# How to calculate LCOE and know when a project actually beats the market price
In late 2023, a US utility signed a solar power purchase agreement (PPA, a long-term contract to buy electricity at a fixed price) at roughly $30 to $35 per megawatt-hour (MWh), a price that made headlines because wholesale power in that region was trading higher. Was that actually a good deal, or just a good headline? To answer that, you need one number: LCOE.
Levelized Cost of Energy (LCOE) is the average price per unit of electricity a project must earn over its lifetime to break even, covering construction, financing, operations, and an expected return. It is measured in $/MWh or €/MWh.
Think of it as the "all-in cost price" of a power plant, spread evenly across every MWh it will ever produce. If a project's contracted sale price beats its LCOE, it is expected to be profitable. If not, someone is losing money, or being subsidized.
$$
LCOE = \frac{\text{Total lifetime costs (discounted)}}{\text{Total lifetime energy output (discounted)}}
$$
More precisely:
$$
LCOE = \frac{\sum_{t=0}^{n} \frac{CapEx_t + OpEx_t}{(1+r)^t}}{\sum_{t=0}^{n} \frac{Energy_t}{(1+r)^t}}
$$
Where:
Discounting matters because $1 spent today is not equivalent to $1 spent in year 15. This is the same net-present-value logic used to value any long-lived investment.
Let's build one from scratch, using realistic 2024 to 2025 US benchmark ranges (all figures below are industry estimates, notably from NREL's Annual Technology Baseline, not project-specific quotes).
Assumptions for a 100 MW onshore wind farm:
Step 1: Annual energy output
100 MW × 35% capacity factor × 8,760 hours/year ≈ 306,600 MWh/year
Step 2: Discounted lifetime output
Summing 306,600 MWh/year for 25 years at a 7% discount rate gives a present value of roughly 3.57 million MWh (using the standard annuity discount factor).
Step 3: Discounted lifetime costs
Step 4: Divide
$$
LCOE = \frac{\$162.6\text{ million}}{3.57\text{ million MWh}} \approx \$45.5/\text{MWh}
$$
That lands close to real-world US onshore wind LCOE estimates of roughly $30 to $50/MWh (NREL, Lazard's Levelized Cost of Energy Analysis, 2024 edition, both estimates). Good sign the math holds together.
Back to that 2023 US solar PPA at ~$30 to $35/MWh. Utility-scale solar LCOE estimates for the US in that period ranged roughly $24 to $40/MWh depending on region, financing cost, and tax credit treatment (Lazard 2023/2024 estimates; Lazard LCOE report).
Here is the catch: US solar LCOE is heavily shaped by federal tax incentives, notably the Investment Tax Credit (ITC) under the Inflation Reduction Act of 2022, which can cover 30% or more of CapExCapExCapital Expenditure (CapEx) is money spent to acquire, upgrade, or extend long-lived assets like equipment, property, or software that deliver value over multiple years.Voir la définition complète →. Strip that out, and unsubsidized LCOE would be meaningfully higher, often estimated in the $40 to $55/MWh range.
So a $30 to $35/MWh PPA only "beats the market" once you factor in the tax credit reducing the developer's effective CapExCapExCapital Expenditure (CapEx) is money spent to acquire, upgrade, or extend long-lived assets like equipment, property, or software that deliver value over multiple years.Voir la définition complète →. Without it, that price could be marginal or loss-making. This is why comparing a headline PPA price to a generic LCOE benchmark without checking subsidy assumptions is a common analytical mistake.
The judgment call: a PPA price above LCOE signals a bankable project. A PPA priced near or below unsubsidized LCOE signals the developer is either extremely efficient, backed by cheap financing, banking on incentives, or taking a strategic loss to build market sharemarket shareThe percentage of total industry sales your company captures in a given period. It measures competitive position relative to rivals in a defined market.Voir la définition complète →.
In Europe, offshore wind LCOE estimates for 2024 run roughly €50 to €85/MWh depending on country and seabed conditions (estimates from IEA's World Energy Outlook and industry sources), notably higher than US onshore wind due to construction complexity at sea and higher financing costs in some markets. Onshore wind and solar in Europe generally sit closer to €30 to €60/MWh (estimates).
Europe's benchmark reference price is often the day-ahead wholesale power price on exchanges like EPEX Spot or Nord Pool, rather than a single PPA. A useful sanity check: if a project's LCOE sits comfortably below the multi-year average wholesale price for its market, it clears the bar without subsidy support.
Vérification des acquis
1. What does LCOE fundamentally represent for a power project?
2. A project signs a PPA at a price below its calculated LCOE. What does this imply?
3. Why does the LCOE formula discount both costs and energy output over time rather than simply summing raw totals?
4. Select ALL correct answers about the inputs used to calculate LCOE.
Sélectionnez toutes les réponses correctes.
5. Select ALL correct answers about how to properly interpret and use LCOE.
Sélectionnez toutes les réponses correctes.
LCOE is a cost benchmark, not a market price predictor. It ignores:
Analysts increasingly pair LCOE with LCOE-adjusted metrics like "value-adjusted LCOE" or compare it against the actual captured price a plant earns in real-time markets. That is a more advanced topic, but knowing LCOE's blind spots is table stakes for reading any project pro forma.
Levelized Cost of Energy Explained