Page 473 - A Comprehensive Guide to Solar Energy Systems

486 A CoMPrEhEnsiVE GUidE To solAr EnErGy sysTEMs

renewable sources to meet electricity demand thus presents challenges not encountered
with using fossil fuels. in addition to providing enough total electricity from renewable
sources, supply must always meet demand. The intermittency problem may suggest the
use of renewable energy portfolios that include a variety of renewable sources and energy
storage.
While biomass, hydroelectric, and geothermal energy can provide stored energy com-
parable to fossil fuels, these sources are not sufficient to meet electricity demand in many
regions. Future renewable energy systems may not have an equivalent of today’s “base
load” power plants, which produce energy continuously. rather, a variety of energy sources
plus energy storage and demand management will be used to provide a continuous flow of
energy services. This chapter describes an economic approach to designing such a system.
A core concept of modern economics is that optimal solutions are identified not by
average costs, but by marginal costs—not how much it costs to produce solar energy on
average, but how much it costs to obtain another unit of solar energy. This is a key con-
cept for minimizing the cost of a renewable energy system. And given the intermittency
issue with ambient energy sources, temporal problems are prominent—how much it costs
to obtain another unit of solar energy now. As shown below, least-cost renewable energy
systems are designed by minimizing the cost of providing energy at critical times with the
most challenging ambient conditions—with little sun, water, or wind. Accommodating
such critical times drives the design of energy infrastructure and total energy cost.
This chapter focuses on costs of renewable energy for society, ignoring any taxes or sub-
sidies that may change these costs and affect the cost-minimizing decisions of businesses
and homeowners. it also considers only direct costs for energy sources, ignoring any exter-
nal costs, for example, any environmental costs related to hydropower development. such
costs should of course be considered in developing a renewable energy system, but vary
greatly by site. And policies to optimize renewable energy systems are another important
aspect of the renewable energy transition not considered in this chapter.

25.2 Renewable Energy Microeconomic Considerations

Costs for energy sources are often expressed as the levelized cost of energy (lCoE), or the
cost per unit of energy based on amortized capital cost, assumed project life, present value
of operating costs, and energy production. For example, in a renewable energy system
with no change in annual output, lCoE is the amortized capital cost plus operating cost
divided by annual energy output:
 r(1 +r ) T 
K  T  +C
LCOE=Kr(1+r)T(1+r)T−1+C(P⋅87 LCOE =  (1 +r ) −  1 (25.1)
60⋅CF) P (.8760. CF )
where K is capital cost, C is annual operating cost, r is an annual interest rate, T is the use-
ful life of the project in years, P is the maximum power output, 8760 is the number of hours
in a year, and CF is the capacity factor. CF represents the portion of maximum energy