Chapter 3. Financial Feasibility of New and Renewable Energy
B. Financial Feasibility Analysis
We analyzed how the electricity tariff reform altered the financial feasibility of a 3-kW PV installation for a household consuming 350 kWh of electricity a month on average.
1) Average Monthly PV Power Output by Year
A 3-kW PV system theoretically generates 301 kWh of electricity per month, but actually produces closer to 292 kWh in the first year of installation when factoring in a stabilization loss of 3.0 percent. Since panel efficiency decreases at a rate of 0.8 percent and inverter efficiency decreases at a rate of 2.0 percent starting in the second year of operation, the average monthly power output of a household PV system varies and decreases gradually over time, as shown in Table 3-6. While the PV system as a whole is assumed to have a lifespan of 20 years, the inverter itself only has a lifespan of 10 years and must be replaced. Assuming that the inverter is promptly replaced after ten years, the monthly output in the eleventh year will exceed that of the tenth year.
Table 3-6. Average Monthly Power Output of a 3-kW PV System by Year Year
Decrease (%) in panel
efficiency
Decrease (%) in inverter
efficiency
Power generation
rate
Avg.
monthly output
1 0 0 0.9700 292
2 0.0080 0.0200 0.9430 284
3 0.0161 0.0404 0.9159 276
4 0.0242 0.0612 0.8886 267
5 0.0324 0.0824 0.8612 259
6 0.0406 0.1041 0.8337 251
7 0.0490 0.1262 0.8061 243
8 0.0574 0.1487 0.7784 234
9 0.0658 0.1717 0.7506 226
10 0.0743 0.1951 0.7227 218
11 0.0829 0 0.8895 268
12 0.0916 0.0200 0.8635 260
13 0.1003 0.0404 0.8374 252
14 0.1091 0.0612 0.8112 244
15 0.1180 0.0824 0.7850 236
16 0.1270 0.1041 0.7587 228
17 0.1360 0.1262 0.7324 220
18 0.1451 0.1487 0.7060 213
19 0.1542 0.1717 0.6796 205
20 0.1635 0.1951 0.6531 197
2) Average Monthly Electricity Bill Prior to PV System Installation
Table 3-7 lists the average monthly electricity bills of households consuming different amounts of electricity. These billing amounts assume the absence of any PV installation and were estimated by applying the pre-reform tariff rates, along with the basic fees, VATs, and the Electricity Industry Base Fund Contributions. Under these considerations, a household consuming an average of 350 kWh of electricity a month would pay a total of KRW 62,900, which includes the basic fee of KRW 3,850, a 10-percent VAT, and a 3.7-percent Base Fund Contribution.
Table 3-7. Pre-Reform Electricity Bills by Consumption Level
(Unit: KRW/month) Monthly
consumption (kWh)
Basic
fee Tariff Subtotal VAT Base Fund
Contribution Total 200 910 18,660 19,570 1,957 720 22,240 250 1,600 28,055 29,655 2,966 1,090 33,710 300 1,600 37,450 39,050 3,905 1,440 44,390
350 3,850 51,480 55,330 5,533 2,040 62,900
400 3,850 65,510 69,360 6,936 2,560 78,850
450 7,300 86,395 93,695 9,370 3,460 106,520
500 7,300 107,280 114,580 11,45
8 4,230 130,260
550 12,940 142,755 155,695 15,57
0 5,760 177,020
600 12,940 178,230 191,170 19,11
7 7,070 217,350
Note: Values under KRW 10 have been truncated.
3) Average Monthly Electricity Bills After PV System Installation
Table 3-8 shows the average monthly electricity bill of a household with a PV system that consumes an average of 350 kWh of electricity a month under pre-reform conditions. In the first year of PV system installation, the household would pay for only 58 kWh of the 350 kWh of electricity it consumes. The household would pay KRW 11,505 a month in electricity bills for the first year, which includes the basic fees and other charges as listed in Table 2-7. The average monthly electricity bill for this household, outfitted with a PV system, can be estimated over the course of 20 years as follows.
Table 3-8. Average Monthly Electricity Bill by Year: Representative Household with a PV Installation Year
Monthly electricity consumption
(kWh)
Monthly PV power output
(kWh)
Consumption after net metering (kWh)
Basic fee Tariff VAT Base Fund
Contribution Total
1 350 292 58 410 3,522 5,533 2,040 11,505
2 350 284 66 410 4,016 5,533 2,040 11,999
3 350 276 74 410 4,512 5,533 2,040 12,495
4 350 267 83 410 5,010 5,533 2,040 12,993
5 350 259 91 410 5,510 5,533 2,040 13,493
6 350 251 99 410 6,012 5,533 2,040 13,995
7 350 243 107 910 6,997 5,533 2,040 15,480
8 350 234 116 910 8,047 5,533 2,040 16,530
9 350 226 124 910 9,100 5,533 2,040 17,583
10 350 218 132 910 10,157 5,533 2,040 18,640
11 350 268 82 410 4,992 5,533 2,040 12,975
12 350 260 90 410 5,468 5,533 2,040 13,451
13 350 252 98 410 5,945 5,533 2,040 13,928
14 350 244 106 910 6,802 5,533 2,040 15,285
15 350 236 114 910 7,797 5,533 2,040 16,280
16 350 228 122 910 8,793 5,533 2,040 17,276
17 350 220 130 910 9,791 5,533 2,040 18,274
18 350 213 137 910 10,791 5,533 2,040 19,274
19 350 205 145 910 11,792 5,533 2,040 20,275
20 350 197 153 910 12,794 5,533 2,040 21,277
4) Net Cash Flow by Year
A household consuming 350 kWh of electricity a month would pay KRW 754,800 in electricity bills (KRW 62,900 x 12 months) to KEPCO if the household lacks any power-generating system. After installing a 3-kW PV system, the same household would pay less, but the marginal deductions would differ from year to year. For example, the household would pay KRW 138,065 (KRW 11,505 x 12 months) to KEPCO in the first year after net metering, but its post net-metering billing amounts would differ in the subsequent years. Table 3-9 shows the household’s net cash flow for 20 years following PV system installation, reflecting system maintenance costs (equivalent to one percent of the PV system installation cost) and the cost of investment.
Table 3-9. Net Cash Flow for a PV-Installed Household by Year
Year
Without PV With PV
Difference (A-E) KEPCO
(A)
Installation cost
(B)
Maintenance cost (C)
Tariff (D)
Total, E (B+C+D)
0 0 5,400,000 - 0 5,400,000 -5,400,000
1 754,800 - 54,000 138,065 192,065 562,735
2 754,800 - 54,000 143,986 197,986 556,814
3 754,800 - 54,000 149,935 203,935 550,865
4 754,800 - 54,000 155,912 209,912 544,888
5 754,800 - 54,000 161,916 215,916 538,884
6 754,800 - 54,000 167,944 221,944 532,856
7 754,800 54,000 185,755 239,755 515,045
8 754,800 - 54,000 198,355 252,355 502,445
9 754,800 - 54,000 210,998 264,998 489,802
10 754,800 - 54,000 223,682 277,682 477,118
11 754,800 - 54,000 155,704 209,704 545,096
12 754,800 - 54,000 161,411 215,411 539,389
13 754,800 - 54,000 167,134 221,134 533,666
14 754,800 - 54,000 183,424 237,424 517,376
15 754,800 - 54,000 195,355 249,355 505,445
16 754,800 - 54,000 207,312 261,312 493,488
17 754,800 54,000 219,291 273,291 481,509
18 754,800 - 54,000 231,288 285,288 469,512
19 754,800 - 54,000 243,299 297,299 457,501
20 754,800 - 54,000 255,320 309,320 445,480
5) NPV Analysis
The NPV for a 3-kW PV system, estimated by applying a discount rate of five percent to the annual net cash flow resulting from electricity bill savings over the 20-year lifespan of the PV system, amounts to KRW 1,034,691. From a financial perspective, the NPV for the household PV system is greater than zero. Therefore, a household consuming a monthly average of 350 kWh of electricity has financial incentive to install a PV system even in the absence of government aid.
6) Sensitivity Analysis
The variables that exert the greatest effect on the financial feasibility of household PV installations include the PV system installation cost, discount rate, rate of performance decline, and operation rate. Installation costs for household PV systems were included in our sensitivity analysis since these costs continue to decline due to system innovations and the increasing popularity of PV technologies. The discount rate was also included in our sensitivity analysis since discount rates are somewhat debatable. A sensitivity analysis was also performed with respect to the operation rate of the household PV system.
Table 3-10 summarizes the results of the NPV sensitivity analysis for the household PV system in terms of installation costs and discount rates. The lower the discount rate and installation cost, the higher the NPV. The NPV for a 3-kW PV system, with a KRW 5,400,000 installation cost, remained positive until the discount rate was raised to seven percent. At a fixed discount rate of five percent, the NPV remained positive up until the installation cost was raised to KRW 6,000,000.
However, when the installation cost was raised to KRW 7,000,000, the NPV turned negative. In other words, even if the installation cost and discount rate used in our analysis were raised somewhat above the adopted KRW 5,400,000 and five percent, respectively, a 3-kW household PV system would remain a feasible object of investment. However, if both the installation cost and discount rate were raised too high, the NPV would turn negative, thereby discouraging investment.
Lowering the discount rate from five percent to four, with a fixed installation cost of KRW 5,000,000, would increase the NPV by 39 percent, from KRW 1,463,119 to KRW 2,027,485. With the discount rate fixed at five percent and the installation cost lowered from KRW 5,000,000 to KRW 4,000,000, the NPV would improve even more dramatically, by 73 percent, from KRW 1,463,119 to KRW 2,534,187. In other words, when the discount rate and installation cost were each lowered by 20 percent, the NPV improved by 39 percent and 73 percent, respectively. The NPV of a household PV system is therefore more sensitive to changes in installation cost than in discount rate.
Table 3-10. NPV Sensitivity Analysis for the Representative Household PV System:
Variations in Installation Costs and Discount Rates
(Unit: KRW 1,000) Installation cost
1,000 2,000 3,000 4,000 4,500 5,000 5,400 6,000 7,000
Discount rate
1% 8,990 7,821 6,652 5,483 4,899 4,315 3,847 3,146 1,977
2% 7,998 6,858 5,717 4,576 4,006 3,436 2,979 2,295 1,154
3% 7,141 6,026 4,910 3,795 3,237 2,680 2,234 1,564 449
4% 6,396 5,304 4,212 3,120 2,574 2,027 1,591 935 -157
5% 5,747 4,676 3,605 2,534 1,999 1,463 1,035 392 -679
6% 5,180 4,128 3,077 2,025 1,499 973 553 -78 -1,130
7% 4,681 3,648 2,614 1,581 1,064 547 134 -487 -1,520
8% 4,242 3,226 2,209 1,192 683 175 -232 -842 -1,859
9% 3,854 2,853 1,852 851 350 -150 -551 -1,152 -2,153
10% 3,510 2,524 1,537 551 57 -436 -831 -1,422 -2,409
Figure 3-1. NPV Sensitivity Analysis for the Representative Household PV System:
Variations in Installation Costs and Discount Rates
단위: 천원 설치비(천원)
Unit: KRW 1,000
Installation cost (in KRW 1,000) Discount rate
할인율
Another sensitivity analysis was performed with respect to the operation rate and installation cost. The operation rate directly affects the power output of the PV system. The higher the operation rate, the greater the power output, and hence, the greater the feasibility of the PV system. Table 3-11 shows estimates of the power output, the billable amounts of electricity after net metering, and the final billing amounts after net metering based on an assumed operation rate of 14.93 percent as typically quoted by PV system manufacturers. A high operating rate increases the output of the PV system and contributes to reducing monthly billing amounts. In the first year, an operation rate of 14.93 percent would lower the average monthly billing amount to KRW 9,975, KRW 1,530 less than the KRW 11,505 achieved with an operating rate of 13.75 percent. Increasing the operating rate by 8.6 percent, in other words, reduces the billing amount by 13.3 percent.
Table 3-11. Average Monthly Electricity Bill by Year: PV System, Operating Rate of 14.93%
Year
Monthly consumption
(kWh)
Monthl y PV output (kWh)
Billable consumption
Basic
fee Tariff VAT Base Fund
Contribution Total
1 350 317 33 410 1,992 5,533 2,040 9,975
2 350 308 42 410 2,528 5,533 2,040 10,511
3 350 299 51 410 3,066 5,533 2,040 11,049
4 350 291 59 410 3,607 5,533 2,040 11,590
5 350 282 68 410 4,151 5,533 2,040 12,134
6 350 273 77 410 4,697 5,533 2,040 12,680
7 350 264 86 410 5,245 5,533 2,040 13,228
8 350 255 95 410 5,794 5,533 2,040 13,777
9 350 245 105 910 6,643 5,533 2,040 15,126
10 350 236 114 910 7,791 5,533 2,040 16,274
11 350 291 59 410 3,588 5,533 2,040 11,571
12 350 282 68 410 4,105 5,533 2,040 12,088
13 350 274 76 410 4,623 5,533 2,040 12,606
14 350 265 85 410 5,143 5,533 2,040 13,126
15 350 257 93 410 5,664 5,533 2,040 13,647
16 350 248 102 910 6,309 5,533 2,040 14,792
17 350 239 111 910 7,394 5,533 2,040 15,877
18 350 231 119 910 8,480 5,533 2,040 16,963
19 350 222 128 910 9,567 5,533 2,040 18,050
20 350 214 136 910 10,656 5,533 2,040 19,139
The estimated NPV amounts to KRW 1,299,816, based on the monthly electricity bills post PV installation and the resulting net cash flow for the representative household. Increasing the operation rate by 8.6 percent raises the NPV by 25 percent, from KRW 1,034,691 to KRW 1,299,816. Table 3-12 summarizes the NPV estimates based upon different combinations of operation rates and installation costs. The operation rate is positively correlated to the financial feasibility of the PV installation. The NPV stays positive until the operation rate of the 3-kW PV system is lowered to 11.0 percent, provided that the installation cost remains fixed at KRW 5,400,000. The system lacks feasibility at operation rates lower than 11.0 percent. At an operation rate of 13.8 percent, the NPV remains positive up until an installation cost of KRW 6,000,000.
When the operation rate is lowered from 13.8 percent to 11.0 percent, under the conditions of a fixed installation cost of KRW 5,400,000, the NPV drops by 81 percent, from KRW 1,305,987 to KRW 201,016. When the installation cost is lowered from KRW 5,000,000 to KRW 4,000,000 and the operation rate remains at a constant 13.8 percent, the NPV improves by 73 percent, from KRW 1,464,414 to KRW 2,535,483. Increasing the operation rate and the installation cost by 20 percent improves the NPV by 81 percent and 73 percent, respectively.
Table 3-12. NPV Sensitivity Analysis for the Representative Household PV System:
Variations in Installation Costs and Operation Rates
(Unit: KRW 1,000) Installation cost
1,000 2,000 3,000 4,000 4,500 5,000 5,400 6,000 7,000
Operation rate
8.3% 3,915 2,844 1,773 702 166 -369 -798 -1,440 -2,511 9.6% 4,451 3,380 2,309 1,238 702 167 -262 -904 -1,975 11.0% 4,914 3,843 2,772 1,701 1,165 629 201 -442 -1,513 12.4% 5,359 4,288 3,217 2,146 1,610 1,075 646 4 -1,067 13.8% 5,749 4,678 3,607 2,535 2,000 1,464 1,036 393 -678 14.9% 6,013 4,941 3,870 2,799 2,264 1,728 1,300 657 -414 15.1% 6,053 4,982 3,911 2,840 2,304 1,769 1,340 698 -373 16.5% 6,305 5,234 4,163 3,092 2,556 2,021 1,592 950 -121 17.9% 6,494 5,423 4,352 3,281 2,745 2,210 1,781 1,139 68 19.3% 6,618 5,547 4,476 3,404 2,869 2,333 1,905 1,262 191
Figure 3-2. NPV Sensitivity Graph for the Representative Household PV System:
Variations in Installation Costs and Operation Rates
단위: 천원 설치비(천원) 이용률
Unit: KRW 1,000
Installation cost (KRW 1,000) Operation rate
3. Financial Feasibility of Fuel Cells
A. Main Assumptions 1) Capacity and Price
The household fuel cell used in our analysis is the 1-kW fuel cell subsidized by the KEA. The installation cost for this type of fuel cell was established at KRW 25,000,000, according to the fuel cell retail price cited by a domestic manufacturer as of April 2017.
2) Cost of City Gas for Households
Household fuel cells in Korea operate on city gas supplied to households. The cost of city gas used in this analysis is KRW 15.8031 per megajoules (MJ) (the current price of city gas as of April 2017). This cost was converted into KRW 716.5 per normal cubic meter (Nm3).12
3) Management of Heat Energy
A household fuel cell can be seen as a cogeneration plant that generates both electricity and heat. For simplicity, this analysis focuses exclusively on the electricity generated by the fuel cell. However, since a portion of the city gas that operates the fuel cell system is also used to generate heat, and the heat generated is not consumed all at once, it is important to account for the presence of heat when analyzing the exact costs of fuel cell power generation. Our analysis, therefore, deducts the city gas used by the fuel cell system to generate heat and considers only for the remainder used for power generation. Our analysis also assumes that approximately 50 percent of the heat energy generated as a byproduct of electricity generation is used to provide the household with hot water and heating; this heat energy is referred to as “heat gains.” For example, operating the fuel cell continuously for an hour produces heat gains of 0.0615 Nm3/h as measured in terms of city gas.13 In this analysis, we deduct the amount of city gas used to generate these heat gains from the total amount of city gas used to operate the fuel cell system.
4) Lifespan
Based on interviews with experts and fuel cell manufacturers, the lifespan of a household fuel cell system was estimated at 10 years. This differs from the lifespan of an industrial fuel cell system, which has a much longer lifespan thanks to systematic operation and maintenance.
5) Main Assumptions and Preconditions of Analysis
Table 3-13 provides a summary of the main assumptions and preconditions of analysis.
12 The process of converting the per-heat price of city gas into a per-volume price is as follows: (a) 1MJ= KRW 15.8031; (b) 1MJ=238.84 Kcal; (c) 1kg=13,040 Kcal; (d) 1Nm3=0.8304 Kg; (a) × 1/(b) × (c) × (d) = KRW 716.5/Nm3.
13 Heat gains can be calculated as follows. First, the heat energy at the level of kilowatts is converted into a volumetric unit of heat energy (city gas) according to the following conditions: (1) 1 kW = 1 kJ/second; (b) 1 hour = 3,600 seconds; (c) 1 Nm3 = 41,000 kJ;
(a) x (b) x 1/(c) x (d) = 0.0878 Nm3/h. In summary, 1 kW of heat energy equals 0.0878 Nm3. According to the technical specifications of the 1-kW fuel cell provided by Manufacturer “S” on its website (http://www.s-fuelcell.com/goods/lineUp.php, accessed on October 28, 2017), generating 1 kW of electricity using the fuel cell results in the generation of 1.4 kW in heat energy; assuming that only 50 percent of this heat energy is actually used, heat gains amount to 0.7 kW a month. This can be converted into 0.0615 Nm3/h of city gas.
Table 3-13. Main Assumptions and Preconditions of Analysis: Household Fuel Cell
Variable Unit Assumpti
on Remarks
Capacity kW 1 Eligible for KEA subsidies
Cost of city gas for the household KRW/N
m3 716.5 Current price in Seoul as of April 2017 Amount of city gas consumed Nm3/kW
h 0.25 According to specifications provided by manufacturer “S”
Heat gains converted into city gas Nm3/h 0.0615 Maximum monthly electricity output kWh/mo
. 720
Lifespan Years 10 According to experts
Discount rate % 5.0 Applied to NPV estimation
VAT % 10.0 10% of the basic fee + tariff
Standard operation rate % 74.56 As suggested by the KEA
Sources: KEA (2016), p. 126; MOTIE (2017a), p. 3; Website of Manufacturer “S” website (http://www.s- fuelcell.com/goods/lineUp.php, accessed on October 28, 2017).