Energy Conversion and Management 42 (2001) 17271739

www.elsevier.com/locate/enconman

Cost benet analysis for solar water heating systems

D. Diakoulaki *, A. Zervos, J. Saradis, S. Mirasgedis
Laboratory of Industrial and Energy Economics, Department of Chemical Engineering, National Technical University of
Athens, Zografou Campus, Athens 157 80, Greece
Received 19 June 2000; accepted 15 November 2000

Abstract
Despite signicant advances in the technology eld, solar collectors still make a very modest contribution
to the total energy consumption for water heating purposes. One of the major factors explaining this delay
is that relevant investment decisions are based on market prices which do not reect positive environmental
impacts and other benets associated with the exploitation of solar energy. This paper presents a cost
benet analysis for evaluating solar water heating systems in comparison with competitive conventional
technologies in Greece. The major external benets included in the analysis are energy saving, avoided
environmental impact and job creation. The results show that in the specic Greek conditions, the use of
solar collectors results in considerable net social benets if substituted for electricity and Diesel but not for
replacing natural gas. 2001 Elsevier Science Ltd. All rights reserved.
Keywords: Solar energy; Renewables; Cost benet analysis; Externalities

1. Introduction
It is, nowadays, widely accepted that the advisability of promoting a project or a policy cannot
depend solely on assessment of the nancial return of the investments required. The reason is that
nancial analysis is not able to include all the costs and benets accompanying the project realization and which society actually perceives. This shortcoming is more acute when it comes to
projects or policies related to the development of renewable energy sources (RES) where the induced environmental benets are not measured in monetary terms, and thus, the existing market
mechanism fails to reect the societys desires and constraints. Other types of benets associated
with RES exploitation, such as contribution to employment or saving foreign currency, are also
*

Corresponding author. Tel.: +301-7723254; fax: +301-7723155.

E-mail address: diak@chemeng.ntua.gr (D. Diakoulaki).

0196-8904/01/$ - see front matter 2001 Elsevier Science Ltd. All rights reserved.
PII: S 0 1 9 6 - 8 9 0 4 ( 0 0 ) 0 0 1 5 3 - 9

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dicult to be taken into account during the evaluation procedure in order to assess the overall
impact on social welfare.
The environmental and social benets of RES are well documented in the literature [14] and
emphasized in relevant policy documents at the EU and international level. In order to avoid
translating these benets into monetary terms, most attempts to incorporate them in the decision
making procedure rely on the multiple criteria decision aid (MCDA) methodology [57]. Nevertheless, decision makers are often unable or unwilling to articulate their preferences and prefer a
single measure of performance reecting ``objective'' social values. In this kind of decision situation, cost benet analysis (CBA) is a very suitable evaluation tool that leads to higher quality
nancial, operational and political decisions. Namely, CBA provides the methodological framework which allows for an overall evaluation of projects and policies by taking account of all cost
and benet parameters, both those referring to the investment party itself (private cost or benet)
as well as those attributed to the external economic and natural environment (external cost or
benet) [810]. Consequently, the CBA methodology is capable of indicating those actions with
the bigger net social benet so as to examine promptly the necessary actions for correcting the
distortion of the market mechanism.
This paper aims at emphasizing the usefulness of CBA for elaboration of policies aiming at the
promotion of solar water heating systems (SWHS). Nowadays, these systems constitute the more
mature technology for solar energy exploitation. However, although in some countries they have
penetrated the market to an impressive degree (e.g. more than 80% of the total water heating
demand of the building sector in Cyprus), in some others with similar levels of sun's radiation, the
penetration degree is signicantly lower, if not negligible. There are obviously many parameters
that account for this variation, such as the existence of reliable solar system manufacturers, the
extent of consumers information, the existing competitive technologies and the respective cost of
energy generation. However, the same goes for the rest of RES exploitation technologies as well,
the most important parameter is the existence of suitable policies promoting their use [11,12]. The
elaboration of such policies requires a comparative evaluation of the cost and benets derived
from SWHS as a result of the CBA.
Such an analysis cannot be other than geographically localized because the cost depends on the
systems eciency which, in turn, is a function of the incident solar radiation, while the benets
are moreover aected by the type of competitive technologies applied in each area. In this paper,
the SWHS assessment refers to Greece where the penetration degree (20%) cannot be considered
satisfactory given the high level of solar radiation.
This paper is structured as follows: Section 2 briey describes the main steps of the CBA approach, while Section 3 denes the main cost and benet parameters characterizing SWHS.
Section 4 presents the Greek case study, emphasizing the general characteristics of the energy
system, the necessary data for applying CBA and the analysis results. Finally, Section 5 summarizes the papers conclusions.
2. Stages of the cost benet analysis
CBA requires that all cost and benet parameters be expressed in monetary terms and is based
on specic decision making rules similar to those applied in a nancial analysis.

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In detail, the calculation process is comprised of the following stages:

Denition of technological project parameters. All the technical charasteristics of the project
under evaluation, which might relate to capacity, eciency, qualitative and quantitative characteristics of inputs, outputs etc. are recorded in detail.
Determination of the project cost and benet components. The analysis involves initially the
recording of the private cost and benet components which determine the nancial return of
the project under study. These are easy to determine based on market data and previous experience. On the contrary, costs and benets resulting from changes in environmental quality or
of other social goods are much more dicult to measure, especially when it comes to non-tradeable goods, such as human health, biodiversity, exhaustion of natural resources etc. Special
techniques are used to that eect, derived from the neoclassic economic theory of welfare or
data derived from pertinent studies.
Calculation of the present value (PV) of costs and benets. The time allocation of the cost and
benet components over the life cycle of the examined project greatly aects the analysis results. Following the determination of these factors over the whole time horizon of the analysis,
it is possible to calculate their PV using a suitable discount rate.
Quantitative estimation of nancial evaluation indicators. The indicators used in CBA are
based on the criteria applied for nancial evaluation of a project. These are the net present
value criterion (NPV > 0), the internal rate of return criterion (IRR > i) and the benet cost
ratio criterion (B=C > 1).
Sensitivity analysis. At this nal stage, an attempt is made to investigate the sensitivity of the
analysis results to critical parameters presenting a high degree of uncertainty.
3. Social benets from the use of solar water heating systems
The benets arising from the installation and operation of SWHS can be distinguished into the
following three categories:
3.1. Energy saving
This benet derives from the reduction in consumption of electricity, Diesel or natural gas, i.e.
the main energy sources used for water heating in the building sector. Based on the eciency of
both the solar collector and the considered alternative systems, the achieved conservation is rst
calculated in physical terms. This benet is translated into monetary units according to the corresponding production or import cost. This is the benet gained by society from the use of solar
systems. However, it is generally accepted that the resulting gures underestimate their real value,
since the dominant pricing mechanism for exhaustible energy sources ignores the interests of
forthcoming generations and, therefore, does not ensure their ecient allocation over time.
3.2. Decrease in environmental burdens
The most important environmental benet resulting from the installation and operation of
SWHS is the reduction in air emissions due to the substitution for electricity and conventional

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fuels. The emissions taken into consideration are primarily conventional pollutants, i.e. sulphur
dioxide (SO2 ), nitrogen oxides (NOx ) and suspended particulates, but the reduction in CO2
emissions is also calculated.
The most important eects of air pollutants on the human and natural environment are:

impact
impact
impact
impact

on
on
on
on

public health (increase of morbidity and mortality rates),

agriculture,
buildings and historical monuments,
forests and ecosystems.

It is relatively simple to measure the nancial impact of these eects when they relate to
tradeable goods (e.g. agricultural crops). When it comes to non-tradeable goods (e.g. human
health, ecosystems), things become more complicated. In the last decade, great eorts have been
made to assign values to similar goods by using the methods of welfare economics [13,14]. Particular emphasis was given to the energy sector in an attempt to ascertain to what extent the
failure of the market mechanism to assess environmental impact leads to the distortion of energy
prices, thus to the non-ecient use of energy resources. At the European Union level, the most
important among these actions is the ExternE project that has provided a sound methodological
framework and a number of national implementation studies, simultaneously conducted in all EU
member states [15]. The results of this project agree that the cost attributable to environmental
impacts of conventional fuels is very high and may be of a similar order of magnitude as their
private cost. The above results, despite their high degree of uncertainty and the fact that several
environmental impacts are still not possible to value, constitute a better approximation than
private cost gures and are already being used in the elaboration of energy policies and in CBA
studies.
It must be noted that the level of environmental impact and, therefore, the social pollution cost
largely depend on the geographical location of the emission sources, which also determines the
type and number of the environmental pollution receptors. Another important factor is the height
of the emission stack, which aects the dispersion of pollutants to the surrounding area.
Contrary to conventional air pollutants, the social cost of CO2 does not vary with the technological and geographical characteristics of the source. This is explained by the fact that each
unit of CO2 contributes equally to the climate change threat and the resulting cost. The existing
estimations for the social cost of climate change vary signicantly, reecting the high uncertainty
that characterizes estimations of the degree and consequences of global warming, as well as the
various approaches for reducing this cost to its PV (discount interest rate selection). The
price used in the following analysis is based on a generally conservative estimation, amounting to
18 /tn CO2 .
3.3. Generation of new working posts
The penetration of a new technology leads to the development of new production activities,
contributing to the production, market distribution and operation of the pertinent equipment. In
addition to other positive eects to the economy, this evolution will lead to the generation of new

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1731

working posts, thus helping decrease unemployment and increase income. At the same time, this
measure will have a multiplicative positive impact, generating a large number of indirect jobs.
Specically, in the case of solar collectors, job creation mainly relates to the construction phase
and is very important, since this is a decentralized energy generation process and requires the
installation of equipment in every building or/and for every individual consumer.
By substituting for other older technologies, these benets are naturally accompanied by respective costs, to the extent that rendering these technologies obsolete leads to the limitation of
certain production activities and loss of working posts. In the case of solar systems for water
heating, these negative eects are deemed negligible, given that the demand for conventional fuels
to cover this type of energy needs is a very small percentage of their overall turnover.
The net social benet expected to derive from the new jobs is dened as the dierence between
the social benet and the social cost, or opportunity cost, of employment.
The social benet of the employment resulting from an investment or the development of an
activity refers to the total income earned by those employed in this investment or activity.
Contrary to this relatively simple approach, determining the social cost of employment involves a
more complex calculation and is related to the previous employees status (totally unemployed,
subemployed, employed with lower income) [16]. Therefore, for someone employed in the considered activity, there is a possibility P that he was previously unemployed and, thus, a possibility
(1 P ) that he was employed elsewhere with wages W. In addition and in case the employee was
previously totally unemployed, there is again a positive value L, reecting the value of his time. L
is actually a measurement of not only an employees leisure time but also the value of his nonproductive tasks (e.g. looking after children, housecleaning etc.). This value is usually expressed as
a percentage of the full time employees wages. Consequently, the social cost C of the employment
resulting from an investment providing i new working posts may be mathematically expressed
with the following function:
C

X
PL 1

P W

4. Application to the Greek case

4.1. Characteristics of the Greek energy system
Until recently, the Greek energy system was mainly characterized by low dierentiation of the
energy mixture. Natural gas was introduced in Greece as late as 1998, and it is expected to spread
to the building sector in the rst years of this decade. Thus, the biggest percentage of nal demand
is still covered by oil products, although the growing use of electricity, especially in the building
sector, shows very high rates following the rise in standard of living. On the other hand, the use of
domestic lignite prevails in the sector of electricity generation, covering 75% of the total demand
for electricity in the country. Intensive use of lignite is explained by a shift towards domestic fuels,
following the energy crisis of the 1970s, and continues steadily until now. As a result, the use of
electricity is accompanied by grave environmental impact and especially by air pollution due to
the high emission coecients of this particular fuel.

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D. Diakoulaki et al. / Energy Conversion and Management 42 (2001) 17271739

The share of RES, both in the electricity generation sector as well as in the nal demand, is
extremely low. This was mainly due to the existence of an unfavourable legal framework which
did not encourage similar initiatives. At the same time, the low prices of liquid fuels that prevailed
in the international market in the last few years, in conjunction with the restraint on the price of
domestic electricity in order to control ination, have added to the unfavourable climate for
promoting RES and other energy conservation technologies.
This framework has recently started to change. Special regulations for the promotion of RES
(especially for electricity generation) and the allocation of large funds by state and EU funding
bodies have led to a signicant market mobilization towards RES.
4.2. Energy demand for water heating in the building sector
In 1995, energy consumption in the building sector (domestic/tertiary) amounted to 4.42 TOE
with a 30% share of the total energy consumption, while during the period 19701995, the average annual increase rate in the sectors energy consumption was of the order of 4%. This increase is attributed to the fast rise in the standard of living (purchase of air conditioning units,
electrical appliances etc.) and the unsatisfactory energy behaviour of existing buildings and energy users.
The distribution of the building sectors energy consumption into various uses cannot be accurately ascertained, since there are no recorded statistical data available. Therefore, any available information results either from empirical surveys or from approximate calculations based on
analysis of the actual need for hot water of various categories of users. According to these approaches, water heating represents about 15% of the total energy consumption in the building sector. More than 90% of the overall demand refers to the household sector. In the tertiary
sector, the building types with the largest demand for hot water are hotels and hospitals [17]. As
far as other building categories are concerned, such as military camps, sport centers and prisons, the lack of sucient data on the number, geographical distribution and prole of demand
renders the estimation of such hot water needs and the respective energy consumption very
dicult.
The hot water needs of the aforementioned categories are currently met by resorting to electricity, Diesel, solar energy or biomass. SWHS already hold a signicant share in the respective
energy needs of Greece. Their market penetration, primarily in the household and secondarily in
the tertiary sector, initially (at the end of the 80s) showed especially high growth rates as a result
of a favourable legal regulation that allowed 75% of the equipment purchase cost to be exempted
from income tax. Thus, with a current 2 mil m2 of collectors all over the country, Greece nowa-days ranks rst among the EU member states, while a pertinent domestic industry has been
developed that already covers 50% of the total EU sales. However, despite these positive developments, the use of SWHS in the building sector tends to become stable at a much lower level
than that of adjacent countries with similar climatic conditions.
As can be seen from Fig. 1, electricity is the main source that meets the energy demand not only
for households (82% of consumption) but also for the overall building sector (80% of consumption). Solar energy accounts for 14% of the total consumption, with an especially high share
in households. Diesel is the main energy source for hotels and the only energy source for hospitals.

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1733

Fig. 1. Share of energy forms in water heating.

Finally, the consumption of biomass is very low and refers only to households in agricultural
areas. Moreover, solar collectors will have to compete with natural gas in the next few years,
following the completion of the distribution networks in major urban centres.
4.3. Numerical data and assumptions
Based on the previous description, it is advisable to evaluate solar systems separately for each
category of nal demand and in relation to the competitive fuels thereof. We distinguish between
the following main categories of classic consumers:
Four people households: split SWHS are examined with electricity and natural gas as competitive fuels.
Block of 12 ats (36 people): central SWHS are examined with electricity and natural gas as
competitive fuels.
Seasonal operation hotels (MaySeptember) with 70 beds: central SWHS are examined with
Diesel and natural gas as competitive fuels.
Hospital with 150 beds: central SWHS are examined with Diesel and natural gas as competitive
fuels.
The sizes of these typical consumers are characteristic of the respective energy demand and
are based on national averages. The solar systems corresponding to these consumers are dened,
and the energy demand and respective percentage of demand fulllment are calculated using the
``f-chart'' method. The following main assumptions were made:
Analysis is conducted for 1998 xed prices.
In all cases, there is a back-up system (electricity, Diesel or natural gas). Therefore, the revenue
from the SWHS investment is calculated based on the quantity saved and the price of the substituted form of energy.
The gures for solar radiation and water supply temperature are the national averages.
Tables 1 and 2 present the main assumptions, as well as the technical and nancial data for
determination of the typical consumer cases under study, based on which the system cost and
eciency is calculated.

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Table 1
Energy demand characteristics
Data/assumptions
Number of people served
Hot water consumption (l/person, day)
Hot water temperature (C)
Annual energy demand (kW h)

Four people
households

Block of ats with

four oors

Hospitals

Hotels

4
45

36
45

150
75

70
75

40
2500

40
23 000

40
160 000

40
21 500

Hospitals

Hotels

Table 2
Technical and nancial data and assumptions
Data/assumptions

Four people
households

Block of ats
with four oors

Type of collector
Collector surface
Collector gradient ()
Tank volume (l/m2 )
System return (kW h m2 )
Investment cost (Euro/m2 )
Operation cost (% investment
cost)
Life cycle
Residual value in 10 years (%
investment cost)

Split system
0,6 m2 /person
45
62.5
600
210
Negligible

Central system: at, with water, 1 pane, selective surface

1 m2 /person
1 m2 /bed
1 m2 /bed
45
45
30
50
50
50
650
700
420
250
250
250
1%
1%
1%

20
25%

20
25%

20
25%

20
25%

The benets arising from operation of solar systems during their life cycle are calculated based
on data that relate to the substituted energy forms and based on the following general assumptions:
The time range of the analysis is 15 years.
The social rate of discount is 6%.
The coecients for reducing domestic or foreign currency expenses in shadow prices are 1.25
and 0.8, respectively.
Table 3 shows the data for calculation of the energy saving achieved and the corresponding
nancial benet, as well as the reduction in air emissions:
In order to assess the social cost of the atmospheric emissions under study, the results of the
ExternE program for the social cost of electricity generation in Greece were used according to
existing and short term planned geographical distribution of units [18]. For the rest of the fuels, it
was assumed that 50% of the collectors will be installed in Attiki and the rest in various less
densely populated areas in Greece, while the dispersion models used in ExternE were also applied
in the case of emission sources of smaller stack height. The results of the analysis are given in
Table 4.

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Table 3
Financial and environmental data of substituted energy types
Data/assumptions

Electricity

Diesel

Natural gas

System return
Marginal production or import cost (drs/
kW h)
SO2 emission coecient (mg/kW h)
NOx emission coecient (mg/kW h)
TSP emission coecient (mg/kW h)
CO2 emission coecient (g/kW h)

95%
11

80%
2.86

88%
2.5

6200a
2120a
2650a
1015a

340
180
0
266

2
180
0
200

The emission coecients for electricity are based on the assumption that the average electricity generation mixture
over the analysis time range consists of 70% lignite, 10% oil, 10% natural gas and 10% hydroelectricity and other RES.
Table 4
Social cost of atmospheric emissions in Greece
Energy sources

SO2 (th drs/tn)

NOx (th drs/tn)

Suspended particles
(th drs/tn)

CO2 (drs/tn)

Electricity
Natural gas
Diesel

1580
1460
1460

1650
1780
1780

1640
0
0

6000
6000
6000

Finally, as regards benets related to employment growth, the estimation of the domestic solar
system industry is taken into account, according to which one new job corresponds to 1000 m2 of
collectors manufactured. Given that it is dicult to make a reliable quantitative estimation for
indirect new jobs, these are not included in the overall benets of this measure. Respectively, the
potential job losses in electricity generation and the distribution network of conventional fuels are
also ignored which, in any case, are considered very small.
According to an additional assumption, new jobs will be exclusively lled by formerly unemployed people. Based on domestic labour market data, the social benet of the employment
growth amounts to 5 000 000 drs/person, year (net employees revenue), while the social cost of
employment is 2 500 000 drs/person, year (a nancial measure of the leisure time that the employee
will no longer have and of the non-productive activities he will no longer exercise). Thus, the net
social benet from the creation of a new man year of labour, according to the above assumptions,
amounts to 2 500 000 drs.
4.4. Results and discussion
Given the high degree of uncertainty that characterizes some of the social benet parameters,
especially those related to the assessment of environmental impact, a sensitivity analysis will be
performed out for the benet cost ratio values, according to three dierent cases of social benet
calculation:
Scenario A: It calculates the overall social benet as a sum of the substituted conventional energy forms, the new jobs and the reduction in environmental impact.

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D. Diakoulaki et al. / Energy Conversion and Management 42 (2001) 17271739

Scenario B: The environmental benet and the benet from employment growth are reduced by
50% compared to scenario A.
Scenario C: The social benet is limited only to the value of the substituted energy forms, while
benets related to impacts on employment and environment are ignored.
As can be deduced from Figs. 25, the results from the application of CBA to the four dierent
solar system categories vary greatly, depending on the type of substituted fuel:
The B=C ratio is especially high in the household sector (Figs. 2 and 3) when SWHS (individual
units or central systems) replace electricity. The small reduction observed in the case of central
systems for blocks of ats is due to the high private cost of these systems which, however, is still
much lower than the corresponding social benet, even in the case of scenario C which ignores the
benets from decreasing the environmental impact and unemployment growth.
In the tertiary sector (Figs. 4 and 5) and when the substituted fuel is Diesel, the B=C ratio, even
though very low compared to the household sector, remains higher than 1. The lowest value

Fig. 2. Benet cost ratio for a typical water heater system in the household sector.

Fig. 3. Benet cost ratio for a typical central system in the household sector.

D. Diakoulaki et al. / Energy Conversion and Management 42 (2001) 17271739

1737

Fig. 4. Benet cost ratio for a typical central system in hotels.

Fig. 5. Benet cost ratio for a typical central system in hospitals.

observed for hotels is mainly due to their seasonal operation which does not allow them to take
full advantage of the benets from the installation of SWHS. Moreover, there is a smaller ratio
variation for the three scenarios calculating social benet, mainly due to the lower environmental
burden of Diesel.
Introducing SWHS does not appear advisable when the substituted fuel is natural gas. Both in
the household and tertiary sectors, the B=C ratio is much lower than 1 without any signicant
variation for the three scenarios. This is due to the fact that natural gas is the cleanest conventional fuel, so that substitution by solar energy results in smaller environmental benets. The
overall social benet does not actually compensate the private cost for SWHS.
These results do not coincide with the results of a private economic analysis that would take
into account only the nancial benets as perceived by the private investor, depending on the
market prices of the substituted energy forms. Specically, according to strictly private economic
criteria, the installation of SWHS is not deemed eective, except in the case of individual systems
for electricity substitution in the household sector which show a marginal positive nancial return.
This dierence between private and social benets indicates the need to elaborate policies aiming
at supporting SWHS, especially in relation to electricity and Diesel substitution.

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D. Diakoulaki et al. / Energy Conversion and Management 42 (2001) 17271739

5. Conclusion
This paper treats the application of CBA in order to evaluate the installation of SWHS in the
building sector and for various building types. Specically, the private cost of these systems was
compared to the PV of the sum of the social benets resulting from their use. Three components
of social cost were considered, i.e. the cost savings from energy conservation, the environmental
impact decrease and the social benet from employment growth.
The analysis was applied to the Greek territory, taking into account the countrys solar radiation levels, as well as the special characteristics of the Greek energy mixture, especially in the case
of electricity generation. Another parameter aecting the results from the geographical point of
view is the type and density of air pollution receptors, which aects the value attributed to the
environmental benet as a result of fuel substitution.
The conclusion is that according to social criteria, SWHS are superior to the conventional
technologies currently used in the building sector which consume electricity or Diesel. In the case
of electricity, the benets are especially high, mainly due to the serious environmental impact of
electricity generation in Greece. It is noted that even if the benets related to employment growth
and drop in environmental impact are ignored and the analysis is restricted to the direct visible
benets resulting from the saving in conventional energy sources, the cost benet ratio is still
greater than 1.
From the above, it is concluded that as far as the Greek case is concerned, substituting electricity and oil products for the purpose of heating water is socially required and should be legally
established. On the contrary, the use of solar energy for heating water does not appear to be
advisable compared to natural gas, which is currently penetrating into the Greek market.
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