The Economic Viability of Electricity from Solar Energy
Encouraging the use of solar energy to generate electricity, whether at the level of individual and institutional consumption or at the public level, raises the question of the economic viability of electricity-generating solar power systems compared with the electricity consumers can obtain from Electricité du Liban or from private generators. This is particularly pertinent given that installing a solar power system to generate electricity requires no less than US$3,000, a figure that rises as the system's generation and storage capacities increase.
Notably, the turn by the Lebanese toward solar energy was not so much the easiest option as it was the fastest way to secure electricity. It came after the daily hours of supply provided by Electricité du Liban fell to record lows, culminating in repeated generation shutdowns from late August 2021 to the present day. This was compounded by soaring generator bills resulting from the lifting of fuel subsidies, which began gradually in July of the same year, at a time when the national currency was collapsing against the US dollar and the incomes and purchasing power of the Lebanese were eroding day by day.
This shift toward solar power systems, to the exclusion of other renewable energy sources for generating electricity, calls for examining how sound a choice these systems are and whether they are economically viable. Such systems stand out for their ease of installation and the ability to tailor their size to a consumer's needs and financial means. They are also distinguished by their short installation time and low cost compared with other renewable energy systems, particularly wind power systems, which have not proven effective in Lebanon even when available in sizes suited to individual consumption.
- Multiple uses, such as heating water and generating electricity. - An inexhaustible, renewable and sustainable source of energy. - Produces clean, environmentally friendly energy with no emissions whatsoever. - Allows the energy generated by the system to be stored for reuse when needed. - Scalable in size through the addition of photovoltaic panels or batteries.
Assessing the financial viability of solar power systems necessarily involves comparing their production cost with the cost of electricity from other sources, notably Electricité du Liban and private generators. A study by Information International on Electricité du Liban's tariff showed that the average monthly bill for a subscriber with a 15-ampere capacity and an average monthly consumption of 200 kilowatt-hours stands at US$42.5, bearing in mind that power supply is limited to four or at most six hours a day.
This means that if Electricité du Liban were to provide power 24 hours a day, the average monthly bill could rise to $160, roughly four times the current bill. Whereas the global average tariff per kilowatt-hour does not exceed 14 US cents at most, in Lebanon that average stands at 21 US cents. Moreover, Electricité du Liban's tariff still includes fixed charges unrelated to consumption, such as the meter fee, a charge applied nowhere else but in Lebanon, whereas the rehabilitation fee was abolished in the latest tariff revision.
Private generator tariffs per kilowatt-hour, meanwhile, range between 50 and 60 US cents. According to a World Bank study conducted in 2023, the average monthly private generator bill stands at US$77, and approaches $80 according to a study by Information International. For residents of luxury buildings, where subscription capacity exceeds 10 amperes and power cuts are virtually nonexistent, the private generator bill rises to US$300.
The World Bank report concludes that despite the high monthly cost of private generators, 73.5% of survey respondents find it difficult to afford the steep upfront cost of solar power systems, which averages between 2,500 and 3,000 US dollars. Regardless of whether people can afford that outlay, the question remains how the cost of electricity produced by solar power systems compares with its cost from other sources.
Answering this question first requires specifying the size of the solar power system under comparison. This study is based on a system comprising six photovoltaic panels (PV Solar Panels) with a capacity of 540 watts each and an estimated lifespan of 20 years, an inverter (Inverter) with a capacity of 5 kWh, and four storage batteries (Lead Acid) of 240 Ah whose estimated lifespan does not exceed 3 years, in addition to the necessary steel mounting structures, cables, circuit breakers and protective devices, with an estimated lifespan of 20 years.
Regardless of the volume of electricity that can be obtained from a solar power system, the consumer's average monthly cost equals the average monthly depreciation of the system's components, whose estimated lifespans vary from one component to another. Calculating this cost requires dividing the total cost of each component by its estimated lifespan (in months) and then summing the results to arrive at the average monthly cost of solar-generated electricity.
The economic feasibility study for this system relies on five indicators alongside a sensitivity analysis, which requires determining both the system's cash flows and its net present value. The annual cash inflows equal the savings achieved by foregoing other energy sources; in the case examined here, those flows equal the combined cost of Electricité du Liban and private generators, namely 42 + 80 = US$122 per month, or US$1,464 per year.
- Accounting Rate of Return (ARR): (1,464 ÷ 3,000) x 100 = 48.8%, which exceeds today's deposit interest rate, making the investment profitable. - Net Present Value (NPV): 6,667.15 - 3,000 = 3,667.15; the result shows that the project's net present value (at a 10% discount rate) is positive, meaning that the project's expected return exceeds the required rate of return and that it is therefore worth investing in (the NPV was calculated using Excel after entering the relevant data). - Internal Rate of Return (IRR): 44%, a rate higher than the discount rate or the interest rate, meaning that the project is profitable (calculated using Excel after entering the relevant data). - Payback Period: 3,000 ÷ 1,464 = 2.04 years, or approximately 24 months and 15 days, which is considered an ideal timeframe for an investment. - Project Sensitivity: a project sensitivity analysis aims to measure the change in the payback period, the accounting rate of return, the internal rate of return and the net present value, and is conducted under two assumptions: - The first examines the project's sensitivity to a 10% decline in annual cash flows, reducing them to: 1,464 - (1,464 x 10%) = US$1,317.6. - The second examines the project's sensitivity to a reduction in the project's lifespan to 10 years instead of 15 years, under which the payback rate remains unchanged at 2.04 years while the remaining indicators change.
It is clear from the above that the internal rate of return exceeds the interest rate, which in Lebanon today stands at zero, and that the payback period is ideal. The project sensitivity analysis also demonstrated that the project remains economically viable even if cash flows fall by 10% or if the project's lifespan drops to 10 years.
Comparing the average monthly cost of electricity across the three sources outlined above further shows that the cost of generating electricity from solar energy remains the lowest, even if it were double what it is today. An integrated solar power system provides electricity 24 hours a day on sunny days, whereas supply is limited to at most 6 hours from Electricité du Liban and 10 hours from private generators.
The economic viability of solar power systems does not negate their lower output on winter days, which necessitates relying on an additional source of electricity. Adopting a comprehensive plan to integrate individual solar power systems into the national grid is therefore an urgent necessity, allowing the expansion of individual solar electricity generation to help offset the shortfall in Electricité du Liban's production. Indeed, a partnership between the public and private sectors is indispensable to confront Lebanon's financial and economic crisis, particularly its electricity crisis.
Translated from Arabic with AI. Read it in Arabic