LCOE for Residential and Commercial Financing

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Paul Gilman
LCOE for Residential and Commercial Financing

Question

We’ve completed the attached modeling, but feel the 4 kW residential and 250 kW commercial scenarios LCOE results are not sensible. Could you review our inputs and methods to determine why the LCOE results are so far apart or don’t respond to some changing inputs? Thank you.

Answer

For the residential and commercial financing option, the levelized cost of energy (LCOE) is a measure of the project after-tax costs, and does not reflect the value of the energy generated by the system. In other words, for a given system, the LCOE does not change when you change the electricity rates. The net present value (NPV) does depend on the electricity rate: It is the present value of the project cash flows over its life.

The LCOE for your residential case is higher than the commercial case because it has a higher installation cost (in $/W of capacity), and does not include the depreciation benefit. Also, for the residential standard loan option, the loan interest is not tax deductible. For the commercial case, the interest is deductible, and helps reduce the LCOE compared to the residential case.

For both of your cases, the project after-tax NPV is negative, which may indicate that both projects cost more than they save. The NPV is the present value of the project after-tax cash flows, which account for the value of the electricity generated by the system, operating and financing costs, taxes, and incentives. One way to increase the NPV is by adjusting the electricity rates on the Utility Rates page.

On the Utility Rate page for the residential case, you enabled net metering, so the project effectively sells all of the electricity generated by the system at the buy rates that you specified. The rates in June, July, and August are higher than other months, so the value of electricity generated in the summer is higher than the rest of the year.

For the commercial case, you specified monthly fixed demand charges in $/kWpeak. However, because you did not specify a load on the Electric Load page, SAM could not calculate a peak load, so the peak charges do not apply. You can see that on the Results page: Choose Data Tables, and under Monthly Data show the First Year Fixed Demand Charge variable. The charges are zero for each month because the load is zero. You also specified tiered rates, but did not enable them, so SAM did not use those rates. If you do enable tiered rates, you will need to specify a load so that SAM can determine the total kWh use and apply the correct tiered rate.

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