# Back-of-envelope math: the calculations pros run daily
A developer pitches you a 200 MW solar project. Before the deck's third slide, an experienced utility analyst has already scribbled three numbers on a notepad: expected annual output, a rough LCOE, and whether the interconnection queue timeline makes sense. That's not a party trick. It's the baseline fluency that separates people who can sit in a deal meeting from people who nod along.
This lesson walks through five calculations you should be able to do on a napkin, with real-world inputs.
Capacity factor (CF): the ratio of actual energy produced over a period to what the plant would produce if it ran at full nameplate capacity 100% of the time.
Formula:
Annual output (MWh) = Nameplate capacity (MW) x 8,760 hours x Capacity factor8,760 is simply the hours in a year (24 x 365), your constant for these conversions.
Typical capacity factors (US/Europe, 2020s averages, treat as estimates):
Worked example: A 200 MW solar project with a 25% capacity factor.
200 MW x 8,760 x 0.25 = 438,000 MWh/yearThat's your annual energy number, the figure that drives revenue, REC counts, and emissions-avoidance claims. Get the capacity factor wrong by a few points and your revenue estimate swings materially.
LCOE: the average cost per MWh of building and operating a plant over its lifetime, discounted to present value. It's the standard yardstick for comparing technologies with very different cost structures (upfront capital vs. ongoing fuel).
Simplified version pros sketch quickly:
LCOE ≈ (Total lifetime cost, discounted) / (Total lifetime MWh produced, discounted)You won't build the full discounted cash flowdiscounted cash flowDiscounted Cash Flow (DCF) is a valuation method that estimates an asset's value by projecting future cash flows and discounting them to present value using a required rate of return.Voir la définition complète → on a napkin, but you can sanity-check a claimed LCOE against public benchmarks. Lazard's Levelized Cost of Energy Analysis is the industry's most cited free reference, updated annually.
As-of-2025 ballpark figures (Lazard-style estimates, US-focused, unsubsidized):
Quick sanity check: if a developer quotes $20/MWh for a new offshore wind project, that's well below range, ask why (unusual site, subsidy layering, or an unrealistic pitch).
REC (Renewable Energy Certificate): a tradable certificate representing proof that 1 MWh of electricity was generated from a renewable source. In Europe, the equivalent is a GO (Guarantee of Origin).
Utilities and corporate buyers under a RPS (Renewable Portfolio Standard), a state or national mandate requiring a set percentage of electricity from renewables, must acquire RECs equal to their obligation.
Worked example: A utility sells 10,000,000 MWh annually to retail customers. The state RPS requires 30% renewable content this year.
REC obligation = 10,000,000 MWh x 0.30 = 3,000,000 RECsIf the utility's own renewable generation only produces 2,000,000 qualifying MWh, it must buy 1,000,000 RECs on the market or pay an ACP (Alternative Compliance Payment), a penalty-like fee some states set as a price ceiling for non-compliance.
This is the calculation compliance officers and portfolio managers run every planning cycle. It directly drives REC market demand and pricing.
Rate case: the formal regulatory proceeding where a utility asks its regulator (a PUC, Public Utility Commission, in the US) to approve new customer rates, usually to recover capital investment and earn a return.
The core number to check: revenue requirement.
Revenue requirement = Operating expenses + Depreciation + (Rate base x Allowed rate of return)Rate base: the utility's invested capital (plants, wires, poles) that regulators allow it to earn a return on.
Worked example: A utility has a $2 billion rate base, a PUC-allowed return of 9.5%, $150 million in annual depreciation, and $300 million in operating expenses.
Revenue requirement = $300M + $150M + ($2,000M x 0.095)
= $300M + $150M + $190M
= $640MIf the utility is asking for a rate increase that implies a revenue requirement far above this, that's your cue to check the assumptions: is the rate base inflated, is the requested return above peer averages (US allowed ROEs have generally clustered in the 9-10.5% range in recent PUC decisions, per S&P Global/RRA rate case data), or is there a large 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 → program (grid hardening, EV infrastructure) driving the jump.
Before trusting any output or LCOE number, check the interconnection queue, the line of generation projects waiting for grid study and approval from the transmission operator or ISO/RTO (Independent System Operator/Regional Transmission Organization, e.g., PJM, MISO, ERCOT in the US; ENTSO-E coordinates across Europe's TSOs, Transmission System Operators).
As of recent data (Lawrence Berkeley National Lab's annual queue report is the standard free source), US interconnection queues hold roughly 2,000+ GW of proposed capacity, dominated by solar, storage, and wind, but historically only about 20% of projects that enter a queue ultimately reachreachThe number of unique people exposed to your message in a given period. Unlike impressions, reach counts each person once, no matter how often they see it.Voir la définition complète → commercial operation.
Quick gut check: if a developer says their 200 MW project achieves COD (commercial operation date) in 18 months and they haven't cleared interconnection studies yet, that timeline is aggressive. Queue times in many US regions now commonly stretch 3-5 years.
Vérification des acquis
1. Why does the capacity factor conversion matter so much when evaluating a generation project's revenue potential?
2. An analyst is comparing a proposed offshore wind project to an onshore wind project of the same nameplate capacity. Based on typical capacity factor ranges, what should they expect?
3. Why is LCOE useful as a comparison metric between a natural gas plant and a solar project, even though their cost structures are completely different?
4. Select ALL correct answers about capacity factor as a concept.
Sélectionnez toutes les réponses correctes.
5. Select ALL correct answers about why experienced analysts run quick back-of-envelope calculations before deep diligence on a project pitch.
Sélectionnez toutes les réponses correctes.
When a deal memo lands on your desk, run this sequence in under five minutes:
1. Convert nameplate capacity to expected MWh using a defensible capacity factor.
2. Compare the quoted LCOE against a current Lazard-style benchmark for that technology.
3. If RECs or GOs are part of the revenue stack, check the obligation math against actual state or national mandate percentages.
4. If a utility rate impact is cited, rebuild the revenue requirement from rate base and allowed return.
5. Check the interconnection queue status. No queue position, no assumed December for the timeline.
None of this replaces a full model. But it catches the pitch decks that don't hold up, before you've spent a week on diligence.
🎬 [VIDEO: "How Solar and Wind Power Get Priced (LCOE Explained)" - youtube.com - a visual walkthrough of how levelized cost of energy is built up from capital, fuel, and operating costs, useful for seeing the LCOE formula in action]