Chapter Economics

This chapter contains a guide for estimating the costs and benefits of alternative water pumping options based on established techniques rather than on new methods. The main problems in economic analysis are not the use of the established techniques but the practical use of tools, the need to make assumptions, the availability of correct data, and the analysis. An economic evaluation is used to identify which alternative pumping option achieves the maximum benefit for the least cost. Economic decision-making includes generating and evaluating alternatives. Because choosing an alternative is always the object of a decision, economic decision-making can proceed only if alternatives have been established. The aim of selection is to find the best possible result for the least possible sacrifice. Economic analysis of alternative systems is undertaken to find the most profitable among the possible energy alternatives.

Installing any pumping system requires a long-term financial commitment. Inadequately assessing various factors may affect the economic and financial viability of the system. When considering economic viability, distinctions must be made between a financial and an economic assessment. The economic approach is based on the true value to a society, using benefits and costs that are free from taxes, subsidies, and interest payments. But financial viability is a concern from the purchaser's point of view; it includes taxes, subsidies, and loan payments in the evaluation. The long-term effects of the loan should be evaluated by spreading the capital cost over the loan period. However, financial and economic approaches cannot convert all relevant factors to monetary terms, so the final decision must be made after all the technical, economical, financial, and other related external impacts are considered.

The main difference between approaches to evaluating economic and external impacts is the valuing of the factors. An economic evaluation of water pumping systems is based on the monetary values of the system. All costs (investment, recurrent, and replacement) and income generated from the system are recorded, based on the time value of money. Then these costs are evaluated to determine the most viable system among all available alternatives. The external impacts evaluation method emphasizes non-monetary values that can directly or indirectly affect the selected pumping system. These two evaluation methods and a technical evaluation are the main criteria in selecting the best alternative energy source for water pumping systems. When a system meets these three criteria, it can be called "the best choice." Because a village water supply must be designed to suit the residents, several factors that affect rural water use habits should be taken into account. They include the social acceptability of the system's level of service, the cost of water, and the institutional setup to run the system. It is equally essential to evaluate and monitor the method of application (how the villagers can use the system), their reaction to the system, and its seasonal reliability. It is difficult to draw conclusions about the relative desirability of various options because the costs of technology and relative operational costs frequently vary and because sustainability may change depending on the end use.

The pumping system should be reliable and fulfill the water demand. However, in many cases, the water resource determines the best type of pumping system. If the well yield is too low, hand pumps may be the only option. In this case, well yield is the primary limiting factor. When the water resource is not a problem, the other main factor for selecting a mechanized pumping system is the energy resource. For wind pumps, the determining factor is the availability of wind; for PV pumps it is solar radiation energy. Availability of fuel and maintenance personnel in a remote rural village can be also a determining factor for pumps driven by diesel or gasoline engines. Economic viability of such systems can be affected because of a lack of fuel or maintenance personnel, or both—days can pass without water until a technician can come to fix the system, or until fuel can be brought to the pumping site.

The familiarities of local technicians with the selected system, the frequency and ease of O&M, and the availability and cost of spare parts are important considerations. PV systems are inherently reliable and maintenance free, but spare parts are scarce and local technicians might be unfamiliar with servicing procedures. Wind pumps might be the best option in these cases, provided there is an adequate wind resource.

Another important factor is the borehole cost. Drilling is generally expensive in remote locations, and it is advisable to use a higher capacity pump for a single borehole with a higher yield. In such cases more water can be pumped from the same borehole and the unit water cost can be reduced instead of using a small pump in the same borehole. In this case, the energy source is the main factor in choosing the type of system (PV, wind, or diesel/gasoline). Therefore, different pumping options should be assessed during the pre-feasibility study.

Economic Evaluation Methods

In economic analysis, all the expenditures and incomes connected with the planned investment data must be compiled for economic comparison of project options. This should include data that reflect the economic atmosphere where such investment is planned, and all associated expenditures and returns, followed by financial analysis. A quantitative formulation of the idea together with the decision-making criteria, applicability of the method, and remarks on its limitations should be presented. Various investments and the resulting annual costs and benefits must be indexed according to their time-order of accrual to properly calculate financial acceptability.

Some traditional methods for analyzing investment costs are life cycle cost (LCC); net present cost (NPC); internal rate of return (IRR); benefit-to-cost ratio (BCR) or savings-to-investment ratio (SIR); net benefits or savings (NB or NS); annuity and cost annuity comparison method; critical value method; levelized costs; and payback period. Of the three most common techniques in economic analysis—the LCC, the IRR, and the payback period—the LCC method is the most complete approach and is widely used. For this reason, we discuss the LCC in more detail below.

LCC is the sum of the capital cost and the present worth of the recurrent and replacement costs. It is a first-order indication when a particular single pumping system is considered for a particular application. To determine the unit water cost, the LCC should be converted into the annual equivalent life cycle cost (ALCC). ALCC is the reverse process of discounting. In other words, the LCC will be distributed equally over the system's economic life. Then the ALCC is divided by the annual water production (requirement) to determine the unit water cost.

When the pumping system is to supply drinking water, the comparative LCC of renewable energy source (wind and solar) pumping systems must be established with that of conventional systems. This is necessary because the economic benefits of supplying water are difficult to quantify. For example, if both a PV pump and a diesel pump can reliably furnish the same quantity of water, it is safe to assume that they provide equal benefits. In this case, the lower cost option is preferred. In LCC analysis, the net present value (NPV) of all the capital and recurrent costs of a pump is compared to the NPV of all the costs of other pumping options. For example, if the NPV costs of a PV pumping system are less than the costs of other alternatives, PV should be the first choice for the power source. However, in most cases alternative pumping systems cannot provide as much water as conventional systems. For this reason, it is convenient to make comparisons in terms of unit water cost rather than the lowest cost pumping option.

In the economic/financial analysis, a sensitivity analysis can be used to evaluate the effects of uncertainty when input parameters, such as interest rate, discount rate, inflation rate, energy escalation rate, service life, investment and operation costs, and income are varied by a certain amount (percentage) from the expected value. Sensitivity analysis is used to quantify the economic consequences of a potential but unpredictable development in important parameters.

Sensitivity analysis covers a range of possible application loads. It is used to determine how the NPV LCC varies from the base case as the key parameters such as equipment capital cost, conventional fuel cost (diesel or kerosene), discount and interest rates, expected lifetime for conventional equipment (engine) and renewable energy sources (solar radiation and wind speed) change. Common base-case assumptions should be considered in all these investment-cost analysis methods. The common assumptions in economical analysis include discount rate, inflation rate, and fuel escalation rate. In financial analysis, salvage value, operating hour, debt service, fuel costs, inflation rate, and discount rates are included along with economic assumptions. The technical assumption is where the most important specifications for the typical system in each application are developed. The key technical assumptions common to the base-case analyses include component life (economic life), major maintenance, and engine overhaul requirements.

Graphs can be constructed to show the overall best- and worst-case viability of each alternative for a given load range. For example, the best-case PV pump viability graph is developed by compounding the extreme sensitivity limit using the lowest discount and interest rates, the highest fuel cost, the shortest conventional system lifetime, and the highest solar radiation of the sensitivity limit range. The worst case is developed using the other extremes of these ranges.

Obtaining the Necessary Data

Obtaining all the necessary parameters and cost data for economic calculations can be difficult. Determining the investment cost, which might seem the easiest information to gather (because the time gap between the beginning and the end of the construction period is shorter than the economic life of the project) is not straightforward. Most of the time, recording actual financial information is impossible. Construction workers and supervisors typically have little interest in paperwork, so financial cost information may never be recorded. In such cases, making assumptions is the common practice. And assumptions of investment costs, even for similar systems, may vary because of variations in transportation and labor costs.

Another challenge is recording the O&M costs over the system's economic life because keeping records of all expenses is impossible. The interest, inflation, and fuel escalation rates must often be assumed. Although there are no alternatives to making assumptions about these rates, it is important to first investigate the past and the future trends of the country's economy. Using an incorrect assumption for long-term economic analysis can lead to erroneous results, which in turn can be misleading for the end users. For these reasons, actual cost information should be used as much as possible, and realistic assumptions made to help to reduce the risks inherent in any economic analysis.

When performing economic evaluations, the alternative systems must provide the same level of service as the conventional ones. For example, hand pumps (unlike diesels, PV, and wind pumps) require labor to pump water. The alternatives should also have similar water distribution net- works. If one system has large distribution networks, where users get service without walking long distances to fetch water, and the other has a small distribution network requiring a long walk to fetch water, the level of service varies, affecting the economic analysis.

Economic Comparisons

Economic comparisons of various water pumping options such as PV pumps (DC and AC systems), wind pumps (mechanical and electrical systems), diesel-driven mechanical pumps, and gasoline pumps can be made using LCC and sensitivity analysis methods. In this economic analysis, we evaluated the following pumping options:

• Seven 1.6 kWp capacity PV arrays coupled with AC motors using Grundfos inverter (SA1500) and various types of pumps (serve 2,000-4,000 people in Ethiopia).

• One 600 Wp DC PV irrigation pump (also in Ethiopia) coupled with a floating pump.

• Two DC PV pumps installed in Mexico, with capacities of 848 Wp and 800 Wp PV arrays, one coupled with a Grundfos submersible pump, the other with a Solarjack pump. They are used to water livestock and supply water.

• Four Lister diesel-driven engines installed in Ethiopia, each with 11.2 kW capacity, coupled with positive displacement (mono) pumps.

• A 6-kW gasoline-driven engine and a 15-kW diesel genset pump installed in Mexico.

• A Bergey 1500 type wind turbine at 18 meter hub height with various types of Grundfos pumps in Bushland, Texas.

• Three mechanical wind pumps in Bushland, Texas:

- The Aermotor: rotor diameter 2.44 meters, maximum stroke 32/min, stroke length 190 mm, 18 curved, inverse-tapered, wing shaped steel blades.

- The Dempster: rotor diameter 2.44 meters, maximum stroke 32/min, stroke length 180 mm, 15 curved, inverse-tapered, wing shaped steel blades.

- The Dutch-Delta windmills: rotor diameter 4.88 meters, maximum stroke 38/min, stroke length 165 mm, 32 delta wing-shaped blades.

The AC PV and diesel-driven pumps installed in Ethiopia have relatively large water distribution networks; the rest are on-site water distribution systems.

The cost information we used to compare the economics of these systems was projected into 1998 prices and evaluated for 20 years of economic life (from the beginning of 1998). The economic lives of the components were assumed as follows:

• PV modules, wind turbines, windmills, and tower—20 years (from the beginning of 1998)

• Windmill pumps and cylinder—5 years each

• Motor-pump subsystem and leading edge tape of the blades for the Bergey 1500 type of wind turbine—5 years each

• Furling cable for Bergey 1500—10 years

• All the rest of the diesel/gasoline engines and the pumps—5 years

• Motor-pump subsystem for the PV pumps—10 years

The real discount rate for wind pumps installed in Bushland, Texas, is 4.1%. For pumping systems installed in Ethiopia and Mexico, we assumed the rate at 7%.

The cost information of the PV pumps in Ethiopia is actual field data found in the archives of donors, contractors, owners, and end users. The cost information for the wind machines was obtained from the USDA Agricultural Research Service (ARS). The cost information of the PV and diesel/gasoline pumping systems in Mexico was supplied by New Mexico State University. The O&M costs of the two PV pumps in Mexico are assumed to be 1% of the initial capital cost.

Labor costs—basically operators' salaries—vary from place to place, depending on the type and size of the pumping system. Diesel pump operators are generally paid more than PV pump operators because diesels require a higher skill level. Real fuel prices were used in the evaluation. The cost of fuel for the diesel pumps in Ethiopia was $0.35/L (based on the 1998 price). The cost also varies from location to location, depending on fuel transportation cost. The oil and lubrication costs for the four diesel-driven mechanical pumps are $2.42/L (U.S. $). The fuel, oil, and lubrication consumption is based on manufacturers' catalogs. The cost of fuel in Mexico for the diesel genset is $0.51/L and for the gasoline pumps $0.47/L. There is no subsidy for any of the systems evaluated here, and we did not include taxes in the comparisons. The economic comparisons of the diesel engines in Ethiopia are based on 7 hours of operation per day.

Field investigations show that the O&M costs of PV pumps depend on whether the system has a distribution network. PV arrays are generally 30%-40% of the total investment cost. The next highest cost is the well drilling, which is about 20% of the total investment cost. The third highest cost is for the motor-pump subsystem; depending on the type of pump and motor, these can account for 10%-15% of the total investment cost. Equipment and material costs consume 60%-70% of the total investment cost and the construction and installation costs share 30%-40%, depending on whether there is a distribution system. The O&M cost for PV systems without a distribution network is close to 1% of the total investment cost. However, if the PV pump has a distribution network, the O&M cost is about 2%. Replacement costs depend on the type of motor-pump subsystem. AC systems tend to be more expensive than DC systems because AC PV pumps require an inverter and a more advanced control system.

The equipment and materials cost for diesel pumps is about 50% of the total investment cost. The construction and installation cost for diesel systems is quite high compared to PV systems because they are robust enough to require relatively better reinforced concrete foundations and shades. The O&M costs for diesels are quite high, running as much as 25% of the total investment cost. This demonstrates that the cost of keeping diesel pumps running is too high. In the long run, PV systems can offset the investment cost even though the investment cost of diesels is lower than that of PV systems. Similarly, the replacement cost for diesel pumps is very high compared to PV pumps. This makes PV pumps even more attractive. This issue will be discussed further in the following paragraphs.

Economic comparisons between windmills (Aermotor, Dempster, and Dutch-Delta) and the Bergey 1500 type of electrical wind turbine were made based on a 5-year average wind speed of 5.65 m/s. All these systems are located at the USDA ARS in Bushland, Texas, and operated in the same environment. The economic comparison showed that Aermotor and Dutch-Delta windmills, using the 70-mm inside diameter pump, performed better at well depths of about 45 meters. The Aermotor windmill with a 48-mm inside diameter pump and the Dempster windmill with a 70-mm inside diameter pump performed equally well to the Bergey 1500 wind pump at about 45 meters pumping head (see Figure 6-1). However, the graph could be different if the wind regime changes. At higher wind speed locations, the Bergey 1500 wind turbine will perform better than the windmills; the windmills perform better at lower wind speeds. This can be seen from a sensitivity analysis of these wind pumps at various wind speeds, shown in Figure 62. Figure 6-2 was prepared using average wind speed (Weibull distribution coefficient of k = 2) and average flow rate data. Mechanical wind pumps can attain their optimum performance at lower wind speeds than can electrical wind turbines.

Figure 6-1. Unit water cost versus total pumping head using three types of mechanical pumps and two types of electrical wind pumps at an average wind speed of 5.65 m/s.

As shown in Figure 6-2, the optimum wind speed (at the lowest unit water cost) for windmills is 8 m/s and for he Bergey 1500 type electrical wind turbine is 13 m/s. Electrical wind turbines require higher wind speeds than mechanical wind machines, as the cut-in wind speed for the Bergey 1500 electrical wind turbine is higher (at 5-6 m/s) than the mechanical wind pumps (at 3.5 m/s).

The Bergey 1500 (at 20 meters well depth), installed at the USDA-ARS in Bushland, Texas, operates at an average wind speed of 5.65 m/s, based on 5 years operational data (1992-1997), and has a unit water cost of $0.14/m3. In fact, if this pump were installed at the optimum wind speed location (13 m/s), the unit water cost could be $0.06/m . This shows that the system is not fully utilized at its optimum capacity. A location with an average wind speed of 13 m/s is not easily found in many parts of the world. Therefore, it might be challenging for wind turbine manufacturers to lower the optimum wind speed while keeping the performance of the system at its optimum level.

---Aermotor-48 mm pump

--Aermotor-70 mm pump

Dempster-70 mm pump Dutch Delta-70 mm pump ■A - Bergey 1500-(20m deep) *—Bergey 1500-(40m deep) Bergey 1500-(60m deep) Bergey 1500-(80m deep)

Figure 6-2. Sensitivity analysis of mechanical and electrical wind pumps, based on average flow rate and wind speed data using Weibull distribution coefficient of k = 2.

Figure 6-2. Sensitivity analysis of mechanical and electrical wind pumps, based on average flow rate and wind speed data using Weibull distribution coefficient of k = 2.

Figure 6-2 shows that the unit water costs of the Bergey 1500 type of pumps (at different pumping heads) tend to be lower, while those of the mechanical wind pumps tend to be higher at higher wind speeds. This shows that electrical wind turbines perform better at higher wind speeds compared to mechanical wind pumps, which furl at lower speeds; windmills are better than electrical wind turbines for pumping water at low wind speeds. It is erroneous to generalize that electrical wind pumps are cheaper or better than windmills or vice versa. Such decisions should be determined based on the average wind speed of each pumping location because the system costs depend heavily on the availability of wind. As we have discussed, it is important to identify the wind regime of the location before selecting the type of machine for a water pumping application. Figure 6-2 shows that windmills are cheaper at wind speeds up to around 6 m/s and that the Bergey 1500 begins to become less expensive above 6 m/s.

We performed a sensitivity analysis of the AC PV pumping system using 1.6 kWp PV arrays at various pumping heads, at solar radiation energy of 3, 5, and 7 kWh/m2/d, respectively. The results are presented in Figures 6-3 and 6-4. The results show that a slight change in solar radiation energy, which is the main source of energy for PV pumps, changes the unit cost and the amount of water production. This analysis indicates that the hydraulic equivalent load limits for these PV pumps (1.6-kWp array size) depend on the available solar radiation energy. The hydraulic equivalent load limit for an annual average solar radiation energy of 3 kWh/m2/d is up to 500 m4/d, for 5 kWh/m2/d it is up to 1,000 m4/d, and for 7 kWh/m2/d it is up to 1400 m4/d (see Figure 6-4).

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Renewable Energy 101

Renewable Energy 101

Renewable energy is energy that is generated from sunlight, rain, tides, geothermal heat and wind. These sources are naturally and constantly replenished, which is why they are deemed as renewable. The usage of renewable energy sources is very important when considering the sustainability of the existing energy usage of the world. While there is currently an abundance of non-renewable energy sources, such as nuclear fuels, these energy sources are depleting. In addition to being a non-renewable supply, the non-renewable energy sources release emissions into the air, which has an adverse effect on the environment.

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