is the equity return; payback is the time to recover the initial outlay.

Common mistakes with LCOE

Comparing LCOEs from different studies without checking the assumptions (discount rate, project life, CUF, degradation). A 1% change in any of these can shift LCOE by 5% to 10%.

Treating LCOE as the only metric for project decisions. LCOE ignores risk, dispatchability, time-of-day value, and grid services.

Forgetting to include transmission and land cost in utility-scale LCOE. These can add 10% to 20% to total LCOE.

Using nominal CAPEX without inflation adjustment for long-term comparisons.

Skipping the inverter replacement cost in year 12 to 15. Replacement adds 5% to 8% to LCOE.

Confusing pre-tax and post-tax LCOE. Tax incentives like accelerated depreciation lower post-tax LCOE significantly for commercial projects.

Best practices

For project decisions, calculate LCOE alongside IRR, NPV, and payback period. No single metric tells the full story.

Use a consistent and transparent set of assumptions: CAPEX in current rupees, degradation 0.5% per year, discount rate matching cost of capital, project life 25 years.

Run sensitivity analyses on key inputs (CAPEX, CUF, discount rate, OPEX) to understand which drives the result most.

For comparisons across studies, normalise to the same assumptions before treating differences as real.

For rooftop solar self-consumers, compare LCOE to retail tariff. If LCOE is below retail tariff, solar provides positive net value through self-consumption.

Standards and references

LCOE methodology is documented in IEA reports, IRENA’s Renewable Power Generation Costs publications, BloombergNEF’s annual New Energy Outlook, and MNRE benchmark cost calculations. Most lender-grade financial models include LCOE alongside IRR and NPV as standard outputs.

Related glossary terms

• CAPEX Model
• OPEX Model
• Power Purchase Agreement
• IRR
• Payback Period
• Feed-in Tariff
• Capacity Utilisation Factor
• Performance Ratio

Key takeaways

Levelised Cost of Energy (LCOE) is the lifetime cost of generating one unit of electricity from a power plant, in rupees per kWh. It combines CAPEX, OPEX, energy production, and discount rate over the project life. Indian solar LCOE in 2026 ranges from Rs 2.10 to Rs 2.70 for utility-scale up to Rs 5.00 per kWh for small residential rooftops. LCOE is the standard metric for comparing generation technologies and forms the basis for tariff bidding in competitive solar auctions.