Calculating the levelised cost of energy (LCOE)

Solar Energy UK Installer Roadshow

Simon Baggaley

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LCOE is the average cost of producing a unit of electricity (kWh) over the lifetime of the generating source. It takes into account:

-The amount produced by the source (Energy yield)

-The costs that went into establishing the source over its lifetime, such as:

- Original capital expenditure (CapEx)

- Ongoing maintenance costs (O&M) including equipment replacements, monitoring and reporting

- Financing costs

Definition of Levelised Cost Of Energy

Note: Assume residual value of 40% of initial price. Service package for 50,000miles on both cars. No road tax on Tesla3

Why lifetime cost matter:A simplified example from the world of cars

BMW 5 series Tesla Model S

£ 37,000 £ 53,000Initial cost

50,000 miles over 4 years

(commuting into London)

43.5 mpg

£1.10/litre

3 years

Usage

Fuel

assumptions

Warranty

50,000 miles over 4 years

(commuting into London)

295 Wh/mile

£0.09-0.14/kWh (work-home)

8 years (drive unit + battery)

£ 0,80 £ 0,70Cost per mile

Note: Top-10 installers per year not the same over timeSource: GTM PV Leaderboard4

In USA, installers providing financing facilitated focus shift from lowest system cost to lowest LCOE

Over 2/3 of residential installs are third-party owned systems…

…and the top-10 installers are growing share

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Comparisons of a fictitious solar system

A more expensive system… …can be cheaper over time.

Initial Capital Expenditure Lifetime LCOE

In the US, the prevalence of third party owners takes the focus off initial capital expenditures and cost and shifts it toward the system that generates the greatest long-term value.

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Summarizing the need for using LCOE

• Installed cost-per-watt accounts only for initial capital expenditure (CapEx) and is not an accurate measure of the long-term value delivered by a solar facility

• Focusing on CapEx alone ignores two critical elements: OpEx and Performance (Output)

• Solar installers and solar customers need to take all costs and system performance into account to represent the true value of a solar facility

• The levelised cost of energy (LCOE) accounts for all costs associated with the working life of a solar facility

• LCOE (cost / energy) = Net Present Value (NPV) of the Lifetime Cost of Ownership (£) / Lifetime Energy Output (kWh)

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Key drivers of LCOE for a solar system

Total upfront cost to install the systemInitial Capital Expenditure

Initial Capital Expenditure

Equipment Replacement

Equipment Replacement

Operations &

Maintenance

Operations &

Maintenance

OutputOutput

Cost of replacing equipment, especially inverter, over the lifetime of the system

Cost of on-going operations and maintenance, including panel washing and inverter maintenance

Production over the lifetime of the system (impacted by efficiency, availability, shading)

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Initial capital cost is only one input into determining cost of energy over lifetime of the system

• Modules• Racking• Inverter

• Labor & Installation• Engineering & Design• Wiring

As a system, choices about individual pieces of the system have impacts on the rest of the system design

Inverters will need to be replaced over the life of the system, and represent a large potential cost

| © 2013 Enphase Energy, Inc. | Confidential9

…faces a significant capital expenditure item approximately 10 years after each system is put into service, when the inverter needs to be replaced*…

Representative String Inverter Failure Profile by Year

*Source: Presale: SolarCity LMC Series III LLC (Series 2014-2), S&P

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Investors require setting aside savings every year to pay for the eventual expense

£0

£200

£400

£600

£800

£1,000

£1,200

£0

£100

£200

£300

£400

£500

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Annual Set-Aside Cumulative Set-Aside

…has a reserve built-up leading up to this expected expense*

Set aside the expected cost of the replacement in equal annual installments,

such that money is available for a £1,000 investment in year 11

*Source: Presale: SolarCity LMC Series III LLC (Series 2014-2), S&P

Prospective Replacement Year

11

Different technology has a different reserve needs

Technology 1

£1,000 set aside over 10 years

Technology 2

£500 set aside over 20 years

Equipment with extended warranties or different replacement requirements can reduce the impact of the inverter reserve

4kW system in the UK, production factor of 950kWh/kWP/yr

£0

£200

£400

£600

£800

£1,000

£1,200

£0

£100

£200

£300

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1 2 3 4 5 6 7 8 9 1011 12 13 14 1516 17 1819 20

Annual Set-Aside Cumulative Set-Aside

£0

£200

£400

£600

£800

£1,000

£0

£100

£200

£300

£400

£500

1 2 3 4 5 6 7 8 9 10 1112 13 14 15 1617 18 1920

Annual Set-Aside Cumulative Set-Aside

LCOE: £0.179 LCOE: £0.193

Wide variance of operations and maintenance needs depending on the technology choice

| © 2014 Enphase Energy, Inc. | Confidential12

“While micro-inverters are not shown here, the available evidence shows a ticket/inverter-year ratio which is 3-4 times lower than that for the string inverters” - SunEdison

PV System Reliability: An Operator’s Perspective

Preventative maintenance is increasingly being required, either by installer or third party

Preventative maintenance is typically only 70% of the total maintenance costs

| © 2013 Enphase Energy, Inc. | Confidential13

• Clean and change air filters & heat sinks

• Ensure fans & moving parts performingInverter /

AC Wiring

Inverter / AC Wiring

Combiner Boxes

Combiner Boxes

Modules /

Mounting

Modules /

Mounting

Module

Cleaning

Module

Cleaning

OtherOther

• Verify string operation and VOC / IMP testing

• Visually inspect enclosure and make repairs

• Visually inspect for damaged modules

• Perform thermographic scan to identify

defects

• Perform periodic module cleaning

• Perform additional tests in order to provide

insight into system operations

Shifting from on-

site requirement to

remote capability

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Small differences in annual maintenance costs create real value for system owners

LCOE – Cheaper Annual O&M

System 1: £0.015/Watt / year

System 2: £0.020/Watt / year

Removing unplanned maintenance results in significant savings over the life of the system

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Energy production key to LCOE calculation

Energy production varies by project factors as well as by technology choice. Each % increase in production is magnified over the lifetime of the system.

LCOE – Increased Production

System 1: 936 kWh/kWp/yr

System 2: 900 kWh/kWp/yr

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Conclusion

• For a true, apples-to-apples comparison of PV systems, one needs to look not at the cost per watt, but the cost per kilowatthour

• Third-party financiers in the United States have led the way in embracing the concept of PV LCOE

• LCOE is driven by CapEx, Output, and OpEx including O&M and inverter replacement

• Small changes to any of these drivers can have a substantial impact on the LCOE and hence the value to the owner

• The system that provides the lowest LCOE creates the highest long-term value for the system owner

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Product Training from the Leaders in Microinverter Technology

Enphase, as part of its commitment to improving the knowledge and profitability of its customers offers PV installers a wide range of Product Training courses covering all aspects of the Enphase solution.

What the training covers?

- Technology overview of microinverters

- Study design and installation of single and three phase applications

- Installation and best practices

-System activation and registration within Enlighten

- Using Enlighten system monitoring

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Enphase Product Training Venues – Feb/March

Tuesday 17 2015 1000-1400

Sheraton Hotel

Athlone, Ireland

Friday 20 February 1000-1400

Dunston Hall

Norwich

Wednesday 4 March 1400-1700

Sunborn Yacht, Excel Centre

London

Thursday 12 March 1000-1400

Oxford Thames Hotel

Oxford

Thursday 19 March 1000-1400

Village Urban Resort Nottingham

Nottingham

Find a venue near you and reserve your spot.

Register now and learn what the Enphase solution can do for your business

Tel: 01908 828928enphase.com/uk/training