Print5.1 Economic Evaluation of RE Projects
This section corresponds to Chapter 5 from the Sustainable Energy textbook.
The following concepts are core to understanding how energy projects are priced over the duration of their life cycle, and/or how to make them cheaper, and/or more appealing. Further, before understanding how to take advantage of nonmarket strategies for renewables, one really needs to have a sound payback strategy that is price competitive within certain parameters. Again, for these topics, you are to refer to the material from Chapter 5 from the Sustainable Energy textbook, so there is no need to repeat here what you will read in the book, but I do want to emphasize a few things when approaching economic evaluations. Amongst the most important issues is that you need to understand what the economic equations are representing, whether or not you may understand the math of the equation. In this regard, if you are in a firm or are acting as a consultant, it is as necessary to know who the experts are that can provide you with this economic information as it is to know what these various economic models mean.
Energy Project Payback Time
Installed RE projects tend to present a significant investment on the front end, as in solar, wind, and hydro, with much lower tailing costs in terms of maintenance and access to a common grid. As such, the main concern in evaluating RE projects is how long it takes to pay back the initial and tailing costs based on the projected cost of energy. The constant that holds relatively constant in the consideration is how much it costs to produce a unit of energy via a specific RE implementation. The variable that has proven to fluctuate more than expected is the market price of fossil fuels, which currently tends to dictate the price per unit of energy. While the fluctuations of fossil prices over the short term can influence present investment RE projects, such projects need to be evaluated over the longer term to make costs comparable. A problem is that investment into RE renovations or new projects does not tend to pay back in the timeframe of shorter term investments of firms and their stockholders (2 months-5 years), or even the board of directors (2-10 years).
Time Value of Money
The payback time of an RE energy project presents relatively predictable variables due to the fact that the most significant aspect of investment is on the frontend. Here, however, the uncertain variable is the general unit cost of energy at any given point. If a project is costed against a high value of money (low cost of energy) at a given time, it may seem unfeasible. But, if that same project is projected to cost against a lower value of money compared to energy (high cost of energy), then it would be a good investment to finance RE projects. The main question here rests upon whether a dollar spent now is worth more than that same dollar (at rate of inflation, so say, $10) about 40 years from now. Or, a simpler way to look at it is, would you rather receive $1000 now or $10,000 10 years from now? The answer is typically relative to a utilitarian evaluation of money which is not just based on financial projections. In other words, it depends on the context.