**Levelised Cost**

Since a solar power plant does not use any fuel, the cost consists primarily of capital cost with minor operational and maintenance cost. If the lifetime of the plant and the interest rate is known, the cost per kWh can be calculated. This is called the levelised energy cost.

The first step in the calculation is to determining the investment for the production of 1 kWh in a year. Example, the fact sheet of the Andasol 1 project shows a total investment of 310 million euros for a production of 179 GWh a year. Since 179 GWh is 179 million kWh, the investment per kWh a year production is 310 / 179 = 1.73 euro. Another example is Cloncurry solar power station in Australia. It was planned to produce 30 million kWh a year for an investment of 31 million Australian dollars. So, if this is achieved in reality, the cost would have been 1.03 Australian dollar for the production of 1 kWh in a year. This would have been significantly cheaper than Andasol 1, which can be partially explained by the higher radiation in Cloncurry over Spain. The investment per kWh cost for one year should not be confused with the cost per kWh over the complete lifetime of such a plant.

In most cases the capacity is specified for a power plant (for instance Andasol 1 has a capacity of 50 MW). This number is not suitable for comparison, because the capacity factor can differ. If a solar power plant has heat storage, it can also produce output after sunset, but that will not change the capacity factor; it simply displaces the output. The average capacity factor for a solar power plant, which is a function of tracking, shading and location, is about 20%, meaning that a 50 MW capacity power plant will typically provide a yearly output of 50 MW × 24 hrs × 365 days × 20% = 87,600 MWh/year, or 87.6 GWh/yr.

Although the investment for one kWh year production is suitable for comparing the price of different solar power plants, it does not give the price per kWh yet. The way of financing has a great influence on the final price. If the technology is proven, an interest rate of 7% should be possible. However, for a new technology investors want a much higher rate to compensate for the higher risk. This has a significant negative effect on the price per kWh. Independent of the way of financing, there is always a linear relation between the investment per kWh production in a year and the price for 1 kWh (before adding operational and maintenance cost). In other words, if by enhancements of the technology the investments drop by 20%, the price per kWh also drops by 20%.

If a way of financing is assumed whereby the money is borrowed and repaid every year, in such way that the debt and interest decreases, the following formula can be used to calculate the division factor: (1 - (1 + interest / 100) ^ -lifetime) / (interest / 100). For a lifetime of 25 years and an interest rate of 7%, the division factor is 11.65. For example, the investment of Andasol 1 was 1.73 euro per kWh, divided by 11.65 results in a price of 0.15 euro per kWh. If one cent operation and maintenance cost is added, then the novelized cost is 0.16 euro per kWh. Other ways of financing, different way of debt repayment, different lifetime expectation, different interest rate, can lead to a significantly different number.

If the cost per kWh may follow the inflation, the inflation rate can be added to the interest rate. If an investor puts his money in a savings account for 7%, then he is not compensated for inflation. However, if the cost per kWh is raised with inflation, then he is compensated and can add 2% (a normal inflation rate) to his return. The Andasol 1 plant has a guaranteed feed-in tariff of 0.21 euro for 25 years. If this number is fixed, after 25 years with 2% inflation, 0.21 euro will have a value comparable with 0.13 euro now.

Finally, there is some gap between the first investment and the first production of electricity. This increases the investment by the interest realised over the period in which the plant is not active. The modular solar dish (but also solar photovoltaic and wind power) have the advantage that electricity production starts after first construction.

Given the facts that solar thermal power is reliable, can deliver peak load and does not cause pollution, a price of US$0.10 per kWh starts to become competitive, although a price of US$0.06 has been claimed With some operational cost a simple target is 1 dollar (or lower) investment for 1 kWh production in a year.

Read more about this topic: Solar Thermal Energy

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