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Techno-Economic Modeling and Analysis of Renewable Energy Projects
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Economics of Variable Renewable Sources for Electric Power Production, 2017
Balcioglu H, EL-Shimy M, Soyer K. Chapter 2: Techno-Economic Modeling and Analysis of
Renewable Energy Projects. In: EL-Shimy M, editor. Economics of Variable Renewable
Sources for Electric Power Production. Germany: Lambert Academic Publishing /
2
Omniscriptum Gmbh & Company Kg, Germany, ISBN: 978-3-330-08361-5; May 2017
TECHNO-ECONOMIC MODELING AND

ANALYSIS OF RENEWABLE ENERGY
PROJECTS
Hasret Balcioglu1, Mohamed EL-Shimy2, and Kemal Soyer3
1 Director of the Institute of Graduate Studies and Research, Head of the Department of
Business Administration, Faculty of Economics and Administrative Sciences, Cyprus
International University.
2 Professor of Electric Power Systems, Electrical Power and Machines Department, Faculty of
Engineering, Ain Shams University, Cairo, Egypt.
3 PhD candidate. Institute of Graduate Studies and Research, Cyprus International University,
North Cyprus, Mersin 10 Turkey.
2.1 Introduction
This chapter considers the economic performance of renewable energy
projects. The chapter includes indicators, models, and methods of analysis of
the techno-economic viability of these projects. Several numerical examples
are given for illustrating the proper use of the given models and indicators23.
In summary, the demand for electricity is sharply increasing with new

challenges such as the lessening fossil fuel, increasing usage of effective
electricity generating technologies, air quality and sustainability of the
environment. There is a growing interest in the use of renewable energy
because of the global economic and political conditions, especially in the
23
http://www.investopedia.com
35
developing countries where several economies depend mainly on its energy.

Projects are chosen for renewable energy to reenergize economies by
creating new jobs, leading to achieve energy independence, decreasing trade
deficits and guide towards a green nation (Omer, 2010)24.
It is known that the major types of renewable energy sources are solar,
wind, hydro and biomass. Solar energy is one of the most important
renewable energy sources which absorb sunlight to create electricity
(Khaligh et al., 2010)25, and solar photovoltaic technology is one of the first
among the renewable energy technologies that is compatible with basic
requirements of electricity, especially in remote areas (Thakre and Subrato,
2014)26.
It is significantly important to determine whether renewable energy

projects make economic sense or not (Duffie and Beckman 27, 1991; Hall et
al.28, 1981). There are different models used to make the right or best
decision. Some of the calculations are simple payback, annual energy/cost
savings, time value of money, present value annuity factor, net present value,
internal rate of return, SWOT analysis, levelized cost of energy (LCOE), and
breakeven analysis. There are several financial formulas applicable on
renewable energy types which enable understanding the renewable energy
project in the context of economic possibilities. For example, a SWOT
analysis could help assess how ready or suitable are states in the region such
as Egypt, Algeria, Morocco, Tunisia and Libya (Hawila et al, 2014)29.
24
Khaligh, A., and Omer C. O., (2010). Energy Harvesting: Solar, Wind, and Ocean Energy
Conversion Systems. Florida: CRC Press, Taylor & Francis Group, pp. 1-5.
25
Khaligh, A., and Omer C. O., (2010). Energy Harvesting: Solar, Wind, and Ocean Energy
Conversion Systems. Florida: CRC Press, Taylor & Francis Group, pp. 1-5.
26
Thakre, O., and Subroto, D., (2014), Techno-Economic Assessment of Renewable Energy
Technologies using Integrated Analysis, International Journal of Engineering and Innovative
Technology, Vol.3, Issue 11, pp. 346-348.
27
Duffie, J.A., Beckman, W.A. (1991). Solar Engineering of Thermal Processes, New York: John
Wiley & Sons.
28
Hall, R. P., Hundley M. F. and Zettl A., (1986). Switching and Phase-Slip Centers in Cahrge-
Density-Wave Conductors, Phys. Rev. Lett. Vol. 56, issue 22, pp. 2399-2402.
29
Hawila, D., Mondal, M., Kennedy, S. and Mezher, T. (2014). Renewable energy readiness
assessment for North African countries. Renewable and Sustainable Energy Reviews, 33, pp.128-140.
36
2.2 Financial and economic performance indicators
2.2.1 Simple Payback

It can be described as the number of years it takes for the savings of
energy to offset the primary investment. It is accepted that the shorter the
payback period, the more economical is the investment. The calculation of
the payback can be misleading if few important investment characteristics are
ignored. For instance time value of money, cost and savings after the
payback period, increases in energy prices, and gains on alternative
investment options.
An example for the payback; let us assume that a factory invests

$400,000 in a new production line, and the production line produces a cash
flow of $80,000 per year, then the payback period is 5.0 years (annual
payback can be calculated as $400,000 initial investment / $80,000).
Another example can be given for a small wind turbine in the USA at
the date of 2010. The household wind turbine is rated at 2.4 kW on a site
with 12 mph average wind speed. The installed cost is $12,000, incentives
are $4,000, annual energy output is 5,280kWh/year, annual
operation/maintenance is $120/yr, useful life is 20 years, the price of retail
electricity is $0.11/kWh, the total initial cost is $8,000 and the discount rate
is 2%. The calculation of simple payback is payback = [(Installed Cost)-
(rebates)/(net annual energy savings)] which is payback=[(12000)-
(4000)]/460.80=17.4 years.
2.2.2 Annual Energy/Cost Savings

The energy/cost savings are the amounts of energy and money saved as
a result of either renewable energy system integration or energy retrofitting
project. For example, consider a light retrofitting project where 3653
inefficient incandescent light bulbs are to be replaced by efficient compact
fluorescent bulbs. This kind of project belongs to the energy saving of
NegWatts projects. The energy saving present an effective approach for
improved utilization of energy resources, cost saving as a result of improved
37
operating efficiencies, and ecological enhancements due to reduced

emissions associated with energy production.
There are two categories of energy saving projects; energy

conservation, and energy efficiency. On one hand, energy conservation refers
to behavioral changes that reduce energy use i.e. increase in the energy
productivity through improved behavior/actions. On the other hand, energy
efficiency refers to changes in equipment designs (i.e. re-engineering) and
behavior that resulting in increased energy services per unit of energy
consumed specifically through growth of the energy productivity through
technological enhancement.
In the considered light retrofitting project, the impacts of technological

enhancements in the energy bulbs are to be analyzed. These enhancements
mainly include significantly lower energy consumption and durability in
terms of lifetime of the bulbs. Table 2.1 includes the main input data where
the term existing refers to incandescent bulbs while the term proposed refers
to compact fluorescent bulbs. It is shown that the given values may be
changed in reality due to technological and economic changes i.e. the
numerical example is given only for illustrating the calculations. Calculations
of techno-economic assessment of this project are illustrated in the following.
Table 2.1: Input data of the light retrofitting project
Data Existing (e) Proposed (p)

Watts of light (WL) 100 20
Annual operating hours (h) 1440 1440
Unit cost of lights, $ (CL) 0.245 6.39
Life hours of lights (LL) 750 10,000
30
Number of lights (N) 3653 3653
Lumens per watt (LW) 1.5.7 60
Cost of electricity, $/kWh (CE) 0.114 0.114
30
The same number of lights is considered while from practical point of view the same lux is more effective
for securing the required illumination level in the considered application. Different activities require
specific illumination levels. For instance, stairways require illumination ofonly 160 lux, library reading
tables requires 500 lux and hand tailoring requires1,000 lux respectively.
38
Annual energy saving (ES) = (Ne  WLe  he - Np  WLp  hp)/1000
=420,826 kWh/year
Annual cost saving (CS) = ES  CE
= 47,974.164 $/year
Cost of implementation (CI) = (CLp  Np) – (Ne  Cle  LLp/LLe)
= 11,409.537 $
Simple payback (SP) period = CI/CS = 0.238 years
These results show the high viability of the considered project in terms of
energy savings, cost savings, and simple payback period.
This presented analysis can be implemented for various energy saving

projects. In addition, the approach can also be used in the analysis of the
techno-economic performance of renewable energy projects such as building
integrated photovoltaics (BIPV) projects which usually have the structure as
shown in Fig. 2.1(a), (b). Fig. 2.1(a) shows a generic schematic of a grid
connected load that is integrated with a variable renewable source such as
wind or solar generator. In this case, the variable source cannot secure the
necessary instantaneous power balance required for proper operation of the
load. In this scheme, the variable energy source provides an effective way
for reducing the energy consumption from the grid and possibly cost saving;
however, lifetime costs of the variable energy source should be carefully
estimated for effective decision making about the overall economic
performance of such projects.
Fig. 2.1(b) shows a typical structure of BIPV, again this structure will
not secure standalone off-grid operation of the load. This is due to the
incapability of the solar-PV source in providing the required instantaneous
power balance for proper operation of the load. For standalone operation of a
variable renewable energy source, the system must be equipped with energy
39
storage. The battery storage would be techno-economically feasible in small

energy applications while in large energy applications the use of hydrogen as
an energy storage/carrier would be more feasible (Fig. 2.1(c)). Details about
modeling and sizing of these systems will be considered in next chapter.
For more details about the types of various loads, structures and
integration philosophies of different variables in renewable energy systems,
the reader may refer to chapter 10 for the dynamic security of interconnected
electric power systems textbook31. Later in this book, energy production
models and economic analysis of such structures will be presented.
2.2.3 Time Value of Money

The value of a specific amount of money is more than the value of the
same amount of money in the future. This is due to effects of inflation, risks,
and lost opportunities to earn interest. Present value (PV) is the current worth
of a future sum of money or stream of cash flows given a specified rate of
return. Future cash flows are discounted at the discount rate, and the higher
the discount rate, therefore when the discount rate is higher, then present
value of the future cash flows become lower. Determining the appropriate
discount rate is a key to be able to calculate the value of future cash flows,
whether they are earning or obligations.
Let us assume that we have two choices. We could receive either

$15,000 today or $18,000 in four years. Which one would be a rational
decision? If we choose to receive $15,000 today and invest this amount, we
could get a sum of cash that is less than $18,000. If we find the present value
of $18,000 and the used interest rates which are currently 4%. Present value
can be calculated by . The FV presents the future sum
and i presents the interest rate while n presents the number of years. Using
the numbers given above, the present value of an $18,000 payment in four
31
M. EL-Shimy. Dynamic Security of Interconnected Electric Power Systems - Volume 2:
Dynamics and stability of conventional and renewable energy systems. Lap Lambert Academic
Publishing / Omniscriptum Gmbh & Company Kg; Germany; ISBN: 978-3-659-80714-5; Nov. 2015.
40
years could be calculated as: Present value = $18,000 * (1+0.04)-4 =

$15,386.48
(a)
(b)
(c)
Fig. 2.1: User’s owned grid-connected variable generators (solar or wind). (a)
Grid connected variable generation without energy storage; (b) The system of
Fig. 2(a) with photovoltaic (solar-PV) generator used; (c) Off-grid variable
generation with hydrogen energy storage
41
2.2.4 Inflation Rate

Inflation shows the rate at which the purchasing power of currency
shows a decrease and general level of prices for goods and services increase.
In order to keep the economy running in a stable environment, central banks
try to limit inflation. For example, when the price of orange juice goes up
overnight, it affects the spending of households. When price changes
decrease the value of spendable money then, households are able to buy less
with the same amount of money in previous times over a certain period is
called inflation.
The annual inflation rate for a given year (say, 1984) is the percent
change from the previous year (1983). Here is the way to calculate the annual
inflation rate for 1984:
 Calculate the difference in the Consumer Price Index (CPI) from 1983
to 1984: 10-9.9 = 0.1
 Calculate the ratio of this difference to the CPI in 1983, and multiply
by 100 to get a percent: 100*(0.1/9.9)  1.0%
So the inflation rate for 1984 was about 1.0%.
In the USA energy sector, residential electricity prices have increased

from an average of 7.83 cents/kWh in 1990 to an average of 11.44 cents/kWh
in 2010. Therefore, a 46% increase in a 20 year period. Inflation can have a
lesser or greater impact on the prices of electricity than normal commodities.
The reason is that; utilities are generally regulated monopolies. It shows that
it would be inefficient for one company to run wires to your house and a
different company to run wires to your neighbor’s house. The government
has a monopoly of the local electric company to run wires for everyone’s
house by granting them. But in the context of monopoly, they make decisions
regarding the price level regulations which should be approved by the
government for the benefit of the society. Generally, the governing agency
allows a certain profit margin and rise in prices equally if there is a rise in the
general prices. The government adds a variable to the billing of utilities to
42
cover “fuel surcharges” so that electric rates can fluctuate with the price of
fuel.
2.2.5 Present Value Annuity Factor (PVAF)

PVAF is calculated as the present value of future one dollar cash
flows. where r is the rate per
period and n is the number of periods.
For example, a company is planning to compute the present value of a

series of $500 annual payments for 5 years based on a 5% rate. The annuity
factor for 5 years and 5% rate is 4.3295 whenever we get information from
present value annuity factor table. This value is the present value per dollar
received annually for 5 years at 5%. In order to get a present value of
$2164.75, $500 can then be multiplied by 4.3295.
2.2.6 Net Present Value (NPV)

It is the difference between the present value of cash inflows and the
present value of cash outflows. NPV is used in to analyze the profitability of
a projected investment or project. The NPV can be calculated using:
where Ct is the net cash inflow during the period t,
Co is the total initial investment costs, r is the discount rate, and t is the
number of time periods. If the NPV is positive, it indicates that the project is
profitable. Being a profitable project means that the projected earnings are
more than the anticipated costs. If the NPV is negative, it shows a net loss.
For example, if a retail clothing business wants to buy an existing

store, it would first estimate the future cash flows that the store would
generate, and then discount those cash flows (r) into one lump-sum present
value amount of, say $600,000. If the owner of the store were willing to sell
the business for less than $600,000, the purchasing company would accept
the offer as it presents a positive NPV. If the owner agreed to sell the store
for $400,000, then the investment represents a $200,000 net gain ($600,000 -
43
$400,000) during the investment period. On the other hand, if the owner
would not sell for less than $600,000, the purchaser would not purchase the
store, as the acquisition would show a negative NPV and would decrease the
overall value of the larger clothing company. Let's use the given formula
above. The lump-sum present value of $600,000 represents the part of the
formula between the equal sign and the minus sign. The amount the retail
clothing business pays for the store represents Co. Subtract Co from $600,000
to get the NPV: if Co is less than $600,000, the calculated NPV is positive; if
Co is more than $600,000, the NPV is negative showing a net loss.
If we ask the question-how big should the NPV be? - The answer will
be that it depends on the other alternatives found for producing energy or
investment. When comparing two alternatives, such as a solar panel and the
wind turbine, the one with the higher value of the NPV makes the sense in
the economic context.
Another example by using the values given for the small wind turbine
can be shown as follows. First of all, the present value of net annual energy
savings could be calculated by using present value annuity factor (PVAF)
which is consistent with the expected life of the project and the inflation rate.
PVAF for a 2 percent discount rate over 20 years is 16.35. The discounted
net annual energy savings are calculated by the multiplication of PVAF with
net annual energy savings (460.80*16.35=$7,534.74). From the result, it is
understood that the $460.80 net benefit is obtained from the small wind
turbine every year for the next 20 years has a value of $7,534.74 today. NPV
is equal to the subtraction of the total initial costs from the discounted net
annual savings which is 7,534.74-8000=-$465.26.
2.2.7 Internal Rate of Return (IRR)

It is a metric used in capital budgeting to measure the profitability of
potential investments. Internal rate of return is also a discount rate that is
required to make the NPV equal to zero.
44
The formula for IRR is:
0 = P0 + P1/(1+IRR) + P2/(1+IRR)2 + P3/(1+IRR)3 + . . . +Pn/(1+IRR)n
where P0, P1, . . . Pn equals the cash flows in periods 0, 1, 2, . . . n,

respectively; and IRR represents the project's discount rate.
For example, let’s assume that Company A should decide whether to

purchase a machine for $300,000. The life of the machine would only last
three years, but it is expected that the machine will generate $150,000 of
additional annual profit for that period. Company A also thinks that it can
sell the machinery for scrap afterward for about $10,000. Using IRR,
Company A can decide whether the equipment purchase is a better use of its
cash than its other investment options, which should return about 10%.
In this example IRR can be calculated as shown below:
0 = -$300,000 + ($150,000)/(1+.2431) + ($150,000)/(1+.2431)2 +

($150,000)/(1+.2431)3 + $10,000/(1+.2431)4
IRR of the investment is 24.31%. This rate makes the present value of the
investment's cash flows equal to zero. As a conclusion, it can be said that
Company A should purchase the equipment since there is a generation of
24.31% return for the Company --much higher than the 10% return obtained
from other investments.
2.2.8 Discount Rate

It is the interest rate used in discounted cash flow (DCF) analysis to
decide the present value of future cash flows. The discount rate in DCF
analysis considers not just the time value of money, but also the risk or
uncertainty of future cash flows. Therefore, greater uncertainty of future cash
flows leads to the occurrence of a higher discount rate.
For example, let's assume that you expect $1,000 in one year. To
determine the present value of $1,000 (present value means what it is worth
45
to you today), you would need to discount it by a particular interest rate such
as 10%. It could be calculated that the $1,000 in a year's time would be
equivalent to $909.09 to you today (1,000 / [1.00 + 0.10]).
Why are discount rates so important in the energy debates? Since discount
rates reflect the capital cost and expected rate of return on investments, then
it can be said that they assess the costs and long term benefits of different
policy scenarios.
Discount rate enables the harmonization of present and future values

within an economic estimation for the opportunities of investment and
economic systems that needs discounting of payment and income streams.
Thus, outcomes such as social costs of the economic assessment of energy
efficiency potentials are highly affected by the selection of discount rate. For
example,
46
A standard-efficiency furnace costs $100 and

consumes $40 per year in fuel over its 10 year
lifetime. A high-efficiency furnace costs $200 and
consumes $20 per year in fuel over its 10 year
lifetime. If the discount rate is 10% per year,
which is the better investment? What if the
discount rate is 30%?
Cash flow diagrams are:
Standard Efficiency High Efficiency
$40
$20
$100
$200
Savings from high-efficiency furnace
$20
-$100 1 2 3 10
$100
47
If the discount rate is 10%, then:
 1  (1  .10)10 
Phigh-eff savings = -$100 + $20  = $23
 .10 
The positive savings indicate that the high-

efficiency furnace is the best investment.
If the discount rate is 30%, then:
 1  (1  .30)10 
Phigh-eff savings = -$100 + $20  = $-38
 .30 
The negative savings indicate that when the

discount rate is 30%, the traditional furnace is the
better investment.
In summary, a high discount rate reduces the value

of future cash flows, including savings from energy
efficiency measures.
Ref: academic.udayton.edu/
In general, it could be said that renewable energy and energy

conservation technologies have high first capital costs and low future costs.
Thus, high discount rates move against these technologies. A zero discount
rate shows that the future is as important as the present value.
48
2.2.9 Return on Equity (ROE)

Return on equity (ROE) is the amount of net income returned as a
percentage of shareholders' equity. Return on equity measures a corporation's
profitability by revealing how much profit a company generates with the
money shareholders have invested. It is also known as "return on net worth"
(RONW). ROE is expressed as a percentage and calculated as: Return on
Equity = Net Income/Shareholder's Equity. The net income is for the full
fiscal year (before dividends paid to common stock holders, but after
dividends on preferred stock.) Shareholder's equity does not include
preferred shares.
2.2.10 Cash Return On Assets Ratio

A ratio used to compare a business performance among other industry
members. The ratio can be used internally by the company's analysts, or by
potential and current investors. The ratio does not however include any future
commitments regarding assets, nor does it include the cost of replacing older
ones. It can be calculated as,
Cash Return On Assets = cash flow from operations/total assets
2.2.11 Equity payback

It is the length of time that it takes for the owner of a project to recoup
its own initial investment (equity) out of the project cash flows generated.
2.2.12 Benefit Cost Ratio (BCR)

It represents the ratio of the net beneﬁts to the costs of the project.
49
2.3 Basic Cashflow

A basic cash flow takes a production estimate and applies price to
calculate a revenue stream. From this revenue stream, the royalties, and
operating expenses are subtracted to achieve an operating income. The
capital is then removed to create a Before-Tax Cash Flow (BTCF). Income
taxes are then calculated, and the After-Tax Cash Flow (ATCF) is created.
The following equations apply,
Revenue = Production Volume * Price
Operating Income = Revenue – (Royalty + Operating costs)
BTCF = Operating Income – Capital expenditures
Taxable Income = Operating Income – Depreciation (DD&A)
ATCF = BTCF – Taxes Payable
where: BTCF = Before-Tax Cash Flow, ATCF = After-Tax Cash Flow,

DD&A = Depreciation, depletion and amortization
2.4 Levelized Cost of Energy (LCOE)

In the past, dollars per Watt served as an index to estimate the cost of
an energy production system. However, the $/Watt evaluation method does
not consider the effects of the lifetime, performances of the system’s
equipment, and financial policies. Therefore, The U.S. Department of Energy
(DOE) has chosen levelized cost of energy (LCOE) as a key parameter to
evaluate energy production systems including wind and solar-PV32. With the
LCOE method, the $/Watt which is traditionally used in solar industry can
32
W. Zhaoyu, A. Qian, X. Da et al., “A Research on Shading and LCOE of Building Integrated
Photovoltaic,” in Power and Energy Engineering Conference (APPEEC) - Asia-Pacific, Wuhan, 2011, pp. 1
- 4.
50
be transformed into $/kWh, which is a more decisive parameter in the

power industry.
Generally, the levelized cost of energy (LCOE) is a cost of generating

energy (usually electricity) for a particular system. It is an economic
assessment of the cost of the energy-generating system, including all the
costs over its lifetime33,34: initial investment, operations and maintenance
(O&M), cost of fuel, and cost of capital. The LCOE is a measure of the
marginal cost (the cost of producing one extra unit) of electricity over
an extended period35. The LCOE is also known as Levelised Energy Cost
(LEC), Levelised Unit Energy Cost (LUEC), and Long-Run Marginal Cost
(LRMC). Therefore, the LCOE is the constant unit cost (per kWh or MWh)
of a payment stream that has the same present value as the total cost of
building and operating a generating plant over its life. Simply, the LCOE
converts unequal annual costs to a constant cost and allows a single cost
value to characterize the resource cost.
The LCOE is the most often used metric for evaluating the economic
feasibility of energy generation projects when comparing electricity
generation technologies or considering grid parity for emerging technologies
such as solar-PV. Since most studies involving new generation or
transmission require an assessment of costs, accurate and readily available
costs of generation estimates are very essential for electric utilities 36. One use
for LCOE calculations is to compare costs without incentives. If incentives
such as the U.S. Investment Tax Credit (ITC) are assumed in an LCOE
calculation, they should be specifically referenced to make clear the basis for
comparison between technologies.
A LCOE model is an evaluation of the life-cycle energy cost and life-

cycle energy production. It allows alternative technologies to be compared
when different scales of operation, investment, or operating time periods
33
"Levelised Cost of Electricity Literature Review,"
http://www.appropedia.org/Levelised_Cost_of_Electricity_Literature_Review.
34
"Levelised Energy Cost," http://en.wikipedia.org/wiki/Levelised_energy_cost.
35
P. Hearps, D. McConnell, M. Sandiford et al., Renewable Energy Technology Cost Review, Melbourne
Energy Institute, May 2011.
36
J. Klein, I. Rhyne, S. Bender et al., Comparative costs of california central station electricity generation,
Final Staff Report: CEC-200-2009-07SF, California Energy Commission 2010.
51
exist. It captures capital costs, ongoing system-related costs and fuel costs –
along with the amount of electricity produced – and converts them into a
common metric: $/kWh. Generally, the LCOE can be represented by
Consider the following nomenclature.
T The life of the project [years]

t Year number i.e. 0, 1, 2 … T
Ct Net annual cost of the project for year t [$]
Et Energy produced in year t [kWh]
It Initial investment and cost of the system for year t [$]
Mt Maintenance cost for year t [$]
Ot Operation cost for year t [$]
Ft Interest expenditure for year t [$]
r Discount rate [%]
St Rated energy output for year t [kWh/year]
d Degradation rate [%]
Rt Revenue for year t [$]
Dep Depreciation [%]
TR Tax rate
RV Residual Value
From an economic point of view, the LCOE is a representation of the

electricity price that would equalize cash flows (inflows and outflows)
over the economic lifetime of an energy generating asset. It is the average
electricity price needed for a Net Present Value (NPV) of zero when
performing a discounted cash flow (DCF) analysis. The LCOE is determined
52
by the point where the present value of the sum-discounted revenues are
equivalent to the discounted value of the sum of the costs37 i.e.
One of the most important assumptions and input parameters is the

discount rate (r). This input represents an appraisal of the time value of
the money used in the investment. Therefore, the discount rate can be
used to convert future costs to present value. The discount rate is particularly
important in the context of renewable energy generating assets, due to their
inherent capital intensity. This can be contrasted with technologies with
higher operating costs such as open cycle gas turbines. Whilst the LCOE for
these technologies is affected by the choice of the discount rate, the impact is
less pronounced, and they are not as much sensitive to variations in the
discount rate.
Considering that . In addition, the sum of the present

value LCOE multiplied by the energy generated should be equal to the
present valued net costs, and the LCOE is a constant value, then equation (2)
results in equation (3).
There are multiple ways to calculate LCOE, depending on the level of

financial detail. For example, the model presented in references 38,39 included
37
W. Short, D. J. Packey, and T. Holt, A Manual for the Economic Evaluation of Energy Efficiency and
Renewable Energy Technologies National Renewable Energy Laboratory (NREL), NREL/TP-462-5173,
1995.
53
in the LCOE inputs the initial investment, the total depreciation tax benefit,
the total annual cost, total system residual value, and lifetime energy
production. The LCOE equation is then represented by equation (4).
In reference40, another model is given as shown in equation (5); in this

model, no incentives are considered.
Several international organizations and institutions such as 41,42 attempted

to standardize the modeling of LCOE. One of the most clear recent LCOE
reports was by the California Energy Commission in 201043. In the Energy
Commission’s Model, 25 separate cost-of-generation models are combined
38
M. Campbell, P. Aschenbrenner, J. Blunden et al., “The drivers of the levelized cost of electricity for
utility-scale photovoltaics,” Sunpower, pp. 1-27, 2008.
39
M. Campbell, J. Blunden, E. Smeloff et al., “Minimizing utility-scale PV power plant LCOE through the
use of high capacity factor configurations ” in 34th IEEE Photovoltaic Specialists Conference (PVSC),
Philadelphia, PA, 7-12 June 2009, pp. 421 – 426.
40
K. Branker, M. J. M. Pathak, and J. M. Pearce, “A Review of Solar Photovoltaic Levelized Cost of
Electricity,” Renewable & Sustainable Energy Reviews, vol. 15, pp. 4470-4482, 2011.
41
42
System Advisor Model (SAM), SAM's Help system, National Renewable Energy Laboratory (NREL),
Dec, 2011
43
54
into one model with drop-down menus. In addition, the model has been
completely reorganized to make it more flexible and more transparent. The
model includes analytical functions for screening and sensitivity curves to
allow users to evaluate the effect of the various cost factors used in
developing the levelized costs.
The System Advisor Model (SAM)44 is a performance and economic

model designed to facilitate decision making for people involved in the
renewable-energy industry. The National Renewable Energy Laboratory
(NREL) in collaboration with Sandia National Laboratories and in
partnership with the U.S. Department of Energy (DOE) Solar Energy
Technologies Program (SETP) develops SAM. The SAM makes
performance predictions for grid-connected solar and other energy
production projects. The model is very flexible and provides several
functions for sensitivity analysis and other techno-economic analysis.
2.5 Breakeven or Grid Parity analysis

The breakeven cost of photovoltaic (PV) technology is defined as the
point where the cost of PV-generated electricity equals the cost of electricity
purchased from the grid45,46,47. This target has also been referred to as grid
parity. Grid parity is considered when the LCOE of energy from a specific
renewable source such as wind, solar, and biomass is comparable with grid
electricity prices of conventional technologies and is the industry target for
cost-effectiveness. Given the state of the art in the technology and favorable
financing terms, clearly most renewable energy technologies have already
obtained grid parity in specific locations and as installation costs continue to
decline, grid electricity prices continue to escalate, and industry experience
44
"System Advisor Model (SAM)," April 2, 2012; https://sam.nrel.gov/
45
C. Yang, Reconsidering solar grid parity, Energy Policy 38 (2010) 3270-3273
46
P. Denholm, R. M. Margolis, S. Ong et al., Break-Even Cost for Residential Photovoltaics in the United
States: Key Drivers and Sensitivities, Technical Report: NREL/TP-6A2-46909, National Renewable Energy
Laboratory, 2009.
47
M. Saed, M. EL-Shimy, and M. Abdelraheem, “Photovoltaics Energy: Improved modeling and analysis
of the Levelized Cost of Energy (LCOE) and Grid Parity”, Sustainable Energy Technologies and
Assessments, vol. 9, pp. 37-48, 2015.
55
increases, renewable sources will become an increasing economical

advantageous source of electricity over expanding geographical regions.
The concept of grid parity for renewable technologies represents a

complex relationship between local prices of electricity, renewable energy
systems’ prices that depend on the size and supplier, and geographical
attributes. However, depending on the location, the cost of many renewable
sources has already dropped below the conventional sources achieving grid
parity.
The grid parity is often graphically given as the industry average for the
considered renewable electricity generation cost against the average
electricity retail price of the utility grid for a given country (see Fig. 2.2).
Whilst this is a useful benchmark, its validity depends on the completeness
and accuracy of the method used to calculate the LCOE. In addition, claims
of grid parity at manufacturing cost instead of retail price have contributed to
confusion.
Fig. 2.2: Breakeven point and grid parity concept
56
2.6 SWOT Analysis

The SWOT analysis is needed for better understanding the Strengths,
Weaknesses, Opportunities, and Threats of the renewable energy sector, to
notice the current situation and what steps to take for better deployment and
effective strategic planning.
Strategic planning may be defined as: “the process by which

members of an organization envision its future and develop the
necessary procedures and operations to achieve that future.”
Strategic planning is also “a process of defining the values,
purpose, vision, mission, goals and objectives of an organization.
Through the planning process, a jurisdiction or agency identifies
the outcomes it wants to achieve through its programs and the
specific means by which it intends to achieve these outcomes.”For
more detail, the readers may refer to Pfeiffer et al.48, 1986 and
Rothwell49, 1989.
The strategic planning provides an effective tool for many

applications including setting future directions, reducing risk,
supporting managers and making strategic decisions.
This technique has been used in several researches to help proficient
decision making and understand the overall picture of renewable energy for
48
Pfeiffer, J. William, Leonard D. Goodstein, and Timothy M. Nolan. Applied strategic planning: A
how to do it guide. University Ass. Incorporated, 1986.
49
Berry, Maureen. "Strategic planning in small high tech companies." Long range planning 31.3
(1998): 455-466.
57
effective planning for countries or regions (Terrados et al., 200750; Hawila et

al.51, 2014; Igliński et al.52, 2016).
Fig. 2.3: The SWOT analysis structure
The SWOT is a technique created in strategic business planning to

pinpoint the complications of a circumstance by accumulating summarized
information for better decision-making involved in a project or business
venture (Chen et al.53, 2014). This widely opted method could be carried out
for a particular product, place, sector or person which entails the evaluation
of the goals of the business venture and specifies the internal and external
50
Terrados, J., Almonacid, G. and Hontoria, L. (2007). Regional energy planning through SWOT
analysis and strategic planning tools. Renewable and Sustainable Energy Reviews, 11(6), pp.1275-
1287.
51
Hawila, D., Mondal, M., Kennedy, S. and Mezher, T. (2014). Renewable energy readiness
assessment for North African countries. Renewable and Sustainable Energy Reviews, 33, pp.128-140.
52
Igliński, B., Iglińska, A., Koziński, G., Skrzatek, M. and Buczkowski, R. (2016). Wind energy in
Poland – History, current state, surveys, Renewable Energy Sources Act, SWOT analysis.
Renewable and Sustainable Energy Reviews, 64, pp.19-33
53
Chen, W., Kim, H. and Yamaguchi, H. (2014). Renewable energy in eastern Asia: Renewable
energy policy review and comparative SWOT analysis for promoting renewable energy in Japan,
South Korea, and Taiwan. Energy Policy, 74, pp.319-329.
58
aspects which are advantageous or disadvantageous to reach those goals. The

level to which the internal environmental factors of the project match with
the external environmental factors is stated by the idea of effective strategy
(Fig. 2.3):
 Strengths (S) identify internal qualities and characteristics of the

project/country/business/firm/sector that gives it an advantage over
others (competitive advantage),
 Weaknesses (W) identify internal factors that place the

project/country/business/firm/sector at a disadvantage compared to
others,
 Opportunities (O) are the external fundamentals the

project/country/business/firm/sector may exploit to its advantage; and
finally,
 Threats (T) explore the possible external environmental influences

that may cause trouble for the project/country/business/firm/sector
(Figure 6) (Terrados, Almonacid and Hontoria, 2007).
It is worthy to mention that the utilization of this method has stretched

beyond the business level particularly since the 1980s, it has been widely
implemented for regional development or planning by municipalities
(Markovska et al.54, 2009), and has been used to compare market positioning
in several renewable energy technologies, amongst various countries and
regions (Chen et al.55, 2014). Kyoto Protocol in Beneking et al.56, (2016)
quote that:
54
Markovska, N., Taseska, V. and Pop-Jordanov, J. (2009). SWOT analyses of the national energy
sector for sustainable energy development. Energy, 34(6), pp.752-756.
55
Chen, W., Kim, H. and Yamaguchi, H. (2014). Renewable energy in eastern Asia: Renewable
energy policy review and comparative SWOT analysis for promoting renewable energy in Japan,
South Korea, and Taiwan. Energy Policy, 74, pp.319-329.
59
“…the use of SWOT Analysis for exploring energy sector conditions and
developing an environmental strategic plan could enable a correct
comprehension of the current energy situation and serve as a basis for
objectives and strategies proposal.”
Fig. 2.4: Example of SWOT Analysis for the Southeast Asian Nations
In the Southeast Asian Nations' area there is a poorer degree of access

to electricity and small consumption rate per capita. Along with the much
estimated population growth, economic expansion and the development gap
getting smaller and smaller, the demand for energy will most probably rise
56
Beneking, A., Ellenbeck, S. and Battaglini, A. (2016). Renewable energy cooperation between the
EU and North Africa. International Journal of Energy Sector Management, 10(3), pp.312-336.
60
from today’s current levels. Research has discovered a positive relationship

between economic growth and energy demand in the Southeast Asian
Nations region. Fig. 2.4 points out the SWOT attribute for this region and the
renewable energy sector; it seems to be under threat of increasing coal usage
share which is brown energy, opposite of renewable energy.
From the analysis, this region will have various opportunities along
with several challenges to follow a cleaner, more sustainable energy
structure. In order to achieve this, usage of cleaner fossil fuels must be
enlarged so as to phase out fossil fuel subsidies and renewable energy
methods must be deployed. In addition, implementing energy efficient
programs, promoting regional incorporation, increasing energy connections,
moving from country to regional energy security viewpoints with action
plans, and maintaining sustainable leadership for cleaner energy could shed
light to a time when the only use of energy source will be renewables. All
stakeholders play an important role; therefore it is a collective process to
become energy efficient, environmental friendly and be able to shift to a
mutual regional renewable energy which could secure energy for the region
(Shi, 2016).
The next chapter will provide an in-depth knowledge for

understanding the characteristics of various renewable energy sources and
challenges faced in the wide spread of large-scale variable renewable
sources.
61
62
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Techno-Economic Modeling and Analysis of Renewable Energy Projects

Chapter · May 2017

Hasret Balcioglu Kemal Soyer

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The user has requested enhancement of the downloaded file.

TECHNO-ECONOMIC MODELING AND

Hasret Balcioglu1, Mohamed EL-Shimy2, and Kemal Soyer3

In summary, the demand for electricity is sharply increasing with new

developing countries where several economies depend mainly on its energy.

It is significantly important to determine whether renewable energy

2.2 Financial and economic performance indicators

2.2.1 Simple Payback

An example for the payback; let us assume that a factory invests

2.2.2 Annual Energy/Cost Savings

operating efficiencies, and ecological enhancements due to reduced

There are two categories of energy saving projects; energy

In the considered light retrofitting project, the impacts of technological

Table 2.1: Input data of the light retrofitting project

Data Existing (e) Proposed (p)

Annual energy saving (ES) = (Ne  WLe  he - Np  WLp  hp)/1000

Annual cost saving (CS) = ES  CE

Cost of implementation (CI) = (CLp  Np) – (Ne  Cle  LLp/LLe)

Simple payback (SP) period = CI/CS = 0.238 years

This presented analysis can be implemented for various energy saving

storage. The battery storage would be techno-economically feasible in small

2.2.3 Time Value of Money

Let us assume that we have two choices. We could receive either

years could be calculated as: Present value = $18,000 * (1+0.04)-4 =

2.2.4 Inflation Rate

So the inflation rate for 1984 was about 1.0%.

In the USA energy sector, residential electricity prices have increased

2.2.5 Present Value Annuity Factor (PVAF)

For example, a company is planning to compute the present value of a

2.2.6 Net Present Value (NPV)

For example, if a retail clothing business wants to buy an existing

2.2.7 Internal Rate of Return (IRR)

The formula for IRR is:

0 = P0 + P1/(1+IRR) + P2/(1+IRR)2 + P3/(1+IRR)3 + . . . +Pn/(1+IRR)n

where P0, P1, . . . Pn equals the cash flows in periods 0, 1, 2, . . . n,

For example, let’s assume that Company A should decide whether to

In this example IRR can be calculated as shown below:

0 = -$300,000 + ($150,000)/(1+.2431) + ($150,000)/(1+.2431)2 +

2.2.8 Discount Rate

Discount rate enables the harmonization of present and future values

A standard-efficiency furnace costs $100 and

Cash flow diagrams are:

Standard Efficiency High Efficiency

Savings from high-efficiency furnace

If the discount rate is 10%, then:

The positive savings indicate that the high-

If the discount rate is 30%, then:

The negative savings indicate that when the

In summary, a high discount rate reduces the value

In general, it could be said that renewable energy and energy

2.2.9 Return on Equity (ROE)

2.2.10 Cash Return On Assets Ratio

Cash Return On Assets = cash flow from operations/total assets

2.2.11 Equity payback

2.2.12 Benefit Cost Ratio (BCR)

2.3 Basic Cashflow

Revenue = Production Volume * Price