Economic Analysis of Solar PV

8/6/2019 Economic Analysis of Solar PV

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An Economic Analysis of Solar PV Micro-Utility in Rural

Areas of BangladeshFaisal Ahammed

1, Abdullahil Azeem

2

1School of Business Studies, Southeast University, Dhaka-1213, Bangladesh

2Dept. of IPE, Bangladesh University of Engineering and Technology, Dhaka-1000, Bangladesh

E-mail of corresponding author: [email protected]

Abstract: Solar PV Micro-Utility is the concept of Solar PV

extension where power rather than the solar electric systems

are offered to the rural poor. In this system, one will never be

the owner of the system, but one can use the Solar PV system

by paying a daily tariff. Several rural markets have already

been electrified through Solar PV under the concept of PV

Micro-Utility by Centre for Mass Education in Science

(CMES), a national NGO in Bangladesh. This paper deals with

economic analysis (Net present value, Benefit cost ratio,

Internal rate of return, Discounted pay back period) of Solar

PV Micro-utility of Manikgang Bazaar which is located

approximately 400 Km north to Dhaka, the capital of

Bangladesh.

1. Introduction

The Government of Bangladesh has a noble vision toprovide electricity for all by the year 2020. But at present

only 32% of total population has connected with grid

electricity [1]. In the near future, it is not possible to

connect all the remote villages and the offshore islands

within the national grid system. Expanding the national grid

in those isolated areas are very expensive and not cost

effective. Therefore, Solar PV could be effective

alternative to fulfill the electricity demand in the off-grid

areas.

Rural Electrification Board (REB) is responsible to

build grid network and supply electricity to the rural areas

of Bangladesh. Bangladesh Power System Master Plan

(PSMP) projects a doubling of electricity generatingcapacity by 2010. The huge investment required to satisfy

the electricity demand means that homes, business centers

and other establishments in many villages and isolated areas

may not be connected to the grid in the near future by

conventional electricity generation and distribution

methods.

Khan [2] studied the utilization of renewable energy for

world poverty reduction as well as for meeting the

objectives of MDGs (Millennium Development Goals). The

MDGs may not be met unless rapid progress is made in

extending efficient and affordable energy services to the

poor in support of productive economic activities or social

development. His study shows some links of energy

services for meeting MDGs in context of reducing poverty,achieving primary education, promoting gender

empowerment, ensuring environmental sustainability etc.

Islam [3] studied on review of policy formulation and

institutional development process for harnessing renewable

energy sources in Bangladesh. He studied on Draft National

Energy Policy-2004 and Draft National Energy Policy-

2006. He was trying to find out some barriers for

implementation of Solar PV technologies in rural

Bangladesh. These two studies illustrated that the factors

contributing to the successful promotion of Solar PV based

rural electrification are:

Suitable financing schemes to address the problem ofhigh initial cost.

Means of providing regular and proper maintenanceand availability of spare parts.

Choice of available configurations to suit theconsumers needs and affordability.

Centre for Mass Education in Science (CMES) has

introduced a suitable financial scheme to address the

problem of high initial cost under the concept of Solar PV

Micro-Utility in rural markets in Bangladesh. Under this

concept, the shop-keepers need to pay no initial investment,

but need to pay only daily tariff for getting the lighting

service. But it is necessary to know the financial viability of

Solar PV Micro-Utility. This paper aims to conduct

economic analysis of one Solar PV Micro-Utility in

Manikgang Bazaar. Net present value, Benefit-cost ratio,internal rate of return, discounted pay-back period have

been calculated to check the financial viability of Solar PV

Micro-Utility.

2. Concept of Solar PV Micro-Utility

One of the main economical activities of rural Bangladesh

is based on rural markets called Haat. Farmers from long

distance come to the Haat with their products to sell to

merchants, who usually come from cities or major towns.

The trading continues till evening. Kerosene lamps called

Kupi and Harricane are the major appliances to meet

the lighting needs of the shops of a Haat. Some shops use

more expensive mantle lamps called Hazzak to obtain


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brighter light. Diesel generators supply electricity in some

rural markets. All of these alternatives are hazardous for

environment [4].

In the concept of Solar PV Micro-Utility, a number ofsolar modules are mounted at one location, preferably in the

middle of the load (light, TV etc.) distribution. The client

shops are then connected to the systems by keeping the

cable as short as possible. A local technician is trained for

operation of the system, which is also capable of doing

minor trouble shooting while the major ones are taken care

of by Engineers and Solar Experts of CMES.

Fig. 1 Photograph of Solar PV Micro-Utility in Manikgang

Bazaar

The first Solar PV based lighting was established in

Manikganj Bazaar of Dinajpur district (Fig. 1), 400 km.

north to Dhaka. There were about 30 shops in the market.Lighting needs of the shops were met by Kupi.

Under the project of RETs in Asia, CMES explained

the concept of solar energy based electrification system to

the shop owners and the Bazaar Management Committee

(BMC). The operation, benefits and maintenance procedure

were explained to them. They welcomed the idea. A daily

tariff of Tk. 5 with no initial deposit was agreed upon. A

contract was then signed with BMC and the shop owners by

CMES. After that, solar energy based lighting was initiated

on 28 September 1999 in Manikgang Bazaar. Seven solar

modules of 50 Wp each, divided into two groups, were

installed in two suitable locations of the bazaar. Thebatteries and controllers accompanying each group were

placed closed to respective solar panel.

3. Economic Analysis of Solar PV Micro-Utility

The first Solar PV Micro-Utility was introduced in

Manikgang Bazaar of Dinajpur district, about 400 Km.

north to Dhaka on September 28, 1999. So, financial cash

flows for the period of 2000 to 2006 have been collected to

conduct the financial feasibility of the project. Table 1

shows the financial performance of Solar PV Micro-Utility

in Manikgang Bazaar.

Table 1 Financial Performance of Solar PV Micro-Utility

in Manikgang Bazaar

Year

Operating

cost (Tk.)

Revenue

(Tk.)

Net cash flow

(Tk.)2000 21320 50400 29080

2001 22760 55440 32680

2002 24200 60480 36280

2003 25640 65702 40062

2004 21385 70756 49371

2005 27870 75600 47730

2006 30750 80655 49905

2007 36275 87600 51325

The initial investment for any Solar PV application is

relatively higher. The initial investment for Solar PV Micro-

Utility in Manikgang Bazaar was Tk. 271250. But the life

cycle of Solar PV is not less than 15 years which is mostlydepends on the life span of solar panel (20 years). So, in

order to conduct the financial analysis, it is necessary to

forecast the cash flow of Solar PV Micro-Utility for the

next 8 years (until 2014). A simple regression analysis has

been conducted to show the relation between cash flow and

time (year).

Yearly Cash Flow

y = 11809Ln(x) + 26401

0

20000

40000

60000

80000

0 1 2 3 4 5 6 7 8 9

Year

NetCashFl

ow

-10000

80000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Fig. 2 Relationship between cash flow (Tk.) and time (year)

Logarithmic fitting was found to be the best equation for

forecasting the cash flows for Solar PV Micro-Utility until

2014 compared to linear and polynomial regression. The

equation can be written as:

( ) 26401ln11809 += xy (1)

where,

x = time (year)y = net cash flow (Tk.)


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Table 2. Net cash flows of Solar PV Micro-Utility in

Manikgang Bazaar

Year

Cash

flow Remarks2000 29080

2001 32680

2002 36280

2003 40062

2004 49371

2005 47730

2006 49905

2007 51325

Actual data

2008 52348

2009 53592

2010 54718

2011 55745

2012 56690

2013 57566

2014 58380

Forecasted data

On the basis of pilot study (from 2000 to 2007) andregression equation for forecasting (from 2008 to 2014), the

cash flows of Solar PV Micro-Utility in Manikgang Bazaar

is shown as Table 2.

Table 3. Cash flows of Solar PV Micro-Utility in Manikgang

Bazaar (Investment Tk. 271,250)

Year Cashflow

Discountedcash flow

Cumulativecash flow

2000 29080 26436 26436

2001 32680 27008 53445

2002 36280 27258 80702

2003 40062 27363 108065

2004 49371 30656 138721

2005 47730 26942 165663

2006 49905 25609 191272

2007 51325 23943 215216

2008 52348 22201 237416

2009 53592 20662 258079

2010 54718 19178 277257

2011 55745 17762 295019

2012 56690 16421 311440

2013 57566 15159 326599

2014 58380 13976 340574

Most financial problems involve cash flows occurring at

different points of time. These cash flows need to be

brought to the same point of time purposes of comparison

and aggregation [5]. For considering the time value ofmoney, here 10% discount rate has been assumed. Table 3

shows the cash flows of Solar PV Micro-Utility in

Manikgang Bazaar with consideration of time value ofmoney.

Net Present Value (NPV)

The NPV of a project is the sum of discounted values of astream of net cash flows generated by a project during its

life period and if NPV>0, the project can be accepted [6].

For Solar PV Micro-Utility in Manikgang Bazaar, NPV canbe calculated by subtracting the investment from total cash

inflow. From this, we can find

271250.340575. TkTkNPV =

69325.Tk=

As the value of NPV is much greater than zero, the Solar

PV Micro-Utility in Manikgang Bazaar is financially viable.

Discounted Pay Back Period

Pay back period is the length of time required to recover the

initial cash outlay on the project. The method also serves as

a proxy for risk. The faster the investment is recovered, the

less risk to which the firm is exposed [8]. The discounted

pay back period for Solar PV Micro-Utility in Manikgang

Bazaar has been calculated as 11 years, i.e., by the year

2010, when the cumulative discounted cash inflow (Tk.

277,257) will exceed the total investment (Tk. 271,250).

Benefit-Cost Ratio (BCR)

Benefit cost ratio is the ratio of present value of benefits to

initial investment. If BCR>1, the project can be financially

feasible. The total benefit of Solar PV Micro-Utility has

been calculated as Tk. 27000. This value comes from the

savings of money by shopkeepers due to consumption of

less amount of kerosene.

BCR value of Solar PV Micro-Utility in Manikgang

Bazaar can be calculated by dividing the total cash inflow

by investment:

271250.

27000.340575.

Tk

TkTkBCR

+

=

36.1=

As the BCR value is greater than 1, we can say that theSolar PV Micro-Utility is financially feasible.

Internal Rate of Return (IRR)

IRR is the rate of discount that equates the present value of

net cash flows equal to the initial investment cost of project.

If IRR of a capital project is greater than the cost of capital,

investment in the project should be made. If IRR is less than

the cost of capital, the project should be rejected [7]. The

IRR value of Solar PV Micro-Utility in Manikgang Bazaar

has been calculated as 14%. As the IRR value (14%) is

greater than the cost of capital (10%), the Solar PV Micro-

Utility is financially sound.


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4. Conclusions

The economic analysis of Solar PV Micro-Utility in

Manikgang Bazaar has been performed by calculating net

present value, benefit cost ratio, internal rate of return anddiscounted pay-back period. These values indicate that it

could not be an appropriate area for corporate investment as

the values are marginally feasible. However, it could be an

appropriate social business for NGOs. Moreover, it is

reducing the emission of carbon dioxide and hence helping

to mitigate global warming. The approach presented in the

paper could also be used for other utility systems in

Bangladesh as well as abroad.

References

[1] T. Rahman, Solar PV Applications, Proceedings of the ShortCourse on Renewable Energy Technologies, Center for Energy

Studies, BUET, pp. 40-60, 17-20 December 2006.[2] S. Khan, An Overview of Renewable Energy Sources,

Proceedings of the Short Course on Renewable Energy

Technologies, Center for Energy Studies, BUET, pp.1-6, 17-20December 2006.

[3] M. N. Islam, Renewable energy in Bangladesh and

Government Policy, Solar Photovoltaic Systems in Bangladesh Experience and Operations, Bangladesh Center for AdvancedStudies, 2005

[4] F. Ahammed, PV Micro-Utility Model in Gha-Chulka CannelBazaar, Bangladesh Renewable Energy Newsletter, Vol. 1, No. 2,pp. 31-32, 2004.

[5] R. B. Chase, F. R. Jacobs, N. J. Aquilano and N. K. Agarwal,Operations Management for Competitive Advantage, Tata

McGraw-Hill, 11th edition, pp. 552-559, 2006.

[6] H. L. Ahuja,Business Economics , S. Chand & Company Ltd.,5th edition, pp. 584-590, 2005.

[7] M. Noman, Lecture Module of Managerial Economics,

School of Business Studies, Southeast University, 2006.

[8] J. R. Meredith and S. J. Mantel, Project Management: A

Managerial Approach, John Wiley & Sons, pp. 51-59, 6 th edition,2006.

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