What is levelised cost of energy, or LCOE?
Levelised cost of energy, or LCOE, expresses discounted lifetime generation costs per unit of electricity. DESNZ's Electricity Generation Costs 2025 report uses costs and output expressed in present-value terms [S1]. For your site, it helps assess a proposal's cost assumptions. It does not establish savings or payback, which require a separate cash-flow calculation [S3]. Checked October 2026.
What does LCOE mean for your site?
Levelised cost of energy (LCOE) is the discounted lifetime cost of generating electricity divided by the discounted electricity output [S1]. A kilowatt-hour (kWh) measures energy; a cost per kWh is a unit cost, not an annual return.
Why it matters for your site: an LCOE figure helps you inspect the cost and output assumptions behind a solar proposal. Ask for the calculation, rather than accepting a headline figure. DESNZ uses present-value costs and output in its generation methodology [S1].
How is a lifetime unit cost calculated?
For an illustration, not a quote, assume total discounted costs of £60,000 and discounted generation of 600,000 kWh. LCOE = £60,000 ÷ 600,000 = £0.10/kWh. Both inputs are assumptions, already discounted; this is not a solar price or generation forecast.
Ask for installation, operating and financing assumptions, equipment replacement allowances and the study period. Use the commercial solar cost data for separate market context, and business electricity price data to understand the bill being considered.
Why is LCOS different from solar payback?
Levelised cost of storage (LCOS) applies a unit-cost approach to electricity storage. The government’s storage study shows how cycling changes the energy delivered and therefore the cost spread across that output [S2]. For a battery proposal, ask whether charging electricity, losses and replacements are included; do not assume different calculations use the same boundary.
Payback asks when project cash flows recover the capital spent. Government energy-appraisal guidance treats payback separately from discounted financial measures [S3]. Read business solar payback and net present value and internal rate of return for those calculations. Check your project appraisal with your accountant.
Next step
Bring the model and its assumptions to the cut energy costs hub and site check, then get matched with an installer that covers your area.
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Common questions
What costs should a generation calculation include?
DESNZ includes pre-development, capital, operating, fuel and financing costs. Ask for a complete cost schedule and the treatment of replacements and end-of-life work [S1].
What does the discount rate do?
It converts future costs and output to present values. DESNZ applies financing cost through the discount rate; avoid adding the same financing cost again [S1].
Does a lower LCOE establish a shorter payback?
No. Payback concerns recovery of capital from cash flows, while LCOE concerns lifetime unit cost. Request the separate cash-flow appraisal and check it with your accountant [S1], [S3].
Why does battery cycling change LCOS?
More discharged energy spreads investment costs over more output. The government storage study identifies cycling and round-trip efficiency as important assumptions [S2].
Does LCOE include the full effect on the electricity system?
No. DESNZ identifies limitations concerning wider system effects, including timing and location. A generation unit cost is not a complete retail electricity bill [S1].
Ask about your site
Sources
- Electricity Generation Costs 2025 - methodology and limitations, Department for Energy Security and Net Zero,Last checked 19 October 2026
- Benefits of long-duration electricity storage - levelised storage costs, Department for Business, Energy and Industrial Strategy,Last checked 19 October 2026
- A guide to implementing energy savings opportunities - financial appraisal, Department of Energy and Climate Change,Last checked 19 October 2026