Misleading expectations for solar PV cost can make market entries more difficult
Just last week I received an email from the Tanzanian private sector foundation. In their e-mail they promoted an upcoming business trip from a delegation of German solar companies to Tanzania. This trip is arranged by AHK as part of the “project development programme” by the Gesellschaft fuer Internationale Zusammenarbeit (GIZ) GmbH under the mandate of the German ministry of economy and energy (BMWi), more specific their “Exportinitiative Erneuerbare Energien” (export initiative for renewable energies).
Now this email provided some interesting facts for Tanzanian businesses and why they should attend the possible meetings with the German technology experts from the solar companies. This is what the email said:
…solar PV systems provide power at costs of 7-10 USD cent/kWh…
…investments are usually paid back after 3-5 years…
(See the full e-mail here)
These sentences are the reasons that caused me to write this article. Why? I will try to explain below.
Solar PV economics
When talking about the financials of a solar PV system, there are many, many factors that affect the viability, and the resulting cost of the energy. But to demonstrate the actual problem, I will keep the calculation simple and focus on the core parameters that decide on the business case. We need the following input to look into the cost of electricity:
- Cost per kWp in USD
- Project lifetime in years
- Existing grid cost per kWh
- Weighted average capital cost (WACC) in %
Now, I have done a simple calculation. And to receive the results presented in the e-mail, the following input is required. With that input, we receive the following results (almost matching what had been stated in the e-mail):
Unrealistic assumptions used as input parameters
The problem with the above is, that to achieve such results, one has to assume input parameters that are not realistic. As a matter of fact, they are far away from what is realistic in a country like Tanzania. So unfortunately, with a more realistic input we receive these results:
(Note: I just entered values based on experience in the market – If you have other experiences, feel free to enter them into the Excel file, which is linked at the bottom of this article)
Expectations set that cannot be met
The problem lies within human nature. The figures that remain in the heads of the people are the 7-10 ct USD/kWh and the payback of 3-5 years. In the e-mail it is pointed out that “the feasibility strongly depends on the current power supply costs and the load profile over day and year”. However, having to explain this to someone that only remembers the figures, is difficult. This leads to frustrations when presenting clients project proposals that cannot meet the expectations raised by such an email. And clients, whose expectations cannot be met, are unhappy clients.
How can this be improved?
Solar always has been a difficult sale, as every project is similar in principal, but economics differ substantially in each one of them. It is therefore important that messages such as in the email are only communicated with:
- A clear list of the input parameters used for such a calculation
- The method of calculation being presented in a comprehensive manner
- Realistic market values used as input parameters
Only then, such a message can actually achieve its intention and have a positive impact on the support of market entries into new markets. If this information is missing however, the provided information, especially when economically very attractive, is misleading.
So to support market entries, messages regarding the LCOE of solar systems and their payback should be placed in the right context, stating the assumptions considered. Then, every company has it easier talking to clients – not more difficult.
If you are interested to download the Excel file and change the values yourself, to see what effects they have, feel free to download the Excel file here.