Economics - Wind Energy: Renewable Energy and the Environment - page 247

generators. For these applications the initial cost of the system, the infrastructure to operate and
maintain the system, and the price people pay for the energy are the main concerns. However, even
if small renewable systems are the only option, a life cycle cost analysis can be helpful for compar-
ing costs of different designs or determining whether a hybrid system would be a cost-effective
option. An LCC analysis allows the designer to study the effect of using different components with
different reliabilities and lifetimes. For instance, a less expensive battery might be expected to last
4 years, while a more expensive battery might last 7 years. Which battery is the best buy? This type
of question can be answered with an LCC analysis.

LCC IC M PV E PV R PV S PV (12.8)

where LCC life cycle cost, IC initial cost of installation, M PV sum of all yearly O&M costs,
E PV energy cost, sum of all yearly fuel costs, R PV sum of all yearly replacement costs, and S PV
salvage value, net worth at end of final year, 20% for mechanical equipment.
Future costs must be discounted because of the time value of money, so the present worth is
calculated for costs for each year. Life spans for wind turbines are assumed to be 20 to 25 years;
however, replacement costs for components need to be calculated. Present worth factors are given
in tables or can be calculated. Life cycle costs are the best way of making purchasing decisions. On
this basis, many renewable energy systems are economical.
The financial evaluation can be done on a yearly basis to obtain cash flow, break-even point,
and payback time. A cash flow analysis will be different in each situation. Cash flow for a business
will be different from a residential application because of depreciation and tax implications. The
payback time is easily seen, if the data are graphed.

EXAMPLE 12.8
Residential application with rebate, IC $25,000, down payment $7,000, loan $18,000 at 10%
(payment $4,000/year), O&M 2.5% * IC $500/year, energy production 50,000 kWh/year (75%
consumed directly, displacing 8 cents/kWh electricity, and 25% sold to the utility at 4 cents/kWh, with
utility escalation at 3%/year). Cash flow done in a spreadsheet.

Year 0-1 2 3 4 5 6 7 8 9

Down payment 7,000

Principal left 18,000 15,800 13,380 10,718 7,790 4,569 1,026 0

Principal paid 2,200 2,420 2,662 2,928 3,221 3,543 3,897 1,128

Interest 1,800 1,580 1,338 1,071.8 778.98 457 103 0

O&M 500 500 500 500 500 500 500 500 500

Insurance 50 50 50 50 50 60 60 60 60

Property tax 70 70 70 70 70 70 70 70 70

Costs 7,620 4,620 4,620 4,620 4,620 4,630 4,630 1,758 630

Value energy used 3,000 3,090 3,183 3,278 3,377 3,478 3,582 3,690 3,800

Value energy sold 500 515 530 546 563 580 597 615 633

Rebate 4,000

Income 7,500 3,605 3,713 3,825 3,939 4,057 4,179 4,305 4,434

Cash flow -120 -1,015 -907 -795 -681 -573 -451 2,546 3,804

Cumulative -1,135 -1,922 -1,702 -1,476 -1,253 -1,023 2,096 6,350

In this analysis the payback time is in year 8. There are a number of assumptions about the future in
such an analysis. A more detailed analysis would include inflation and increases on costs for operation
and maintenance as the equipment becomes older.