5/14/2018 Annualized Cost

Annualized Cost

The annualized cost of a component is the cost that, if it were to occur equally in every year of
the project lifetime, would give the same net present cost as the actual cash flow sequence
associated with that component.
HOMER calculates annualized cost by first calculating the net present cost, then multiplying it
by the capital recovery factor, as in the following equation:

where:
CNPC = the net present cost [$]
i = the annual real discount rate [%]
Rproj = the project lifetime [yr]
CRF() = a function returning the capital recovery factor

Example: A wind turbine has an initial capital cost of $165,000, a replacement cost of $95,000,
a lifetime of 20 years, and an operation and maintenance (O&M) cost of $5,000/yr . What is its
annualized cost over a 25-year project lifetime at an annual real interest rate of 6%?

The actual cash flow sequence associated with this wind turbine appears in the graph below.
This graph shows the large capital expense in year zero, the small O&M cost that appears in
every year, the large replacement cost that occurs after 20 years, and the salvage value that
occurs at the end of the project:

We want to calculate an equivalent cash flow sequence, meaning one that gives the same net
present cost, in which a single cost occurs in every year of the project. That single cost is the
annualized cost, and the equivalent cash flow sequence would look like the one that appears
below:

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5/14/2018 Annualized Cost

To calculate the net present cost of the wind turbine, we create a cash flow table as shown
below. For each year, we calculate the discount factor, the nominal cash flow, and discounted
cash flow, which is equal to the nominal cash flow multiplied by the discount factor. The sum of
the discounted cash flows is the net present cost of the wind turbine over the project lifetime:
$241,938. We multiply this by the capital recovery factor, which for 25 years and 6% is equal to
0.0782, giving an annualized cost of $18,926/yr.

Discount Actual Cash Flows

Year
Factor Nominal Discounted
0 1.000 -165,000 -165,000
1 0.943 -5,000 -4,717
2 0.890 -5,000 -4,450
3 0.840 -5,000 -4,198
4 0.792 -5,000 -3,960
5 0.747 -5,000 -3,736
6 0.705 -5,000 -3,525
7 0.665 -5,000 -3,325
8 0.627 -5,000 -3,137
9 0.592 -5,000 -2,959
10 0.558 -5,000 -2,792
11 0.527 -5,000 -2,634
12 0.497 -5,000 -2,485
13 0.469 -5,000 -2,344
14 0.442 -5,000 -2,212
15 0.417 -5,000 -2,086
16 0.394 -5,000 -1,968
17 0.371 -5,000 -1,857
18 0.350 -5,000 -1,752
19 0.331 -5,000 -1,653
20 0.312 -100,000 -31,181
21 0.294 -5,000 -1,471
22 0.278 -5,000 -1,388
23 0.262 -5,000 -1,309
24 0.247 -5,000 -1,235
25 0.233 66,250 15,436
Total -241,938

To check our work, we can create a cash flow table for this equivalent cash flow sequence, and
verify that it gives the same net present cost. The table below shows that the equivalent cash
flow does indeed lead to the correct net present cost.
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5/14/2018 Annualized Cost

Equivalent Cash
Discount
Year Flows
Factor
Nominal Discounted
0 1.000 0 0
1 0.943 -18,926 -17,855
2 0.890 -18,926 -16,844
3 0.840 -18,926 -15,891
4 0.792 -18,926 -14,991
5 0.747 -18,926 -14,143
6 0.705 -18,926 -13,342
7 0.665 -18,926 -12,587
8 0.627 -18,926 -11,874
9 0.592 -18,926 -11,202
10 0.558 -18,926 -10,568
11 0.527 -18,926 -9,970
12 0.497 -18,926 -9,406
13 0.469 -18,926 -8,873
14 0.442 -18,926 -8,371
15 0.417 -18,926 -7,897
16 0.394 -18,926 -7,450
17 0.371 -18,926 -7,028
18 0.350 -18,926 -6,631
19 0.331 -18,926 -6,255
20 0.312 -18,926 -5,901
21 0.294 -18,926 -5,567
22 0.278 -18,926 -5,252
23 0.262 -18,926 -4,955
24 0.247 -18,926 -4,674
25 0.233 -18,926 -4,410
Total -241,937

The annualized cost serves as a useful metric for comparing the costs of different components
because it measures their relative contribution to the total net present cost. It allows for a fair
cost comparison between components with low capital and high operating costs (such as diesel
generators) and those with high capital and low operating costs (such as PV arrays or wind
turbines).
The annualized costs of each system component and of the system as a whole appear on the
Cost Summary tab of the Simulation Results window.

See also
Net Present Cost
Discount Factor
Capital Recovery Factor
Cost Summary Outputs
Total Annualized Cost

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6/22/2018 Levelized Cost of Energy

Levelized Cost of Energy

HOMER defines the levelized cost of energy (COE) as the average cost per kWh of useful
electrical energy produced by the system.

Type: Output Variable

Units: $/kWh
Symbol: COE

To calculate the COE, HOMER divides the annualized cost of producing electricity (the total
annualized cost minus the cost of serving the thermal load) by the total electric load served,
using the following equation:

where:
Cann,tot = total annualized cost of the system [$/yr]
cboiler = boiler marginal cost [$/kWh]
Hserved = total thermal load served [kWh/yr]
Eserved = total electrical load served [kWh/yr]

The second term in the numerator is the portion of the annualized cost that results from serving
the thermal load. In systems, such as wind or PV, that do not serve a thermal load
(Hthermal=0), this term is zero.

The COE is a convenient metric with which to compare systems, but HOMER does not rank
systems based on COE.

See also
Annualized Cost
Total Annualized Cost

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5/11/2018 Load Profile

Load Profile

After you create an electric, thermal, or hydrogen load using one of the methods in the Adding a
Load section of the help, the Electric, Thermal, or Hydrogen Load page appears, respectively.
You can return to this page by clicking on the corresponding load icon in the system Schematic
or under the Load tab in the toolbar.

The Load profile page displays a graphic representation of the load profile and presents
summary statistics for the data. You can modify some details of the load on this page.

Hourly Data
You can modify the daily profile, hour-by-hour in the table on the left side of the page.

Click "Show All Months..." to set a different daily profile for weekends and weekdays and for
each month of the year.

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5/11/2018 Load Profile

If you select "Copy Changes to Right," any value you enter is copied across all remaining
months. For example, if you enter "10" for January, hour 0, all months, hour 0, are set to 10. If
you then enter "9" for hour 0 in February, January stays set to 10 and February through
December are set to 9. You can edit values for weekends or weekdays by selecting the
respective tab at the top of the table. Changes made to the profile for weekends do not affect
the profile for weekdays, and vice versa.

Scaled Data for Simulation

HOMER uses scaled data for calculations. To create scaled data, HOMER multiplies each of the
baseline data values by a common factor that results in an annual average value equal to the
value that you specify in Scaled Annual Average.

To determine the value of this factor, HOMER divides the scaled annual average by the baseline
annual average. The scaled data retains the shape and statistical characteristics of the baseline
data, but may differ in magnitude. The default value for the scaled annual average is the
baseline annual average. When the two values are equal, the scaled data and baseline are
identical.

Note: The average load is reported in kWh/day but the peak load is reported
in kW.

Two reasons to use a scaled annual average that is different from the baseline annual average
are for unit conversion (e.g., to convert from W to kW) or to perform a sensitivity analysis on the
size of the thermal load. Click the Sensitivities button (to the right of the text box) to enter
multiple values for a sensitivity analysis.

The Export button allows you to export the scaled data to a text file.

Click the Plot button at the bottom of the page to see a Timme Series Detail Analysis.
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5/11/2018 Load Profile

Other Options
You can set additional options on the Load Profile page, as described in the table below.

Variable Description
Sets the daily or hourly variability used in synthesizing artificial
Random variability
data.
Select whether the load is alternating current (AC) or direct current
Load Type
(DC)
Check this box to calculate cost-effectiveness of efficiency
Efficiency (Advanced) measures. The inputs below are enabled when the box is checked.
(For Electric Load only) *
The factor by which this primary load is multiplied if the efficiency
Efficiency multiplier
package is implemented. (Enter 0.80 for a 20% reduction in load.) *
Capital cost ($) The cost of implementing efficiency measures, in $. *
Lifetime (yr) The lifetime of efficiency measures, in years. *

*This input requires the Advanced Load module. See Adding Modules for more information on
purchasing these modules.

See also
Adding a Load

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6/22/2018 Net Present Cost

Net Present Cost

The net present cost (or life-cycle cost) of a Component is the present value of all the costs of installing and operating the
Component over the project lifetime, minus the present value of all the revenues that it earns over the project lifetime.
HOMER calculates the net present cost of each Component in the system, and of the system as a whole.

Example: A diesel generator has an initial capital cost of $96,000, a replacement cost of $48,000, and a lifetime of 3.52
years. Its cost of operation and maintenance (O&M) is $2,471/yr, and its fuel cost is $34,969/yr. What is the net present cost
of this generator over a 25-year project lifetime at an annual real discount rate of 6%?

To perform this calculation, HOMER produces a Cash Flow table such as the one below. Except for the salvage value that
occurs at the end of the 25th year, all of these cash flows are costs, so they appear as negative numbers in the table.

The first column shows the time at which each cash flow occurs, in years since the start of the project. The capital cost
occurs at the start of the project, or year zero. The annual O&M and fuel costs occur at the end of each year. The
replacement costs occur every 3.52 years.
The second column, highlighted in yellow, contains the discount factor. The columns highlighted in green contain the
nominal cash flows. The columns highlighted in purple contain the same cash flow discounted to year zero. HOMER
calculates the discounted costs by multiplying the nominal costs by the discount factor.
The bottom row below the purple discounted cash flow columns contains the net present value of each category of cash
flow, as well as the total net present value, shown in red, with a value of -$725,240. The net present value and the net
present cost differ only in sign, so the net present cost of this generator over the 25-year project lifetime is $725,240.

HOMER does a similar analysis for each Component in the system, and for the system as a whole.

Year Discount Nominal Cash Flows Discounted Cash Flows

Replace- Replace-
Factor Capital Salvage O&M Fuel Total Capital Salvage O&M Fuel Total
ment ment
0 1.000 -96,000 -96,000 -96,000 -96,000
1 0.943 -2,471 -34,969 -37,441 -2,331 -32,990 -35,321
2 0.890 -2,471 -34,969 -37,441 -2,200 -31,123 -33,322
3 0.840 -2,471 -34,969 -37,441 -2,075 -29,361 -31,436
3.52 0.815 -48,000 -48,000 -39,098 -39,098
4 0.792 -2,471 -34,969 -37,441 -1,958 -27,699 -29,657
5 0.747 -2,471 -34,969 -37,441 -1,847 -26,131 -27,978
6 0.705 -2,471 -34,969 -37,441 -1,742 -24,652 -26,394
7 0.665 -2,471 -34,969 -37,441 -1,644 -23,257 -24,900
7.04 0.663 -48,000 -48,000 -31,847 -31,847
8 0.627 -2,471 -34,969 -37,441 -1,551 -21,940 -23,491
9 0.592 -2,471 -34,969 -37,441 -1,463 -20,698 -22,161
10 0.558 -2,471 -34,969 -37,441 -1,380 -19,527 -20,907
10.56 0.540 -48,000 -48,000 -25,941 -25,941
11 0.527 -2,471 -34,969 -37,441 -1,302 -18,421 -19,723
12 0.497 -2,471 -34,969 -37,441 -1,228 -17,379 -18,607
13 0.469 -2,471 -34,969 -37,441 -1,159 -16,395 -17,554
14 0.442 -2,471 -34,969 -37,441 -1,093 -15,467 -16,560
14.08 0.440 -48,000 -48,000 -21,130 -21,130
15 0.417 -2,471 -34,969 -37,441 -1,031 -14,592 -15,623
16 0.394 -2,471 -34,969 -37,441 -973 -13,766 -14,738
17 0.371 -2,471 -34,969 -37,441 -918 -12,986 -13,904
17.60 0.359 -48,000 -48,000 -17,212 -17,212
18 0.350 -2,471 -34,969 -37,441 -866 -12,251 -13,117
19 0.331 -2,471 -34,969 -37,441 -817 -11,558 -12,375
20 0.312 -2,471 -34,969 -37,441 -771 -10,904 -11,674
21 0.294 -2,471 -34,969 -37,441 -727 -10,286 -11,013
21.12 0.292 -48,000 -48,000 -14,020 -14,020
22 0.278 -2,471 -34,969 -37,441 -686 -9,704 -10,390
23 0.262 -2,471 -34,969 -37,441 -647 -9,155 -9,802
24 0.247 -2,471 -34,969 -37,441 -610 -8,637 -9,247
24.64 0.238 -48,000 -48,000 -11,420 -11,420
25 0.233 43,120 -2,471 -34,969 5,679 10,047 -576 -8,148 1,323
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6/22/2018 Net Present Cost
Total -96,000 -336,000 43,120 -61,784 -874,234 -1,324,899 -96,000 -160,668 10,047 -31,593 -447,026 -725,239

Note that HOMER uses the discount factor to account for the time value of money, not inflation. Inflation is factored out of
the analysis by using the real discount rate instead of the nominal discount rate. All costs in the table above are in year-zero
dollars. This explains why the fuel and O&M costs remain the same for each year of the project lifetime.
Even with inflation removed from the analysis, the time value of money dictates that a future cash flow is worth less than a
present cash flow of the same amount. The discount factor accounts for this effect; its value decreases with the increasing
number of years from the start of the project.

See also
Total net present cost
Annualized cost
Present value
Future value
Salvage value
Project lifetime
Real Discount rate
Discount factor
Cash Flow table

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6/22/2018 Operating Cost

Operating Cost

The operating cost is the annualized value of all costs and revenues other than initial capital
costs.

Type: Output Variable

Units: $/yr
Symbol: Coper,tot

HOMER uses the following equation to calculate the operating cost:

where:
Cann,tot = the total annualized cost [$/yr]
Cann,cap = the total annualized capital cost [$/yr]

Tip: The total annualized capital cost is equal to the total initial capital cost
multiplied by the capital recovery factor.

HOMER displays the operating cost in the optimization results list, and at the top of the
Simulation Results window. You can see the total annualized cost (Total) and the total
annualized capital cost (Capital) by clicking the Cost Summary tab in the Simulation Results
window and clicking the Annualized radio button under Cost Types.

See also
Total Annualized Cost
Simulation Results
Cost Summary Outputs

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5/14/2018 Salvage Value

Salvage Value

Salvage value is the value remaining in a component of the power system at the end of the
project lifetime. HOMER assumes linear depreciation of components, meaning that the salvage
value of a component is directly proportional to its remaining life. It also assumes that the
salvage value depends on the replacement cost rather than the initial capital cost. HOMER
calculates salvage value using the following equation:

Rrem, the remaining life of the component at the end of the project lifetime, is given by:

Rrep, the replacement cost duration, is given by:

other
definitions:
Crep = replacement cost [$]
Rcomp = component lifetime [yr]
Rproj = project lifetime [yr]
= a function that returns the integer amount of a real number; for
INT() example, INT(6.843) = 6

HOMER assumes that salvage value accrues at the end of the project lifetime.
Example 1: A wind turbine has a capital cost of $1 million, a replacement cost of $750,000, and
a 25-year lifetime. At the end of a 20-year project lifetime, the replacement cost duration, Rrep,
is zero, the remaining life, Rrem, is 5 years, so the salvage value is $750,000 * 5/25 = $150,000.
Note that the capital cost does not affect the calculation of salvage value.
Example 2: A diesel generator has a capital cost of $400,000, a replacement cost of $350,000,
and a lifetime of 7.85 years. At the end of a 30-year project lifetime, the replacement cost
duration, Rrep, is 23.55 years, the remaining life, Rrem, is 1.40 years, so the salvage value is
$350,000 * 1.40/7.85 = $62,420.

See also
Project Lifetime
Replacement Cost

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6/22/2018 Total Net Present Cost

Total Net Present Cost

Type: Output Variable

Units: $
Symbol: CNPC

The total net present cost (NPC) of a system is the present value of all the costs the system
incurs over its lifetime, minus the present value of all the revenue it earns over its lifetime. Costs
include capital costs, replacement costs, O&M costs, fuel costs, emissions penalties, and the
costs of buying power from the grid. Revenues include salvage value and grid sales revenue.
HOMER calculates the total NPC by summing the total discounted cash flows in each year of
the project lifetime.
The total NPC is HOMER's main economic output, the value by which it ranks all system
configurations in the optimization results, and the basis from which it calculates the total
annualized cost and the levelized cost of energy.

See also
Net Present Cost
Total Annualized Cost
Levelized Cost of Energy

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