EME 810
Solar Resource Assessment and Economics

7.6 Economic Figures of Merit


Reading Assignment

I want you to think about the ways that figures of merit serve as various economic metrics to allow a client to compare alternatives in energy systems selection and design in an "apples to apples" fashion, despite the fact that SECS are coupled to an intermittent solar resource. You may find it easier to read chapter 4 of Short et al., and then jump back to chapter 3 of Short et al. We will focus on the figure of merit below; but really, these pages are chock-full of useful information for future project development!

Figures of Merit

What are the figures of merit to which our clients will respond?

  • Net Present Value (NPV): in our case, deals with annualized costs and revenues that account for discount rates.
  • Total Life-Cycle Cost (TLCC): used to assess marginal costs and the timing of costs when comparing alternative projects. Provides no frame of reference for acceptable/unacceptable costs, and doesn't address returns and benefits.
  • Levelized Cost of Energy (LCOE): used to compare alternative technologies that often have different operational periods, different scales of operation and investment, or both. The common example is comparing a renewable technology like wind or solar electricity to a generation unit that requires geofuels. LCOE is often used to rank alternatives for effective budgeting of expenditures. As different investment sizes are not considered in a unit cost, LCOE is not recommended when choosing among systems that are "mutually exclusive." The LCOE represents the costs of the system throughout its lifetime spread evenly over the energy produced by the system, It is computed as the TLCC (discounted to the base year) divided by the lifetime energy production.
  • Internal Rate of Return (IRR): the discount rate at which the NPV for the period of analysis is zero.
  • Discounted Payback Period (DPB): contrasted with a simple payback, the discounted payback helps to compare risk between project options.

Try This! Levelized Cost of Energy

Now that we've entertained the idea of a Levelized Cost of Energy, let's try out a web tool designed by NREL to estimate LCOE (link directs to the documentation site first).

  • How does "capacity factor" affect the LCOE in a renewable system, and what is the capacity factor in places like MI, MO, or AZ? If you don't know what that is, search for it in the SECS text book (I've included a table for each US state).
  • What are the capital costs (range) for Solar PV? Why do you think it is a big spread?

The OpenEI (Open Energy Information; site home here) has a supplemental resource called the Transparent Cost Database. (Make sure you are looking at "Generation.").

  • Why do you think there is such a large spread in the LCOE of solar PV and not for Natural Gas?
  • Is there any weakness with using LCOE to compare power generation in a residential PV installation with the LCOE for a coal fired power generation plant?

Send Feedback!

I would value hearing back from you as to whether these tools are useful, or not so much. Please take a moment to post your perspective on whether these government-based online tools seem useful to you for the future on the General Forum for Lesson 7.