When a business thinks about going solar, the first question that usually comes up is: how much will it cost me upfront? That’s understandable, because a commercial solar installation is a serious investment. But focusing only on the installation price misses the bigger picture. What matters more is the cost of the electricity your solar system produces over its entire life. That’s where the concept of Levelized Cost of Electricity (LCOE) comes in.

LCOE is often talked about in the renewable energy industry, but many business owners aren’t familiar with how it applies to their decisions. Think of it as the real bottom line: the average cost per unit of electricity generated, once all expenses are spread across the system’s lifespan. In this blog, we’ll unpack LCOE in plain language and explain why it’s one of the most useful ways to measure whether solar stacks up for your business.

What is LCOE?

Levelized Cost of Electricity is essentially the “true cost” of producing power. It takes into account every dollar spent on the system and divides it by the amount of energy the system is expected to generate. Unlike payback period or ROI, which focus on how quickly the investment pays itself off, LCOE gives a straightforward cost per kilowatt-hour (kWh).

The reason that makes the matter simple is that it allows businesses to compare solar directly with the price of grid electricity. If your LCOE comes in lower than the tariff your retailer charges, your business is generating energy at a cheaper rate than buying it from the grid.

Why LCOE Matters for Businesses

For Australian businesses, electricity costs have always been unpredictable. Market spikes, policy changes and time-of-use pricing models mean your bills today could look very different in two years’ time. LCOE takes away that uncertainty because once your solar system is installed, the cost of generating power is essentially locked in.

By focusing on LCOE, businesses gain:

• A clearer view of the long-term savings potential
• Transparency to compare solar against grid prices on equal footing
• A reliable way to build an internal business case for renewable investment

It’s not just about saving money now—it’s about putting your business in control of future energy costs.

Components of LCOE

Breaking LCOE down shows the moving parts that need to be considered.

• Capital expenditure (CapEx): The upfront purchase and installation cost of panels, inverters, racking and connection.
• Operating expenses (OpEx): Ongoing maintenance, cleaning, insurance and system monitoring.
• System lifetime & degradation: How long the system will perform efficiently and the small annual drop in panel output.
• Energy output (kWh): The projected generation across the lifetime of the system, based on your location and solar exposure.
• Financing costs: Any loans, leases or power purchase agreements tied to the system.

Each of these inputs can vary, but together they form the complete cost picture.

How to Calculate LCOE (Simplified)

The formula itself is straightforward:

LCOE = Total lifetime costs ÷ Total lifetime electricity generated

Let’s put this into context with a simplified example. Say a mid-sized business in Sydney installs a 100 kW solar system for $120,000. Over 20 years, including maintenance, the total cost comes to $150,000. The system is expected to generate around 2.6 million kWh over its life.

That makes the LCOE about 5.7 cents per kWh. Compare this with current commercial electricity rates, which are typically 20–30 cents per kWh (and climbing), and the advantage becomes clear. Your solar system isn’t just an asset—it’s producing electricity for a fraction of the price you’d otherwise pay.

Factors That Influence LCOE for Business Solar

The actual LCOE figure for your business will depend on a range of conditions:

• Location: Solar output in Perth differs from Melbourne due to variations in sunlight.
• System size: Larger systems often benefit from economies of scale.
• Technology choice: Higher efficiency panels cost more upfront but produce more energy over time.
• Maintenance quality: A well-maintained system delivers more consistent output.
• Financing model: Owning the system outright, leasing it, or signing a PPA can change the cost balance.

Understanding these factors ensures your LCOE calculation reflects your business reality, not just a textbook example.

LCOE vs Payback Period vs ROI

It’s worth noting that LCOE isn’t the only financial measure to consider. Many businesses still want to know the “payback period” — how long until the savings cover the initial investment — or the ROI over a set timeframe.

The difference is that LCOE paints a fuller picture. It tells you the average cost of producing each kWh, not just how quickly you earn back what you spent. In fact, the best analysis comes from using all three metrics together. That way you can evaluate immediate payback alongside the lifetime economics of solar.

Practical Benefits for Businesses

So what does all this mean in practice?

• It gives you a transparent way to compare solar against grid electricity.
• It helps with long-term budgeting and future-proofing energy costs.
• It strengthens the business case when pitching solar to boards or stakeholders.
• It aligns cost-saving with sustainability and ESG commitments.

In short, LCOE is not just a calculation—it’s a decision-making tool that keeps your business grounded in numbers, not guesswork.

Where LCOE Fits in Broader Energy Strategy

LCOE is one piece of the puzzle. For businesses also dealing with complex network tariffs and shifting time-of-use rates, it makes sense to view solar alongside your broader energy management. If you’d like to explore more on how tariff structures affect business decisions, we’ve covered it in our article on Time-of-Use Energy Tariffs. Together, these approaches can help you take a more strategic view of energy planning.

Conclusion

For Australian businesses looking to gain certainty in an uncertain energy market, LCOE is one of the most reliable tools available. It simplifies the complexity of solar economics into a single, comparable figure. More importantly, it empowers you to see solar not just as an environmental choice but as a financially sound investment.

If you’re considering solar for your business and want a tailored analysis of how LCOE stacks up against your current energy costs, our team at Connect Business Energy is here to help. We’ll run the numbers, compare your options and guide you toward a solution that makes sense for your business now—and well into the future.