**2.7 Levelized cost of energy (LCOE)**

**Table 2** shows a sample Microsoft excel worksheet to evaluate NPV, IRR, and Payback Period for a biomass- based energy project. Levelized cost of energy is a uniform equivalent rate that is calculated from the revenue stream of an energy project. The revenue generated is discounted at IRR to yield an NPV. The calculated NPV is converted to annual payments and then divided by the project's annual energy output. The unit stands at \$/kWh. This LCOE is a first order parameter to evaluate projects attractiveness. The LCOE should be at a comparable level to defend the competitor's price. LCOE analysis of power generation plant is a price estimation


**Table 2.** *Sample Microsoft excel worksheet to evaluate NPV, IRR, and PBP [12].* based on specific assumptions. The assumptions are made for the simplification of calculations. A standard form used by most of the industries worldwide is as below:

$$LCOE(T) = \frac{\sum\_{n=0}^{T} \frac{TIC(n) + OM(n) + FC(n)}{\left(1 + r\right)^{n}}}{\sum\_{n=0}^{T} \frac{EP(n)}{\left(1 + r\right)^{n}}} \tag{8}$$

where TIC, is the total investment cost in the year, OM is the annual operation and maintenance cost, FC is the annual fuel cost, EP is the estimated annual generation and T is life span of the project in years. **Table 3** shows a comparison of LCOE values of different renewable energy sources at different areas. Biomass based energy can be seen as an attractive mode of energy source in the range 0.03–0.07 \$/kWh which is much lower margin than solar PV [13].


**Table 3.**

*Average LCOE from renewable energy source in 2017 (\$/kWh) [13].*

#### **2.8 Profitability index (PI)**

Profitability index is the ratio of the future cash flows to initial investment. If the value is 1 than the project is at breakeven point and greater than one means project is profitable. If mutually exclusive projects are ranked based on PI than it eases the decision making. If an individual project shows to have a PI ratio less than 1 then, it indicative that the future cash inflows cannot cover the expenditures.

The simple relation of profitability index in terms of NPV and I0 can be written as,

$$PI = \frac{NPV}{I\_0} + \mathbf{1} \tag{9}$$

The present value of a single payment made in the future can be written as, [8].

$$PV = FV(1+i)^{-n} \tag{10}$$

Profitability Index (PI) is a relative parameter. It shows how much present value of cash inflows generated for each dollar invested. It is a ratio not having unit unlike NPV.

#### **Decisions for using the Profitability Index:**

Accept the investment project proposal if index is greater than 1.0.

Reject the project proposal if index is smaller than 1.0.

When the index equals 1.0, it makes it indifferent whether accept or reject. So, the investment alternatives should be ranked from highest index to lowest one.

#### **Sample problem on profitability analysis:**

Three mutually exclusive projects are under consideration for decision making. The economic attributes are as follows:


The opportunity cost of capital is 10%. Identify the best alternative among those three using profitability index.

Solution: Profitability index for the three mutually exclusive projects can be calculated as:

$$\begin{array}{l} \textbf{Profiability Index of Project A:}\\ \textbf{PI}\_{\textbf{A}} = \frac{\frac{t12,500}{(t+0.1)} + \frac{t12,000}{(t+0.1)^2} + \frac{t11,500}{(t+0.1)^3} + \frac{t0100}{(t+0.1)^4}}{s40,000} = \textbf{1.05.}\\ \textbf{Profatibility Index of Project B:}\\ \textbf{PI}\_{\textbf{B}} = \frac{\frac{t13,000}{(t+0.1)} + \frac{t12,000}{(t+0.1)^2} + \frac{t11,000}{(t+0.1)^3} + \frac{t01,000}{(t+0.1)^4} + \frac{t9,000}{(t+0.1)^5} + \frac{t8,500}{(t+0.1)^5}}{s42,000} = \textbf{1.14}\\ \textbf{Profatibility Index of Project C:}\\ \textbf{PI}\_{\textbf{C}} = \frac{\frac{t15,500}{(t+0.1)} + \frac{t21,500}{(t+0.1)^2} + \frac{t11,500}{(t+0.1)^3} + \frac{t9,500}{(t+0.1)^4} + \frac{t9,500}{(t+0.1)^5} + \frac{t10,000}{(t+0.1)^6}}{(t+0.1)^6} = \textbf{0.99} \end{array}$$

Since project B has the highest profitability index, it should be chosen among the three alternatives.

#### **2.9 Sensitivity analysis**

A sensitivity analysis illustrates how much the merit figures will change in response to a given change in an input variable. There always exist some critical parameters which have significant impact on the final sought parameters like Net present value or internal rate of return, IRR). For example, the estimate of energy produced from a biomass-based energy project is often a major factor. Cost of the project, and estimated operation and maintenance cost are other factors generally considered to have greater impact in a sensitivity analysis.

A sensitivity analysis done for the operation of a power generation plant with revenue earning, costs of generation, and operational expenses as the parameters to have significant impact on IRR and Payback period, PBP. These parameters are plotted with �10% change from the business-as-usual scenario. **Table 4** below gives the sensitivity analysis done in the three parameters, revenue earning; the cost of goods sold and operational cost and the resulted changes in IRR and payback period. When all other parameters are fixed and revenue earning is declined by 10% then the


#### **Table 4.**

*Sensitivity analysis of the project IRR and payback period.*

**Figure 1.**

*Sensitivity of IRR at the variation of revenue earning, generation cost, and operational cost.*

IRR becomes 3.13%. This negative IRR means the project cannot payback the investment in its lifetime and thus the payback period is not available in this condition. Similarly, the revenue earning increase by 10% causes IRR changes from 4.31% (base case) to 9.10%. Hence project turns to earn positive NPV and the corresponding payback period is 7.6 years only. Revenue earning is the sensitive factor in the case of biomass-based power generation project.

As the operational cost of a plant run on biomass cannot be expected to decrease over the years, the first cost of project installation must be curtailed. These can happen if the government ensures the tax credit and subsidy in the import items of the equipment needed.

**Figure 1** shows the sensitivity of IRR with respect to revenue earning, the total cost of power generation and operational cost of generation. The internal rate of return of a biomass based power generation project is highly sensitive to revenue earning and cost of investment. The operational cost shows a less sensitivity. Perhaps, the earning is based on the selling to the utility company and the rate if low the internal rate of return is low. The implication of the IRR sensitivity curve is that the pricing of the energy generated should be increased to make the plant operation competitive with traditional power generation units.

### **3. Discussions**

#### **3.1 Economy of biomass combustion based power generation**

Biomass based power generation is very much dependent on the source of biomass. There is a wide range of biomass feed stocks and can be procured from a variety of

*Economic Assessment of Biomass Based Power Generation DOI: http://dx.doi.org/10.5772/intechopen.103692*


**Table 5.**

*Total biomass price for combustion-based plant [12].*

sources. The price of biomass is a critical factor as it is directly related to its thermal properties (calorific value, moisture content, bulk density and homogeneity etc.). The economic analysis is based on the palm oil-based fuels. **Table 5** shows the cost structure of different types of biomasses needed for a typical combustion-based plant of capacity 10 MW.
