A review of solar photovoltaic levelized cost of electricity

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Abstract

As the solar photovoltaic (PV) matures, the economic feasibility of PV projects is increasingly being evaluated using the levelized cost of electricity (LCOE) generation in order to be compared to other electricity generation technologies. Unfortunately, there is lack of clarity of reporting assumptions, justifications and degree of completeness in LCOE calculations, which produces widely varying and contradictory results. This paper reviews the methodology of properly calculating the LCOE for solar PV, correcting the misconceptions made in the assumptions found throughout the literature. Then a template is provided for better reporting of LCOE results for PV needed to influence policy mandates or make invest decisions. A numerical example is provided with variable ranges to test sensitivity, allowing for conclusions to be drawn on the most important variables. Grid parity is considered when the LCOE of solar PV is comparable with grid electrical prices of conventional technologies and is the industry target for cost-effectiveness. Given the state of the art in the technology and favourable financing terms it is clear that PV has already obtained grid parity in specific locations and as installed costs continue to decline, grid electricity prices continue to escalate, and industry experience increases, PV will become an increasingly economically advantageous source of electricity over expanding geographical regions.

Introduction

It is technically feasible for renewable energy technologies (RETs) to replace the present fossil fuel electricity infrastructure [1], [2]; however, economic barriers remain the primary impediment to a renewable-powered society. Solar photovoltaic (PV) technology, which converts sunlight directly into electricity, is one of the fastest growing RETs in the world [3], [4]. PV is considered a clean, sustainable, renewable energy conversion technology that can help meet the energy demands of the world's growing population, while reducing the adverse anthropogenic impacts of fossil fuel use [5], [6], [7]. From 2000 to 2010, global solar PV deployment has increased from 0.26 GW to 16.1 GW1 [8] with an annual growth rate of more than 40% [3], [9], [10], [11], due to both technological innovations that have reduced manufacturing costs by 100 times and various government incentives for consumers and producers [3], [4], [11], [12], [13], [14], [15].

Despite increased incentives and the demand for more sustainable forms of energy, PV has still not become a major energy supply contributor [3], [16]. The tipping point for solar PV adoption is considered to be when the technology achieves grid parity [17], [18], [19], [20], [21] given that conventional-powered electricity prices are rising while PV installed prices are falling. ‘Grid parity’ refers to the lifetime generation cost of the electricity from PV being comparable with the electricity prices for conventional sources on the grid [13], [15], [17], [18], [19], [20], [22], [23], [24] often graphically given as the industry average for solar PV electricity generation against the average electricity price for a given country. While this is a useful benchmark, its validity depends on the completeness and accuracy of the method used to calculate the lifetime generation cost of solar PV electricity. In addition, claims of grid parity at manufacturing cost instead of retail price have contributed to confusion [15]. The economic feasibility of an energy generation project can be evaluated using various metrics [15], [25], [26], [27], [28], but the levelized cost of electricity (LCOE) generation is most often used when comparing electricity generation technologies or considering grid parity for emerging technologies such as PV [9], [11], [13], [15], [17], [19], [22], [24], [28], [29], [30], [31], [32]. Unfortunately, the LCOE method is deceptively straightforward and there is a lack of clarity of reporting assumptions, justifications showing understanding of the assumptions and degree of completeness, which produces widely varying results [3], [10], [15], [25], [30], [32], [33], [34], [35], [36], [37], [38]. The concept of grid parity for solar PV represents a complex relationship between local prices of electricity and solar PV system price which depends on size and supplier, and geographical attributes [11], [13], [17], [19], [21]. Different levels of cost inclusion and sweeping assumptions across different technologies result in different costs estimated for even the same location. In addition, the trend of eliminating avoidable costs for consumers and folding them into customer charges can mask real costs of conventional technologies [39]. Reporting the wrong LCOE values for technologies can result in not only sub-optimal decisions for a specific project, but can also misguide policy initiatives at the local and global scale. In the solar case for example, it is still a common misconception that solar PV technology has a short life and is therefore extremely expensive in the long term [20], [21], [40], [41]. Yet, depending on the location, the cost of solar PV has already dropped below that of conventional sources achieving grid parity [3], [18], [20], [21], [22], [42], [43]. Since varying estimates exist for LCOE, this paper reviews the methodology of calculating the LCOE for solar PV, correcting the misconceptions made in the assumptions and provides a template for better reporting needed to influence the correct policy mandates. A simple numerical example is provided with variable ranges to test sensitivity, allowing for conclusions to be drawn on the most important variables.

Section snippets

Review of the cost of electricity and LCOE

A clear understanding of the relative cost-effectiveness and feasibility of different energy technologies is paramount in determining energy management policies for any nation. The actual electricity prices depend on the marginal cost of electricity generated by the given power plant and market-based or regulatory measures [26], [44], [45]. Various power plants can compete to supply electricity at different bids, such that the electricity price from suppliers varies depending on the accepted

LCOE methodology

In this paper, the LCOE of solar PV is reviewed and clarified and a correct methodology is demonstrated for a case study in Canada, where few LCOE calculations have been done for solar PV when considering energy management strategies [37], [63]. Calculating the LCOE requires considering the cost of the energy generating system and the energy generated over its lifetime to provide a cost in $/kWh (or $/MWh or cents/kWh) [27], [30], [32], [34], [49]. Many have noted that LCOE methodology is very

Addressing major misconceptions and assumptions in LCOE for solar PV

The main assumptions made in the LCOE calculation are the choice of discount rate, average system price, financing method, average system lifetime and degradation of energy generation over the lifetime.

Numerical example in Ontario, Canada

In Canada, electricity prices range from $0.06/kWh to $0.17/kWh in major cities [51] so that as a proxy for grid parity, the LCOE for residential solar would need to be in this range. Using the simplified method outlined in Section 3 and improved assumptions, the LCOE was calculated for Ontario, Canada using ranges of variables to test sensitivity as an example. As shown in Table 5, a realistic starting fully installed system price is $5/Wp1 as prices are declining and thin-film PV would show

Discussion

Table 1 gives an example of the existing varying LCOE estimates and inconsistency of reporting assumptions. Thus, the first point to be addressed is the reporting of LCOE. With the value or range given, the following assumptions must be provided and justified:

  • 1.

    Solar PV technology and degradation rate (e.g. c-Si or a-Si:H, and 0.5%/year degradation rate).

  • 2.

    Scale, size and cost of PV project [including cost breakdown] (residential, commercial, utility scale/# kW, # MW, $/Wp).

  • 3.

    Indication of solar

Conclusions

As the solar photovoltaic (PV) matures, the economic feasibility of PV projects is increasingly being evaluated using the levelized cost of electricity (LCOE) generation in order to be compared to other electricity generation technologies. A review of methodology and key assumptions of LCOE for solar PV was performed. The LCOE calculations and assumptions were clarified and a correct methodology and reporting was demonstrated for a case study in Canada. It was found that lack of clarity in

Acknowledgements

The authors would like to acknowledge support from the Natural Sciences and Engineering Research Council of Canada and helpful discussions with B. Purchase and R. Andrews.

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