Levelized Cost of ElectricityPart 2

February 24, 2014

Learning Outcomes

•An understanding of essential economic considerations including:

o Life Cycle Costingo Levelized Cost of Electricity (LCOE)o Payback Analysis

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Value to participants

• The Levelized Cost of Electricity (LCOE) is extensively employed in the energy industry, as it is used to compare costs among energy sources, or to compare the cost of energy from variations in the same technology. It also has some limitations in its application. It is essential for PV designers to know how to calculate and to apply the LCOE in any PV project.

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Class Components

• LCOE, continued

• Payback Analysis

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Resources

• Photovoltaic Systems Engineering, Messenger & Ventre (3rd Edition), Ch.8

• Economic Analysis and Environmental Aspects of Photovoltaic Systems, R.A.Whisnant, S.A.Johnston, & J.H.Hutchby, in Handbook of Photovoltaic Science and Engineering, Luque et al., Ch 21

• “Levelized Cost of Electricity,” T.Yates & B.Hibberd, in SolarPro, V5N3, April/May 2012

• Notes from S.Trimble

Economic Analysis• Present Worth

o This analysis can be extended to consider the case of recurring costs (fuel, maintenance & operation, etc.). One can sum up the PW of each separate expense.

Levelized Cost of Electricity• LCOE is defined as an energy source’s total lifetime cost

of operation divided by the total lifetime energy production:

• Its main function is to provide a way to compare the relative cost of energy produced by different energy-generating sources regardless of project scale or operating time frame

• Note: LCOE is a metric with units $/kWh

LCOE• As shown previously

LCOE factors

• Costso Initial investment or capitol

costo O&M and operating costso Financing costso Insurance costso Taxes (County, State and

Federal)o Return on Investmento Decommissioning

• Incentiveso Tax credits (State and

Federal)o Depreciation (MACRS)o Incentive revenue

• Energyo Estimated year one

productiono Annual degradationo System availability

LCOEExpanding the previous equation

where:o I = Initial capital costo D = Depreciationo T = Tax rateo O = Annual operating cost (O&M, loan payments, insurance, etc.)o R = Incentive revenueo S = Salvage valueo Q1 = Year one energy production o Degradation rate

LCOE• In the paper by Yates & Hibbard, then LCOE calculation is used to analyze

and predict the LCOE for future power –plants

LCOE• Yates & Hibbard also analyze other factors, inside one technology:

o Effect of location

LCOEo Effect of module cost and degradation rate

LCOEo Sensitivity to factors in the equation

LCOE• There are some limitations to the value of LCOE

calculations

o It calculates energy value in the analysis period, but does not calculate how valuable the power is. This can be an important factor with time variable energy sources

o A project with a lower LCOE is not necessarily the preferred project. It is a good macro-perspective design tool, but not always the most useful when making decisions about a specific project

Payback

• The numerator of the LCOE equation can be examined alone, to help estimate the payback period for a PV system

• But if various factors turn on (or turn off) at different times, then the equation has to be modified.

Payback Example

• Assume that the installed cost of a 5kW PV system is $4/W after all incentives are accounted for. Assume that the system will produce an annual electrical amount of 7600 kWh (as determined by PVWatts). Assume money is borrowed to pay for the system at 5% interest and a 20 year term. Assume the utility cost of electricity as $0.14/kWh, which will escalate at 6% per year