Author: Author

The break-even point refers to when the investment in a solar system is paid off meaning the system has ‘paid for itself’ and starts generating income if it is selling to a grid. The concept applies to every type of grid-connected system. For an off-grid system, this is when it starts producing electricity ‘for free’ (apart from maintenance costs).

When exactly the break-even point occurs depends on many factors that vary depending on the type of system, such as:

• Initial capital cost of all system components, including the costs of planning, shipping, installation, testing and commissioning.
• Cost of finance (interest rates).
• Operational and periodic costs, such as replacing inverters, batteries and other equipment which has a shorter life than PV modules, and other incidentals.
• Maintenance costs (preventive, predictive and corrective).
• Costs associated with grid outages for back-up systems providing security of supply.
• Price at which electricity is sold to the grid (for grid-connected systems).
• Price of electricity purchased from the grid if it is being replaced by electricity generated by the PV system.
• For off-grid systems, savings associated with not using a diesel generator (fuel, generator, servicing).
• For off-grid systems, savings associated with not connecting to the grid (this can be very expensive in remote areas, or may not be even possible).
• Annual solar irradiation at the site.
• Rate of system degradation as system components age over time and system losses increase (electricity production decreases).
• The service life of the system and the related performance ratio, which depends on the quality of design; sizing and planning; quality of the components used, and quality of the installation; quality of maintenance; and the previous two points.

Example of cost and payback structure with break-even point for a solar power plant selling electricity to the grid. This will be similar for many grid-connected systems. Estimating the break-even point for grid-connected systems which offset electricity normally purchased from the grid and/or have batteries to provide energy security will be more complex. This will also be the case with many off-grid systems.

The investment in a PV system, can be seen as upfront purchase of a quantity of electricity for a specified time period at a more or less predetermined price.

The electricity generated by large solar power plants – in the MW range and connected to the medium-voltage transmission network – is usually sold directly to an electric power utility via a power purchase agreement (PPA). This is a legal contract defining pricing and conditions of sale, often including the agreement to purchase all the power produced by the solar power plant. The selling party usually needs to be registered as an independent power producer (IPP), a status which may require a range of technical, legal and financial criteria to be fulfilled, depending on the country and local regulations.

Grid parity is the point when it becomes cheaper to generate electricity with a solar electric system than to buy it from the grid.  It is reached when the levelised cost of a kWh of electricity produced by a PV system is equal to the cost of a kWh of electricity purchased from the utility grid.

Grid parity depends on:

• The level of solar irradiation
• The cost of the system installed
• The local retail price of electricity

Reaching grid parity means that it is just as economic to purchase and install a solar system and utilise the solar electricity than it is to purchase electricity from a utility company which supplies electricity produced from conventional energy sources. Installing PV modules on a roof can therefore be considered a sound investment, providing electricity at a price-level competitive with local grid prices. Also, whereas grid electricity prices from conventional energy sources are typically increasing annually, PV delivers electricity at a price that will not change over the entire life of the system.

Grid parity is reached when it becomes cheaper to produce electricity with one’s own PV system rather than to purchase it from the grid.

Grid parity may occur earlier for residential and small-business consumers than for commercial and industrial users. This is because the price of electricity for commercial and industrial users, who consume a lot of electricity, may be lower than the price paid by smaller consumers, who consume less electricity.

Additionally, some countries subsidise fuels such as diesel. Where electricity is produced from a diesel generation, the price the consumer pays does not represent the real cost of electricity.

The levelised cost of electricity (LCOE) is the average cost of a kWh of electricity produced over the working life of an energy generating. To calculate it, the total cost of the system (upfront and total running costs) is divided by the estimated total amount of electricity which the system will produce over its working life.

The costs of a solar system can be categorised as follows:

• Upfront costs, which include the initial capital cost of all the system’s components, including the costs of planning, shipping, installation, testing and commissioning. If the system is grid-connected, then upfront costs will also include equipment, services and fees associated with connecting the system to the electricity grid, as well as for arranging an electricity purchase agreement with a buyer and/or agreements with government agencies.
• Total running costs, which include annual maintenance costs and incidentals.
• Periodic costs, which must also be included because certain system components will reach the end of their working lives before the PV modules will. Inverters, for example, will need to be replaced at least twice as often as PV modules.  In off-grid systems, batteries may need to be replaced several times.
  

  How to calculate the levelised cost of electricity (LCOE) produced by a solar electric system. Interest payments and capital repayment on loads should be included in running costs.

  The working life of system will depend on the system type. However, PV modules usually have 20 to 25 year warranties that guarantee that at the end of that period the PV modules will still be producing 80% of their original rated peak power output (Wp).

  LCOE calculations also need to take into account the method of financing and the associated cost of capital. A certain rate of system depreciation must also be included in the calculation because as system components age over time, losses within the system increase, and its productivity decreases.

  LCOE is also useful in comparing the cost of energy delivered from different generation plants with different technologies, such as those using fossil fuel, nuclear or renewables, with different cost structures and performance characteristics. For example, PV is characterized by high capital costs and low operating expenses. The LCOE indicator takes these differences into account and enables a direct comparison with fossil fuel power plants.