## Life Cycle Costs

A life cycle cost (LCC) analysis gives the total cost of the system, including all expenses incurred over the life of the system and salvage value, if any [1, 4, 5]. There are two reasons to do an LCC analysis: (1) to compare different power options, and (2) to determine the most cost-effective system designs. The competing options to small renewable energy systems are batteries or small diesel generators. For these applications the initial cost of the system, the infrastructure to operate and maintain the system, and the price people pay for the energy are the main concerns. However, even if small renewable systems are the only option, a life cycle cost analysis can be helpful for comparing costs of different designs or determining whether a hybrid system would be a cost-effective option. An LCC analysis allows the designer to study the effect of using different components with different reliabilities and lifetimes. For instance, a less expensive battery might be expected to last 4 years, while a more expensive battery might last 7 years. Which battery is the best buy? This type of question can be answered with an LCC analysis.

where LCC = life cycle cost, IC = initial cost of installation, MPV = sum of all yearly O&M costs, EPV = energy cost, sum of all yearly fuel costs, RPV = sum of all yearly replacement costs, and SPV = salvage value, net worth at end of final year, 20% for mechanical equipment.

Future costs must be discounted because of the time value of money, so the present worth is calculated for costs for each year. Life spans for wind turbines are assumed to be 20 to 25 years; however, replacement costs for components need to be calculated. Present worth factors are given in tables or can be calculated. Life cycle costs are the best way of making purchasing decisions. On this basis, many renewable energy systems are economical.

The financial evaluation can be done on a yearly basis to obtain cash flow, break-even point, and payback time. A cash flow analysis will be different in each situation. Cash flow for a business will be different from a residential application because of depreciation and tax implications. The payback time is easily seen, if the data are graphed.

### EXAMPLE 12.8

Residential application with rebate, IC = \$25,000, down payment = \$7,000, loan = \$18,000 at 10% (payment = \$4,000/year), O&M = 2.5% * IC = \$500/year, energy production = 50,000 kWh/year (75% consumed directly, displacing 8 cents/kWh electricity, and 25% sold to the utility at 4 cents/kWh, with utility escalation at 3%/year). Cash flow done in a spreadsheet.

Residential application with rebate, IC = \$25,000, down payment = \$7,000, loan = \$18,000 at 10% (payment = \$4,000/year), O&M = 2.5% * IC = \$500/year, energy production = 50,000 kWh/year (75% consumed directly, displacing 8 cents/kWh electricity, and 25% sold to the utility at 4 cents/kWh, with utility escalation at 3%/year). Cash flow done in a spreadsheet.

 Year 0-1 2 3 4 5 6 7 8 9 Down payment 7,000 Principal left 18,000 15,800 13,380 10,718 7,790 4,569 1,026 0 Principal paid 2,200 2,420 2,662 2,928 3,221 3,543 3,897 1,128 Interest 1,800 1,580 1,338 1,071.8 778.98 457 103 0 O&M 500 500 500 500 500 500 500 500 500 Insurance 50 50 50 50 50 60 60 60 60 Property tax 70 70 70 70 70 70 70 70 70 Costs 7,620 4,620 4,620 4,620 4,620 4,630 4,630 1,758 630 Value energy used 3,000 3,090 3,183 3,278 3,377 3,478 3,582 3,690 3,800 Value energy sold 500 515 530 546 563 580 597 615 633 Rebate 4,000 Income 7,500 3,605 3,713 3,825 3,939 4,057 4,179 4,305 4,434 Cash flow -120 -1,015 -907 -795 -681 -573 -451 2,546 3,804 Cumulative -1,135 -1,922 -1,702 -1,476 -1,253 -1,023 2,096 6,350

In this analysis the payback time is in year 8. There are a number of assumptions about the future in such an analysis. A more detailed analysis would include inflation and increases on costs for operation and maintenance as the equipment becomes older.

In this analysis the payback time is in year 8. There are a number of assumptions about the future in such an analysis. A more detailed analysis would include inflation and increases on costs for operation and maintenance as the equipment becomes older.

100 90 80 70 60

82 84

88 90 92 94 96

00 02 04 06 08

FIGURE 12.2 Cost of energy for generation of electricity: wind, photovoltaic, and solar thermal (\$ 2008).

A cash flow analysis for a business with \$0.02/kWh tax credit on electric production and depreciation of the installed costs would give a different answer. Also, all operating expenses are a business expense. The economic utilization factor is calculated from the ratio of the costs of electricity used at the site to that of the electricity sold to the utility.

The core of the RETScreen tools [6] consists of a standardized and integrated renewable energy project analysis software that can be used to evaluate the energy production, life cycle costs, and greenhouse gas emission reductions for the following renewable energy technologies: wind, small hydro, PV, passive solar heating, solar air heating, solar water heating, biomass heating, and ground-source heat pumps. The Hybrid2 software package [7] includes economic analysis. The cost of energy for wind, photovaltic, and solar thermal have decreased dramatically since 1980 (Figure 12.2).

## Solar Panel Basics

Global warming is a huge problem which will significantly affect every country in the world. Many people all over the world are trying to do whatever they can to help combat the effects of global warming. One of the ways that people can fight global warming is to reduce their dependence on non-renewable energy sources like oil and petroleum based products.

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