Understanding of the key factors affecting Economics of Solar PV Project

Globally, solar energy is getting its much deserved attention. As the cost of electricity generation from solar power system is falling and reaching towards grid parity, solar market is becoming very attractive investment option and India has been seen as one of the largest markets with huge potential for the solar industry. The Indian government has set a new interim target for solar of 9GW of grid connected solar energy by 2017 – the year that the solar industry is tipping that utility-scale solar farm will reach parity with the cost of coal-fired generation. So, all the investors should understand the basic but important parameter of the solar PV plant business and their affect on the overall profitability of the project. The cost for electricity generation from solar PV depends on

  • The technical assumptions
  • Economic / financing assumptions

To understand the economics of solar projects it is important to understand how the assumptions on above factors affect the cost of a PV plant. So, in this article, I am going to explain sensitivity analysis showing, how sensitive Project IRR and Equity IRR are to Capital cost, Capacity utilization factor, Interest rate on debt, O & M expenses and Escalation rate. I have done the analysis using following assumption

Parameter Assumptions
Capital cost per MW Rs 700 lacs
Capacity utilization factor 18%
Debt: Equity 70:30
Interest rate debt 13%
O & M expenses per MW Rs 75 lacs
O&M expenses escalation 5.72%

Using above assumptions Equity IRR and Project IRR are calculated as 20.46% and 15.37% respectively. To ascertain how the assumptions affect the Project IRR & Equity IRR, sensitivity analysis is carried out. The stronger the deviation is the stronger is the influence of the parameter.

chart 1



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