INTRODUCTION
MEC 4722 Capstone Project students are not obligated to fulfill the requirements for costing. However, a review of costing standards and methods may be beneficial for Capstone students for consideration of their required tasks in Section 3, Energy Needs Assessment, and Section 4, Analysis. This lesson plan provides a description of Life Cycle Costing (LCC), and then follows the costing content outlined in the SEforALL Powering Health - Approach.
Please read and review the Sustainable Energy for All (SEforALL) Powering Health - Approach Costing Standards before reviewing the lesson plan content below.
Please read and review the Sustainable Energy for All (SEforALL) Powering Health - Approach Costing Standards before reviewing the lesson plan content below.
The Concept of Life Cycle Costing
Life Cycle Costing (LCC) is an important methodology for economic analysis that measures financial impact at first cost and future costs over the full life cycle of a product or service. It examines initial investment options and identifies costs for a twenty year period. As applied to the procurement of renewable energy systems and related energy conservation measures for federal contacts in the U.S., the process is mandated by law and is defined in the Code of Federal Regulations (CFR), Title 10, Part 436, Subpart A: Program Rules of the Federal Energy Management Program. See U.S. General Services Administration [1] 1.8. Life Cycle Costing for a detailed discussion of LCC methodologies, procedures and approach, and a table of LCC formulas with definitions of types of costs, cost examples and Present Value Relationships. (Reference: U.S. General Services Administration (2021); 1.8. Life Cycle Costing. (See Section 5, Bibliography.)
Figure 1, Distribution of Life Cycle Costs of a Solar PV System, below, provides a projection of the estimated life cycle disaggregated into three cost categories: capital cost (CapEx); operations and maintenance (O&M); and component replacement. O&M and component replacement combined are referred to as OpEx. In Figure 1, the projected total sum of OpEx over the life cycle of the PV system is greater than CapEx.
Figure 1, Distribution of Life Cycle Costs of a Solar PV System, below, provides a projection of the estimated life cycle disaggregated into three cost categories: capital cost (CapEx); operations and maintenance (O&M); and component replacement. O&M and component replacement combined are referred to as OpEx. In Figure 1, the projected total sum of OpEx over the life cycle of the PV system is greater than CapEx.
Figure 1. Distribution of Life Cycle Costs of a Solar PV System
Source: USAID, Powering Health
Procurement systems in developing countries, including multilateral donor funded programs, may lack the rigorous life cycle costing (LCC) methods that are commonplace in mature energy markets. By example, in the Energy for Rural Transformation (ERT) Project the World Bank provided the funds for system capital costs (as well as the first year of O&M) for all ERT installations. However, after year one, the line ministries (including the Ministry of Health) assumed responsibility for all additional costs related to O&M. However, component replacement was not cost calculated using LCC methods; consequently, component replacement funds were not set aside.
A mid-2017 study showed that 25% of batteries had already failed, and the cost of battery component proved prohibitive. Overlooking the sizable economic cost of component replacement (particularly batteries) has jeopardized the functionality of many of the installed systems, resulting in millions of dollars in stranded assets in the field. (Reference: United Nations Foundation (2019): Lasting Impact, Sustainable Off-Grid Solar Delivery Models to Power Health and Education [2], pg. 75.) (See Section 5.0. Bibliography.)
The lesson learned from the ERT Project failure to implement LCC into project budgeting, the Ministry of Energy and Mineral Development (MEMD) has drafted a Life Cycle Cost policy in the "Terms of Reference" [3] for the Uganda Energy Access Scale-up Project, as cited below:
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To achieve improved outcomes, off-grid solar systems for institutional applications should be financed in a manner that incentivizes on-going maintenance and reliable performance of the systems. Under such incentives, companies in the off-grid solar sector would not only finance and install solar PV systems but also enter into medium- to long-term payment contracts with public institutions to provide an appropriate level of service (based on key performance indicators) in return for guaranteed fixed monthly payments. The payments would be designed to cover the capital costs of equipment and installation, and the ongoing operation and maintenance costs over the contract period. At the end of the contract period, the service contract could be extended or handed over to the public institutions, considering the projected residual lifespan and efficiency of the system, assessed by an independent technical and financial audit.
Source: Ministry of Energy and Mineral Development (2021); Uganda Energy Access Scale-Up Project, Terms of Reference; pgs. 3-4 (See Section 5, Bibliography) |
Costing for PV energy and micro-grid systems under the MEC 4722 Capstone Project will be assessed utilizing the Life Cycle Costing (LCC) methodology, and with consideration of the cost factors referenced in the SEforAll Powering Health - Approach [4] as referenced in Sections A - C, below:
A. CapEx (Capital Expenditures)
The CapEx description in the SEforALL Powering Health - Approach references the following issues that impact PV energy and micro-grid costs:
Key Components: Key components (both energy systems components and end-use devices) are addressed in systems design. For example, if the system is designed as DC (direct current) versus AC (alternating current), or a hybrid AC/DC system, the cost of the inverter as a key component may be entirely eliminated, or vary based upon end-use applications and product availability in certain markets. For example, a DC refrigerator for basic medicine storage can operate on as little as 11 watts (11Wp), compared to an AC refrigerator operating at greater than 200Wp. The DC refrigerator may cost as much as 10 times that of a DC refrigerator, as DC refrigerators are uncommon in certain markets. It is important to note that PV systems costs may be driven by the availability of high efficiency DC appliance markets, not just PV systems components.
Systems Sizing: In general, larger systems will have a lower average cost ($/Wp). However, costs of smaller systems can be reduced by purchasing in volume. In essence project size and project scale can have similar pricing impacts. Project scale was a key issue for the Energy for Rural Transformation (ERT) Project, and is a core component of the Uganda Energy Access Scale-up Project (EASP).
Inventory levels in-country: The ERT and EASP programs were designed to impact in-country inventory levels and achieve economies of scale by simply increasing sales volume.
Development of a solar PV market: Developing a country-wide market requires a sustained effort to support all aspect of industry infrastructure, including industry financial incentives through structural reform, workforce development, consumer awareness, etc. These components must be developed through stakeholder engagement and policy reform to establish a mature market.
Logistics Cost: The Uganda ERT Project was structured in a manner that permitted eligible private contractors to bid on lots of facilities, organized by geography. This practice should be maintained over the PV Energy and micro-grid system life cycle (OpEx).
Enabling Factors: Public policy reforms, such as value-added tax (VAT) and import tax exemptions, are structural reform measures that can be a factor in dramatically reducing CapEx and OpEx costs.
- Key components;
- Systems sizing;
- Inventory levels in-country;
- Development of a solar PV market;
- Logistics costs; and
- Enabling factors;
Key Components: Key components (both energy systems components and end-use devices) are addressed in systems design. For example, if the system is designed as DC (direct current) versus AC (alternating current), or a hybrid AC/DC system, the cost of the inverter as a key component may be entirely eliminated, or vary based upon end-use applications and product availability in certain markets. For example, a DC refrigerator for basic medicine storage can operate on as little as 11 watts (11Wp), compared to an AC refrigerator operating at greater than 200Wp. The DC refrigerator may cost as much as 10 times that of a DC refrigerator, as DC refrigerators are uncommon in certain markets. It is important to note that PV systems costs may be driven by the availability of high efficiency DC appliance markets, not just PV systems components.
Systems Sizing: In general, larger systems will have a lower average cost ($/Wp). However, costs of smaller systems can be reduced by purchasing in volume. In essence project size and project scale can have similar pricing impacts. Project scale was a key issue for the Energy for Rural Transformation (ERT) Project, and is a core component of the Uganda Energy Access Scale-up Project (EASP).
Inventory levels in-country: The ERT and EASP programs were designed to impact in-country inventory levels and achieve economies of scale by simply increasing sales volume.
Development of a solar PV market: Developing a country-wide market requires a sustained effort to support all aspect of industry infrastructure, including industry financial incentives through structural reform, workforce development, consumer awareness, etc. These components must be developed through stakeholder engagement and policy reform to establish a mature market.
Logistics Cost: The Uganda ERT Project was structured in a manner that permitted eligible private contractors to bid on lots of facilities, organized by geography. This practice should be maintained over the PV Energy and micro-grid system life cycle (OpEx).
Enabling Factors: Public policy reforms, such as value-added tax (VAT) and import tax exemptions, are structural reform measures that can be a factor in dramatically reducing CapEx and OpEx costs.
B. OpEx (Operating Expenses: Operations & Maintenance and Component Replacement)
The OpEx description in the SEforALL Powering Health - Approach references the following issues that impact PV energy and micro-grid costs:
Cost of Labor: The cost of labor is generally the largest cost factor in the category of operations and maintenance. The cost of labor can be reduced by: (a) providing remote monitoring of PV systems components with the capacity to conduct routine systems testing; and (b) providing on-site capacity building and on-going remote training for facility staff in order to reduce the need for high-paid technicians to conduct site inspections.
Spare Parts: Economies of scale play an important role in the ability of industry service providers to maintain inventory levels both on-site and in industry warehousing schemes.
Logistics: The Uganda ERT Project structure in that permitted eligible private contractors to bid on lots of facilities organized by geography can significantly reduce logistics costs for OpEx measures that require on-site inspections and/or repairs for O&M and component replacement.
Lifespan of Key Components: The current lifespan of key components ranges from approx. 7-10 years (for batteries) to 20-25 years (for solar PV panels). PV energy systems and micro-grid design can play a large factor in lifespan of key components, including the lifespan of end-use devices.
Cost of Labor: The cost of labor is generally the largest cost factor in the category of operations and maintenance. The cost of labor can be reduced by: (a) providing remote monitoring of PV systems components with the capacity to conduct routine systems testing; and (b) providing on-site capacity building and on-going remote training for facility staff in order to reduce the need for high-paid technicians to conduct site inspections.
Spare Parts: Economies of scale play an important role in the ability of industry service providers to maintain inventory levels both on-site and in industry warehousing schemes.
Logistics: The Uganda ERT Project structure in that permitted eligible private contractors to bid on lots of facilities organized by geography can significantly reduce logistics costs for OpEx measures that require on-site inspections and/or repairs for O&M and component replacement.
Lifespan of Key Components: The current lifespan of key components ranges from approx. 7-10 years (for batteries) to 20-25 years (for solar PV panels). PV energy systems and micro-grid design can play a large factor in lifespan of key components, including the lifespan of end-use devices.
C. Service-based Approaches
An alternative approach to project costing referenced the SEforAll Powering Health - Approach is to bundle CapEx and OpEx into a long-term service contract, with performance-based payments over time, with the PV energy systems and micro-grid vendor, or a third-party project owner, providing financing for the 20-year project life cycle. This approach can be accomplished under a variety of contract structures, included a fixed-fee systems purchase agreement (based on a monthly payment for CapEx and OpEx combined), or on a performance-based power purchase agreement (PPA) with a fixed-fee per kWh (kilowatt hour) monthly billing cycle that covers CapEx costs and projected OpEx (O&M and component replacement) costs. (Note that PPA implementation model is the preferred long-term model, as referenced in Section 6, Operationalize and finance implementation strategy. See Section 6, Lesson Plan ERT Project Concept Document (PCD) [5], Annex 4 (2009); pg. A4-2
Utilizing the CapEx models provided in Powering Health: Electrification Options for Rural Health Centers, published by the United States Agency for International Development (USAID) [6], and the life cycle cost (LCC) methods published by the United States General Services Administration (GSA) [7], as shown in Figure 1, Distribution of Life Cycle Costs of a Solar PV System, the following scenario illustrates the service-based approach:
Utilizing the CapEx models provided in Powering Health: Electrification Options for Rural Health Centers, published by the United States Agency for International Development (USAID) [6], and the life cycle cost (LCC) methods published by the United States General Services Administration (GSA) [7], as shown in Figure 1, Distribution of Life Cycle Costs of a Solar PV System, the following scenario illustrates the service-based approach:
Table 1. Health Center II Power and Energy Consumption
Source: USAID, Powering Health: Electrification Options for Rural Health Centers, pg. 21 (See Section 5, Bibliography.)
Assuming a 15kWh/Day electricity consumption at a Healthcare Center II based upon the end-use medical devices listed in Table 1, above, the required system size is at minimum, 4,744Wp for annual minimum power consumption is 5,474kWh.
Table 3, CapEx and O&M Costs of 15kWh/Day PV Energy System
Source: USAID, Powering Health: Electrification Options for Rural Health Centers, pg. 6 (See Section 5, Bibliography.)
Table 4, PV Life Cycle Cost Comparison, provides a life cycle cost (LLC) comparison between a USAID cost estimate as published in Powering Health: Electrification Options for Rural Health Centers [8], and UNICEF (United Nations Children's Fund) "indicative pricing" for a 4kWp solar system, provided by the UNICEF Supply Division [9]. (See Section 5.0, Bibliography.)
Table 4, PV Life Cycle Cost Comparison*
Source: Renewable Nations Institute
*See UNICEF Supply Division [10] for detailed systems specification.
*See UNICEF Supply Division [10] for detailed systems specification.
Table 4, PV Life Cycle Cost Comparison assumes 15kWh/Day production over the 20-year system lifespan for a lifetime estimated electricity production of 124,100kWh. The LCC system cost of $130,100 (USAID) and $130,921 (UNICEF) results in the LLC/kWh of $1.5 and $0.95, respectively.