Solar Project Assessment: PR, LCOE, and IRR

Industry Insights

Solar Project Assessment: PR, LCOE, and IRR

There are confusions around a solar project when it comes to benefit assessment and income analysis. We often hear grumbles from one development company that a project has poor margin prospect, or even a cash trap, while it’s being built by another developer with great eagerness. Put all financial stunts apart(cooking books, forging revenues, etc. ), there must be some factors which make the project attractive, or not, in a more economic standpoint.

PR (Performance Ratio) is a factor indicating actual power generation out of a project under certain energy input KWh/KWh(in this case, from sunlight). A high PR number shows that the project converts energy effectively, resulting from not only the fact that each component is in good condition, but more importantly they work together to make the whole system steady and robust. PR value can be affected by ambient condition (i.g. weather, dust, neighboring objects, etc.), panel quality (i.g. LID, PID, AC EL, etc.), inverter quality (DC EL, etc.). Some contingencies could also affect PR, such as, frequency/efficiency of maintenance, grid congrestion, intermittence, and transmission curtailment. Some occurence can be very destructive for developer in term of operation and profitability. Some are also largely out of developer's control, for example, transmission curtailment. It's widely known that grid transfer cut offs are rampant in fragile grid area like northwest part of China (as high as 40% cut off rate in some provinces). Regardless those grid transmission issues, an ideal PR rate of first years for a ground project in northwest China is around 70-80%.

A good RP shows that the project is under good working condition. It builds a good foundation for the project in financial prospect. But it doesn’t necessarily elaborate benefit details and, cost of the power generation. Because, clearly, it doesn’t remark financial numbers.

LCOE (Levelized cost of electricity) is cost spent along lifetime of the project against total power generation of same timeframe $/KWh. This is commonly recognized as an objective measure to assess economic value of a project, or that of its individual components. With this tool development company can pick up proper components for the project to achieve max. income. However, LCOE doesn’t provide exact number of revenue and profit along lifetime, as it doesn’t remark sold price of power generation (PPA), investment structure, financial cost, loans, and so on.

IRR (Internal Rate of Return). It puts LCOE and other financial numbers together to work out an detailed return prospect from investing in this project. Obviously, it’s on a case to case basis as each project could have its own particular financial status such as PPA, loans, loan interests, investment structure, and so on. Currently, 8-10% IRR for ground project in China would be good enough. Too low would result in investors waking away, too high would cause over investment and over expansion.

There are some other assessment factors, such as ROI (Return of investment, yrs), Annual Yield (KWh/kw), Capacity Factor (working hours/8760 %), Electrical Efficiency (%), and so on. There are either minor factors or can be integrated into above stated numbers.

In short, PR indicates quality level of the project but doesn’t provide economic assessment. LCOE helps maximize profit of the project but doesn’t provide exact figures. IRR provides exact income numbers but quite often they are only feasible for the individual project.



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