Understanding LCOE for Solar Power Plant


PV power plants are in essence front-loaded investments with no fuel cost and therefore insignificant O&M costs. To determine the advisability of a scale PV plant in India, discounted cash flows have to be calculated and analyzed. For the (relatively straightforward but somewhat extensive) PV cash flow modelling (as done regularly for all types of project finance), three essential elements have to be determined:

i.            Discount factor,

ii.            Cost and

iii.            Benefits.

The levelised costs of electricity (LCOE) of solar PV are compared to the most expensive power plants in India.  The formula below illustrates how to calculate the LCOE:

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Where,

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In many reports the Annuity Method and the Net Present Value (NPV) are used for economic evaluation. In case of feasibility studies for a single project cash-flow profiles are used, i.e. the Internal Rate of Return IRR either expressed as Equity Internal Rate of Return (EIRR) or as Project Internal Rate of Return (PIRR).

In addition, the Cost Benefit Ratio over the project lifetime can be used to assess the profitability of an investment. It is expressed asPresentation5

LCOE can be calculated as follows:

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Therefore,  Levellised Tariff is Rs 7.69

Any calculation should consider possible failures in the parameter settings. Consequently a sensitivity analysis spotlights the relevant and the less important parameters –or in other words it advises the author to focus on the most important input parameters.

The following figure shows the impact of a deviation of one – and each simulation only one – input parameter and the resulting deviation of the outcome, here the specific cost (in Rs/kWh) of a PV plant. The sensitivity analysis is carried out for the input initial investment, useful life, O&M cost and interest rate. The stronger the deviation is the stronger is the influence of this parameter.

Sensitivity analysis of a PV plant

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