Copper oxide (CuO) is a p-type semiconductor having a band gap energy of 1.5 eV, which is close to the ideal energy gap of 1.4 eV required for solar cells to allow good solar spectral absorption. The inherent electrical characteristics of CuO nanoparticles make them attractive candidates for improving the performance of polymer solar cells (PSCs) when incorporated in the active polymer layer. The incorporation of CuO nanoparticles in P3HT/PC70BM solar cells at the optimum concentration yields 40.7% improvement in power conversion efficiency (PCE). The CuO nanoparticles in the size range of 100–150 nm have an effective average band gap of 2.07 eV. In addition, the X-ray diffraction (XRD) and differential scanning calorimetry (DSC) analyses show improvement in P3HT crystallinity, and surface analysis by atomic force microscope (AFM) shows an increase in surface roughness of the PSCs. The key factors namely photo-absorption, exciton diffusion, dissociation, charge transport, and charge collection inside the PSCs which affect the external quantum efficiency (EQE) and PCE of these cells are analyzed.