/ Operational Research. An International Journal. Vol.6, No.1 (2006), pp.

37-54

A methodology for the economic evaluation of

photovoltaic systems
Vassilis L. Stampolidis1, Yiannis A. Katsigiannis2, Pavlos S. Georgilakis3
1

MSc Student, Department of Production Engineering and Management, Technical University

of Crete, 731 00 Chania, Greece
2
PhD Student, Department of Production Engineering and Management, Technical University
of Crete, 731 00 Chania, Greece
3
Assistant Professor, Department of Production Engineering and Management, Technical
University of Crete, 731 00 Chania, Greece

Abstract
This paper presents a model for the economic evaluation of electrical energy production from
photovoltaic systems. The economic evaluation model takes into account all the operational
incomes as well as all the expenses for the implementation, operation and maintenance of the
photovoltaic system. The model uses five financial criteria and is applied for the economic
evaluation of an on-grid photovoltaic station at the prefecture of Chania.
Keywords: Photovoltaic plants, Electricity production, Financing schemes, Sensitivity
analysis, Cash flows, Internal rate of return, Net present value.

1. Introduction
In modern societies, energy consumption appears to be an increasingly intensive
problem, while the undesired effects of the use of conventional energy sources are
getting to be more severe. These facts lead the international community to take
measures in order to reduce the consequences of those effects. During the last years,
the interest for energy production has focused on the use of the Renewable Energy
Sources (RES). RES provide an explicitly more clean form of energy, which is
complied with the demands of international conventions for the environment
protection. A type of RES is the photovoltaic (PV) system. PV systems are taking
advantage of the solar energy, which they convert directly into electricity. An
advantage of PV systems is that they can store the produced energy, using a suitable
subsystem of batteries, in order to use it afterwards.
A summary of the experienced results of using PV systems is presented in Korokawa
et al. (2001). Vallv and Serrasolses (1997) present examples of autonomous PV
systems that are used in residential territories of Spain. Haas et al. (1999) presented
the experiences from the domestic usage of relatively small PV systems in Austria. A
survey comparing interconnected PV systems that are installed on the roofs of

38

Operational Research. An International Journal / Vol.6, No.1 / January-April 2006

buildings located in south Spain is given by Castro et al. (2004). Spiegel et al. (2000)
investigate the potential for reducing the greenhouse gas emission by using PV
stations in the USA. Perez et al. (2004) presented a comparison between the simple
payback method and the cash flows method for the economic evaluation of a PV
system.
In this paper, a methodology for the economical evaluation of PV systems is
presented. This methodology covers every phase of a PV system development, from
the preliminary design to the final evaluation of the plantations performance. In order
to implement this methodology, the knowledge of information concerning the site of
the plantation, the cost of equipment and several financial parameters, like inflation,
are needed.
The proposed methodology is complete and detailed. The methodology makes the
evaluation of the PV projects for all the different types of PV applications, namely
off-grid PV plants, on-grid PV plants and PV plants for water pumping. The method
includes a module for the calculation of the energy delivered by the PV plant and a
module for the economic evaluation of the PV plant. Five economic evaluation
criteria are used: the internal rate of return, the net present value, the year-to-positive
cash flow, the simple payback and the profitability index. Another feature of the
proposed methodology is that it provides the possibility to calculate the total
reduction of greenhouse gas emissions. This reduction is caused because of the usage
of the PV system instead of a conventional power source.
Various users can use the proposed methodology: regulatory authorities (who are
evaluating PV project proposals), investors, electric utilities, and policy makers. This
methodology can be used worldwide, exploiting certain economical and weather
characteristics of a specific location. The proposed method incorporates the current
state of the art in several phases of a PV plant establishment, ranging from technical
characteristics and the energy delivered by it to the economical evaluation, providing
an easy way to follow step by step the development of the PV system. The proposed
methodology covers all the three major categories of PV system applications, namely
off-grid, on grid and water pumping PV systems. In addition, this methodology offers
a direct way to compare two or more alternative options to supply with energy
specific applications, including hybrid PV systems. Finally, it should be mentioned
that this methodology is developed in a modular manner, providing the way to deal
individually with all the parameters needed in order to implement the PV project (e.g.
solar and weather data, technical data, economical data, etc).
The paper is organized as follows: Section 1 briefly describes the PV systems. In
Section 3, the proposed methodology for the economic evaluation of PV systems is
described in detail and special features of it are pointed out. In Section 4, the financial
evaluation process of this methodology is analytically presented, underlining the
mathematical framework adopted. Section 5 describes an implementation of the

Vassilis L. Stampolidis, Yiannis A. Katsigiannis, Pavlos S. Georgilakis / A methodology for the

economic evaluation of photovoltaic systems

39

proposed methodology together with the obtained results. Section 6 concludes the
paper.

2. Photovoltaic systems
2.1 Photovoltaic phenomenon
PV systems collect solar energy and transform it directly into electricity. The
photovoltaic phenomenon is taking place when solar radiation reaches an appropriate
material surface that is used in PV systems. Semiconductor materials, like Si, Ge,
GaAs, and CdS are used to construct semiconductors surfaces. When solar radiation
reaches those surfaces, it causes the release of the external electrons of the atoms,
which are free to move in every direction, producing in this way electrical current.
This phenomenon is called photovoltaic phenomenon and this kind of contact
between two semiconductors for electricity production is called solar cell
[Kagkarakis, 1992].

2.2 Photovoltaic system components

The smaller structural unit in every PV system is the solar cell. In order to achieve the
desired electricity output, a combination of many solar cells is used. This formation is
called PV module. The number of solar cells that is used depends on the desired
voltage that has to be achieved.
In cases that the electrical power demands, in several applications, is significantly big,
the usage of PV panels is recommended. PV panels are pre-constructed units ready to
be installed and are composed of several PV modules. In some applications though,
the demand in electrical power requires the use of a PV array, which is a group of
interconnected PV modules or PV panels. On the other hand, there are some
applications that involve the use of a combination of several PV arrays, composing in
this way a PV park.
Its worth mentioning that the so-called PV generator comprises the basic component
of a PV system. A PV generator generates the electrical power in the framework of a
PV system. It consists either of only one PV module or a PV panel. In larger
installations, however, it consists of several groups of PV modules or PV panels.
An important component of a PV system is the DC-AC inverter. This inverter is used
to invert the DC voltage produced by the PV system into AC voltage.
In many cases of PV systems, there is a need to store the produced energy, in order to
use it afterwards (e.g. during rainy days or during nights). The storage of the
produced energy is implemented by using appropriate batteries, which along with
their control unit comprise the energy storage system.

Operational Research. An International Journal / Vol.6, No.1 / January-April 2006

40
Solar Radiation

Energy
Consumption
Netwrok

PHOTOVOLTAIC
PLANT

ENERGY STORAGE
SYSTEM
(Batteries )

CONTROL UNIT

DC CURRENT
LOAD

CONVERTER

AC CURRENT
LOAD

CONVENTIONAL
ELECTRICITY PRODUCTION
SYSTEM

Figure 1: General layout of a photovoltaic plant.

It should be mentioned that in several occasions of PV systems, there might be a need
for using a conventional energy production system (e.g. diesel generators, natural gas,
gasoline, etc) along with the PV system, in order to cover the energy demands of the
plant. These kind systems are known as hybrid PV systems.
In Figure 1, the general layout of a PV installation is shown.

2.3 Photovoltaic applications

There are four main categories in which PV technology can be implemented [IEA]:
1. Off-grid domestic PV systems: this category involves the off-grid PV systems
that are used to supply domestic devices.
2. Off-grid non-domestic PV systems: PV systems that are not interconnected
with the main power supply network and they are used in non-domestic
applications, e.g. telecommunications, water pumping, weather data
registration, etc.
3. Grid connected distributed PV systems: PV distributed systems that are
interconnected with the main power supply network. They are used to provide
energy to buildings or residential territories. The special feature of these
systems is that the redundant produced electrical energy can feed the main
power supply network through an inverter.

Vassilis L. Stampolidis, Yiannis A. Katsigiannis, Pavlos S. Georgilakis / A methodology for the

economic evaluation of photovoltaic systems

4.

41

Grid-connected centralized PV systems: PV systems that are grid connected

and centralized. These systems are primarily used for two reasons: as an
alternative energy source against conventional centralized energy sources and
to support the main power supply network.

A more analytical categorization can be found in [Tsoutsos et al. (2004)].

3. Economic evaluation methodology

3.1 General
In this paper, a methodology is proposed in order to evaluate if the investments in PV
plants are profitable or not. The methodology offers the possibility for the evaluation
of all types of PV plants, as they have been described in section 2.3. More
analytically, this methodology deals with three main types of PV systems:
1. Off-grid PV systems.
2. Grid connected PV systems.
3. Water pumping PV systems.
In this section, all the necessary inputs for the methodology are described and the
basic calculations for each type of a PV plant are given. Finally, the economic
evaluation method is presented.

3.2 Inputs
The necessary inputs for the proposed methodology include technical characteristics
of the equipment, weather data of the plantation site, cost data for the equipment and
the activities related to the development of a PV plant. The inputs also include
economical, financial and accounting data that characterize the operation of a
particular PV plant.
In general, these inputs may be grouped into three main categories:
1. Technical characteristics of the PV plant.
2. Characteristics of the plantation site.
3. Economical and financial inputs.
3.2.1 Technical characteristics of the photovoltaic plant
This category includes the following input parameters: the type of the investigated PV
plant, the nominal efficiency of the PV modules, the nominal total installed capacity
of the PV plant, the tilt of the installed PV modules, the efficiency and the capacity of
the inverter(s) and the characteristics of the energy storage system (if it exists). Other
inputs are the energy consumptions of the supplied devices or the fuel consumption
by a supporting conventional energy production system.

42

Operational Research. An International Journal / Vol.6, No.1 / January-April 2006

3.2.2 Characteristics of the plantation site

This category includes the following input parameters: the weather data of the
plantation site, the latitude of the site, the solar radiation density that the site is
exposed to and the annual average temperature of the site. These inputs will help in
the calculation of the available solar radiation to the PV system, which is an important
parameter in order to compute the overall efficiency of the plant.
3.2.3 Financial parameters
In this third category of inputs, the parameters regarding the economic data for the
evaluation of the PV plant are given. Cost data about the equipment (e.g. cost of PV
modules, cost of inverter(s), electrical equipment etc) are defined in this category.
The costs of the preliminary design and the development of the PV plant are also
defined in this category of inputs.
Financial parameters also include the discount rate (with which the performance of
the PV plant will be compared), the debt ratio and the debt rate, the taxation rate and
the governmental or other grants. Moreover, the price that the produced energy is
sold, the energy escalation rate, the national inflation and the expected lifetime of the
PV plant (during which the net annual cash flows are calculated) are given in this
category.

3.3 Evaluation results

In every PV plant, except for the on-grid PV plants, there is a need for the load
consumption to be known. Therefore, there is a need to calculate the AC and DC
energy demands that have to be served by the PV plant. These AC and DC energy
demands are calculated as follows:
N

EDC = LDC H d d / w N days

7
mi
mi

EAC = LAC H d d / w N days

7
mi
mi

(1)

where LAC and LDC are the AC and DC loads respectively, Hd are the hours of use of
the application in a daily basis and Nd/w are the days of use of the application in a
weekly basis for every month of use mi.
The overall PV system efficiency is:

nPV = nTc (1 PPV losses ) (1 array controler index ) (1 Plosses )

(2)

where nTc is the temperature corrected efficiency in temperature T (%), PPV losses (%)
are the losses in the PV system, array controler index is an index that takes the value

Vassilis L. Stampolidis, Yiannis A. Katsigiannis, Pavlos S. Georgilakis / A methodology for the

economic evaluation of photovoltaic systems

43

1 when the maximum power point tracking (MPPT) system is used in the PV system
and the value 0.75 otherwise and Plosses (%) are the losses in the whole PV plant.
The total area of the PV plant is calculated as follows:

S array =

Parray nom

(3)

narray nom

where Parray-nom (kWp) is the installed capacity of the PV plant and narray-nom (%) is the
nominal efficiency of each of the PV modules of the PV plant.
3.3.1 Off-grid photovoltaic plants
In off-grid PV plants, the total amount of the electrical power that is delivered can be
calculated in connection with the served application. When the energy consumptions
of the supplied devices are known, the total AC and DC energy demands can be
calculated by equation (1). If there is one or more devices that use AC current, there
is a need to use one or more inverters, the capacity and efficiency of which are
calculated. The designer of the PV plant chooses the number of inverters that will be
used in the PV plant. Knowing the inverter(s) efficiency, the equivalent energy
demand in DC current can be calculated. In case that the produced energy by the PV
plant exceeds the calculated energy demands, then the excess of energy is calculated
by the difference of the total energy demands from the total produced energy by the
PV plant. Finally, the capacity of the energy storage system (batteries) is calculated
and proposed (when such system is used in the PV plant).
Usually, in off-grid PV plants, the use of an energy storage system is needed, in order
to provide with energy while PV plants are not able to produce more energy (e.g.
during the night). The capacity (Ah) of the used energy storage system is given by:

Battmi capacity

L
Batt
1000 LDC + AC

autonomy
n
inv

=
Batt DOD (1 Fcapacity dlvd )

(4)

mi

where (1 Fcapacity dlvd ) are the portions (%) of the nominal capacity that are not
m
i

delivered for each month mi, Battautonomy is the autonomy (days) of the batteries used,
Batt DOD is the maximum depth of discharge (%) of the batteries used and LAC and
LDC are the AC and DC loads respectively that the application consumes.

The total energy delivered by the PV plant is:

44

Operational Research. An International Journal / Vol.6, No.1 / January-April 2006

RE dlvd mi =

(E

cont met dir PV

+ E matched PV + E met batt )

mi

(5)

where mi is the month of use, E cont met dir PV is the constant (during day-time) part
of energy demand that is achieved directly by the PV generator, E matched PV is the
part of energy demand that is served directly by the PV generator and E met batt is the
part of energy demand that is served by the energy storage system. E cont met dir PV
can be served directly either by the PV generator or by the energy storage system.
3.3.2 Grid connected photovoltaic plants
In the case of grid connected PV plants, there is a need to use one or more inverters,
in order to invert the produced by the PV plant DC current into AC current, which can
be supplied directly to the main power supply network. The capacity of the inverter(s)
used is calculated. In such PV plants, there is no need to use an energy storage
system, because the excess of the produced by the PV plant energy can be supplied
directly into the main power supply network. Furthermore, any additional energy
demands can be served directly by the main power supply network.
The total energy delivered by the PV plant is calculated as follows:

E AC dlvd = (S array H tilted n PV ninv N days )m

mi

(6)

where Sarray is the total PV array area (m2), Htilted is the monthly average daily
radiation in the PV module plane (kWh/m2/day), nPV is the overall PV array efficiency
(%), ninv is the inverter(s) efficiency (%) and Ndays is the number of days of each
month mi.
3.3.3 Water pumping photovoltaic plants
The water pumping PV plants are a special category of PV plants that are used for
water pumping. In these PV plants, the produced energy is used to supply the solar
pump. The total energy demands are calculated considering the amount of water that
has to be pumped. In case that the solar pump uses AC current, there is a need to use
one or more inverters, because the PV plant produces directly DC current.
These PV plants may or may not use an energy storage system. The calculation of the
characteristics of the energy storage system (if it exists) is the same with the
respective case of off-grid PV plants.
The total energy delivered by the PV plant supplied to the solar pump is:
PEdlvd = (N days MIN (E avail pump n pump , Eq pumpdmd d ))m
mi

(7)

Vassilis L. Stampolidis, Yiannis A. Katsigiannis, Pavlos S. Georgilakis / A methodology for the

economic evaluation of photovoltaic systems

45

where Ndays is the number of days of each month mi, Eavail-pump is the available energy
to the solar pump, npump is the efficiency of the used solar pump and Eqpump-dmd-d is the
equivalent daily energy demand of the solar pump that is proportional to the water
level in the pumping source.

4 Financial evaluation
In this Section, the proposed economic evaluation methodology will be presented.
The initial costs of the investigated project, the potential savings resulted by the PV
plant operation, the annual incomes and outcomes, the taxation and the PV plants
equipment depreciation are issues to be analyzed. The results of the economic
evaluation are derived by the use of five financial evaluation criteria that are applied
to the results of the annual cash flows of the project.

4.1 Initial costs

The initial costs of the project include activities such as the feasibility study, the
preliminary design of the facility, the purchase of the equipment and the salary and
training of the staff needed. In this methodology, several periodic costs are included,
such as the maintenance of the facility, the replacement of the equipment, the
operational costs, taxes and insurance costs etc.

4.2 Annual savings

The potential savings by the operation of the PV plant are taken into account in an
annual basis. Such savings could be resulted by the replacement of some type of fuel
used before the PV plant installation. Furthermore, they may be derived by the
compensation caused by the reinforcement of the local power energy supply network
or the credits granted because of the reduction of the greenhouse gas emissions.

4.3 Annual cash flows

The calculation of the annual cash flows of the PV project plays an important role in
order to achieve reliable results using the proposed methodology. For this calculation,
all incomes and outcomes of the project have to be taken into account, in order to
calculate the total annual income and outcome cash flows during the projects
lifetime. For each year that the PV plant operates, the total net annual cash flows are
calculated as the difference between the annual income and outcome cash flows of the
respective operating year. The lifetime of the project is defined to start at year 0.
The annual income cash flows of the project can be calculated by summing all types
of income resulting by the operation of the PV plant. The proposed methodology
takes into account the following types of income:

46

Operational Research. An International Journal / Vol.6, No.1 / January-April 2006

Energy sources savings: this kind of savings is calculated for each operating
year of the PV plant. For the year 0, it is defined to be equal to the product of
the annual energy savings and the unit energy cost that is saved. The unit
energy cost is considered to be zero for year 0. For each year after year 0 it is
equal to the product of the annual increment factor and the amount of savings
of the former year. The annual increment factor equals to (1 + rE-cost), where
rE-cost is the energy cost escalation rate and it is equal to 1 for year 0.
Capacity savings: for the year 0, this kind of savings is equal to zero. For
each one of the following years until the end of the projects lifetime it is
calculated as the product of nominal installed capacity of the PV plant and the
annual capacity saving (which is defined by the institutional frameworks of
each country) and with the factor (1 + f), where f is the national inflation. The
factor (1 + f) equals to 1 for year 0.
Credits for the renewable energy production: for the year 0, these credits are
defined to be equal to zero. For each one of the following years of the
projects lifetime, they are calculated as the product of the renewable energy
production credit and the annual increment factor for the renewable energy
production credit. This increment factor is equals to 1 for year 0 and to
(1 + rRE-credit) for each one of the following years, where rRE-credit is escalation
rate of the annual renewable energy production credit.
Incomes due to greenhouse gas emissions reduction: this kind of income is
equal to zero for year 0. For each one of the following years, until the end of
the projects lifetime, these incomes are calculated by the product of the
annual income due to greenhouse gas emissions reduction and the increment
factor (1 + rGHG), where rGHG is the escalation rate of the annual greenhouse
gas emissions reduction credit. This increment factor equals to 1 for year 0.
End of projects lifetime value: this value depends on the projects
characteristics. The final value that is taken into account is equal to
Evalue(1 + f)PL, where Evalue is the end of projects lifetime value, PL is the
projects lifetime and f is the national inflation.
Grants: in many cases they correspond to the state grants for the development
of PV projects.
The annual outcome cash flows of the project are calculated in a similar way. The
possible outcome types for the PV plant are described next:
Initial costs: they are the costs for the feasibility study, the purchase of the
equipment, the plants installation, etc.
Energy supply costs: they are the costs for the energy supply to the PV plant.
These costs are multiplied by an annual increment factor that equals to
(1 + f)n for each year n between 1 and PL, where PL is the projects lifetime
and f is the national inflation.

Vassilis L. Stampolidis, Yiannis A. Katsigiannis, Pavlos S. Georgilakis / A methodology for the

economic evaluation of photovoltaic systems

47

Operation and maintenance costs: for the year 0, these costs are equal to
zero, while for each one of the next years of the project lifetime, these costs
are calculated form the formula CO&M(1+f)n, 1 n PL , where CO&M are the
costs for the operation and maintenance.
Debt service: these costs refer to the reimbursement of the projects debt, if
there is one. The annual debt payments are calculated by:

dp =

Project debt rdebt (1 + rdebt )

(1 + rdebt )

Debtterm

Debtterm

(8)

where rdebt is the debt interest rate and Debtterm is the debt reimbursement
term. For the year 0, there are no such costs for the project.
Periodic costs: these costs concern periodic costs of the project, such as
equipment replacement, the plants maintenance and inspection etc. These
costs are calculated at the time that they expected to be occurred. For
instance, if a battery replacement is expected to occur at year n, where
1 n PL, then the cost for this replacement is multiplied by the factor
(1 + f)n, where PL is the projects lifetime and f is the national inflation.
Its worth mentioning that the annual cash flows are calculated before and after
taxation is applied. In general, there is the possibility to use the right of carry forward
and the possible equipment depreciation in the cash flows calculation.
Finally, let us note that the first cumulative cash flow is equal to the first net cash
flow (incomes - outcomes), while each one of the following cumulative flows, until
the end of the projects lifetime, are equal to the sum of the present net cash flow with
the former one. The cumulative net cash flows are calculated always including
taxation, when it is applied.

4.4 Economic evaluation criteria

The economic evaluation of the PV plants is implemented with the use of five
financial evaluation criteria:
1. Internal rate of return (IRR).
2. Net present value (NPV).
3. Year-to-positive cash flow.
4. Simple payback.
5. Profitability index.
Analytic information about these criteria can be found in Appendix A.

48

Operational Research. An International Journal / Vol.6, No.1 / January-April 2006

5. Application of the economical evaluation methodology

In this Section, an application of the proposed methodology is presented. This
application concerns the installation of a PV station in the prefecture of Chania, Crete,
for electrical power production.

5.1 Problem definition

The case of the installation of a PV station at the prefecture of Chania, Crete will be
discussed in this section. The PV station will be handled as an investment plan that
will be evaluated. More specifically, the parameters that characterize the installation
of this PV station are defined in order to formulate several Base Cases for its analysis.
Then a sensitivity analysis follows for the results of the evaluation. This analysis is
taking place into two steps. In the first step, nine parameters of the project are
analytically examined. In the second step, a sensitivity analysis is carried out, using
financing schemes for those parameters that resulted in a significant change in the
results of the analysis during the first step. The financing schemes depict the way that
the project is funded and they follow the general scheme: Capital Investment
Lending - Grants. For instance, the financing scheme 40% - 40% - 20% shows that
the project is funded by 40% from capital investment, by 40 % from lending and by
20% from state or other grants to the project.
Referring to the installation site, the territory of Chania, Crete, has a latitude of
= 35.3 and it has 2,808 hours of sunshine every year [National Observatory of
Athens], while it is exposed at 1,7 MWh/m2 of solar radiation, on horizontal plane, in
an annual basis [Lalas et al. 1982].
The investigated PV station is interconnected to the electrical power supply network
of Crete and it will provide all the produced energy to it. Therefore, there is no need
to use an energy storage system. The produced energy by the PV station is sold at a
feed-in tariff of 77 /MWh [Regulatory Authority for Energy]. For the development
of this PV station, it is assumed that the total costs for it should not be more than
1,500,000.

5.2 Results
Taking into account the values of the parameters for the Base Case, it is calculated
that the PV station will have a total installed capacity of 120 kWp. 750 PV modules
will be used; each one of them will have a nominal capacity of 160 W and an
efficiency of 12.7%. Furthermore, 8 inverters will be used; each one of them will
have a nominal capacity of 15 kW and an efficiency of 94%. The tilt of the chosen
PV modules will be = 30, which is close to the sites latitude (therefore it is
considered to be optimal). The losses in the PV system are estimated to be around
5%, while the losses in the whole PV plant are estimated to be 7%. The total

Vassilis L. Stampolidis, Yiannis A. Katsigiannis, Pavlos S. Georgilakis / A methodology for the

economic evaluation of photovoltaic systems

49

estimated PV array area is expected to be around 945 m2 and the total energy
delivered by the PV station is estimated to be around 161 MWh per year. The
individual characteristics of the PV station are shown in Table 2.
The analysis has shown that the total costs for this PV station will be around
1,277,350. The financing schemes that are examined for the economical evaluation
are the following: 60%-0%-40%, 60%-40%-0%, 40%-20%- 40% and 100%-0%-0%.
The expected lifetime of the investigated project is considered to be 25 years. The
economical parameters used for the analysis of each financing scheme are shown in
Table 3.
Table 2: Technical characteristics of the PV station (Base Case).
Characteristic
Total installed capacity
Number of PV modules
Efficiency of each PV module
Efficiency of each inverter
Expected PV array area
Delivered energy by the PV station

Value
120 kWp
750
12.7 %
94 %
944.9 m2
160.75 MWh/year

Table 3: Financial parameter values for each investment plan (Base Case).
Financing schemes
Financial parameter

60%-0%-40%

60%-40%-0%

40%-20%-40%

100%-0%-0%

Discount rate

12%

12%

12%

12%

Inflation

3.5%

3.5%

3.5%

3.5%

Debt rate

8.5%

0%

8.5%

0%

Debt term

10 years

0 years

10 years

0 years

Table 4: Financial evaluation results for each investment plan (Base Case).
Financing schemes
Evaluation Criterion

60%-0%-40%

60%-40%-0%

40%-20%-40%

100%-0%-0%

Internal rate of return (IRR)

Simple payback period
Time to first positive cash flow
Net present value (NPV)
Profitability index

22.6%
5.0 years
4.6 years
674,489
0.55

15.3%
8.3 years
8.8 years
251,722
0.34

26.6%
5.0 years
4.0 years
708,760
0.72

13.%
8.3 years
7.9 years
183,548
0.15

Operational Research. An International Journal / Vol.6, No.1 / January-April 2006

50

The economic evaluation results using the five economic criteria introduced in
Section 4.4, for each financing scheme and for each Base Case, are shown in Table 4.
The results presented in Table 4 seem to be very encouraging. More specifically, the
IRR takes values bigger than 12%, which is the value for each Base case, for each
investigated financing scheme. This fact leads to the conclusion that the investment in
this PV plant is attractive. In specific, the IRR takes relatively high values for the
schemes that involve lending. It is also concluded that small loans improve the IRR.
The results are also attractive for the simple payback time and the year-to-positive
cash flow time. More specifically, the mean simple payback time is about 5 years for
the schemes that do not involve lending, while the respective time is close to 8.5 years
for the rest schemes. This result could possibly be explained by taking into
consideration the time needed for the loan settlement. The mean time for the
occurrence of the first positive cash flow (year-to-positive cash flow) is close to 4.5
years for the schemes that involve lending and close to 8.5 years for the rest of them,
in correspondence with the results for the simple payback time.
The results for the NPV calculation, concerning all the investigating financing
schemes, show that the investment in this PV plant seems to be profitable. More
specifically, the NPV takes positive values in all these schemes. Especially for the
schemes that do not involve lending, but involve grants to the project, the NPV arises
to relatively high positive values, because in these cases the amount of the invested
capital by the investors is reduced.
Table 5: Sensitivity analysis parameters for comparing two scenarios with the Base
Case.
No

Parameter

Symbol

Base Case

Scenario 1

Scenario 2

1)

PV array modules losses

Parray loss

5%

7.5 %

10 %

2)

PV system losses

Plosses

7%

5%

9%

3)

PV modules tilt

30

45

60

4)

PV modules cost

PVarray cos t

643,560

617,818

669,302

5)

Inverters cost

Invcos t

216,000

207,360

224,640

rRE credit

1%

1.5%

2%

f
k
PL

1.4 %
12 %
25 years

2.5 %
10 %
20 years

4%
9%
30 years

6)
7)
8)
9)

Renewable energy production

escalation rate
Inflation
Discount rate
Expected project lifetime

Vassilis L. Stampolidis, Yiannis A. Katsigiannis, Pavlos S. Georgilakis / A methodology for the

economic evaluation of photovoltaic systems

51

Finally, the profitability index takes positive values for each one of the investigated
schemes. This fact shows that the investment in this certain PV plant might be
profitable. It should be noted that this index takes higher positive values for the
schemes that involve grants to project, but do not involve lending at the same time.
Then, sensitivity analysis is carried out for each financing scheme, taking into
account the values presented in Table 5. The results of the sensitivity analysis are
presented in Table 5. This analysis has shown that the PV modules cost, the discount
rate and the project lifetime have the biggest impact on the economic evaluation
results. The sensitivity analysis has also shown that the state or other grants to the
project significantly contribute to the project financial viability. In addition, the
analysis has shown that the lending could contribute in a positive way to the projects
financial viability. Its worth mentioning that the more the project lifetime, the better
the economic evaluation results. Finally, the selection of the debt term period for
extended periods (8 years or above) improves the economical evaluation results,
compared to the results for smaller debt term periods.
The observation that the evaluation results are improved for extended lifetime periods
of the project could be explained by the fact that the operational incomes of it for
such lifetime periods are enough to cover a significant part of the operational and
other costs of it (loan and several other costs).

6 Conclusions
The PV systems technology is a form of renewable energy production that is rapidly
developing globally. The source for the PV energy production is the solar energy,
therefore the impacts to the environment are considerably little. Countries around the
world adopt PV systems as a reliable alternative form of energy production, even
though a small portion of sunshine during the day characterizes several of these
countries.
In our days, the purchase and installation of PV systems are still very expensive. The
purchase of the appropriate equipment, especially the PV modules, could arise up to
50% of the total initial costs of the PV system. This fact could be balanced by the
relatively high state grants to such projects, which could arise up to 40% of the total
initial costs of the project in many countries around the world.
In this paper, a methodology for the economic evaluation of PV plants is presented.
This methodology takes into account all the installation phases of every PV plant
type. The economic evaluation is based on the individual technical parameters of
every PV plant. In the evaluation process, the initial costs of the PV plant and the
annual cash flows resulted by the operation of the PV plant, play a significant role.
The economic evaluation is implemented with the use of five financial criteria, most

52

Operational Research. An International Journal / Vol.6, No.1 / January-April 2006

of which take into account the expected PV plant lifetime and the diachronic value of
money.
The proposed method is applied for the economic evaluation of an on-grid
photovoltaic station at the prefecture of Chania and the main conclusions from this
application are the following:
The cost for the purchase and installation of a PV plant is still high.
The PV project lifetime plays an important role in the financial viability of PV
plants.
The value for the discount rate could have significant impacts on the PV plants
performance. This value is important because it is the conventional rate of an
alternative (and secure) investment, with which the performance of the PV
plant is compared.

Acknowledgements
The authors would like to thank the Research Committee of the Technical
University of Crete for financing the research project entitled Investigation of the
possibilities offered by renewable energy sources for energy supply in isolated
regions, under which the research presented in this paper was carried out.

References
Apseridou M. E., Wind Energy Regulatory frmawork and Economical Analysis,
Diploma thesis, National Technical University of Athens, Athens, 2002 (in
Greek).
Castro M., Delgado A., Argul F.J., Colmenar A., Yeves F. and Peire J., Gridconnected PV buildings: analysis of future scenarios with an example of Southern
Spain, Solar Energy, In press, 2004.
Duffie J. A., Beckman W. A., Solar engineering of thermal processes, John Willey
and sons, Inc, Second edition, 1991.
Haas R., Ornetzeder M., Hametner K., Wroblewski A. and Hbner M., Socioeconomic aspects of the Austrian 200 kWp-photovoltaic-rooftop programme,
Solar Energy, vol. 66, no 3, 1999, pp. 183-191.
IEA, Trends in Photovoltaic Applications Survey report of selected IEA countries
between 1992 and 2002, Report IEA-PVPS T1-12:2003, (it can be downloaded
from the URL address:
http://www.oja-services.nl/ieaps/products/download/rep1_11.pdf that is accessed
on 31/3/2005).

Vassilis L. Stampolidis, Yiannis A. Katsigiannis, Pavlos S. Georgilakis / A methodology for the

economic evaluation of photovoltaic systems

53

Kagkarakis K., Photovoltaic Technology, Symmetria publications, Athens, 1992 (in

Greek).
Korokawa K. and Ikki O., The Japanese experience with PV system programmes,
Solar Energy, vol 70, no 6, 2001, pp 457-466.
Lalas D. P., Pisimanis D. K., Notaridou B. A., Methods for the calculation of the
solar radiation in arbitrary inclination plane and panels for 30, 45 and 60 in
Greece, Technika Chronika Scientific Journal of the Technical Chamber of
Greece, B, vol. 2, issue 3-4, July-December 1982, pp 129-181 (in Greek).
NOA, http//:www.noa.gr, National Observatory of Athens, Accessed on 22/7/2005 (in
Greek).
Perez R., Burtis L., Hoff T., Swanson S. and Herig C., Quantifying residential PV
economics in the US-payback vs cash flow determination of fair energy value,
Solar Energy, vol. 77, 2004, pp. 363-366.
Regulatory Authority for Energy (RAE), Report for the period July 2000
December 2002, Gabriilidis publications, 2004 (in Greek).
Spiegel R. J., Greenberg D. L., Kern E. C. and House D. E., Emmisions reduction
data for grid-connected photovoltaic power systems, Solar Energy, vol. 68, no 5,
2000, pp 475-485.
Tsoutsos Th., Mavrogiannis I., Karapanagiotis N., Tselepis S., Agoris D., An
analysis of the Greek photovoltaic market, Renewable & Sustainable Energy
Reviews, vol 8, Issue 1, 2004, pp 49-72.
Vallv X. and Serrasolses J., Design and operation of a 50 kWp PV rural
electrification project for remote sites in Spain, Solar Energy, vol. 59, nos 13,1997, pp 111-119.
Zopounidis K., Foundational Principles of Financial Management, University Notes,
Technical University of Crete, Mediterranean Agricultural Institute of Chania
(M.A.I.CH), Chania, 2000 (in Greek).

Appendix A
The Internal Rate of Return (IRR) represents the profits and other benefits of the PV
plant, expressed in the portion of the annual performance of the initial costs of the
project. The IRR is calculated by the following equation [Apseridou (2002)]:
0 = cap +

(1 + IRR )
t =1

Ct

S PL
(1 + IRR ) PL

(.1)

54

Operational Research. An International Journal / Vol.6, No.1 / January-April 2006

where I cap is the projects equity, SPL is the remaining value of the project, Ct is the
net cash flow of the project at year t and PL is the expected lifetime of the project.
Net Present Value (NPV) expresses the present value that a series of cash flows will
have in the future. The NPV is calculated by [Zopounidis (2000)]:

NPV =

PL

C (1 + k )

I cap

(.2)

where Ct is the net cash flow of the project at year t, k is the discount rate, cap are the
capital investments of the project and PL is the expected lifetime of the project.
The Year-to-Positive cash flow time is the time when the first positive net cash flow
occurs. In many cases, the calculation of the exact time of the first positive net cash
flow occurrence is defined by using linear interpolation between those two years.
The Simple Payback method shows the time that the investors will collect back their
invested capital to the PV plant. The time counts from year 0. The payback time is
calculated by [Zopounidis (2000)]:
SP =

I cap I G
p d p E yr

(.3)

where cap are the capital investments of the project, G are the grants to the project, p
are the annual savings of the project, dp is the annual debt payment of the project and
yr is the annual operating cost of the project.
The Profitability Index, PI, represents the comparison between the projects NPV
with the capital investments of it, Icap [Zopounidis (2000)]:
PI = NPV / cap

(.4)

Positive and bigger than 1 values of this index show a good economic performance of
a project.