Levelised Cost of Energy

The formula

LCOE = (Total lifetime costs) ÷ (Total lifetime energy produced)

For a residential solar system:

• Total lifetime costs = upfront capital + maintenance over system life (minimal for solar) + replacement inverter (~year 10–12)
• Total lifetime energy = annual generation × 25 years, adjusted for annual degradation (~0.5%/year)

Example - 6.6 kW system in Sydney:

• Net upfront cost after STCs: $8,500
• Inverter replacement at year 12: $1,500
• Annual maintenance: ~$100 (cleaning, monitoring)
• 25-year generation: approximately 9,000 kWh/year × 25 × degradation factor ≈ 213,000 kWh
• LCOE: ~$11,000 ÷ 213,000 kWh ≈ 5.2¢/kWh

That 5.2¢/kWh compares to a retail electricity rate of 30–40¢/kWh - which is why solar self-consumption is so financially attractive. The energy you generate yourself is produced at roughly one-eighth the cost of buying it from the grid.

LCOE at the grid scale

CSIRO’s annual GenCost report tracks the LCOE for utility-scale generation in Australia. Key findings from recent editions:

• New build utility-scale solar PV: approximately $35–$70/MWh ($0.035–$0.07/kWh)
• New build wind: approximately $50–$80/MWh
• New build gas peaker: $150–$300/MWh (highly variable with gas prices)
• New build coal: effectively uneconomic for new build in Australia

These figures explain why no new coal generation is being built and why gas peakers are increasingly used only for residual firm capacity rather than baseload. Solar and wind LCOE has fallen dramatically over the past decade - by roughly 85% for solar between 2010 and 2023, according to IRENA data.

Limitations

LCOE doesn’t capture dispatchability. A wind farm with $60/MWh LCOE that only generates when the wind blows is not directly comparable to a gas plant with $200/MWh LCOE that generates on demand. For utility planning, LCOE needs to be paired with analysis of capacity value and grid integration costs.

For residential solar, LCOE is a cleaner comparison tool because the “grid” provides backup on demand. Your solar doesn’t need to be dispatchable - it just needs to be cheaper than the alternative, and at 5¢/kWh vs 35¢/kWh, it is.