# Economics and Policies for PV systems – Sustainable Energy – TU Delft

So far you have seen the main PV system topologies,
their design rules and some examples of specific PV systems. We shall now discuss the basic ideas involved
in the economics of PV systems. The economics in the field of photovoltaics
can be discussed at several levels. We can consider the consumer, manufacturers,
installation companies or even the technology level. For a comparison with other energy sources,
we generally consider the economics at a grid level. In this video we will start our discussion
at the consumer level at this level we will discuss the concept of payback period. In finance, the payback period is defined
as the amount of time required to recover the cost of an investment. So how can we translate this to the consumer
level? Our consumer is a homeowner, who installs
a rooftop PV system. The homeowner puts up an initial investment,
that covers the costs of the PV system. The costs are recovered over the years, as
the PV system offsets the electricity bills. This can be understood using a simple example. Let’s look at the Smith family for instance,
who has installed a 1 kWp PV system, at an initial investment cost of €4000. The family’s average electricity consumption
is such that they receive an annual electricity bill of €2000. After installation of the PV system, roughly
€800 worth of electricity is generated by the PV system each year. We can illustrate this situation in a graph. Here we see a straight line, representing
the initial investment costs. Since the PV system has no maintenance costs,
the overall costs of the system do not increase over the years. As the family uses more of the power produced
by the PV system, it offsets the electricity bill accordingly. In our example, the amount saved is €800
per year. In other words, the family earns a return
of €800 per year on their investment. As the years’ progress, the savings accumulate. At some point in time , the savings will exceed
the costs of the investment. The period of time, from the initial investment
to this break-even point, is called the payback period. In this case, the Smith family’s PV system
has a payback period of 5 years. Note that the payback period is not a fixed
value, but rather depends on number of factors. The location of the PV system is one of these
factors. A sunnier the location will have a greater
PV yield, and therefore a shorter payback period. The amount of money saved by a PV system,
also depends on the electricity costs of the local grid. Finally, the initial costs of the PV system
are also a major factor in deciding the payback period. The calculations involved in determining the
payback period can become even more complex as more parameters are factored in. For instance, when we consider an extended
period of time, generally the time value of money is taken into account. The time value of money factors in that a
certain amount of money today, will have a different purchasing power 10 years from now. Then there are also policy-related factors. Subsidies and feed-in tariffs can strongly
affect both the initial investments, as well as the savings over time. Let us briefly discuss the concept of feed-in
tariffs in PV systems. The feed-in tariff is the rate that a consumer
is paid for the electricity that a grid-connected PV system contributes to the local grid. There are two kinds of feed-in tariffs, namely
the gross- and net-tariff. The gross feed-in tariff is the amount paid
for all the electricity generated by the PV system, regardless of the electricity consumption
of the PV system owners. The net feed-in tariff is a higher rate. This rate is paid for the surplus electricity
fed into the grid, after subtraction of the domestic consumption. Now we will look into the concept of the levelized
cost of electricity. The Levelized cost of electricity is defined
as the cost per kWh of electricity, generated by a certain energy production system. It is generally used to compare the lifetime
costs of projects based on various power sources. For the Levelized cost, the overall costs
of an energy plant during its useful lifetime are determined. This overall cost is combined with the overall
energy generation of a plant over its lifetime, to give an effective price per kWh. The calculation of the levelized cost can
get quite complex, depending on the number of parameters taken into consideration. In simple terms, if we know the annual yield
of the PV system over its useful lifetime, and the system costs, the Levelized cost can
be determined according the shown formula. Here At is the total annual cost in year t,
I0 is the initial investment, and Et is the annual energy yield. ‘i’ is the discount rate, to account for
the time value of money. The discount rate relates the worth of a certain
amount of money in the future, to the amount it is worth in the present. Based on the location of the PV system and
the cost of the materials, the Levelized cost of a PV-project can vary strongly. Also, the discount rates used for evaluation
will have a big impact on the Levelized cost value. For the producer, the Levelized cost is a
valuable indicator of the cost competitiveness of a certain energy technology. It is also a good price point indicator, since
the producer will have to sell the power at a price greater than the Levelized cost, for
a system to be profitable. Of course, the policies structured around
PV energy like feed-in tariffs, subsidies and other incentives will all play a role
in determining the grid power prices. Finally, we will discuss the concept of grid
parity. Grid parity represents the situation where
the levelized cost of electricity from a renewable energy source is equal to the cost of purchasing
power from the grid. There is however, a significant difference
between PV and other renewable technologies, like wind turbines or hydropower. PV can be scaled down to the level of a single
module. It therefore does not require high transmission
and distribution costs, which are an essential part of hydro- and wind turbines. This means that, in the case of grid parity,
PV power is effectively competing with the retail grid price. Compared to the wholesale price, PV grid parity
for retail grid prices can be achieved more easily, as shown in the graph. The graph shows the cumulative volume of installed
PV systems on the horizontal axis. The installed volume has a direct correlation
with time, for the installed PV capacity has strongly increased over the past decade. As capital costs decline with increasing volume,
PV power is expected to become increasingly less expensive. The cost of fossil fuels on the other hand,
due to the limited availability and increasing emission costs, are expected to rise. This will increase the price of electricity
from the grid. Keeping in mind the location dependency of
the LCOE, we can draw both a typical curve and a best curve, for the price of solar power. Grid parity occurs when the curves for solar
power price and grid price in the graphs cross. The grid parity could be reached faster with
the help of incentives and subsidies. It is said however, that true grid parity
occurs, when the price of unsubsidized PV power matches the grid price. The grid parity is a very important indicator
of the usefulness of a renewable energy technology. The closer a technology is to grid parity,
the easier its integration in the local energy mix will be. New solar power plants are now being built
in Dubai and India, that already promise to deliver electricity at a price below that
of conventional coal and gas fired power plants. The electricity and water authority in Dubai
has received a bid, to produce solar energy at a levelized cost of under 3 dollar cents
per kWh. Meanwhile in Europe, the Fraunhofer institute
predicts that by 2025, solar energy can be produced at a levelized cost of 4 to 6 eurocents
per kWh. This is well below the Levelized cost of fossil
fuels. We now have a better idea of the economics
involved in the field of photovoltaics. This video concludes our discussion of solar
energy. I hope you enjoyed it as much as I did, and
I wish you all good luck in engineering your very own PV system.

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