Economic Factor

Starting from the last decade, the market of PV has grown rapidly. The total installed
PV capacity has grown from 6.1 GW to 291 GW in ten years. There is net increase about 28%
annually on average and also increase about 94% of the total capacity which was installed
between 2006 and 2016.
Even though the PV technology is matured and many countries started to implement
solar PV technology at scale, but there is still having the regional cost differences. The maturity
level of the domestic market, labor cost, manufacturing cost and support policy structure are
the factors that influence competitiveness.
The global average total installed cost decreased by 68% in between 2010 and 2017.
The cost becomes cheaper in the more cost mature markets. Residential PV system total
installed costs have also decreased significantly in many countries since 2010.
The realistic cost analysis is needed to design the PV system to get an expected net
present value and payback times of the investment. This cost is broadly divided into two parts,
which are capital cost and operational and maintenance cost.
Capital Cost
Capital cost is the initial cost of PV system that including the component cost such as
module and inverter price, installation of the system and balance of system (BOS). The BOS
cost includes the additional equipment, installation labor, engineering and environmental study
cost before starting the operation of the system.
PV module cost includes the cost of raw material, cell manufacturing and module
assembly. This is the key component of a PV system and around 30%-40% of total system cost
is covered by this. In recent years, module price has decreased around 80% due to massive
growth and expansion of PV system installation. The cost is varied within technology, module
efficiency, and manufacturer market strategy. In 2015, silicon crystalline based PV module
price decreased around 15% whereas thin film based module price decreased only 4%.
Inverters are the primary power electronics component in a PV system and accounted
for 5% of total installed cost. Therefore, large systems have lower cost in compare to the system
less than 100 kW.
The economic feasibility of batteries depends on the energy capacity and life cycles.
Lithium-ion and lead-acid battery cost is studied in which the lithium-ion battery is found to
cost more than the lead-acid battery as well as having better life cycle and performance. The
BOS installation cost is comprised with the additional component cost. It includes the system
mounting and tracking components, cables, combiner box, site engineering, installation labor
and grid connection cost. It depends on the system sizing and installation area.
Operational and Maintenance Cost
At an earlier time, PV panel operation and maintenance (O&M) costs are not considered
as a major challenge to their economics. But due to the significant drop in PV module and
installation costs over the last five years, the share of O&M costs in the levelized cost of energy
(LCOE) of solar PV in markets has ascended significantly.
Financial Metrics
The return of PV investment depends on price of electricity and revenue sources. The
analysis of investment is varied according to the economic metrics that characterize the
economic performance PV system. The economic parameters which are used to evaluate a PV
system are discussed below.
a) Net Present Value (NPV)
Net present value (NPV) is an important economic parameter used to evaluate the
investment. It calculates the present value of future money by taking account the
discount rate. The outflows cash is negative and the inflows is positive. In addition, the
cash flow in every year is discounted with a discounted rate. By summing up all the
cash flows, NPV can be calculated. Positive NPV means it is a profitable investment
and whereas negative NPV shows the opposite. The formula below is used to determine
the NPV.
𝑁
𝐶
𝑁𝑃𝑉 = −𝐶0 + ∑
(1 + 𝑑)𝑁
0
𝑤ℎ𝑒𝑟𝑒 𝐶 = 𝑡𝑜𝑡𝑎𝑙 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤, 𝐶0 𝑖𝑠 𝑡ℎ𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡,
𝑑 = 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡𝑒𝑑 𝑟𝑎𝑡𝑒, 𝑁 𝑖𝑠 𝑡ℎ𝑒 𝑝𝑟𝑜𝑗𝑒𝑐𝑡 𝑎𝑛𝑎𝑙𝑦𝑠𝑖𝑠 𝑝𝑒𝑟𝑖𝑜𝑑

b) Payback Period (PBP)

Payback period is the time required to return the capital investment. The shorter the
payback time, the better the system for investment. Payback period is highly dependent
on the economic conditions of investor. This is because longer payback period has a
higher risk of money liquidity. The main limitation of payback period is that; it can’t
measure the system profitability. This is not an effective economic analysis of a project
by taking only payback time into account as a main decision making indicator.
𝑁𝑒𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑐𝑜𝑠𝑡
𝑃𝐵𝑃 =
𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑉 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 − 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝑐𝑜𝑠𝑡

c) Levelized Cost of Electricity (LCOE)

The LCOE is measured from the expected lifetime cost and annual production of
electricity. The costs are calculated by considering inflation and discounted rate to
estimate the actual time value of money. This is a valuable metric to compare different
options of systems to choose the lowest cost of electricity production. The main
limitation of LCOE is that, it fails to measure the future capacity expansion cost and
revenue of the project. It varies from countries weather profile, global market trends
and economic metrics. The following formula is commonly used to calculate the LCOE
𝑡𝑜𝑡𝑎𝑙 𝑙𝑖𝑓𝑒 𝑐𝑦𝑐𝑙𝑒 𝑐𝑜𝑠𝑡
𝐿𝐶𝑂𝐸 =
𝑡𝑜𝑡𝑎𝑙 𝑙𝑖𝑓𝑒𝑡𝑖𝑚𝑒 𝑒𝑛𝑒𝑟𝑔𝑦 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛
d) Profitability Index
The profitability index is an investment assessment technique that is obtained from the
divided NPV value and initial investment. This is a modification of the NPV method to
evaluate the project. Net present value is an absolute measurement in cash while the
profitability index acts as a relative measurement. It represents the discounted value of
return on an investment and the result greater than zero is considered as the profitable
investment. To compare several investments with different cost, normalized values are
used to rank the relative returns and finalize the selection.
𝑁𝑒𝑡 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒
𝑃𝑟𝑜𝑓𝑖𝑡𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑖𝑛𝑑𝑒𝑥 (𝑃𝐼) = ( )
𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝐶𝑜𝑠𝑡
e) Annual Bill Saving
The annual electricity bill savings are used to measure the PV system capacity to reduce
the annual electricity bill for end consumers. This annual bill saving or monthly bill
saving are normally used by the third party owners to show the PV system cost
reduction potential. In this project the following formula is used to calculate the bill
savings:
𝐴𝑛𝑛𝑢𝑎𝑙 𝑛𝑒𝑡 𝑠𝑎𝑣𝑖𝑛𝑔𝑠
= 𝑐𝑜𝑠𝑡 𝑤𝑖𝑡ℎ𝑜𝑢𝑡 𝑃𝑉 𝑠𝑦𝑠𝑡𝑒𝑚 − 𝑐𝑜𝑠𝑡 𝑤𝑖𝑡ℎ 𝑃𝑉 𝑠𝑦𝑠𝑡𝑒𝑚
Grid-Connected Solar PV System in Malaysia
The PV system market is defined as the market of all nationally installed PV
applications with a PV capacity of 40 W or more. A PV system consists of modules, inverters,
batteries and all installation and control components for modules, inverters and batteries.
Since 2011, the grid-connected photovoltaic (PV) market in Malaysia is largely driven
by the implementation of the feed-in tariff (FiT) mechanism by Sustainable Energy
Development Authority Malaysia. The FiT is framed by the Renewable Energy (RE) Act 2011
[Act 725] whilst the establishment of the Authority is under the SEDA Act 2011 [Act 726]. PV
allocation under the FiT falls under three categories: individuals, communities and non-
individuals.
In 2016 alone, a total of 3 794 applications for PV under the FiT were approved with a
total capacity of 101,60 MW. The breakdown of approved applications is as follows:
individuals (3 449 applications 32,13 MW), community (126 applications 3,39 MW), and non-
individuals (219 applications 66,08 MW). As at 31 December 2016, a cumulative installed
capacity of 335,7703 MW of PV projects were operational. The installed PV capacity in 2016
alone was 71,8059 MW; 14,3275 MW from individuals, 1,4526 MW from communities, and
56,0258 MW from non-individuals.
Feed-in Tariff (FiT)
The FiT mechanism is financed by a dedicated fund called the Renewable Energy (RE)
Fund. This fund is established under Section 23 of the RE Act 2011 and is derived through the
collection of an additional charge of 1.6% imposed on the electricity bill by the DLs to their
consumers except for consumers in Sarawak. The additional 1.6% charge is collected by the
DLs and is remitted to the Authority. The Recovery of Moneys is the process in which the
Authority reimburses to DLs the monthly payment made to the feed-in approval holders
(FiAHs). The reimbursement is based on the positive differential amount after deducting the
prevailing displaced cost from FiT payment to the FiAHs.
However, for domestic consumers whose electricity bills do not exceed 300 kWh (or
RM 77 in Peninsular Malaysia; RM69 in Sabah and FT Labuan) per month are exempted from
contributing to the RE Fund. The contribution to the RE Fund will be until such time when the
FiT is no longer required. This is because the FiT mechanism in Malaysia is designed with the
main objective of achieving grid parity.
FiT Rates for Solar PV
Basic FiT rates having installed capacity of: FiT Rates (RM per kWh)
Up to and including 4kW 0.6682
Above 4kW and up to and including 24kW 0.6519
Above 24kW and up to and including 72kW 0.4435
Above 72kW and up to and including 1MW 0.4285
Tariff Rates for Domestic Consumer
TARIFF CATEGORY UNIT CURRENT RATE
(1 JAN 2018)
For the first 200 kWh (1 - 200 kWh) per month RM/kWh 0.218
For the next 100 kWh (201 - 300 kWh) per month RM/kWh 0.334
For the next 300 kWh (301 - 600 kWh) per month RM/kWh 0.516
For the next 300 kWh (601 - 900 kWh) per month RM/kWh 0.546
For the next kWh (901 kWh onwards) per month RM/kWh 0.571

Cost Analysis
Cost analysis was carried out using Life Cycle Cost (LCC) analysis.
𝐿𝐶𝐶 = 𝐶𝐶 + 𝑂𝑀 + 𝑅 + 𝑆
CC is the capital cost. M is operation and maintenance cost. R is repair and replacement cost.
S is salvage value, the estimated value of an asset at the end of its useful life.
Table below shows the cost analysis for 20 years carried out by H A Rahman using Kuala
Lumpur’s generated meteorological data in the year of 2017. Annual global irradiation in
Kuala Lumpur is 1655.59, kWh/m2. The net discount rate is 8%. Useful energy generated for
the proposed system is 1828.305 kWh.
Components RM
PV modules 7088.48
Electrolyzer 2213.70
H2 storage tank 24518.63
Inverter 560.70
Module support system installation 4480
Total O&M cost 3892.7
Inverter replacement 259.72
Salvage value 7929.46

𝐿𝐶𝐶 = 7088.48 + 2213.7 + 24518.63 + 560.70 + 4480 + 3892.7 + 259.72 − 7929.46

= 35084.47
𝐿𝐶𝐶 35084.47
= = 3573.43
𝑦𝑒𝑎𝑟 (1 + 0.08)20 − 1
(1 + 0.08)20 (0.08)
3573.43
𝐿𝐶𝑂𝐸 = = 1.95
1828.305
So, the cost to generate 1kWh of energy is RM1.95.