RENEWABLE PROJECT

COSTING
LECTURE 15
RENEWABLE ENERGY SYSTEMS
INTRODUCTION
• Renewable energy has entered a definitive trend of falling costs and
accelerated technological advances coupled with rising efficiencies. An
exception is certain biofuels that have to be purchased, such as wood.
• Between 2010 and 2016, the cost of electricity generated from solar
photovoltaics has fallen by almost 70% and that from onshore wind plants
fell by 18% [1].
• Continued falling prices and advances in renewable energy technologies are
bringing prices of electricity from renewables in line with many competing
fossil-fueled power plants.
• In order to evaluate the economic viability of any renewable energy project,
or any project for that matter, it is imperative that some financial appraisals
are performed so that a decision to reject or accept a project can be taken.
[1] R. E. Agency, “International Power Generation Costs 2017,” https://www.irena.org/ publications/2018/Jan/Renewable-
power-generation-costs-in-2017.
INTRODUCTION
• In an ideal world, a power plant should be able to produce electricity
24 hours a day, 7 days a week for the whole year. However, in the
real world, this is not possible due to many reasons.
• For example, a power plant may have to be shut down for regular
maintenance and servicing or replacement of faulty or aging parts. In
addition, many renewable energy plants have an added limitation on
their availability to generate electricity because their output energy
depends on weather conditions, which are continuously changing.
• For example, a solar PV plant cannot produce electricity in the
absence of the sun. Similarly, a wind turbine cannot produce
electricity without wind. Further, even if sun or wind energy is
available, it may not be sufficient to enable a PV or a wind plant to
run at its full rated capacity.
 RATED CAPACITY AND CAPACITY FACTOR
• The rated capacity, also known as the installed capacity, of an
electricity generating plant defines the maximum intended full-
load output of the plant. The basic unit for measuring the rated
capacity is the kilowatt (kW) or any of its multiples; for example,
the megawatt (MW) and gigawatt (GW).
• A figure of merit for a power plant is its CF, also known as the
load factor, which is defined as the ratio of the actual amount of
electricity generated in one year to the theoretical (or maximum)
amount of energy a plant can deliver if it runs constantly
throughout the year at full rated capacity.
 RATED CAPACITY AND CAPACITY FACTOR
• Using the capacity factor, the actual amount of electricity
produced per year can thus be expressed as

the capacity factor is a measure of a plant’s availability during a year

for generating electricity. For fossil-fueled and even some renewable
energy plants, such as tidal, the CF factor can be as high as 95%.
However, for photovoltaic plants in cloudy climates, the CF can be as
low as 10% and for wind turbine plants, it ranges from about 20% to
40% depending on climate conditions [2].

[2] Boyle, G. (ed.), Renewable Energy Power for a Sustainable Future, Oxford, UK: Oxford University Press with The Open University, 2012.
 TYPES OF COSTS OF A POWER PLANT

• In general, the cost of electricity derived from any power

plant may be categorized into four main types :
1. Initial capital costs;
2. Fuel costs;
3. Operation and maintenance (O&M) costs;
4. Decommissioning costs.
 1.INITIAL COST
• The initial costs include elements like the costs of land and any
required infrastructure in addition to the cost of the initial
construction of a plant. Construction costs of nuclear and large-
scale renewable energy plants, such as tidal, are typically larger
than gas-fired plants, but fuel costs are either very low or zero.
However, the cost of gas for a gas-fired plant can be as much as
70% of the cost of generated electricity.
• The cost of an offshore wind plant is £3,000/kW and for onshore
wind turbine plant it is £1,000/kW. Since the capital costs of a
renewable energy plant are relatively high, the life expectancy of a
plant is a major factor in assessing its economic viability.
• Typically, wind turbines and photovoltaic modules have life
 2. FUEL COST
• Fuel costs are the cost of the primary fuel (e.g., coal in a coal-fired plant) used
to generate electricity and may include the cost of fuel transport as well as
disposal, such as in the case of nuclear plants. The cost of fuel for most
renewable energy plants may be reasonably considered to be zero; an
exception is a biomass plant that uses biomass fuel that must be purchased,
such as wood, sugarcane, and maize.
• A major contributing factor to the overall cost of fuel in any plant is the
energy conversion efficiency of the plant defined as

The efficiency can range from about 10% for

photovoltaics plants to about 40% for modern
fossil-fueled plants. The fuel cost per kilowatt
of energy is expressed as
 3. OPERATION AND MAINTENANCE COST
• The O&M costs include costs such as those of regular maintenance
and safety inspection, repairs and replacements of faulty
equipment, insurance, and waste disposal. In addition, these may
include costs of access to the plant, which may be significant, for
example, for offshore wind plants.
4. DECOMMISSIONING COST
• Decommissioning costs of a nuclear plant are typically very high. In
order to make a comparison between the costs of electricity from
different plants, a simple method called the levelized cost of electricity
(LCOE) is used here.
• In this method, the cost of energy is levelized over the lifetime of the
plant and is expressed in pence per kilowatt-hour (p/kWh). The main
advantage of the LCOE method is the fact that it enables us to make a
comparison of the cost of electricity from different technologies, for
example, wind, tidal, and coal, of different lifespans, rated capacity,
capital cost, and so on.
• This allows us to make statements such as the cost of electricity from
a coal-fired plant is 6 p/kWh and from a wind plant is 4 p/kWh.
 CALCULATING COSTS
1. Payback Time Method
• One simple method of assessing the economic viability of a
project is to calculate the time it takes the project to recover the
initial capital outlay, known as the payback time, which is
normally expressed in years.
• The inputs to this method are the capital cost, the price of the
output energy, and the price of a competing energy source,
which is typically a fossil source of energy. The latter is then
compared with the price of the output energy to calculate the
payback time. The operation and maintenance and any finance
costs are not taken into account, which artificially reduces the
calculated payback time.
 EXAMPLE
• A proposed onshore wind energy plant is rated at 2 MW. It has a
capital cost of £1,800/kW and an estimated O&M costs of
£35,000 per year. It has a life expectancy of 25 years and a CF of
25%. Assuming a competing fossil fuel electricity price of 15
pence per kilowatt, estimate the payback time of the plant.
 ANNUAL LEVELIZED COST OF ELECTRICITY

• The LCOE represents the average return per unit of

electricity generated by spreading various costs of the
plant over its life expectancy. The main inputs required to
calculate the LCOE include the initial capital costs, O&M
costs, and finance costs (e.g., interests on loans).
• For renewable plants with no fuel costs, such as solar and
wind plants, the LCOE changes in proportion with the
capital costs, while for plants with high fuel costs, the
LCOE varies considerably with the costs of fuel.
• Thelevelized cost can be calculated on annual basis and
the capital cost is repaid in equal annual payments over
ANNUAL LEVELIZED COST OF ELECTRICITY

• two levelized costing methods; the first assumes zero cost of interest and
the second uses the method of discounted cash flow to allow for the cost
of interest.
• In the first annual levelized method, the capital is assumed to be repaid in
equal annual payments over the lifetime of the project without incurring
any interest charges. The levelized O&M and fuel costs are added to the
annual payments. The levelized (average) cost of electricity is given by
• In the above method, it was assumed that the total capital
cost will be repaid in equal amounts without any interest
charges. However, in practice, the value of money changes
with time. If you invest a sum of money, say VP in a saving
bank account with an interest rate of say r%, then after n
years, the future value of your investment will be
• This leads to a method of project financial assessment called
discounting cash flow (DCF). The future amount of money Vn can
be discounted by rearranging the above equation:
• If a capital sum, say V , is to be repaid as an annuity (i.e.,
p

annual equal amounts over the duration n years of a loan)

using a discount rate r, the annuity (A) is calculated using the
following formula:
EXAMPLE
• A proposed biomass wood-fired power plant with a rating of 10 MW has a
capital cost of £2,000 per kilowatt and is expected to run for 8,000
hours, on average, per year at full power. The plant has a life expectancy
of 30 years and an estimated overall electrical generation efficiency of
30%. O&M costs have been estimated at 2 pence per kilowatt of
electricity generated. It is assumed that wood will be available at £5 per
GJ over the lifetime of the plant. Calculate
a. The capacity factor and amount of electrical energy generated per year.
b. The total capital cost of the plant.
c. The total cost per kWh of electricity generated using the DCF method
using a discount rate of 10%.