Capacity factor is the ratio of the annual average energy production
(kWh_{AC}) of an energy generation plant divided by the
theoretical maximum annual energy production of a plant assuming it
operates at its peak rated capacity every hour of the year. The formula
for calculating capacity factor is given by:

CF =

Annual energy production *(kWh*_{AC} _{/} year)

System rated capacity *(kW)* × 24 *(hours/day)* × 365 *(days/year)*

For a PV system, the rated capacity in the denominator is either
reported in terms of the aggregated capacity of (1) all its modules or
(2) all its inverters. PV modules are rated using standard test
conditions and produce direct current (DC) energy; inverters convert DC
energy/power to alternating current (AC) energy/power. Therefore, the
capacity of a PV system is rated either in MW_{DC} via the
aggregation of all modules' rated capacities or in MW_{AC} via
the aggregation of all inverters' rated capacities. The ratio between
these two capacities is referred to as the inverter loading ratio
(ILR).

Because the capacity factor is calculated using a system's rated
capacity, it can be represented using exclusively AC units or using AC
units for electricity (the numerator) and DC units for capacity (the
denominator). Both capacity factors will result in the same LCOE as
long as the other variables use the same capacity rating (e.g., if
capacity factor is calculated in kWh_{AC}/kWh_{DC},
then CAPEX should use the units of $/kW_{DC}). Both capacity
factors will also produce the same estimated energy generation as long
as they use consistent units.

Because a PV system's DC-rated capacity is typically higher than its
AC-rated capacity, a PV capacity factor calculated using a DC-rated
capacity has a higher denominator and, thus, a lower ratio than a PV
capacity factor calculated using an AC-rated capacity. To translate
between the two capacity factors, simply multiply or divide by the ILR.
For example, the PV system capacity factor calculated using a DC-rated
capacity (CF_{DC}) is given by:

CF_{DC} =

CF_{AC}

ILR

where CF_{AC} is the capacity factor calculated using an
AC-rated capacity and ILR is the inverter loading ratio.