Value-Based Design Metrics

The simplest financial metric used to describe a PV system is cost per watt ($/W). While buyers widely rely on this metric to price dc-rated equipment, it often leads them to believe that components do not differ in quality or performance. Since $/W is indifferent to quality or performance, it is not useful as a value-based design metric. You need more-sophisticated metrics to compare the relative value of different systems or proposals. Here are some approaches to analyzing PV project efficiency and value.

Cost per kilowatt-hour ($/kWh) This value-based metric is the cost per unit of output energy. It measures the cost efficiency of energy generation for a system, given its design, components and location. This is an easy-to-use metric for comparing offerings. However, it does not account for the time value of money.

Levelized cost of energy (LCOE) LCOE is similar to $/kWh, but considers a wider range of costs and accounts for the time value of money. LCOE incorporates O&M costs, the decline in energy output as the system ages and the timing of cash outflows for the system. However, both $/kWh and LCOE focus on costs only; they completely disregard the revenue side of the equation.

Net present value (NPV) NPV is the sum of the project’s cash inflows and outflows, discounted back to the present. This metric is comprehensive in that it accounts for all costs to finance, build and maintain the project, and all revenues it generates. For large projects with complex revenue calculations, costs and timelines, this is the best metric to use because it expresses the magnitude of financial returns in dollars.

Internal rate of return (IRR) IRR closely correlates to NPV. In fact, the IRR is the annualized effective compounded return rate for an investment that yields an NPV of zero. It is the rate an investor needs to break even on the risk it has taken in the project. Whereas NPV expresses a project’s returns in dollars, IRR displays them as a percentage.