Rethinking grid-connected PV economics: cost parity period

Typical analysis of PV system economic viability usually assesses net present value of the PV plant capital expense and running costs in comparison with an alternative investment offering a specified rate of return, or ‘discount rate’.

Grid-connected PV plants should be assessed against a different type of competing ‘investment’ - the grid electricity tariff - as PV plants are a power generation system that are most often considered as a cost mitigation element for the grid they are connected to.

When viewed this way, a different economic model emerges that assesses the period of time it takes for the value returned from a PV system in relation to the energy it has generated equals, or subverts, the grid electricity tariff: the cost parity period.

Simplified model

The concept of cost parity period is most easily grasped when described with a working example.

Overall, we wish to understand how the PV system value changes together with the cumulative energy it creates, and how the specific energy cost - the ‘levelised cost of energy’ (LCoE) - changes in this value/energy equation.

Consider the simplified model of PV value and cumulative energy generation over time for an illustrative PV system having the installed parameters shown in Table 1 below:

System size	10 kW
Net system cost	$30,000
PV energy yield	1500 kWh/kW/year (doesn’t include annual PV performance degradation)
Electricity tariff	20c/kWh at time of installation
Electricity tariff escalation rate	6% per year

Table 1. Illustrative PV system parameters used to model energy and value analyses.

Using the design parameters given in Table 1, we can generate a time-series list of how cumulative energy and value creation occurs for such a system, shown in Table 2.

 

Column 1	Column 2	Column 3	Column 4	Column 5	Column 6
End of year	Cumulative energy generation (kWh)	Electricity tariff (c/kWh)	Annual cost saving	System cost to client	Cumulative cost rate to client (or levelised cost of energy, c/kWh)
0	0	20	0	$30,000	∞
1	15,000	20	$3000	$27,000	180
2	30,000	21.2	$3180	$23,820	79.4
3	45,000	22.5	$3371	$20,449	45.4
4	60,000	23.8	$3573	$16,876	28.1
5	75,000	25.2	$3787	$13,089	17.5
6	90,000	26.8	$4015	$9,074	10.1
7	105,000	28.4	$4256	$4818	4.6
8	120,000	30.1	$4511	$308	0.3
9	135,000	31.9	$4782	-$4474	-3.3

Table 2. Variation of energy and value over time for PV system with installed parameters described in Table 1.

Interpretation of Table 2 proceeds as follows:

• Column 1 shows the yearly progression against which energy and value are calculated (note that ‘end of year 0’ is just another way of saying ‘the beginning of year 1’).
• Column 2 shows the annual cumulative energy generation - ie, after the first year, 15,000 kWh of energy will have been generated; after the second year, a total of 30,000 kWh of energy will have been generated by the system, etc.
• Column 3 shows the electricity tariff that will be applicable to energy consumed (or displaced by the PV system). Note the annual increase in the tariff according to the tariff escalation rate.
• Column 4 shows the annual electricity displacement cost saving provided by the PV system.
• Column 5 shows the progressive (reducing) cost of the PV system to the client. For example, at the beginning of year 1, the system ‘owes the client’ $30,000, or the full purchase price of the system. However, after year 1 the PV system has paid back $3000 to the client (in saved electricity tariff), and hence the system now ‘owes the client’ $30,000 - $3000 = $27,000. Each year the PV system saves the client an increasing electricity tariff; hence, the net system cost to the client keeps reducing.
• If we look at the ratio of what the system has cost the client to the net energy it has created over the same time interval, we get a levelised cost of energy figure that decreases with time, as shown in Column 6. For example, after year 1, the system has cost the client $27,000 and created 15,000 kWh of energy; hence the LCoE is $27,000/15,000 = 180c/kWh. After year 2, the system has cost (or ‘still owes’) the client $23,820, for a net energy creation of 30,000 kWh, or an LCoE of 79.4 c/kWh, etc.

If we plot the annual change of both electricity tariff and the LCoE of the PV system (given in Table 2) on the same graph, we get Figure 1.

Figure 1. Plot of levelised cost of energy and electricity tariff over time for an example PV system.

We see two critical points emerge from Figure 1:

1. The falling LCoE (blue) curve eventually intersects the rising price of electricity (red) curve, at the point of the cost parity period, or CPP. The CPP represents the point at which the cumulative energy created by the PV system has cost the client the same as if the client had bought the same quantity of electricity from the grid. The LCoE from the PV system only keeps decreasing beyond this point, and the PV system effectively ‘beats the grid’ with its cost of electricity.
2. The LCoE curve falls further over time, to eventually cross over the LCoE = 0 axis, at which point the PV system has paid back to the client the complete cost of the system, and we understand this to be the typical (simple) payback period of the investment.

For the example shown in Figure 1, we find a payback period of eight years for the system, but a cost parity period of only 4.4 years. This means that after 4.4 years, the client is obtaining electricity for a cheaper price from their PV system than they can buy it from the grid.

Assumptions

The operating assumptions behind this modelling assume:

• All of the PV electricity is used on-site and displaces electricity cost at the grid tariff.
• Progressive PV module performance degradation (generally ~0.7%/year) is not included (although this will make only a small difference to the overall outcome).
• Costs of borrowing, maintenance, depreciation and general time-value-of-money factors - if these parameters are applicable - are not included.

Further developments

The simple levelised cost of energy analysis applied in the present study can be further refined by replacing the somewhat basic concept of ‘what the PV system owes the client’ with a more detailed net present value analysis, which would also include allowances for several of the variables noted as omissions in the assumptions.

We can also note that the cost parity period analysis can be applied to off-grid PV systems, although in this case:

1. A figure would have to be allocated to the electricity tariff the system would displace, if the grid were available at the site; and,
2. A figure determined (again by a proper NPV analysis) to add to the notional grid tariff that accounts for all capital costs of getting the grid connected to the site (with a nominal plant lifetime period against which to amortise the capital expenditure).

Conclusion

Figure 1 shows that the CPP for a grid-connected PV system occurs far earlier than the typical payback period. The CPP represents the point in time at which the cost of energy from the PV system beats the cost of energy from the electricity grid, and only keeps getting cheaper than grid electricity as time progresses.

In this sense, the CPP realises the time when the PV system has demonstrated its true worth, and the client is in an economically more advantageous position than if they had not installed the PV system.