Analysis of Levelized Cost of Energy (LCOE) and Grid Parity for Utility-Scale Photovoltaic Generation Systems

Mohamed EL-Shimy
IEEE member, Associate Prof., Electrical Power and Machines Department Ain Shams University Abbassia, Cairo 11517, Egypt Mohamed_bekhet@eng.asu.edu.eg; shimymb@gmail.com. Tel. +2 01005639589
Abstract - This paper highlights the Levelised Cost of Energy (LCOE) and the opportunity for grid parity of utility-scale photovoltaic (PV) generating systems in Egypt. Various technical and financial assumptions required for estimating the PV-LCOE are discussed and inspected. In addition, the sensitivity of LCOE to various input parameters is performed. Measures for PVLCOE reduction are discussed. For standardized modelling of the LCOE, the internationally verified System Advisor Model (SAM) is used in this study. Detailed results are available in the associated sections in the paper; however, the main decision-aid related results show that the PV-LCOE values in Egypt are far away from being comparable with the actual retail electricity prices and the estimated LCOE of conventional power generation. Achieving grid parity through grid-connected PVgeneration requires huge reduction in the current costs associated with PV-plants. Probable economic use of PV-plants is still possible in off-grid applications in remote and arid areas where grid-connection is neither economical nor possible. Index Terms - LCOE; grid parity; breakeven; photovoltaic (PV); energy production; techno-economic analysis; sensitivity and parametric analysis.

I. INTRODUCTION Solar photovoltaic (PV) technology, which converts sunlight directly into electricity, is one of the fastest growing Renewable Energy Technologies (RETs) in the world [1]. Photovoltaic (PV) capacity has exhibited an average annual growth rate of more than 40% over the last decade [1-3]. The installed capacity almost increased by 50% between 2008 and 2009 from 15.7GW to 22.9 GW [2, 3]. This is due to both technological innovations that have reduced manufacturing costs in the last decade by approximately 100 times and various government incentives for consumers and producers [1, 4]. The cost of solar generated electricity is consistently coming down, while the cost of conventional electricity is increasing. Advances in solar cell technology, conversion efficiency and system installation have allowed utility-scale photovoltaic (PV) to achieve cost structures that are competitive with other peaking power sources [5, 6]. Governments subsidize the deployment of solar photovoltaics (PV) because PV is deployed for societal purposes [7]. There are many different types of PV cells. Single crystalline silicon and multi-crystalline silicon represent 8590% of the PV market. Thin film PV cells represent 10%-15% of the PV market, and have many several different categories.

Thin film cells are less efficient yet cheaper, whereas crystalline silicon cells are more expensive [2]. Egypt is endowed with high intensity direct solar radiation [8-10]; Egypt is one of the Sun Belt countries, which have highest potential for solar energy projects [9, 10]. In the past, dollars per Watt serve as an index to estimate the cost of solar PV systems. However, the $/Watt evaluation method does not consider the effects of the lifetime, performances of the solar equipments, and financial policies. Therefore, The U.S. Department of Energy (DOE) has chosen levelized cost of energy (LCOE) as a key parameter to evaluate PV systems [11]. With the LCOE method, the $/Watt which is traditionally used in solar industry can be transformed into $/kWh, which is a more decisive parameter in power industry. Generally, the levelised cost of energy (LCOE) is a cost of generating energy (usually electricity) for a particular system. It is an economic assessment of the cost of the energygenerating system, including all the costs over its lifetime: initial investment, operations and maintenance (O&M), cost of fuel, and cost of capital [12, 13]. The LCOE is a measure of the marginal cost (the cost of producing one extra unit) of electricity over an extended period [2]. The LCOE is also known as Levelised Energy Cost (LEC), Levelised Unit Energy Cost (LUEC), and Long-Run Marginal Cost (LRMC) [2, 12-14]. Therefore, the LCOE is the constant unit cost (per kWh or MWh) of a payment stream that has the same present value as the total cost of building and operating a generating plant over its life. Simply, the LCOE converts unequal annual costs to a constant cost and allows a single cost value to characterize resource cost [15]. The breakeven cost for photovoltaic (PV) technology is defined as the point where the cost of PV-generated electricity equals the cost of electricity purchased from the grid [4, 16]. This target has also been referred to as grid parity [1, 4, 16]. Grid parity is considered when the LCOE of solar PV is comparable with grid electricity prices of conventional technologies and is the industry target for cost-effectiveness [1, 4]. Given the state of the art in the technology and favorable financing terms, clearly PV has already obtained grid parity in specific locations and as installed costs continue to decline, grid electricity prices continue to escalate, and industry experience increases, PV will become an increasingly economically advantageous source of electricity over expanding geographical regions [1].

The LCOE is most often used metric for evaluating the economic feasibility of energy generation projects when comparing electricity generation technologies or considering grid parity for emerging technologies such as PV [1, 4, 5, 15]. Since most studies involving new generation or transmission require an assessment of costs, accurate and readily available costs of generation estimates are very essential for electric utilities [15]. One use for LCOE calculations is to compare costs without incentives. If incentives such as the U.S. Investment Tax Credit (ITC) are assumed in an LCOE calculation, they should be specifically referenced to make clear the basis for comparison between technologies [5, 6]. The LCOE is highly sensitive to small changes in the input variables and assumptions. For this reason, Careful assessment and validation of assumptions used for different technologies when comparing the LCOE are very important [1, 5, 6, 15-24]. The main assumptions made in the LCOE calculation is the choice of the discount rate, average system cost, financing method and incentives, average system lifetime, and degradation of energy generation over the lifetime. References [1, 5, 6, 15, 23, 25] provide guidelines for correctly setting the input assumptions for estimation of the LCOE. Sensitivity curves to study the change in the LCOE as various input variables are changed. In addition, the sensitivity analysis can be used to overcome the ample uncertainty in the input variables and assumptions. The key parameters that govern the cost of PV power are the capital costs and the discount rate. Other costs are the variable costs, including operations and maintenance. Of these parameters, the capital cost is the most significant and provides the largest opportunity for cost reduction [2]. The capital costs themselves fall into one of two broad categories: the module and the Balance of System (BOS) [2, 18]. The module is the interconnected array of PV cells and incorporates feedstock silicon prices, cell processing and module assembly costs. The BOS includes structural system costs (structural installation, racks, site preparation and other attachments) and electrical system costs (the inverter, wiring and transformer and electrical installation costs). Breakdowns of the capital costs for a ground-mounted system as suggested by the Rocky Mountain Institute are 40% module and 60% BOS. Cost reduction can be achieved by numerous alternatives, but all possible opportunities are based on the technological improvements and the economics of scale and volume. Both the module and BOS cost components have experienced, or have the potential to experience reductions because of both factors [2]. Cost reductions are mainly associated with increasing capacity [2], inverter development for utility-scale PV systems [2, 18, 19, 24], downsizing of the structural components [18, 21], increased installation efficiency [18, 21], and use of trackers [2, 5, 6]. This paper highlights the Levelised Cost of Energy (LCOE) and the opportunity for grid parity of utility-scale photovoltaic (PV) generating systems in Egypt. Various technical and financial assumptions required for estimating the PV-LCOE are discussed and inspected. In addition, the

sensitivity of LCOE to various input parameters is performed. Measures for PV-LCOE reduction are discussed. For standardized modelling of the LCOE, the internationally verified System Advisor Model (SAM) is used in this study. II. MODELING OF THE LCOE AND GRID PARITY A. The LCOE The nomenclature used in this paper is shown in Table 1. Utility scale PV systems are generally built directly on the ground, and are typically between 1MW and 50MW in size. The module is combined with a ground based, mounting system, to create the solar collector array. The modules within the array are connected to an inverter, which converts the DC power into AC power, which is then transformed at a substation for distribution in a high-voltage transmission-line [2]. With time, the efficiency of power plants is reduced. In PV systems, the time-dependent reduction in the efficiency is called output degradation [17]. PV systems are often financed based on an assumed 0.5 to 1.0% per year degradation rate, although 1% per year is used based on warranty. In general, a degradation rate of 0.2% - 0.5% per year is considered reasonable given technological advances [1]. The energy generated in a given year (Et) is equal to the rated energy output per year (St) multiplied by the degradation factor (1 - d) which decreases the energy production with time [1]. The economies of scale inherent in utility-scale solar systems is similar to those found with other power options, but PV has the benefit of being completely modular PV works at a 2 KW residential scale, at a 2 MW commercial scale or at a 250 MW utility scale. PV has the unique advantage among renewable resources of being able to produce power anywhere: deserts, cities, or suburbs [5, 15]. A LCOE model is an evaluation of the life-cycle energy cost and life-cycle energy production [5]. It allows alternative technologies to be compared when different scales of operation, investment, or operating time periods exist. It captures capital costs, ongoing system-related costs and fuel costs along with the amount of electricity produced and converts them into a common metric: $/kWh. Generally, the LCOE can be represented by [5, 6], = Total Life Cycle Cost Total Lifetime Energy Production
TABLE 1 NOMENCLATURE Life of the project [years] Year number i.e. 0, 1, 2 T Net annual cost of the project for year t [$] Energy produced in year t [kWh] Initial investment and cost of the system for year t [$] Maintenance cost for year t [$] Operation cost for year t [$] Interest expenditure for year t [$] Discount rate [%] Rated energy output for year t [kWh/year] Degradation rate [%] Revenue for year t [$] Depreciation [%] Tax rate Residual Value

(1)

T t Ct Et It Mt Ot Ft r St d Rt Dep TR RV

From economic point of view, the LCOE is representative of the electricity price that would equalize cash flows (inflows and outflows) over the economic life time of an energy generating asset. It is the average electricity price needed for a Net Present Value (NPV) of zero when performing a discounted cash flow (DCF) analysis. The LCOE is determined by the point where the present value of the sumdiscounted revenues is equivalent to the discounted value of the sum of costs [1, 2, 22] i.e.

(1 + ) =
=1 =0

(1 + )

(2)

One of the most important assumptions and input parameters is the discount rate (r). This input represents an appraisal of the time value of the money used in the investment [2]. Therefore, the discount rate can be used to convert future costs to present value. The discount rate is particularly important in the context of renewable energy generating assets, due to their inherent capital intensity. This can be contrasted with technologies with higher operating costs such as open cycle gas turbines. Whilst the LCOE for these technologies is affected by the choice of the discount rate, the impact is less pronounced, and they are not as much sensitive to variations in the discount rate. Considering that = . In addition, the sum of the present value LCOE multiplied by the energy generated should be equal to the present valued net costs, and the LCOE is a constant value [1, 2, 22], then equation (2) results in equation (3).

One of the most clear recent LCOE reports was by the California Energy Commission in 2010 [15]. In the Energy Commissions Model [15], 25 separate cost-of-generation models are combined into one model with drop-down menus. In addition, the Model has been completely reorganized to make it more flexible and more transparent. The model includes analytical functions for screening and sensitivity curves to allow users to evaluate the effect of the various cost factors used in developing the levelised costs. The System Advisor Model (SAM) [23, 24] is a performance and economic model designed to facilitate decision making for people involved in the renewable-energy industry. The National Renewable Energy Laboratory (NREL) in collaboration with Sandia National Laboratories and in partnership with the U.S. Department of Energy (DOE) Solar Energy Technologies Program (SETP) develops SAM. The SAM makes performance predictions for grid-connected solar and non-solar generation projects. The model is very flexible and provides several functions for sensitivity analysis and other techno-economic analysis. The SAM is used in many previous studies for technoeconomic analysis of grid-connected PV systems [11, 20, 25, 26], and it will be used for the study in this paper as a standard tool for determining the LCOE and associated technoeconomic analysis. In contrast with the typical or average capacity factor methods [1, 2, 4, 7, 17] for determining the annual energy production of PV plants, the SAM provides an accurate tool for determination of the produced energy. Actual long-term meteorological and accurate models for the PV system components are available in the SAM for determination of the annual energy production. B. Grid Parity Despite increased incentives and the demand for more sustainable forms of energy, PV has still not become a major energy supply contributor [1]. The tipping point for solar PV adoption is considered to be when the technology achieves grid parity [1, 4] given that conventional-powered electricity prices are rising whilst PV installed prices are falling. The concept of grid parity for solar PV represents a complex relationship between local prices of electricity, solar PV system price that depends on size and supplier, and geographical attributes. However, depending on the location, the cost of solar PV has already dropped below that of conventional sources achieving grid parity [1, 4, 28]. The grid parity is often graphically given as the industry average for solar PV electricity generation against the average electricity price for a given country [1, 4, 27]. Whilst this is a useful benchmark, its validity depends on the completeness and accuracy of the method used to calculate the PV-LCOE. In addition, claims of grid parity at manufacturing cost instead of retail price have contributed to confusion [1, 4]. III. DEMONSTRATION EXAMPLE A. PV PLANT AND LOCATION In [10], the viability analysis of building a 10 MW PVgrid connected power plant in Egypt is given. Both techno-

=
=0

(1 + )

=1

(1 + )

(3)

There are multiple ways to calculate LCOE, depending on the level of financial detail. For example, the model presented in [5, 6] included in the LCOE inputs the initial investment, total depreciation tax benefit, total annual cost, total system residual value, and lifetime energy production. The LCOE equation is then represented by equation (4). In [1], another model is given as shown in equation (5); in this model, no incentives are considered.
0 =
=1

1 +

=1

1 + 1 1 +
=1

1 +

(4) =
=0

+ + + (1 + ) 1 =1 (1 + )

(5)

Several international organizations and institutions such as [15, 23] attempt to standardized modeling of the LCOE.

economical and environmental conditions are taken into account. The results show that placement of the proposed 10 MW PV-grid connected power plant Kharga site (Lat. 25o 27 N, Long. 30o 32 E, Elev. 77.8 m) offers the highest profitability, energy production, and GHG emission reduction. The Sanyo mono-Si-HIP-205BA3 205 Wp PV-module is selected from a large list of modules from many manufacturers. The selection criterion was a minimum efficiency of 15% and the highest capacity/area ratio. The required number of modules is 48781. Two-axis trackers are selected for maximization of the electric energy production. The DC system is connected to the AC system via two 4750 kW inverters. The inverter efficiency is assumed to be 95%. The initial and periodic costs of the PV plant as well as the financial parameters are given in [10]. B. Objectives The objective of this example is to determine the LCOE and to perform a sensitivity analysis for the mentioned PV plant in the considered location. The sensitivity and parametric analysis are performed to overcome the uncertainties in the input parameters and to take into account the time-dependent changes of the costs. In addition, the sensitivity analysis is also valuable in assessing the impact of various technologies on the LCOE. For example, in [1], the cost of PV modules varies from technology to technology, from country to country, and according to the project scale. The sensitivity analysis is also valuable in determining the significant directions for reducing the LCOE. The PV-LCOE in comparison with the actual retail price of electricity and the estimated LCOE of conventional power generation is considered to evaluate the grid parity. The System Advisor Model (SAM) [23, 24] is used for this study. No incentives are considered in this example. The degradation is assumed to be 0.5% [1]. The availability factor accounts for downtimes due to forced and scheduled outages [23, 24]. The availability of PV systems is largely driven by inverter downtime [5, 6]. The availability of the PV power plant is assumed to be 99%. IV. RESULTS AND DISCUSSIONS A. BASE-CASE ANALYSIS The base case is the situation where the considered 10 MW PV power plant is placed at the Kharga site in Egypt. The total incident solar radiation on Kharga and the expected monthly energy production from the PV plant are shown in Fig. 1. It is depicted from Fig. 1 that high-energy production levels can be achieved during the summer period. This production pattern is an agreement with the annual load curve of Egypt. Therefore, the considered PV power plant can support well the power grid in supplying the peak loading. The maximum energy production is 2.5 GWh associated with May. The effect of the PV system degradation is shown in Fig. 2. The system is capable of producing 24.8 GWh in the first year; however, due to the system degradation, its production capability is limited to 22 GWH by the 25th year. Therefore, 11.33% of the production capability is lost by the end of the lifetime which is considered 25 years in the base case.

Fig. 1 Incident radiation and monthly energy production at the Kharga site

Fig. 2 Impact of system degradation on the annual energy production.

Fig. 3 Stacked cost/watt and LCOE for the base case

The costs per Watt and the LCOE as well as the cost components for each of them are shown in Fig. 3. The cost Per Watt is 11.83 US$/Watt where the modules present the dominant cost (60.55% of the cost per Watt). The BOS is the second major cost component (21.05%) followed by O&M costs (11.92%). The LCOE is 37.74 cent/kWh where the major cost components are the same as in the cost per Watt but with different percentage values. In the LCOE, the Modules present 65.95% followed by the BOS (22.93%) then the O&M costs (4.06%). Therefore, reducing the cost per Watt and the LCOE can be achieved by reducing the costs associated with the modules, BOS, and O&M. This is can be achieved, for example, by increasing the scale, and volume of PV power plants. In addition, technological improvements can provide an opportunity for cost reduction [2, 5, 6, 18, 19, 21, 24]. B. SENSITIVITY AND PARAMETRIC ANALYSIS The sensitivity analysis is used in this section to investigate how sensitive an output metric is to variations in the values of input variables. The parametric analysis involves assigning multiple values to one or more input variables to explore the relationship between the input variables and

Fig. 4 Base case LCOE sensitivity to input values

Fig. 6 Impact of various variables on the LCOE

resulting metrics [23]. Fig. 4, 5, and 6 show the results of the sensitivity analysis while Fig. 7, and 8 show the results of the parametric analysis. Based on Fig. 4, where the LCOE sensitivity to various input variables is shown, the system availability is the most affective variable on the LCOE. The availability of PV systems is largely driven by inverter downtime [5, 6]. Therefore, improving the availability of components such as inverters, electrical connections, and structures is associated with reduction in the LCOE. The second influential variable on the LCOE is the cost of modules followed by loan interest rate then the analysis period (lifetime). BOS, inflation rate, debt fraction, loan term, and insurance costs are of significant effect on the LCOE value. The impact of solar tracking options on the LCOE is shown in Fig. 5. Three options are considered; the fixed system, one-axis trackers, and two-axis trackers. Although the use of tracking systems adds to the costs of the PV power plants, their beneficial impacts are demonstrated in Fig. 5. The use of tracking systems results in increasing the solar-energy capture capability of the PV modules as a result the electrical energy production increases in comparison with fixed PV systems. The economic consequence is a reduction in the LCOE. Therefore, the costs required for providing solar tracking are recovered by the economic gains. As shown in Fig. 5, the two-axis trackers provide more energy capture and LCOE reduction in comparison with the one-axis trackers. In comparison with the fixed PV system, the use of one-axis tracker increases the annual energy production by 23.3% and decreases the LCOE by 18.87%

while these values are respectively 27.2% and 21.37% for the systems with two-axis trackers. Fig. 6 shows the impact of some other variables on the LCOE. It is clear that reducing the LCOE can be achieved by reducing the loan interest rate, reducing the discount rate, increasing the lifetime, increasing the debt fraction, reducing the degradation, increasing the efficiency, or increasing the availability. As previously stated that all possible opportunities for reducing the LCOE are based on the technological improvements and the economics of scale and volume.

Fig. 5 Impact of solar tacking type

Fig. 7 LCOE and annual energy production as affected by the location

Fig. 8 Stacked LCOE as affected by the location TABLE 2 ABBREVIATED FORM OF THE TARIFF STRUCTURE IN EGYPT Tariff Power service voltage level / consumer class Min. Max. Very high voltage1 12.9 Pt/kWh 20.2 Pt/kWh High voltage1 15.7 Pt/kWh 24.5 Pt/kWh 9.5 10.4 > 500 LE/kW/month + LE/kW/month + kW1 Medium and low 21.4 Pt/kWh 33.4 Pt/kWh voltage < 500 11.2 Pt/kWh 25.0 Pt/kWh kW Residential2 5 Pt/kWh 48 Pt/kWh Commercial2 24 Pt/kWh 60 Pt/kWh 1. Power factor dependent tariff 2. Block rate tariff

being comparable to the retail electricity prices shown in Table 2 i.e. the grid parity with PV systems is impossible with the current costs. However, neither incentives nor subsidies are considered in the determined values for the LCOE. The LCOE for conventional power generation (ConvLCOE) and its forecast up to 2050 has been estimated in [32]. The determined average Conv-LCOE values in cent/kWh for years 2010, 2015, and 2050 were 2.39, 2.54, and 4.01 respectively. Therefore, achieving grid parity through grid-connected PV-generation requires huge reduction in the current costs associated with PV-plants. Based on Figures 3 and 8, the costs associated with the modules, BOS, and O&M are the main cost items that should be highly reduced for grid parity to be realized in Egypt. Probable economic use of PV-plants is still possible in off-grid applications in remote and arid areas where gridconnection is neither economical nor possible. However, detailed techno-economic analysis is essential for the optimal choice of an alternative power production technology. Available renewable power generation technologies include photovoltaics (PV), concentrated solar power (CSP), wind, wave/tidal, geothermal, biomass, hydropower etc. V. CONCLUSIONS Overview and Standardized evaluation and analysis using the System Advisor Model (SAM) of the LCOE of grid-connected PV generating systems are presented in this paper. In addition, the results included detailed sensitivity and parametric analysis to investigate the effects of variations of the input variables on the LCOE and the cost per Watt. The grid parity is also investigated where both the actual retail prices of electricity, and the estimated LCOE of conventional power are considered. The demonstration site is the Kharga site in Egypt. This site was previously found to be the optimal location for placing utility-scale PV power plants in Egypt. The Arish site is also considered in the geographical location sensitivity. The results show that the main cost portions in the cost per watt, and the LCOE are the Modules present 65.95% followed by the BOS (22.93%) then the O&M costs (4.06%). Therefore, LCOE reduction increasing the scale of PV power plants as well as technological improvements. The LCOE sensitivity analysis shows that the main affective variables are the system availability followed module cost, then loan rate, then lifetime, then BOS, then inflation rate, then debt fraction, then the loan term. Although it adds to the system costs, the impact of solar tracking options shows that the use of trackers results in reduction in the LCOE. Highest LCOE reduction is achieved using two-axis trackers. In comparison with fixed PV systems, the use of two-axis trackers results in an increase in the annual energy production by 27.2% and reduction in the LCOE by 21.37%. The LCOE sensitivity to the geographical site shows the surpass of the Kharga site to provide higherenergy production (+38.4%) and lower LCOE (-27.75%) in comparison with AL-Arish. However, the determined values

In order to study the sensitivity of the results to the geographical location, i.e. the meteorological conditions, the considered PV power plant is placed at AL-Arish site (Lat. 31o 16 N, Long. 33o 45 E, Elev. 15.0 m), and the results are compared with those obtained with Kharga site. The locations of the considered site can be identified on the map that is available at [29]. With the PV plant placed at ALArish, the LCOE is 48.07 cent/kWh and the annual energy production is 17.9764 GWh. This shown in Fig. 7. In addition, the results for the Kharga site are included for comparison. The results shown in Fig. 7 show the surpass of the Kharga site to provide higher-energy production (+38.4%) and lower LCOE (-27.75%) in comparison with AL-Arish. This proves the site-dependency of the LCOE. The breakdown of the LCOE for the considered sites is shown in Fig. 8. Higher values of all the cost components are associated with AL-Arish site in comparison with the Kharga site. It is worthy to be mentioned that the determined values for the LCOE for the considered sites in Egypt are within the range of LCOE values estimated from various sources in North America and other locations [1]. C. GRID PARITY In Egypt, a tiered retail electricity-pricing scheme is used [30]. A low tariff is offered for low-energy consuming customers such as residential and commercial customers. These consumers receive subsidies for their electricity. An abbreviated form of the electricity-tariff structure in Egypt is shown in Table 2. Based on the 2012 exchange rate [31], one US$ is equal to 6.03130 Egyptian Pounds (EGP). Therefore, the LCOE at Kharga site is 143.183 Pt/kWh while its value at AL-Arish is 289.925 Pt/kWh. These LCOE values are far away from

for the LCOE for the considered sites in Egypt are within the range of LCOE values estimated from various sources in North America and other locations. Evaluation of grid parity shows that the grid parity with PV systems is impossible with the current costs. Both the actual retail electricity prices and estimated LCOE for conventional power generation are considered in the evaluation. The results show that achieving grid parity through grid-connected PV-generation requires huge reduction in the current costs associated with PV-plants. Probable economic use of PV-plants is still possible in off-grid applications in remote and arid areas where gridconnection is neither economical nor possible. However, detailed techno-economic analysis is required for proper decision making. In addition, various alternatives for renewable power generation should be considered in achieving optimal decisions. REFERENCES
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