Levelized Cost of Energy
There are several ways to analyze the financial benefits of a solar photovoltaic (PV) project, such as Payback, Net Present Value, and Levelized Cost of Energy (LCOE). While Payback and Net Present Value are effective methods, we will not talk about them in detail now.
LCOE is the average monetary value of a unit of energy produced over the life of a PV system. LCOE is measure used by utility companies to determine electric rates for their consumers. If you know what your current kWh rate is for your site (ours is $.30/kWh for power from diesel generators), LCOE is a straightforward way to compare PV costs to traditional energy costs.
In this paper, we explain how we calculated a $.045/kWh LCOE for a sample PV project, which is 85% cheaper than our existing diesel generator source of power. To arrive at our figures, we conducted market research with 30 PV vendors in the MENA region. We then used the responses from the 10 most experienced vendors .
Costs of a 6.6MW Rooftop PV System in Kuwait
For our calculations, we used a 6.6MW Rooftop PV system in Kuwait. There were nine large warehouses on which we wanted to install rooftop PV.
We received an average $930/kW installation cost for a 6.6MW rooftop PV system, for a total of $6,138,000.
Vendors gave wide-ranging costs for annual maintenance. We used their average price of $150,000/year for maintenance, which includes replacing the inverters at years 10 and 20.
We also received the estimated number of kWh produced in the first year for the 6.6 MW PV system from the vendors. We used the average of 10,516,500 kWh produced per year.
We had no finance fees for this project.
LCOE Calculations for 6.6 MW PV System in Kuwait
LCOE = (initial installation costs + total maintenance costs) / total kWh
LCOE = $.0443 kWh = $.045 rounded = ($6,138,000 + $4,509,454) / 240,556,548 kWh
(See Definitions for further explanation)
With this PV system, we assume we will receive reliable power over 25 years at an average rounded rate of $.045/kWh. We will not have to worry about the price increases in oil or natural gas which affect traditional electric prices.
At our site, PV is 85% cheaper to own and operate than diesel generation. Currently, we spend $.30/kWh to produce electric power with diesel generators at our site. $.045 kWh for PV is 85% of $ .30 for diesel generation.
Try using the LCOE approach when you pitch a solar PV project to your colleagues, boss, or family members. You may be surprised by the cost savings you can achieve.
LCOE= (Cost of initial installation + maintenance costs + interim replacement costs + finance fees) / total kWh. Note: in our Example above, we had no finance fees and interim replacement costs were included in maintenance costs)
Economic Life: The useful life of the PV panels. We used the US government standard of 25 years.
Cost of initial installation: Costs paid to design and install the PV system—PV panels, mounting system, inverters, and wiring.
Maintenance costs: Total costs to clean and perform routine maintenance for 25 years. We took first-year maintenance costs and escalated them by 1.5% a year to account for inflation (from the recent US Consumer Price Index).
Finance Fees: Total amount of interest paid on the full term of a loan to finance the project.
Interim replacement costs: Although the PV panels have a 25 year life, other components of the system do not. Include replacement costs of inverters at every 10 years.
Total kWh: total kWh produced by the PV over the economic life of 25 years. PV panels become less efficient over time. We factored in a degradation rate of .075% a year, following NREL’s rule-of-thumb of .05%, but higher for hot climates and rooftop PV.