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Techno-Economics of Solar Energy

Applications

Tara C. Kandpal

Centre for Energy Studies


Indian Institute of
Technology Delhi
Hauz khas, New Delhi -
Outline

• Introduction
• Measures of Financial/Economic Performance
• Financial Incentives and Measures of Financial
/Economic Performance
• Case Studies
Pre-requisites to Diffusion of
Solar Energy Technologies
◆Resource availability

◆Technological appropriateness

◆Energetic feasibility

◆Socio-cultural acceptability

◆Environmental sustainability

◆Financial and economic viability


Financial Evaluation: Costs and benefits of the project
applicable to an individual

Economic Evaluation: Assessment of overall impact of


the project on the
society/economy
Economics in Technology Development

• Thickness of insulation on a hot water


storage tank
• Spacing between risers in flat plate solar
collector
• Sizing a solar process heating system with
auxiliary back up
How to study economics of renewable energy
systems?

To compare associated costs and benefits


Cost(s): - Capital cost
- Cost of operation
- Cost of repair and maintenance
- Cost of insurance
- Taxes
Benefit(s): - Monetary worth of fuel(s) saved/
substituted by the renewable energy
system.
- Subsidies/Incentives
- Carbon credits
Quantification of Costs and Benefits:
• Underestimation as well as overestimation of both
Costs and Benefits
Cost : optimistic projections
: insufficient experience
: unrealistic assessment of repair and maintenance cost
: increased repair/replacement costs in the later years of the
technology
: lab/demonstration experience versus field performance
Benefits: assessment of resource availability
: dynamics of the price of the fuel substituted
: performance reliability of the system
Reason for possible difference(s) between financial costs and
benefits from economic costs and benefits
• Market imperfection: Due to rationing, minimum usage rate
prescription, foreign exchange regulation
• Taxes and subsidies : Essentially transfer payments
(for an individual taxes add to the cost
and subsidies reduce the cost)

• Externalities : Both positive and negative (if any)


(reduction of indoor air pollution due to
the use of improved biomass cook stoves)
Costs and Benefits accrue at different points
during the useful life of a solar energy system

Hence

 Time value of money must be considered in


comparing costs and benefits
 Discount rate (d) is used for this purpose.
 An amount X is equivalent to X(1+d) after one year.
Time Value of Money

•Opportunity to invest
(rate of return, r)
Present Future
•Change in purchasing
power of money
(inflation, I)

D = (r – I) / (1 + I)

r = 0.15, I = 0.08
d = (0.15 – 0.08) / (1 + 0.08)
= 0.065
Formulae Based on Time Value of Money

F = P (1+d)n Compound Amount (single)

F Present Worth (single)


P=
(1 + d ) n

A Compound Amount (uniform series)


F= [1 + d ) n − 1]
d
F .d Sinking Fund (uniform series)
A=
[(1 + d ) n − 1]

 (1 + d )n − 1 Present Worth (uniform series)


P = A n 
 d (1 + d ) 

 d (1 + d ) n  Capital Recovery (uniform series)


A=  
 (1 + d ) n
− 1 
Measures of economic/financial performance

 Unit Cost of Energy


 Payback Period
 Net Present Value
 Benefit to Cost Ratio
 Internal Rate of Return
Measures of Financial/Economic Performance

Unit Cost of Energy (Rs/MJ or Rs/kWh)


annualized capital cost + annual cost
of operation, repair and maintenance
Unit cost of Energy =
annual amount of energy delivered
Annualized capital cost = Capital cost * Capital Recovery Factor

Capital Recovery Factor (CRF): • A factor to equally distribute a


single amount (at present) over a pre-
specified period in future with time
 d(1+d) n  value of money taken into account
CRF   n  • Pre-specified period – useful life (n)
 (1+d) - 1)  • Time value of money – discount
rate (d)
CRF with n (in years)
d
5 10 15 20 25 30
0.01 0.2060 0.1056 0.0721 0.0554 0.0454 0.0387
0.02 0.2122 0.1113 0.0778 0.0612 0.0512 0.0446
0.03 0.2184 0.1172 0.0838 0.0672 0.0574 0.0510
0.04 0.2246 0.1233 0.0899 0.0736 0.0640 0.0578
0.05 0.2310 0.1295 0.0963 0.0802 0.0710 0.0651
0.06 0.2374 0.1359 0.1030 0.0872 0.0782 0.0726
0.07 0.2439 0.1424 0.1098 0.0944 0.0858 0.0806
0.08 0.2505 0.1490 0.1168 0.1019 0.0937 0.0888
0.09 0.2571 0.1558 0.1241 0.1095 0.1018 0.0973
0.10 0.2638 0.1627 0.1315 0.1175 0.1102 0.1061
0.11 0.2706 0.1698 0.1391 0.1256 0.1187 0.1150
0.12 0.2774 0.1770 0.1468 0.1339 0.1275 0.1241
0.13 0.2843 0.1843 0.1547 0.1424 0.1364 0.1334
0.14 0.2913 0.1917 0.1628 0.1510 0.1455 0.1428
0.15 0.2983 0.1993 0.1710 0.1598 0.1547 0.1523
0.16 0.3054 0.2069 0.1794 0.1687 0.1640 0.1619
0.17 0.3126 0.2147 0.1878 0.1777 0.1734 0.1715
0.18 0.3198 0.2225 0.1964 0.1868 0.1829 0.1813
0.19 0.3271 0.2305 0.2051 0.1960 0.1925 0.1910
0.20 0.3344 0.2385 0.2139 0.2054 0.2021 0.2008
Unit Cost of Energy (continued….)

• estimation on lifecycle (or equivalent annual) basis


• on the basis of useful energy, final energy or primary
energy delivered
• no need to estimate monetary value of benefits
• facilitates direct comparison with energy delivery using
fossil fuels
• does not capture the likely enhancement in benefits due to
escalation in prices of fossil fuels in future
Payback Period

 Time elapsed between the time of initial (capital)


investment and the time when cumulative net savings
equal the initial investment.
 Lesser the payback period better the project is
 Payback period should be less than the useful life of the
solar energy system.
 Time value of money may also be considered
(simple/discounted payback period)
ln( B − C ) − ln[( B − C ) − dC o ]
Tdp =
ln(1 + d )

It does not consider the cash flows after payback.


Net Present Value

 Cumulative Present value of Net Benefits accrued to the


user of a solar energy system

 n Bi − Ci 
NPV =  ∑ i 
− Co
 i =1 (1 + d ) 
 For an investment in a solar energy system to be
profitable NPV should be positive.
 The value of NPV is very sensitive to the value of d used
in its determination.
 Comparison of projects with same NPV but different
capital costs.
Benefit to Cost Ratio
n
Bi

B = i =1 (1 + d )
i

C n Ci
∑i=1 (1 + d ) i + Co

or
( Bi − Ci )
n

∑i=1 (1 + d ) i
B =
C Co

For an investment in a solar energy system to be


economically/financially viable the ratio (B/C) should be
greater than unity
Internal Rate of Return (IRR)

 The value of discount rate at which the NPV is equal to


zero

at d = IRR
 n ( Bi − Ci ) 
NPV =  ∑ i 
− Co = 0
 i =1 (1 + IRR) 

 For an investment in a solar energy system to be


economically/financially viable IRR should be greater
than the minimum attractive rate of return (MARR) for
the investor.
Common Economic Questions and Recommended Tools for Solution

NPV B-C IRR DPB

How can savings be compared to costs?


● ●
How large an investment to make?
● ●
How to find the level of maximized rupee benefits?
● ●
How can projects directly competing for the same purpose be
compared? ●
How can different purpose projects competing for the same budget be
compared? ● ●
How to find the rate of return on investment?

How soon will energy investments be paid off by savings?

Cumulative Volume of Products Opportunity Cost of Capital
Experience
Inflation
Capital Cost Discount Rate

Financial
Attractiveness Cost of operation
Benefits accrued
to the user Cost of repair, replacement
and maintenance

Amount of
fuel(s) saved Monetary worth of
fuel(s) for the user

Availability Technical performance


of resource characteristics of the device/system
Uncertainty in the Values of Input Parameters

The values of

 Useful life
 Discount rate
 Cost of operation, repair and maintenance
 Amount of energy (fuel) saved and its price to the user
have considerable uncertainty associated.
Reasons of Uncertainty in Input Parameters

• Defining discount rate is complicated and it can vary


during the useful life of the project
• Useful life of project/system not known with sufficient
accuracy
• Uncertainty in long term resource assessment
• Market price of the fuel substituted by the solar energy
system changes with time
• Repair and maintenance requirements are not known with
certainty
Approaches to Consider Uncertainty

 Scenario Analysis
 Probability Based Approaches
 Computer Simulations
 Breakeven Analysis
 Sensitivity Analysis
Incentives

◆Capital subsidy
◆Low interest loan (interest subsidy)
◆Income tax benefit on accelerated
depreciation
Interest Subsidy Accelerated
Capital Subsidy
(soft loan) Depreciation Benefits

Reduced income
Reduced Effective User need not arrange,
tax payments
Capital Cost invest own money for
purchase
Reduction in
Effective capital Cost
Enhanced Potentially suitable
affordability of for users with High income group
very poor users regular income users can be
motivated to invest in
solar energy systems
Defining the Extent of Incentive

• Fraction of capital cost provided as subsidy


• Differences between the normal interest rate charged by the
financing institutions and the interest to be paid on the loan
• Extent of depreciation allowed in the first year
• Combination(s) of incentives
Extent of incentive may be equivalent to
• carbon savings
• expected savings due to volume and/or learning effect(s)
• monetary worth of intangible benefits
EFFECT OF CAPITAL SUBSIDY ON
FINANCIAL FIGURES OF MERIT
A fraction fcs of the capital cost is provided as subsidy

Simple Payback Period


 Co 
= (1 − f cs )  
( B - C ) 

Benefit to Cost Ratio


  ( 1 + d ) T − 1 
= (1 − f1 ) C ( B - C )  T 
cs 0
  d (1 + d ) 

Net Present Value


  ( 1 + d ) T − 1  
= ( B - C )   − C o  + f cs C o
  d ( 1 + d ) 
T 
PURCHASING POWER AND MOTIVATION TO
USE SOLAR ENERGY

Monthly repayment installment (MRI) depends upon


total cost Co of the system
fraction ( f ) of the capital cost provided as loan
loan repayment installments (N)
effective interest rate per period (de)

d e (1 +d e ) 
 N

MRI = f Co  
(1 +d e ) −1 
N
 

Gross income > n [ MRI ]

where n is a specific multiplying factor depending upon the


country/specific location
Annual Income vs. Number of households in India

100
100
90
Number of households (million)

90
Number of households (million)

80
80 70
60
70
50
60 40
50 30
20
40
10
30 0
20 20000 30000 40000 50000 60000 70000 80000 90000
Annual income (Rs)
10
0
20000 30000 40000 50000 60000 70000 80000 90000
Annual income (Rs)
FUEL PURCHASE vs.
FUEL GATHERING
Use of non-commercial fuels
Fuelwood
Agricultural residues
Dungcakes

at
ZERO PRIVATE COST
to the user

Negligibly small opportunity cost of the


fuel saved by solar energy technologies

Little motivation to invest in solar energy technologies


EXTERNALITY
An externality occurs when production or consumption inflicts involuntary
costs or benefits on others (costs or benefits are imposed on others but
are not paid for by those who impose them or receive them)
Health
Reduced environmental emissions
Climate change
Employment generation
Foreign exchange saving

Internalization of Externalities

Reduction in CO2 emissions


Assessing monetary value
Benefit to the user
Experience Curve: Reasons for
Decline in Marginal Cost
• Changes in Production: Process innovation,
learning effect, economies of scale

• Changes in the Product: Product innovation,


product redesign, product standardization

• Changes in input prices


Current Status of Financial/Economic
Evaluation Related Studies
1. Studies primarily reporting on design /
fabrication/performance evaluation but also
include financial performance.
2. Studies reporting on financial viability with
technological design/ performance provided as
exogenous inputs.
3. Techno-economic evaluation frameworks
4. Optimization studies
5. Energy planning models
Example:
Unit Cost of Useful Energy Delivered by a Domestic Solar Water Heating System
Rated Capacity = 100 liters per day
Capital cost = Rs 25000 /-
Annual cost of operation =0
Average annual cost of repair and maintenance = 3 % of capital cost = Rs 750 /-
Estimate useful life of system = 25 years
Discount rate (fraction) = 0.10
 0.1(1+0.1) 25 
Capital recovery factor =  25  = 0.1102
 (1+0.1) - 1) 
Annualized capital cost = (25000)*0.1102
= 2755
Total annual cost = 2755+750
= Rs 3505
Unit Cost of Useful Energy Delivered by a Domestic Solar Water Heating
System (continued…)
Inlet water temperature = 20 0C
Design outlet temperature = 60 0C
Capacity Utilization Factor of the system (CUF) = 0.6
Total amount of useful energy delivered by the = (0.6) (365)(100)(4.2)(60-20)
system
= 3679200 kJ
= 3679.200 MJ

Total annual cost


Unit cost of useful energy delivered =
Useful energy delivered annually
CUF Rs./MJ = 3505 / 3679.2
0.20 2.86
0.40 1.43 = Rs.0.95 / MJ
0.60 0.95
0.80 0.72
Estimates of Unit Cost of Useful thermal Energy with Other Energy Resource-Technology
combinations

• LPG based water heating


First law efficiency of LPG burner = 0.60
Calorific value of LPG = 44 MJ/kg
Unit cost of LPG to the user = Rs 25/kg
Ignoring the cost contribution of LPG burner:

Unit cost of useful thermal energy delivered = 25 / (44*0.6)


by LPG burner = Rs. 0.95/MJ
• Kerosene based water heating
First law efficiency of kerosene stove = 0.50
Calorific value of kerosene = 40 MJ/litre
Unit cost of kerosene to the user = Rs 30/litre
Unit cost of useful thermal energy delivered = 30/(40* 0.5)
by kerosene stove
= Rs. 1.50/MJ
Estimates of Unit Cost of Useful thermal Energy with Other Energy
Resource-Technology combinations (continued…)

•Electricity based water heating

First law efficiency of electric geyser = 0.95


Unit cost of electricity = Rs. 4.00/kWh
Unit cost of useful thermal energy delivered
= 4.00/ 3.6 * .95
= Rs. 1.17/MJ
Discount rate (fraction)

PV POWER Capital cost : Rs. 7500000 0.05 0.10 0.15


Installed Capacity (W) 50000
Energy Output kWh/day 150
% Modules in capital cost 40
% Batteries in capital cost 15
Energy Unit Cost % Conv/reg. in capital cost 15

Output of Electricity % Other in capital cost 30

(kWh/day) (Rs. /kWh) Depreciation period modules: years 20


Depreciation period batteries: years 7
Depreciation period conv/reg: years 15
100 24.93
Depreciation period other: years 15
150 16.62 Labor + overhead in % cap. cost 1
200 12.47 Maintenance cost in % cap. cost 1
250 09.98 Calculated annual costs
(discount rate = 0.05) Module depreciation 240728 352379 479284
Battery depreciation 194422 231081 270405

d(1+d) 
Conv/reg. depreciation 108385 147908 192394
n
CRF  
Other depreciation 216770 295816 384788

n  Total depreciation 760305 1027184 1326872

 (1+d) - 1)  Labor + overhead


Maintenance
75000
75000
75000
75000
75000
75000
Total annual costs 910305 1177184 1476272
Unit cost (Rs. / kWh) 16. 62 22 27
PV POWER

Total annual cost = (CRF + m) C0

Rs/Wp Unit Cost(Rs/kWh)

100 11.08
150 16.62
5 22.16
250 27.70
PV POWER

50 kWp System with capital cost of Rs. 7500000


Annual O&M cost = 2% of capital cost (m = 0.02)
Module: cost = 50%, useful life = 20 years
Battery: cost = 20%., useful life = 07 years
Electronics and others: cost = 30%, useful life = 15 years
Average daily output = 150 kWh/day
CRF (0.05, 20) = 0.08024
CRF (0.05, 07) = 0.17282
CRF (0.05, 15) = 0.09634
Total annual cost = [(0.08204*0.5 + 0.17282*0.2 +
0.09634*0.3 + 0.02)*7500000]
= 926995
Unit cost of electricity = 926995/(150*365)
= Rs. 16.93/kWh
Concluding Remarks
• Evaluation of financial/ economic viability of
solar energy proposals is a must.
• Do not make decisions on the basis of Pay Back
Period alone.
• Include uncertainty analysis.
• Internalize externalities.
• Treat incentives as special cases.
• Include future escalation in fossil fuel prices.
• Develop generalized techno-economic models.
Concluding Remarks (continued..)

• Financially viable applications:


low temperature solar water heating for domestic,
commercial and industrial applications with year
round loads, remote area applications of
photovoltaics, PV systems as alternatives to DG
sets (??)
• Case-specific viability in niche areas:
Solar process heating, Drying , Domestic and
commercial PV applications (??)
Concluding Remarks (continued..)

• Suitable financing schemes are crucial for


large scale dissemination. Poorly planned
and implemented financing instruments can
do more harm than good.
• Carbon finance is welcome but may not
transform an unfeasible project as feasible.
• Include productive uses of energy in the
planning/sizing of the project.
Thank you
For
Your Attention
Need for Techno-economic Evaluation

• To compare costs and benefits of a project


• To identify least cost option to satisfy the energy
requirement(s) of an end use/ a set of end uses
• For design optimization
• To study the effect of policy measures on the financial
attractiveness of solar energy technologies
Financial Evaluation: Costs and benefits of the project
applicable to an individual

Economic Evaluation: Assessment of overall impact of


the project on the society/economy
Feasibility assessment of proposed design modifications in
a solar thermal/ photovoltaic system
• Technology appropriateness
• Comparison of incremental costs with incremental
benefits
• Energetic feasibility
• Environmental sustainability
Cumulative Volume of Products Opportunity Cost of Capital
Experience
Inflation
Capital Cost Discount Rate

Financial
Attractiveness Cost of operation
Benefits accrued
to the user Cost of repair, replacement
and maintenance

Amount of
fuel(s) saved Monetary worth of
fuel(s) for the user

Availability Technical performance


of resource characteristics of the device/system
High capital cost of renewable energy systems
with
Low/negligible cost of operation

With increasing rate of renewable resource use

- decreasing marginal cost due to economy


of scale
- stable marginal cost due to market
penetration
- increasing marginal cost due to marginal
resource use
Need for Techno-economic Evaluation

• To compare costs and benefits of a project


• To identify least cost option to satisfy the energy
requirement(s) of an end use/ a set of end uses
• For design optimization
• To study the effect of policy measures on the financial
attractiveness of solar energy technologies
Financial Evaluation: Costs and benefits of the project
applicable to an individual

Economic Evaluation: Assessment of overall impact of


the project on the society/economy
Feasibility assessment of proposed design modifications in
a solar thermal/ photovoltaic system
• Technology appropriateness
• Comparison of incremental costs with incremental
benefits
• Energetic feasibility
• Environmental sustainability
Cumulative Volume of Products Opportunity Cost of Capital
Experience
Inflation
Capital Cost Discount Rate

Financial
Attractiveness Cost of operation
Benefits accrued
to the user Cost of repair, replacement
and maintenance

Amount of
fuel(s) saved Monetary worth of
fuel(s) for the user

Availability Technical performance


of resource characteristics of the device/system
Measures of Financial/Economic Performance

(a) Unit Cost of Energy (Rs/MJ or Rs/kWh)


annualized capital cost + annual cost
of operation, repair and maintenance
Unit cost of Energy =
annual amount of energy delivered
Annualized capital cost = Capital cost * Capital Recovery Factor

Capital Recovery Factor (CRF): • A factor to equally distribute a


simple amount (at present) over a
pre-specified period in future with
 d(1+d) n  time value of money taken into
CRF   n  account
 (1+d) - 1)  • Pre-specified period – useful life (n)
• Time value of money – discount
rate (d)
O&M
capital cost
Economic/
Technical financial
barriers barriers
Cost
effectiveness
Site
selection

Social/environmental
barriers

Local capacity: infrastructure and


knowledge barriers
Political, institutional and
legislative barriers
Green House Gas Mitigation Benefits

• Increasing concern for environmental


sustainability in selecting energy resource
technology combinations.
• Most of the renewable energy options are
relatively much less GHG emitting (often,
only embodied emissions).
• Credits under CDM can help make them
more attractive.
Why study economics of renewable energy
systems?

 Several energy resource technology combinations


available to satisfy the energy demand of an end use
 Users often select/adopt the least cost option.
 Design optimization of renewable energy systems
often requires economic considerations.
PV Compared to PV Coleman (pressurized kerosene) lamps

Coleman (pressurized Number of lamps 3 Number of lamps 3


Number of hours/day 6 Number of hours/day 6
kerosene) Lamps Fluorescent lamp capacity W 13 Consumption (cm3/h/lamp) 50
Power in lumens (per lamp) 800 Power in lumens (per lamp) 700
PV peak power W 100
Total capital cost US$ 1600 Total capital cost US$ 200
System cost (US$/Wp) 16
% cost modules 60
% cost batteries 15
% cost miscellaneous 25

Module life years 20 Lamp life years 5


Battery life years 5 Kerosene consumption (l/month) 27
Miscellaneous life years 10 Kerosene cost $/l 0.65
Maintenance cost in % capital
Maintenance cost in % capital cost 2 cost 10
Calculated annual cost Calculated annual cost
Depreciation in $ 241 Depreciation in $ 53
Maintenance in $ 20
Maintenance in $
19 Fuel in S 216
Total annual cost in US$ 260 Total annual cost in US$ 289
Monthly cost in US$ 23 Monthly cost in US$ 24
% operating expenses 12 % operating expenses 82
Economic comparison between D-G set and PV System
Diesel-generating set Photovoltaic system
Number of lamps 4 Number of lamps 4
Number of hours/day 5 Number of hours/day 5
Lamp consumption W 60 Lamp consumption W 13
Other uses: Wh/day (refrigerator, TV, miscellaneous) 1300 Other uses: Wh/day (refrigerator, TV, miscellaneous) 540
Capital in kW 3 Peak capacity Wp 288
Capital cost in FF 25000 Capital cost in FF 43200
Capital cost US$ 3330 Capital cost US$ 5760
Life-cycle in years 6 % cost modules 50
Running time h/day 6 % cost batteries 12
Consumption in l/kWh 0.8 % cost miscellaneous 38
Fuel cost FF/l 6 Module life years 15
Maintenance and parts cost: % cap. Cost 10 Battery life years 5
Output Wh/day 25000 Miscellaneous life years 10
Maintenance cost in % capital cost 2
Calculated annual cost Calculated annual cost
Depreciation in FF 5740 Depreciation in FF 6879
Fuel 4380 Maintenance in FF 864
Maintenance in FF 2500
Other 200
Other 500
Total annual cost in FF 13120 Total annual cost in FF 7943
Total annual cost in US$ 1750 Total annual cost in US$ 1060
Monthly cost in FF 1093 Monthly cost in FF 662
Monthly cost in US$ 146 Monthly cost in US$ 88
% operating costs 56 % operating costs 13