When you receive a solar quotation, the first number you probably look at is the total price.
But price alone doesn’t tell you whether the solar system is actually a good investment.
A ৳10 lakh solar system may be a better investment than a ৳8 lakh system if the first one produces significantly more electricity over its lifetime.
This is where LCOE, or Levelized Cost of Energy, becomes useful.
LCOE tells you approximately:
How much does each unit of electricity produced by the solar system actually cost over its entire lifetime?
Instead of looking only at the installation price, LCOE considers the total project cost, operating expenses, system lifetime, electricity generation and the time value of money.
For homeowners, businesses and commercial solar projects in Bangladesh, this can be a much better way to compare different solar options.
What Is Solar LCOE?
LCOE stands for Levelized Cost of Energy.
In simple terms, it is the average cost of producing electricity from a solar system over its entire operating life.
The basic idea is:
Total lifetime cost ÷ Total lifetime electricity generation
The more complete version discounts future costs and electricity generation back to today’s value.
The standard formula is:
LCOE = Present Value of Lifetime Costs ÷ Present Value of Lifetime Energy Production
The source article expresses this using discounted CAPEX, OPEX and annual energy production.
Why Is LCOE Important?
Imagine you are comparing two solar systems.
System A
- Cost: ৳8 lakh
- Expected life: 25 years
- Annual generation: 8,000 kWh
System B
- Cost: ৳10 lakh
- Expected life: 25 years
- Annual generation: 11,000 kWh
At first glance, System A looks cheaper.
But System B may produce much more electricity over its lifetime.
This is why the better question isn’t:
“Which solar system costs less?”
It is:
“Which system produces electricity at the lower long-term cost?”
That’s what LCOE helps you understand.
The Main Components of Solar LCOE
Several inputs affect the final LCOE.
CAPEX — Initial Investment
CAPEX means the upfront capital cost of the solar project.
For a Bangladesh solar installation, this can include:
- Solar panels
- Inverter
- Mounting structure
- Installation
- DC and AC cabling
- Protection equipment
- Electrical distribution
- Monitoring system
- Civil work, where required
For a larger commercial project, engineering, transportation and other project-development costs may also be included.
OPEX — Operating Costs
OPEX means the ongoing cost of operating and maintaining the solar system.
Depending on the project, this may include:
- Panel cleaning
- Inspection
- Monitoring
- Maintenance
- Repairs
- Insurance, where applicable
- Inverter replacement
- Other operational expenses
One commonly overlooked cost is inverter replacement.
Solar panels may continue operating for decades, but the inverter may have a shorter service life.
The source article specifically highlights inverter replacement as an important OPEX consideration.
Discount Rate
The discount rate accounts for the fact that:
৳1 today is more valuable than ৳1 received many years from now.
For a commercial solar project, the discount rate can represent the expected return on capital or financing cost.
For a homeowner, the appropriate rate can be more difficult to define.
But it is important because changing the discount rate can significantly change the calculated LCOE.
A higher discount rate generally increases the calculated LCOE.
A lower discount rate generally decreases it.
System Lifetime
Solar systems are generally designed for long-term operation.
For LCOE calculations, a project life of around 20–30 years may be considered depending on the system and financial model.
A longer operating life can spread the initial investment across more electricity generation.
However, you should not assume that the system produces exactly the same amount of electricity every year.
Solar Panel Degradation
Solar panels gradually lose some output over time.
For a planning calculation, an annual degradation assumption may be used.
The attached source uses approximately 0.4%–0.5% annual degradation after the initial first-year effect as a typical planning range.
For example, if a system generates:
10,000 kWh in Year 1
it may generate slightly less in later years.
Ignoring degradation can make lifetime electricity production look higher than it is and therefore make the calculated LCOE look artificially low.
A Real Bangladesh Solar LCOE Example
Let’s calculate a simplified example for a commercial rooftop solar project in Bangladesh.
Suppose a business installs:
100 kW solar system
Assume the following:
| Item | Assumption |
|---|---|
| Initial system cost | ৳70,00,000 |
| System lifetime | 25 years |
| Year 1 generation | 1,35,000 kWh |
| Annual degradation | 0.5% |
| Annual OPEX | ৳1,00,000 |
| Discount rate | 6% |
These numbers are an illustrative worked example, not a quotation or guaranteed generation estimate.
Actual generation and project cost should be based on the property’s location, roof orientation, shading, equipment and engineering design.
Step 1: Calculate Year 1 Energy Production
Our hypothetical 100 kW system produces:
1,35,000 kWh in Year 1
That’s the starting point.
Because solar output gradually declines, Year 2 will be slightly lower.
At a 0.5% annual degradation assumption:
Year 2 ≈ 1,34,325 kWh
Year 3 will be slightly lower again.
This continues throughout the project life.
Step 2: Calculate Lifetime Energy Production
If we simply multiplied:
1,35,000 × 25
we would get:
33,75,000 kWh
But that assumes the system produces exactly the same amount every year.
That’s not realistic.
With 0.5% annual degradation, lifetime production will be slightly lower.
For this simplified example, the total lifetime generation is approximately:
3.30 million kWh
The exact number depends on the degradation model used.
Step 3: Calculate the Initial Cost
Our initial project investment is:
৳70,00,000
This includes the hypothetical complete installed solar system.
Remember that LCOE should use the actual project CAPEX—not just the panel price.
If your quotation says:
Solar panels = ৳30 lakh
but the complete project costs:
৳70 lakh
you should use the ৳70 lakh figure in the project LCOE calculation.
Step 4: Include Operating Costs
Our example assumes annual OPEX of:
৳1,00,000
Over 25 years, the simple undiscounted OPEX would be:
৳1,00,000 × 25 = ৳25,00,000
But LCOE does not simply add future costs at their full present-day value.
Future costs are discounted.
This is why a proper LCOE calculation requires year-by-year modelling.
Step 5: Discount Future Costs
Suppose the discount rate is:
6%
The cost in Year 1 is discounted by:
1 ÷ (1.06)¹
Year 10 is discounted by:
1 ÷ (1.06)¹⁰
And Year 25 is discounted by:
1 ÷ (1.06)²⁵
So costs that occur far into the future have a lower present value than costs occurring today.
The same discounting principle is applied to future energy production.
This is one of the key differences between a basic lifetime-cost calculation and a proper LCOE calculation.
Step 6: Calculate the LCOE
After discounting:
- Initial CAPEX
- Annual OPEX
- Lifetime energy production
- Annual degradation
we can calculate:
LCOE = Present Value of Total Costs ÷ Present Value of Total Energy Production
For this hypothetical example, the resulting LCOE would be expressed in:
৳/kWh
rather than simply giving the total project cost.
That number tells you approximately how much each unit of electricity costs the project to produce over its lifetime.
Why ৳/kWh Is More Useful Than Total Project Price
Suppose:
Solar System A
LCOE:
৳6.00/kWh
Solar System B
LCOE:
৳8.00/kWh
Even if System B has a lower upfront price, System A may be the better long-term electricity investment.
This is because LCOE considers both:
How much you spend
and
How much electricity you produce.
LCOE vs Electricity Tariff
This is where LCOE becomes particularly useful.
Suppose your solar project’s LCOE is:
৳6/kWh
and the electricity it is replacing effectively costs your business:
৳10/kWh
There is potentially a meaningful economic advantage.
But if your solar LCOE is:
৳11/kWh
and the electricity being replaced costs only:
৳9/kWh
the project may not look as attractive from a pure electricity-cost perspective.
The actual comparison should also consider:
- Net metering
- Demand charges
- Fixed charges
- Self-consumption
- Financing
- Backup requirements
- Maintenance
LCOE Does Not Equal Your Electricity Bill Savings
This distinction is extremely important.
LCOE answers:
“What does it cost to produce each unit of solar electricity?”
It does not directly answer:
“How much money will I save every month?”
Your electricity savings depend on how the generated electricity is used.
For example, electricity consumed directly by a commercial building may have a different financial value from electricity exported to the grid.
This is why self-consumption and net-metering arrangements affect the economic value of solar, but they are not themselves part of the basic LCOE formula.
LCOE vs Payback Period
LCOE and payback period are not the same thing.
LCOE
Measures the average cost of electricity produced over the system’s lifetime.
Payback Period
Measures approximately how long it takes for cumulative savings to recover the initial investment.
For example:
Solar investment = ৳60 lakh
Annual savings = ৳8 lakh
Simple payback:
৳60 lakh ÷ ৳8 lakh = 7.5 years
That does not tell you the LCOE.
Similarly, a low LCOE does not automatically mean the project has the shortest payback.
The source article correctly separates LCOE, payback and IRR because they answer different financial questions.
LCOE vs IRR and ROI
These three metrics are often confused.
| Metric | What It Tells You |
|---|---|
| LCOE | Cost of each unit of electricity |
| Payback Period | How long until investment is recovered |
| ROI / IRR | Overall investment return |
For a commercial solar project, you ideally want to evaluate all three.
A project may have:
- Excellent LCOE
- Moderate payback
- Attractive IRR
Or a project may have a low LCOE but poor financial returns because of financing or site-specific constraints.
What Can Increase Solar LCOE?
Several factors can push your LCOE higher.
High Initial Installation Cost
If the system costs more but does not produce proportionally more electricity, LCOE increases.
Poor Solar Exposure
Shading or poor roof orientation can reduce energy production.
Expensive Financing
A higher discount rate increases the present value of the project’s financial burden.
High Maintenance Costs
Higher OPEX increases lifetime cost.
Large Battery Storage
Adding batteries can substantially increase CAPEX.
If the battery provides necessary backup or energy-management value, it may still be worthwhile—but the LCOE of the overall system can increase.
Low System Output
A poorly designed system that generates less electricity than expected will have a higher effective cost per kWh.
What Can Lower Solar LCOE?
Good Solar Resource
More sunlight generally means more electricity from the same installed capacity.
Efficient System Design
Correct panel orientation, inverter sizing and low system losses can improve annual generation.
Competitive Equipment Pricing
Lower-quality equipment should not be selected simply because it is cheap, but competitive procurement can reduce CAPEX.
Long System Life
A system that produces useful electricity for many years can spread its initial investment across a larger lifetime energy output.
Low Operating Costs
Good-quality equipment and proper maintenance can help control OPEX.
Why Location Matters in Bangladesh
Two identical solar systems can have different LCOE depending on where they are installed.
The reason is simple:
Different locations can produce different amounts of solar electricity.
Your calculation should consider:
- Solar irradiation
- Roof orientation
- Tilt
- Shading
- Temperature
- Dust
- System losses
- Weather conditions
A system that generates more electricity from the same CAPEX generally produces a lower LCOE.
Dhaka Rooftop Solar Example
Imagine two commercial buildings install identical:
100 kW solar systems
Building A has:
- Large unobstructed roof
- Minimal shading
- Good panel orientation
Building B has:
- Multiple rooftop structures
- Significant shading
- Limited usable roof area
Both businesses may pay similar amounts for the equipment.
But Building A could generate substantially more electricity.
Therefore:
Building A → Lower LCOE
Building B → Higher LCOE
This is why site assessment is so important before purchasing solar equipment.
What About On-Grid vs Off-Grid LCOE?
The system type can make a major difference.
On-Grid Solar
Usually has:
- Lower CAPEX
- No large battery requirement
- Grid available as backup
This can result in a relatively low LCOE.
Hybrid Solar
Adds:
- Battery storage
- Backup capability
- More equipment
The additional battery cost can increase LCOE.
Off-Grid Solar
Usually requires:
- Larger battery storage
- More backup capacity
- Larger system reserves
Therefore, the cost per unit of electricity can be significantly higher than a simple grid-connected rooftop system.
The reason for choosing off-grid is usually energy independence or lack of grid access, not simply the lowest LCOE.
What LCOE Does Not Tell You
LCOE is extremely useful, but it does not tell you everything.
It does not fully capture:
- When electricity is generated
- When electricity is needed
- Grid constraints
- Electricity export value
- Demand charges
- Backup value
- Energy independence
- Power quality
- Reliability
For example, one unit of solar electricity generated at noon may have a different economic value from electricity needed during an evening peak.
The source article also highlights this limitation: LCOE is a cost-of-generation metric, not the complete economic value of electricity at every hour.
LCOE and Net Metering in Bangladesh
For eligible grid-connected solar systems, net metering can allow surplus electricity to be exported to the grid under the applicable Bangladesh framework.
This can improve the economic value of solar generation.
But remember:
Net metering does not change the physical cost of producing a unit of solar electricity.
It changes how that electricity can be used and financially valued.
Therefore:
LCOE = Production cost
Net metering = Part of the economic value calculation
Keeping these two concepts separate makes your solar financial analysis much clearer.
Common LCOE Calculation Mistakes
Ignoring Degradation
If you assume the panels generate exactly the same amount every year, you may overestimate lifetime production.
Ignoring Inverter Replacement
A 25-year model should not automatically assume the original inverter will operate perfectly for 25 years.
Using Only Panel Price
The project cost includes much more than panels.
Using Unrealistic Solar Generation
Overestimating annual generation makes LCOE look artificially low.
Ignoring Discount Rate
A calculation without a discount rate may be useful for a simple estimate, but it is not the same as a discounted LCOE analysis.
Comparing Different System Types
Comparing the LCOE of a simple on-grid system with an off-grid system containing a large battery may not provide a fair apples-to-apples comparison.
What Should You Ask Your Solar Installer?
If a company gives you an LCOE or ROI calculation, ask:
What CAPEX did you use?
Ask for the complete installed cost.
What annual generation did you assume?
Ask for the expected kWh/year.
What degradation rate did you use?
Make sure the calculation doesn’t assume constant production forever.
What discount rate did you use?
This can significantly affect the result.
What OPEX did you include?
Ask whether cleaning, maintenance and inverter replacement were included.
What system lifetime did you use?
Ask whether the model covers 20, 25 or 30 years.
Did you include battery replacement?
If batteries are part of the system, this is important.
A Simple LCOE Calculation Without a Complex Spreadsheet
For a quick estimate, you can start with:
Simple LCOE ≈ Total Lifetime Cost ÷ Total Lifetime Energy Production
For example:
Total lifetime cost:
৳1.00 crore
Total lifetime electricity generation:
20,00,000 kWh
Then:
৳1,00,00,000 ÷ 20,00,000
= ৳5/kWh
This is a simplified, undiscounted LCOE.
A proper LCOE calculation will be different because it discounts future costs and energy production and can include degradation, replacement costs and other assumptions.
Why a Spreadsheet Is Better for a Real Project
For a serious commercial solar project, calculate each year separately.
Your spreadsheet can include:
| Year | Solar Generation | Degradation | OPEX | Discount Factor | Present Value |
|---|---|---|---|---|---|
| 1 | kWh | — | ৳ | — | ৳ |
| 2 | kWh | 0.5% | ৳ | — | ৳ |
| 3 | kWh | 0.5% | ৳ | — | ৳ |
| … | … | … | … | … | … |
| 25 | kWh | 0.5% | ৳ | — | ৳ |
Then calculate:
Total Present Value of Costs
and
Total Present Value of Energy
Finally:
LCOE = PV Costs ÷ PV Energy
This provides a much more defensible result than simply dividing the initial price by expected annual generation.
What Is a “Good” Solar LCOE in Bangladesh?
There is no single number that applies to every solar project in Bangladesh.
A good LCOE depends on what you are comparing it against.
For example:
Solar LCOE = ৳6/kWh
may look attractive if the electricity it replaces costs considerably more than ৳6/kWh.
But the same LCOE may be less attractive if the relevant electricity cost is lower.
For commercial projects, you should compare the LCOE against the actual effective electricity cost of the business, while also considering net metering, demand charges and the timing of electricity consumption.
Frequently Asked Questions
What does LCOE mean in solar?
LCOE means Levelized Cost of Energy. It represents the average cost of producing each unit of electricity over the lifetime of a solar system.
What is the formula for solar LCOE?
The simplified formula is:
LCOE = Total Lifetime Cost ÷ Total Lifetime Energy Production
A proper LCOE calculation discounts future costs and energy production back to their present value.
Is LCOE the same as solar payback period?
No.
LCOE measures the cost of producing electricity.
Payback measures how long it takes for savings or revenue to recover the initial investment.
Is a lower LCOE always better?
Not necessarily. A lower LCOE is generally desirable, but the complete economic value of a solar project also depends on when electricity is generated, how it is consumed, net metering, financing and other project-specific factors.
Does battery storage increase LCOE?
Usually, yes. Batteries add significant upfront cost and may require replacement during the project’s lifetime. However, they can provide backup power and other benefits that are not captured by LCOE alone.
Does net metering reduce LCOE?
No. Net metering does not change the physical cost of generating electricity. It can, however, increase the economic value of surplus electricity exported to the grid.
Why does solar panel degradation matter?
Panel degradation means the system gradually produces less electricity over time. If degradation is ignored, lifetime energy production can be overstated and LCOE can appear lower than it actually is.
What discount rate should I use for a Bangladesh solar project?
There is no single correct rate for every project. It depends on the project’s financing structure, cost of capital and investment assumptions. For a commercial project, the financial model should use an appropriate project-specific discount rate.
Can I calculate LCOE for a home solar system?
Yes. You can calculate it for residential rooftop solar as well as commercial and utility-scale projects. You need the system cost, expected generation, operating costs, lifetime, degradation and discount rate.
What is the difference between LCOE and ROI?
LCOE measures the cost of electricity production, while ROI measures the financial return on the investment. They answer different questions and should ideally be considered together.
Should I calculate LCOE before installing solar?
For larger residential, commercial or industrial projects, it is highly useful. It allows you to compare different system designs and understand whether the electricity produced is economically competitive over the project’s lifetime.
Final Verdict
LCOE is one of the most useful numbers for evaluating a solar project because it moves the conversation away from:
“How much does the solar system cost?”
and toward:
“How much does the electricity actually cost over the system’s lifetime?”
For Bangladesh solar projects, the calculation should consider:
CAPEX
OPEX
Solar generation
Panel degradation
Discount rate
System lifetime
Inverter replacement
Battery costs, if applicable
Once those numbers are modelled properly, you can calculate a realistic ৳/kWh LCOE.
At Muspana, we recommend looking at LCOE alongside payback period and ROI/IRR, rather than relying on a single financial metric.
A solar project with the lowest upfront price is not necessarily the cheapest electricity source.
And a project with the shortest payback is not necessarily the one with the lowest lifetime cost.
The best project is the one where the system design, energy generation, financing and long-term operating costs all work together.
