Life Cycle Costing: Electric Power Projects (Energy Engineering)

Abstract

Life-cycle cost (LCC) assessment involves the estimation of major expected costs within the useful life of a power system. Life-cycle cost estimation facilitates investment decisions before acquiring or developing assets associated with a power project. Life-cycle cost analysis allows comparison of different investment alternatives and thus enables determination of the most cost-effective system. A framework has been developed to conduct LCC analysis of energy projects, with the focus on two phases of a project’s life: (i) the development, construction, and commissioning phase and (ii) the operation phase. The energy projects considered are: (i) a 520 MW coal power plant; (ii) a 50 MW wind power project; and (iii) a 3-kWp grid-tied residential PV system. The LCC assessment considers costs associated with the debt servicing, variable costs, interest on working capital, depreciation, annual operation and maintenance costs, etc. The results indicate that the installed cost of wind and coal power projects is comparable. However, the LCC of electricity from the wind power project is around twice that of the coal power plant. The cost of electricity from the PV system is around ten times higher than that from the coal power source.

In this study, a framework has been developed to quantify the financial and fiscal incentives (FIs) offered by federal and state agencies to promote renewable energy technologies. This enables studying the effect of FIs on the LCC of electricity generated from the PV and wind power systems. The state-offered FIs considered are sales tax exemption on the purchase of system components, property tax exemption, income tax rebate, and capital subsidy on the system cost. The FIs offered by the federal agencies are the accelerated depreciation for capital recovery, the production tax incentive, and the income tax rebate. For the residential PV system, the state offered upfront capital subsidy on the system cost and avoided cost of electricity due to onsite power generation contribute in reducing electricity cost (LCC) by 65%. Similarly, the LCC of electricity from the 50 MW wind power project is significantly reduced when the FIs are considered. The accelerated depreciation for capital cost recovery and the production tax credit contribute in reducing the cost of electricity by 65%. The LCC of electricity generated from the PV and wind-based energy systems could be significantly less than that generated from coal power projects when the effects of financial incentives are considered.


INTRODUCTION

Life-cycle cost (LCC) assessment involves the estimation of major expected costs within the useful life of an asset. Life-cycle cost estimation facilitates investment decisions for acquiring or developing an asset. According to Woodward (Ref. 13, p. 336), “LCC of a physical asset begins when its acquisition is first considered and ends when it is finally taken out of service for disposal or redeployment (when a new LCC begins).” LCC analysis allows comparison of different investment alternatives and, thus, the determination of the most cost-effective system. For example, decisions based on a low initial cost do not guarantee low LCC. To conduct LCC, the major costs associated with the development of a project needs to be evaluated. The major costs associated with a project can broadly be categorized into the following:

• Initial cost consisting of

— Acquisition and financing costs,

— Procurement cost, and

— Installation and commissioning costs

• Operation and maintenance costs

• Cost of asset disposal after its useful life

To illustrate the LCC for energy projects, we will consider three case studies. These are: (i) a 520 MW coal power project; (ii) a 50 MW utility scale wind project; and (iii) a 3-kW grid-tied residential solar power unit. The rationale for choosing coal, wind, and solar-based power projects is twofold. First, the relevance of the energy source used for electricity generation is considered and, second, the complexity involved in calculating LCC associated with the scale of a project is reviewed.

The relevance of the three energy sources is as follows: coal has been and is expected to remain a major source of electricity generation. For example, in 1971, coal contributed 40% to the total global electricity supply, while the corresponding value in 2002 was 39%.[8] Wind has made substantial inroads into the utility scale commercial electricity supply during the last 10-15 years. In recent years, distributed grid-tied residential solar photovoltaic (PV) power systems have been demonstrating viability due to state-(and utility-) offered financial (and fiscal) incentives, especially in Japan, Germany, and several states in the United States.

In terms of the complexities involved in the LCC calculations, those for a small PV power system would be simple in comparison to calculations for a large coal power project. For example, a typical 3-kWp (DC) residential solar system could be procured and installed quickly. On the other hand, a large coal power project (as well as nuclear and large hydro power projects) could take several years to construct and commission.

In this article, major cost components associated with the different power systems are briefly described in “Coal, Wind, and Solar Power Systems.” In “Methodology for Calculation of the Life-Cycle Cost,” a simple framework for the LCC calculation has been developed. The results of the LCC calculations for the three different power systems are discussed in “Results and Discussion,” with concluding remarks in “Conclusions.”

COAL, WIND, AND SOLAR POWER SYSTEMS

The three power systems, i.e., coal, wind, and PV power systems, operate in significantly different manners. Therefore, the costs associated with each differ. For example, the initial cost for installing a PV system is high as compared to that for coal and wind power projects. However, the resource needed for electricity generation for the PV is free and the same holds true for a wind power system.

Coal Power Plant

A coal power plant consists of the steam and turbine generator sections. Major mechanical systems of the plant are: water system, heat cycle make-up system, coal handling plant, ash handling plant, fuel oil system, compressed air system, ventilation and air-conditioning system, fire protection systems, and miscellaneous auxiliaries. The electrical systems are: generator, transformer, switchyard, control and instrumentation systems. Coal power plants are usually constructed either near coal mines (in order to reduce the transportation cost of coal) or near load centers to reduce the electricity transmission losses. Coal power plants are generally operated through onsite “operational and maintenance” personnel. Once the plant has outlived its designed life (around 25-30 years), it is usually retrofitted and made operational.

Wind Power Project

A wind power plant consists of turbines and towers, foundations, access roads, switch gear, instrumentation and control systems, etc. Small wind power projects are generally remotely operated. In general, for every 10-20 turbines, one operator is needed.[11] Wind power projects offer potential socioeconomic benefits to local communities. Typically, for a 50 MW power project, 50 jobs are created during the construction phase. During the operation phase one job is created for every 5-8 MW of the installed capacity.[12] The turbines are repowered, replacing the old and typically smaller wind turbines with new equipment when the design life of the equipment diminishes.1-11-1

Photovoltaic Power System

A small rooftop (3-kWp) PV system consists of around 20-30 PV modules tied on to panel mountings with the roof. Direct grid-tied inverters convert the DC power produced by the PV to AC power. The safety equipment includes a DC combiner box for wiring, a DC disconnect to facilitate servicing, and an AC disconnect to isolate the PV system from the grid.

Cost Components of Energy Projects

The costs associated with the useful life of a project are categorized (in Introduction) as initial cost, operation and maintenance cost, and disposal cost. Wind and coal power projects usually undergo retrofit after useful design life. Therefore, disposal or decommissioning of these plants is not considered in this study. Similarly, PV modules disposed from the rooftop may not be associated with high costs. Additionally, the recycling of PV modules is unlikely to produce high value products.[6]

The initial costs associated with a power project before commencement of construction activities are typically the project site survey, land lease agreements, power purchase agreements, etc. (see Table 1) for coal and wind power projects. For the PV system, an assessment of energy produced from solar irradiance is completed at the location where the system is to be installed.

During the construction period, the costs are divided into two categories: (i) capital cost and (ii) noncapital cost. Capital costs are associated with the procurement of physical assets, such as boiler, wind turbine, and PV panels, respectively, for coal, wind, and PV power projects. The noncapital costs are associated with services needed for the deployment of physical assets, e.g., costs associated with legal services, erection, testing, and commissioning. In Table 2, the capital and noncapital costs associated with coal, wind, and PV power systems are provided. During the operation phase of the plant, the costs usually considered are variable costs (cost of fuel and consumables), operation and maintenance costs, debt servicing costs, etc. (the environmental costs associated with emissions and solid wastes during the operation of the coal power plant have not been considered in this study).

Table 1 Activities During Project Development Phase 520-MW coal power project

• Site survey

• Environmental impact assessment

• Fuel and water transportation corridor survey

• Development of project technical specification

• Permitting

• Land lease agreement

• Appointment of engineering procurement and construction contractor

• Debt and equity finance tie-up

• Power purchase agreement

• Fuel supply agreement 50-MW wind power project

• Wind resource assessment and site survey

• Environmental impact assessment (including the bird sighting study)

• Permitting

• Land options agreement

• Power purchase agreement

• Debt and equity finance tie-up 3-kW PV system

• Assessment of energy available at the installed roof tilt angle

• Shading analysis

These are explained in detail in “Methodology for Calculation of the Life-Cycle Cost.”

METHODOLOGY FOR CALCULATION OF THE LIFE-CYCLE COST

In this section, a framework for the calculation of LCC has been developed. The LCC considers costs associated with two phases of a power system, i.e., the construction and commissioning phase and the operation phase. Therefore, the costs associated during the former are due to interest during construction (IDC), financing charges, and taxes and duties (Fig. 1). Those associated with the operation phase are due to depreciation, interest on working capital, loan repayment, and variable costs (Fig. 1).

Annual Electricity Generation

The annual electricity generated from the ith power project, Et (in kWh), is calculated considering the number of hours a plant operates in a year. While annual energy generated is strongly related to the wind speed for a wind power plant, the calorific value of the coal used is important for a coal power plant.

tmp12F-11

where Pcap (in MW) is the rated capacity of the plant. fe i is the effective capacity factor of the ith power plant (i.e., coal or wind power plants). The effective capacity factor considers the plant’s overall efficiency of energy conversion and the auxiliary power consumed to operate several electrical and mechanical systems associated with the plant. For example, around 10% of the total electricity produced in a coal power plant is utilized as auxiliary [31 power.

Annual electricity generated from a PV system, EPV (in kWh), is related to annual average daily equivalent sunshine hours [ESH; the ESH is equal to the average monthly daily solar irradiation in kWh/m2/day. PV modules are rated at 1 kWh/m2 incident irradiation (or one sun). In other words, ESH represents the capacity factor for a PV system. It indicates the number of hours per day that the system is expected to operate] of the place the PV system is installed.

Table 2 Capital and noncapital costs of energy projects

Capital cost category Noncapital cost category
520-MW coal power project
Steam generator Erection testing and commissioning
Turbine generator Construction insurance
Balance of plant Engineering and overheads
Mechanical Systems Preliminary expenses
Coal handling plant Land and site development
Ash handling plant Owner’s engineers expenses
Cooling towers and circulating water system Operators training
Other mechanical systems Start-up fuel
Electrical Systems Legal fees, taxes, and duties
Generator and transformer Establishment expenses
Switchyard
Balance of electrical systems
Instrumentation and control systems
Initial spares
External water supply system
Intake channel and pipes
Related equipment and systems
Civil works
Access and diversion roads
Ash disposal area development
Coal transportation railway construction
Residential township
Temporary constructions
Plant building facilities
External coal transportation system
Merry-go-round rail system
Rolling stock and locomotive
Miscellaneous fixed assets
50-MW wind power project
Turbine and tower Erection testing and commissioning
Foundations Construction insurance
Electrical infrastructure Engineering and overhead
Substation Assembly and checkout
Transmission upgrade Preliminary expenses
Roads and grading Legal fees, taxes, and duties
Control systems
Control buildings
Central building
3-kW Grid-tied photovoltaic system
Photovoltaic modules Assembly and installation
Inverter
DC and AC disconnects
Wire and cables
Panel mounts

Components contributing to LCC of electricity for coal and wind power projects.

Fig. 1 Components contributing to LCC of electricity for coal and wind power projects.

tmp12F-13

PVcap is the capacity of the PV system in kW, ?jinv is inverter efficiency, and /T,d and fw are the fraction of the rated module output adjusted for temperature dust load, and wire loss, respectively. The ESH varies with the system tilt angle. It is usually least at 90° system tilt, the maximum being at the latitude angle tilt. However, ESH available at the latitude + 15° angle has been used in the study as, for this panel tilt, the solar energy available across each month in a year is (generally) uniform.[2]

Depreciation

Depreciation of a physical asset relates to the loss in its value over time. For energy projects, depreciation is usually assessed based on the accounting concept that the depreciated value of the asset is allocated over years and treated as an operating expense. Thus, the annual depreciated cost of an asset is used for allocation rather than valuation.[9] The method for depreciation calculation could be either: (i) straight-line depreciation; (ii) declining balance depreciation; (iii) sum-of-the-year digit depreciation; or (iv) modified accelerated capital recovery system (MACRS). In this study, the MACRS method has been used to calculate asset depreciation. The depreciation rate is likely to vary for different assets of the plant. For example, electrical components usually attract higher depreciation rates as compared to mechanical systems. The annual depreciation of the assets, DEP, can be expressed as:

tmp12F-14

PCP&M, PCcw, and PCMFA (in $) represent the asset components of the project cost (PC) for plant and machinery, civil works, and miscellaneous fixed assets, respectively. The depreciation rate is represented by rdep. As mentioned above, different depreciation rates are likely to be applicable for the three categories of the depreciable assets. However, in this study, all assets are depreciated with the same annual depreciation rate. /dep is the depreciable fraction of the project cost.

Financing Charge

During the project construction and commissioning period, a part of the project cost is funded through equity and the balance through a loan. The amount of the loan drawdown depends on the equipment and services that have been supplied during the construction of the project. And the corresponding interest on the loan is compounded on a monthly basis. Financing charges are usually associated with the loan amounts and categorized as[4'10]:

1. Management agreement fee

2. Commitment fee

3. Bank guarantee commission

4. Bank guarantee fee

5. Financial advisory fee

The financing charges, as a fraction of the loan, may be a one-time upfront charge or a recurring charge based on periodic drawdown of loan amounts. For example, the management agreement fee, bank guarantee fee, financial advisory fee are one-time upfront charges.[10] Charges accrued on bank guarantee commission and commitment fee are progressive in nature. Mathematically, the financing charge (FC) can be expressed as:

tmp12F-15

where CC,j is the capital cost corresponding to ith project for its jth component—for example, the wind turbine (the jth component) for the wind power project (the ith project). NCC, ^ represents the noncapital cost of the ith project for its gth component (e.g., legal expenses), / is the fraction of CC, j and NCC, g funded through the loan. A fraction of// is fm, representing the mth upfront financing charge. / j ^ n is the fraction of C,j supplied in the fcth month and n is the maximum number of months required for its construction and commissioning. / g^ n is the fraction of NCC, g phased in the feth month and f0 represents a fraction of// associated with the oth progressive financing charge.

Equity finance is the provision of money or goods and services that gives partial ownership of assets and liabilities of a project to an investor(s). Large corporations normally raise equity by selling shares and bonds in the capital market and also through allotment of preferential shares to investors. The structure of equity ownership, its concentration, and composition are crucial for equity investors. The composition of the equity investor can be an individual, a family or family group, a holding company, a bank or an institutional investor like an investment company, a pension fund, an insurance company, or a mutual fund.[11 Equity investors require a minimum return on investment for their capital and they claim residual surpluses from project cash inflows.

Debt is the amount of money loaned by a party to another party at a mutually agreed repayment terms. Debt is characterized by several attributes, such as repayment period (or maturity), repayment provisions, seniority, security, and interest rates. Debt maturity can be characterized in terms of short-term (up to 1 year), medium-term (up to 5 years), and long-term (more than 5-7 years) loan repayment periods.

Interest During Construction

Interest during construction is the accumulated monthly interest on the loan used to finance construction and commissioning activities of a project. For example, a large coal power project takes around three or more years for its construction and to become operational. The IDC will depend on the phasing of equipment and services required during construction of the project and the corresponding loan drawdown to finance the same. Therefore, the IDC can be expressed as:

tmp12F-16

where J is the annual interest rate on J sources of the loan. It is normal for large power projects to secure loans from more than one source.

Project Cost

The total cost of a power project considers three important components and these are: (i) the project’s capital and noncapital costs; (ii) the IDC; and (iii) the financing cost. The project cost can be calculated as:

tmp12F-17

Variable Cost

The variable costs associated with a plant are typically the cost of consumables and the “operation and maintenance” costs. For a coal power plant, the consumables are coal, oil, and water, whereas these costs’ components are not applicable in the case of wind and solar power projects. The variable cost can be expressed as:

VC =

coal x Ccoal) + (S oil X P oil

X Coil)} X Ei + (8760 X plf X Swater

X Coil)} X Ei + (8760 X plf X Swater

tmp12F-18

where Scoai, Sou, and Swater are specific coal, oil, and water consumptions, respectively. The cost of coal, secondary oil, and water are represented as Ccoai (in $/t), Con (in $/t), and Cwater (in $/1000 m3/h). The density of oil is poil. It is worth mentioning that even in a coal power plant, oil (or, as it’s usually termed, secondary oil) is used as a fuel during the boiler startup. In calculating the variable cost, a fraction of the capital cost is assumed to meet the operation and maintenance of the plant (/o&M). Further, this fraction is subdivided into components contributing to the variable cost (fvc) and fixed cost. The annual average plant load factor for the coal power plant is given as plf. The annual inflation rate is represented as e in the fth year.

Interest on Working Capital

In order to maintain uninterrupted operation of a large power plant, some working capital is required to meet the costs arising out of unanticipated circumstances. For example, in a coal power plant, a few months of consumables (coal and oil) would always be stocked in case of temporary disruption in fuel supply. In addition, costs associated with debt servicing (or the loan repayment) and operation and maintenance for a few months are also considered in the working capital. The working capital is generally funded through very short-term loans (i.e., loans for a few months). The interest rate applicable to the working capital is likely to be higher than that for long-term loans. The total interest on working capital (7WC) can be calculated as:

tmp12F-19

where iwc is the annual interest on working capital and VC; is the ith component of the variable cost (e.g., costs of coal and oil and the “operation and maintenance” cost) for which the provision of working capital is required. , is the number of months of working capital needed, corresponding to VCj. Loan repayment is the value of annual loan repayment and y the number of months for which the working capital for LR is required.

Taxes and Duties

The taxes and duties are applicable to different components of the project’s capital and noncapital costs. Import duty is levied on part of the goods and services procured from overseas. Local, state, and federal taxes and duties, such as sales tax, apply to the equipment and services required for the project. Mathematically, the costs of taxes and duties can be expressed as:

tmp12F-20

where RTD,; is the rate of tax or duty for the ith component of capital or noncapital costs.

Loan Repayment

As mentioned before, a certain fraction (fd) of the total project cost is funded by debt (D) and the rest by equity. However, it is likely that large projects raise debt from more than one source (7 sources) such that:

tmp12F-21

LR is the annual loan repayment amount. TL J is the period of the loan repayment (in years) and Ij is the interest on /th loan, qj is the number of loan repayments in a year. In Eq. 9b, the principal payment remains constant throughout the term of the loan period. However, the interest is paid on the declining balance of the loan amount (Dj). Therefore, in the loan repayment proceeds, the interest amount is high during the initial years of the loan term. Toward the final years of the loan term, the principal amount is the major component of the loan repayment.

Life-Cycle Cost of Electricity

The LCC of the electricity (in $/kWh) of a project is obtained by taking all of the associated costs within the life of the project (N) into account and adjusting with a discount rate (d). The selection of a suitable discount rate is important for LCC analysis since a high discount rate will tend to favor options with low capital costs, short life spans, and high recurring costs, while a low discount rate will have the opposite effect (Ref. 13, p. 338). The LCC of electricity can be expressed as:

tmp12F-22

where ELCC is the LCC of electricity from the wind or the coal based power projects. £LCC,Pv is the LCC of electricity from the PV system. ROE is the return on equity invested into the project. An investor is likely to expect minimum return on investment (as equity) into the power project. In the present study, the equity return is assumed at 16%. Csys,Pv and CRpi, respectively, are the capital cost of the PV system and the replacement cost of equipment within the system life (i.e., inverter replacement every 10 years)./o&M-PV is the fraction of the system’s capital cost assumed to meet the annual operation and maintenance costs associated with the system.

Financial and Fiscal Incentives Offered on Renewable Energy Systems

Eq. 10 shows all of the costs associated with the energy project/plant added and discounted (with an inflation adjusted real discount rate) to obtain the present value of the LCC. However, any financial or fiscal incentive offered to an energy system also needs to be adjusted in its LCC. In recent years, several renewable energy (RE) technologies were aided with financial and fiscal incentives (FIs) offered by the federal and respective state governments in order to mainstream RE as a viable option (see Ref. 5 for an in-depth analysis of the effects of FIs on the users of solar energy technologies). In the United States, about 22 states have adopted the “Renewable Energy Portfolio Standard” (RPS) or a similar framework, (see www.dsireusa.org for an overview of federal and state financial incentives on RE technologies) which has been emerging as an effective mechanism to increase the share of RE in a state’s energy mix. Typically, the financial incentives offered by the federal agencies on RE technologies are: the accelerated depreciation for cost recovery, renewable electricity production tax credit, etc. The state-offered FIs are: sales tax rebate, income tax credit, property tax exemption, system cost buy-down rebate, etc. In addition, the applicability of FIs vary considerably among the RE technologies, as well as among the sectors (i.e. residential, commercial, and industrial sectors) and the states in which the RE systems (or projects) are implemented.1-21 Therefore, to illustrate the effects of FIs on LCC, we consider the incentives applicable in the state of Massachusetts on PV and wind-based RE technologies. In addition, the federal incentives applicable to the PV and wind-based energy systems have also been considered (Table 3). The present value of the various FIs can be calculated as:

tmp12F-23

where ST (in $) is the present value of the state sales tax exemption on purchase of RE equipment and systems. This is assumed to apply on the capital cost of the respective energy system or project (i.e., PV system and wind power project). rST is the sales tax rate applicable in a state. For MA, its value is 5% of the capital cost.

Table 3 Financial incentive on PV and wind energy systems

Technology Sector Federal incentives and the incentive level State incentives and the incentive level
PV Residential Income tax credit for maximum of $2000 or 30% of the system cost Property tax exemption: for 20 years assumed at 1.5% of the system cost per year

Capital subsidy: offered by the MTC at $2/kWdc


Capital subsidy: offered by MTC for state (Massachusetts) manufactured components at $0.5/kWdc

100% sales tax exemption

Income tax credit at maximum of $1000

Production credit: sale of renewable energy

certificates at 6 cents/kWh offered by mass

Energy

Wind Commercial / Industrial Modified accelerated cost recovery system—100% of the total asset depreciation in five years, using MACRS rates

Production tax credit: renewable energy certificate (REC) at 1.9 cents/kWh for first 10 years from 2005 (with inflation adjusted in the subsequent years). Also, the REC sale is assumed for rest of the plant life

Property tax exemption: for 20 years assumed at 1.5% of the project cost per year 100% sales tax exemption

tmp12F-24

where PT (in $) is the present value of annual property tax assessed on the installed RE project/system. Note that the property tax is assessed annually on a diminishing value of the project cost (PC) by a factor [1 — t/NPT1. NPT is the maximum number of years the project is exempted from the property tax payment (which is 20 years in Massachusetts, as shown in Table 3) and rPT is the property tax rate.

tmp12F-25

CSpv (in $) is the capital subsidy (or, as commonly referred to, the system buy-down rebate) offered on a PV system. Capital subsidy is usually offered as an upfront rebate on the rated capacity of the PV system. rCS_ sys and ts- comp (in $/kWDC or $/kWAC) are the subsidy rates on system and components manufactured respectively in the state (Table 3).

tmp12F-26

where IR (in $) is the income tax rebate offered to a buyer of a PV system. The IRstate and IRfed are the dollar amounts of the income tax rebate offered by state and federal agencies, respectively (Table 3). In this study, the income tax rebate is where IR (in $) is the income tax rebate offered to a buyer of a PV system. The IRstate and IRfed are the dollar amounts of the income tax rebate offered by state and federal agencies, respectively (Table 3). In this study, the income tax rebate is assumed to be availed by the buyer of the system in the very first year it is purchased. However, the income tax rebate is generally offered with the provision to carry it forward for more than one year (usually for 3-5 years).

assumed to be availed by the buyer of the system in the very first year it is purchased. However, the income tax rebate is generally offered with the provision to carry it forward for more than one year (usually for 3-5 years).

tmp12F-27

Accelerated depreciation of the project assets has been a useful mechanism that allows a commercial (and/or an industrial) entity an early recovery of the project costs. For example, the current provisions allow 100% project cost recovery within 5 years of project operation by applying accelerated depreciation rates. In Eq. 11e, DEPACCL ($) is the present worth of the depreciated value of the project cost within a period of A^accl_ dep (years) with a depreciation rate of rACCL_ DEP,r, applicable in the fth year.

tmp12F-28

where REC ($) is the present value of renewable energy certificates (RECs) generated from the wind power project. The capped price of an REC unit is 1.9 cents/kWh, starting from 2005, and it is adjusted with the annual inflation rate in the subsequent years. Prec,i is the unit REC price (cents/kWh) for period (11) of the first 10 years of the plant’s operation (Table 3) and is a tax exempt revenue source. It is assumed that the RECs generated beyond the first 10 years to the end of the plant life (period f2) could also be sold at the unit price of Prec,2; however, revenue generated from REC sale is taxable. In this study, the unit price for REC for both periods is assumed to be the same. The RECs generated from the PV system can also be sold, however, at a unit rate different from that of a wind power plant and can be expressed as:

tmp12F-29

where PREC,Pv (in cents/kWh) is the price of a REC unit generated from the PV system.

The financial advantage of installing a PV system to generate electricity on a residential site is that it partially offsets the cost of electricity purchased from grid. Therefore, the energy costs saved due to the PV system can be obtained as:

tmp12F-30

where ES is the cost of the grid electricity avoided due to on-site electricity generation and TR is the electricity tariff applicable in the residential sector. Therefore, the effect of financial incentives on the life cycle of electricity from wind and PV power systems can be expressed as:

where ES is the cost of the grid electricity avoided due to on-site electricity generation and TR is the electricity tariff applicable in the residential sector. Therefore, the effect of financial incentives on the life cycle of electricity from wind and PV power systems can be expressed as:

tmp12F-31

RESULTS AND DISCUSSIONS

The cost profile of coal, wind, and PV power systems are different since each system operates in a different manner. For instance, the installed cost of coal and wind-based projects are comparable while that for a PV system is high. As shown in Table 4, the installed cost of the coal and wind power project are $1210/kW and $1353/kW. For the PV system, it is $7840/kW. The costs, input parameters, and associated assumptions are given in Appendices A-D.

It can also be noticed from Table 3 that for the coal power project, the IDC and financing charge comprise around 16% of the total project, while the corresponding value for the wind power project is less than 10%. This is due to the fact that coal power projects take a longer time to implement than wind power projects. This also indicates the importance of commissioning a project on time and within the budget. To reduce the IDC, a project developer would ideally prefer to invest the equity funds before the loan. This provides banks additional security for loans offered to project developers. In fact, for large green-field power projects, banks normally allow loan drawdown after a substantial part of the project equity funds have been invested. This is because after investing a large part of the equity, a project developer’s commitment to complete the project on time and budget is likely to increase.

On the other hand, a project developer would prefer to schedule payments to the project’s construction and commissioning contractors as close to the project completion schedule as possible to reduce the IDC. However, this would increase financial risks for the contractors. Usually, the project contracts are designed such that a certain percentage (10%-15%) of the contractual amount is paid to the contractor as mobilization advances to commence activities. The balance payments are made progressively, based on achieving predetermined project construction and commissioning milestones.

Table 4 Cost components of coal, wind, and PV power systems

Cost Coal Wind
Category (million $) (million $) PV ($)
Capital cost 445.5 49.9 23,520
Non-capital 86.0 11.8
cost
Interest 61.5 2.1
during
construction
Financing 36.2 3.8
charge
Total project 629.2 67.7 23,520
cost
Project 520 MW 50 MW 3 kW
capacity
Unit cost 1210 $/kW 1353 $/kW 7840 $/kW

The annual electricity tariff for coal and wind power plants follow a similar trajectory, except that the electricity tariff for a wind power plant is higher than that for the coal power plant, as shown in Fig. 2a and b.

For both coal and wind power projects, the sharp decline of the electricity tariff in the 11th year is due to the full amortization of loan repayments. In the 15th year, the deprecation costs are also fully adjusted. Thereafter, the funds required to meet the fixed charges reduce substantially. From the 15th year onward, the components of the variable charge contribute largely to the electricity tariff. Because wind power projects do not require fuel during operation, the electricity tariff is predominantly dictated by the fixed cost components of the project. On the other hand, for coal power plants, the components of variable charge contribute largely after the loan repayment and depreciation costs are fully adjusted.

The levelized cost or the LCC of electricity is shown in Fig. 3 for the three power projects considered in this study. The costs, input parameters, and assumptions are given in Appendices A-D. As expected, the LCC of electricity from a coal power plant is the least expensive, followed by wind, while it is highest for the PV system. It is interesting to note that the installed cost (in $/kW) of a solar system is about six times higher than that for the coal power project (Table 3). However, the levelized cost of electricity from these two sources differs by around ten times. This effect is due to the different capacity factors utilized by these systems. A coal power plant usually operates around 80% of the time in a year, while a PV system operates only around 15% in a year. The levelized cost of electricity from the wind power plant is around twice that of the coal power project and the corresponding values are 4.4 and 7.6 cents/kWh, respectively.

tmp251_thumb (A) Annual electricity cost for the 520-MW coal plant. (B) Annual electricity cost for the 50-MW wind plant.

Fig. 2 (A) Annual electricity cost for the 520-MW coal plant. (B) Annual electricity cost for the 50-MW wind plant.

From the above discussion, it can be inferred that the cost of electricity associated with wind and PV-based power systems can possibly impede investors or individuals from installing such systems for electricity generation. In order to promote the use of electricity from RE sources, several state and federal agencies in the United States (and several other countries) have been offering FIs for RE technologies. Typically, the state-offered FIs consist of sales tax exemption on the purchase of system components, property tax exemption, income tax rebate, capital subsidy on the system cost, etc. The FIs offered by federal agencies are typically the accelerated depreciation on the project cost for faster recovery of the capital, the production tax incentive, income tax rebate, etc.

To illustrate the effects of FIs on the LCC of electricity from the PV system and the wind power project considered in this study, the federal and Massachusetts state financial (and fiscal) incentives offered on residential PV system and utility scale wind power projects have been used.

The FIs have a significant effect on the LCC of electricity generated from the PV system. The capital subsidy on the system, along with the electricity costs saved due to onsite power generation, contributes to a reduction of as much as 65% of the LCC of electricity from the system (Fig. 4). When several other FIs, such as federal and state income tax rebates, state sales and property tax exemptions, and the sale of RE credits generated from the electricity produced by the system are considered, the LCC of electricity from the PV system is negative (Fig. 4).

Levelized cost of electricity from coal, wind, and PV-based power systems.

Fig. 3 Levelized cost of electricity from coal, wind, and PV-based power systems.

Similarly, the LCC of electricity from the 50 MW wind power project is significantly reduced when the effect of FIs is considered. The accelerated depreciation for capital cost recovery and the production tax credit contribute to reducing the cost of electricity by 65% (Fig. 5). The LCC of electricity from the wind power project without the FIs is 7.6 cents/kWh and when the effect of FIs is considered, the corresponding value is 2.1 cents/kWh (Fig. 5).

Effect of financial incentives on the levelized cost of electricity from the 3-kW PV system.

Fig. 4 Effect of financial incentives on the levelized cost of electricity from the 3-kW PV system.

Effect of financial incentives on the levelized cost of electricity from the 50-MW wind power project.

Fig. 5 Effect of financial incentives on the levelized cost of electricity from the 50-MW wind power project.

The cost of electricity from coal, wind, and PV-based power systems after considering the effects of FIs are compared in Fig. 6. The cost of electricity generated from the PV-and wind-based energy systems could be significantly less than that generated from coal power projects (contrary to the conventional belief; however, the financial incentives on PV and wind-based RE systems vary considerably from state to state. Therefore, the results of this study are only illustrative in nature). This is (possibly) one of the reason for large-scale deployment of residential PV systems and utility scale wind power projects in several parts of the United States (and elsewhere) in the recent years.

CONCLUSIONS

Life-cycle cost assessment provides an estimate of the major expected costs that can be incurred within the useful life of an asset. Life-cycle cost estimation is a tool that influences investment decisions for acquiring or developing an asset. It allows for the comparison of different investment alternatives and thus enables determination of the most cost-effective system. This study has attempted to develop a framework for conducting LCC analysis of energy projects by focusing on two phases of a project’s life-cycle costs, these are

 Levelized cost of electricity with financial incentives from coal, wind, and PV-based power systems.

Fig. 6 Levelized cost of electricity with financial incentives from coal, wind, and PV-based power systems.

(i) the development, construction, and commissioning phase and (ii) the operation phase. The energy projects considered were: (i) a 520-MW coal power plant; (ii) a 50-MW wind power project; and (iii) a 3-kWp grid-tied residential PV system. The LCC assessment considers costs associated with the debt servicing, variable costs, interest on working capital, depreciation, annual operation and maintenance cost, etc. Most of these costs are applicable for large (or utility scale) power projects and the effect of these costs on the electricity produced from a grid-tied residential PV system is negligible. The LCC of electricity from the PV system is around ten times higher than that from the coal power source when the effects of financial incentives are not considered. Similarly, the LCC of electricity from the wind power project is around twice that from the coal power plant without considering the FIs. The annual cost of electricity generated from a coal power plant is balanced between fixed and variable costs, while that for the wind power project is largely contributed by fixed cost.

In addition, a framework has been developed to quantify the financial and fiscal incentives offered by federal and state agencies to RE technologies. This enables studying the effect of FIs on the LCC of electricity generated from the PV and wind power systems. For the residential PV system, the state offered upfront capital subsidy on the system cost and the cost of electricity that was avoided due to the contribution of onsite power generation in reducing electricity cost (LCC) by 65%. Similarly, the LCC of electricity from the 50-MW wind power project is significantly reduced when the effect of FIs is considered. The accelerated depreciation for capital cost recovery and the production tax credit contribute to reducing the cost of electricity by 65%. The cost of electricity generated from the PV and wind-based energy systems could be significantly less than that generated from coal power projects when the effects of financial incentives are considered in the calculation of the LCC of electric power projects.

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