The Impact of PV Panel Degradation Rate, Initial System Efficiency, and Interest Rate on the Levelized Cost of Energy for PV Projects: Saudi Arabia as a Benchmark

Abstract

As nations worldwide strive for carbon neutrality, Saudi Arabia has set ambitious targets to increase its renewable energy capacity, aiming for 50% of its electricity production to come from renewable sources by 2030. To accurately assess the economic viability of these photovoltaic (PV) projects, it is crucial to consider the levelized cost of energy (LCOE). In this study, we developed a comprehensive model incorporating PV panel annual degradation rate, initial system efficiency, and interest rates to provide a more precise LCOE calculation. The results demonstrate that PV panel annual degradation, initial system efficiency, and interest rate all significantly influence LCOE. In the most favorable scenario with a 0.5% degradation rate, 0.95 initial system efficiency, and a 0% interest rate, the LCOE was USD 0.0156/kWh. However, under the least favorable scenario with a 2.5% degradation rate, 0.75 initial system efficiency, and a 4% interest rate, the LCOE increased to USD 0.0317/kWh, representing a 103.2% increase. These findings underscore the importance of considering these factors when evaluating the economic viability of PV projects. By understanding their impact, investors and policymakers can make informed decisions regarding renewable energy investments and policies.

1. Introduction

1.1. Background and Motivation

Many countries around the world, both developed and developing, are striving to reach a state of zero net carbon emissions [1]. The Kingdom of Saudi Arabia is actively working towards carbon neutrality through multiple projects and initiatives. As part of its “Saudi Vision 2030” plan, the government set a goal of 9.5 GW of renewable energy capacity by 2023. The Kingdom updated its renewable energy targets in 2019, setting a new benchmark of 27.3 GW by 2023 and 58.7 GW by 2030, including a mix of photovoltaic (40 GW), wind (16 GW), and concentrated solar power (2.7 GW) [2,3]. In 2024, the Kingdom of Saudi Arabia announced its intention to procure renewable energy projects annually, with a cumulative capacity target of 20 GW per year. This ambitious initiative is aligned with the broader goal of achieving a renewable energy capacity between 100 and 130 GW by the year 2030, depending upon the trajectory of growth in electricity demand [4]. Under the “Saudi Green Initiative”, the Kingdom aims to increase its renewable energy electricity production to 50% by 2030 [5].

Utilizing RESs significantly reduces greenhouse gas emissions, leads to cleaner air, and helps the Kingdom to achieve carbon neutrality. As there are several benefits for renewable energy sources (RESs), as mentioned earlier, it is important to utilize them economically to ensure their sustainability. The levelized cost of energy (LCOE) is an indicator used to compare different methods of energy production. It represents the average net present cost of energy generation for an energy source over its lifetime. LCOE describes the cost of each unit of power generated over the project’s lifetime in USD/kWh.

However, evaluating the LCOE for PV projects faces several challenges such as PV panel degradation rate, initial system efficiency, and the project’s interest rate. Degradation refers to the gradual decline in the energy output of PV panels due to various environmental and material factors. PV panels may degrade at an average rate between 0.5% and 5% per year [6], though this can vary based on the quality of the panels and the conditions they are exposed to. The initial system efficiency depends mainly on the efficiency of the system’s power electronics devices, wiring, and connections. Interest rates, which are the cost of borrowing money, are influenced by a complex interplay of economic factors, including central bank policies, inflation targets, economic conditions, and risk factors.

The main motivation of this work is to develop a model that considers all parameters affecting the LCOE of PV projects to provide the most accurate result. Furthermore, it should highlight the importance of technical and economic variables directly impacting the LCOE, such as the PV system’s degradation rates, initial efficiencies, and interest rates.

1.2. Literature Review

In the literature review, several topics will be covered, including an overview of PV projects globally. This will be followed by an introduction to the financial metric used in this paper, the levelized cost of energy (LCOE). Finally, we will discuss the three key factors that influence LCOE: PV panel degradation rate, initial system efficiency, and interest rate.

PV solar energy is considered one of the main players in helping countries achieve their environmental goals. PV technology has experienced a remarkable surge in recent years, driven by factors such as increasing energy demand, climate change concerns, and technological advancements [7,8]. The global installed PV capacity has witnessed exponential growth, as shown in Figure 1 [9]. Significant contributions in terms of global installed PV projects come from countries such as China, the United States, and Japan, as shown in Figure 2 [10]. The decline in PV system costs, supportive government policies, and growing environmental awareness has been a major driver of this expansion.

Continuous advancements in PV cell technology have led to increased efficiency, enabling more energy generation from a given area. Research into innovative materials and cell designs, such as perovskite solar cells and bifacial modules, holds promise for even further efficiency gains [11].

PV is expected to play a pivotal role in the transition to a decarbonized energy future and in helping countries to achieve their environmental goals. Ongoing research and development efforts will continue to drive technological advancements and improve the efficiency and cost-effectiveness of PV systems. Investments in grid infrastructure will be necessary to accommodate the increasing integration of renewable energy sources [12].

The levelized cost of energy (LCOE) has emerged as a critical metric for evaluating the economic competitiveness of various energy technologies. By providing a standardized framework for comparing the costs associated with different energy sources, LCOE plays a vital role in informing investment decisions, policy development, and the transition to a sustainable energy future. LCOE is a financial metric that calculates the average cost of generating electricity over the lifetime of an energy project. It takes into account the initial capital costs, operation and maintenance expenses, fuel costs, and the time value of money. By considering these factors, LCOE provides a comprehensive assessment of the overall economic viability of different energy technologies [13].

Several factors can influence the LCOE of a renewable energy project, including capital costs, operation and maintenance (O&M) costs, interest rate, degradation rate, and systems’ initial efficiency [14,15]. The initial investment required to build and install the energy generation facility can significantly impact capital costs. Ongoing expenses for running and maintaining the facility throughout its lifetime can vary depending on the technology, equipment reliability, and maintenance requirements. The interest rate used to account for the time value of money can also influence LCOE.

While LCOE provides a valuable tool for evaluating energy project economics, it is important to note its limitations. LCOE often relies on simplified assumptions about project performance, economic conditions, and technological advancements. These assumptions may not always accurately reflect real-world conditions. In Section 2 (Methods), the LCOE indicator is analyzed, and the impact of three key influencing factors is discussed: PV panel degradation rate, initial system efficiency, and interest rate.

The levelized cost of energy has become an indispensable tool for understanding the economic competitiveness of energy technologies. By providing a standardized framework for comparing costs, LCOE informs investment decisions, policy development, and the transition to a sustainable energy future. While LCOE has its limitations, it remains a valuable metric for evaluating the economic viability of energy projects.

PV panel degradation is a significant factor influencing the long-term efficiency and economic viability of solar power plants. Over time, solar panels may gradually lose their ability to generate energy due to various environmental and material factors. This decline, often referred to as degradation, can occur at an average rate of between 0.5% and 5% per year [6], though this can vary based on panel quality and exposure conditions. The annual PV degradation rate significantly impacts the LCOE for a PV project. As PV modules degrade over time, their energy output decreases, leading to lower total energy generation over the project’s lifetime. This reduction in energy output increases the LCOE, making the electricity generated more expensive.

Key contributors to solar panel degradation include ultraviolet (UV) radiation, thermal cycling, humidity, and mechanical stresses [16]. UV radiation can break down the chemical bonds in the protective coatings and cell materials, reducing the panel’s ability to convert sunlight into electricity. Thermal cycling, caused by temperature fluctuations, can lead to microcracks in solar cells or failures in solder joints and interconnections. Moisture penetration can cause corrosion and delamination, further diminishing panel performance.

Over the lifetime of a solar power plant, degradation can lead to significant decreases in power output. This reduction can negatively impact the financial models that justify the initial investment in the plant. To mitigate degradation effects and maintain closer-to-expected performance levels, it is crucial to use high-quality materials, choose suitable panel technologies, and implement effective maintenance practices. By doing so, solar power plants can remain economically feasible throughout their intended lifespan.

Initial system efficiency is a key factor influencing the LCOE for a PV project. Higher initial efficiency results in greater electricity generation, reduced specific capital cost, and improved financial performance, ultimately leading to a lower LCOE. Initial system efficiency in this study considers the efficiencies of the power electronics devices used in the system, including inverters, the installation quality for wiring and joints, and the solar panel quality. The inverter, which converts DC power from the solar panels into AC power for utility, can affect system efficiency. Higher-efficiency inverters will result in less energy loss. Inverters’ efficiency can vary from 49.6% to up to 99% [17,18,19]. Central inverters for mega PV projects are available commercially, with a maximum efficiency of 99%, from several companies, including SINENG and SUNGROW [19,20]. Losses in wiring and joints are estimated to be around 1–2% [17]. More details will be discussed regarding initial system efficiency in the Methods section.

Interest rates are the cost of borrowing money, particularly for financing the initial investment in PV projects. This means paying for the installation of solar panels and related equipment. Interest rates have a significant impact on the LCOE for a PV project. A higher interest rate increases the cost of borrowing money, which, in turn, increases the financing costs of the project. This higher cost of capital is directly reflected in the LCOE, making the electricity generated by the PV project more expensive. Conversely, lower interest rates reduce the cost of financing, leading to a lower LCOE. This makes solar energy more competitive with traditional fossil fuel-based power generation. Interest rates are expressed as a percentage of the principal amount borrowed. Given the significant upfront costs associated with PV projects, loans are often used to cover these investments [7].

When interest rates increase, borrowing becomes more expensive. This translates to higher overall project costs, potentially impacting the financial viability of PV projects. In simpler terms, higher interest rates can reduce the profitability of solar projects, discourage investment, and lengthen the payback period.

In contrast, conventional power plants fueled by gas or coal typically have lower initial investment costs and rely more on fuel costs for operation. Rising interest rates have a less significant impact on the overall project cost for these traditional energy sources.

Many governments offer subsidies or tax breaks for renewable energy projects, including PV projects. These incentives can help reduce the financial burden of higher interest rates, making PV projects more attractive to investors and developers [21].

1.3. Contributions

The main contributions of this article are the following:

• Comprehensive analysis of key factors: This article provides a detailed analysis of the impact of PV panel degradation rate, initial system efficiency, and interest rate on the levelized cost of energy (LCOE) for PV projects. This analysis is crucial for understanding the economic viability of PV projects.
• Scenario-based approach: This study employs a scenario-based approach, considering various combinations of degradation rates, initial system efficiencies, and interest rates. This allows for a thorough investigation of the potential outcomes under different conditions.
• Sensitivity analysis: This article conducts a sensitivity analysis to assess the impact of each factor on the LCOE. This helps identify the most critical factors influencing project economics.
• Comparison of scenarios: This study compares the most favorable and least favorable scenarios to highlight the significant impact of these factors on project viability.
• Practical insights: The findings of this study provide valuable insights for investors, policymakers, and industry professionals involved in solar energy projects. These insights can inform decision-making regarding project planning, financing, and policy development.

1.4. Paper Organization

The initial section of the paper, Section 1, provides a comprehensive overview of the research topic, including background information, the motivation behind the study, a review of the relevant literature, the specific contributions of this research, and a detailed outline of the paper’s structure. Section 2 delves into the methodologies employed to measure economic viability. The findings of the study are presented in Section 3. Section 4 offers a detailed discussion of the results and their implications. Finally, Section 5 provides a concise summary of the key conclusions drawn from the research.

2. Methods

The Methods section is divided into two main parts. The first part explores and enhances the viability indicators for accurate PV project assessments. The second part discusses and justifies assumptions for nine key factors influencing these indicators, i.e., initial investment, solar system power rating, average peak sun hours, operation and maintenance costs, tracking system improvement percentage, electricity selling price, PV panel degradation, initial system efficiency, and interest rate.

There are several viability indicators to assess the economic viability of PV projects. Simple payback period (PP) estimates the recovery period for the initial investment and can be calculated using (1):

$$PP={\displaystyle \frac{C_0}{{\sum }_{t=1}^T{(CF}_t-{O\&M}_t)}}$$

(1)

where $C_0$ is the initial investment, ${CF}_t$ is the annual cash inflow, and ${O\&M}_t$ refers to the annual operation and maintenance costs. This method is very simple; however, it does not consider the time value of money (interest rates) and ignores cash flows beyond the cutoff date (payback year).

The second indicator is the discounted payback period (DPP), which is defined in (2):

$$DPP={\displaystyle \frac{C_0}{{\sum }_{t=1}^T\frac{{(CF}_t-{O\&M}_t)}{{(1+r)}^n}}}$$

(2)

where $C_0$ is the initial investment; ${CF}_t$ and ${O\&M}_t$ are the annual cash inflow and the annual operation and maintenance cost, respectively; and $r$ is the interest rate considered for the initial investment. This indicator considers the time value of money by considering the interest rate for the annual cash inflow. However, this method still ignores cash flows beyond the cutoff date (payback year).

The third indicator is the LCOE, with the LCOE equation described in (3):

$$LCOE={\displaystyle \frac{C_0+{\sum }_{t=1}^T{O\&M}_t}{{\sum }_{t=1}^T{E}_t}}$$

(3)

where $C_0$ is the initial investment, ${O\&M}_t$ is the annual operation and maintenance, and $E_t$ is the total energy produced within a single period t. This indicator considers the cost for each unit of power generated over the lifetime of the project (USD/kWh). However, this indicator does not consider the interest rate on the initial investment. There are two methods to consider the interest rate for the LCOE; these are illustrated in (4) and (5):

$$LCOE={\displaystyle \frac{C_0+{\sum }_{t=1}^T\frac{{O\&M}_t}{{(1+r)}^n}}{{\sum }_{t=1}^T\frac{E_t}{{(1+r)}^n}}}$$

(4)

$$LCOE={\displaystyle \frac{C_0+Interest Cost+{\sum }_{t=1}^T{O\&M}_t}{{\sum }_{t=1}^T{E}_t}}$$

(5)

In (4), the ${O\&M}_t$ and $E_t$ are reduced based on the interest rate value. The cost of ${O\&M}_t$ can be discounted, as it is money, and therefore, a discount can be applied to it. However, discounting the output energy is not practical because energy is not reduced in value over time like money. In fact, energy may be valued more in the future due to global efficiency improvements. Equation (5) adds the cost of money (interest) to the initial investment to consider the interest rate. In this study, Equation (5) is used to evaluate the PV projects while considering the impact of the interest rate.

$E_t$ can be calculated using (6):

$$E=SSPR\times APSH\times 365\times \eta \times Deg.R\times T.I\%$$

(6)

where SSPR indicates the solar system power rating, average peak sun hours per day is noted by APSH, 365 stands for the number of days within one year, $\eta$ indicates the initial system’s efficiency, Deg.R is the degradation rate for the PV panel, and T.I% is the racking system improvement percentage.

The second part of the Methods section will discuss and justify assumptions for nine key factors influencing viability indicators, including initial investment, solar system power rating, average peak sun hours, operation and maintenance costs, tracking system improvement percentage, electricity selling price, PV panel degradation, initial system efficiency, and interest rate.

Given that Saudi Arabia is the benchmark for this study, the initial investment was determined by averaging the costs of five recently implemented PV projects in the region. These projects include Sakaka PV, Shuaibah PV, Sudair PV, Layla PV, and Ar Rass PV, with reported initial investment costs of USD 1.01/W, USD 0.9/W, USD 0.62/W, USD 1.15/W, and USD 0.64/W, respectively [22,23,24,25,26]. The calculated average initial investment cost of USD 0.86/W will be used throughout this study. The second factor to be considered is the solar system power rating. Given the ambitious 40 GW solar power target outlined in Saudi Vision 2030, this value is adopted for this study [2,3]. The Kingdom of Saudi Arabia receives significant solar irradiation, with average peak sun hours ranging from 3.5 to 8.5 kWh/m² daily. For this study, an average value of 8 kWh/m² is adopted as the third factor [27]. Operation and maintenance costs constitute a substantial portion of the total cost of the PV projects. These costs can vary significantly based on factors such as system size, location, and specific maintenance requirements. For utility-scale systems, operation and maintenance costs typically range upwards from USD 16.42/kW/year, while residential systems may incur costs of up to USD 31.12/kW/year [28]. Considering these factors, a conservative estimate of USD 16.42/kW/year is adopted as the fourth factor in this study. Based on existing research on PV projects in Saudi Arabia, it is evident that single-axis solar trackers are the predominant technology employed [22,23,24,25,26]. These tracking systems have been shown to significantly improve energy output, typically by 20–30% [29,30]. Based on these findings, a 25% increase in energy production is considered as the fifth factor for this study, reflecting the benefits of utilizing single-axis trackers. The sixth fixed factor is the selling price of electricity. In Saudi Arabia, residential consumers pay SAR 0.18/kWh (USD 0.048/kWh) for the first 6000 kWh/month and SAR 0.30/kWh (USD 0.08/kWh) thereafter. Commercial consumers pay SAR 0.20/kWh (USD 0.053/kWh) for the first 6000 kWh/month and SAR 0.30/kWh (USD 0.08/kWh) for subsequent consumption [31]. For this study, a selling price of USD 0.064/kWh is used, with 70% or USD 0.0448/kWh attributed to generation costs. For the first six key factors, fixed values were determined based on available data, as discussed in the preceding paragraphs.

However, due to the inherent uncertainty in predicting the exact PV panel degradation rate over a 25-year project lifespan, as well as variations in initial system efficiency and interest rates across the 40 GW projects, a scenario-based approach was adopted. This involved considering three distinct scenarios for each of these factors.

PV panel degradation rates can vary significantly, ranging from 0.5% to 5% annually. These variations are influenced by factors such as panel quality, environmental conditions, and operational and maintenance practices [6]. Degradation can manifest as linear or non-linear trends, depending on the root causes. Several factors contribute to PV panel degradation, including temperature, humidity, dust, discoloration, delamination, hotspots, and cracks [32,33]. In this study, a linear degradation model is adopted for two primary reasons. Many industry standards and warranties employ a linear degradation rate as a foundational assumption [34,35]. The LCOE considers energy output over a 25-year lifetime. Linearizing degradation simplifies LCOE calculations while providing a reasonable approximation of long-term performance. For this study, three degradation rates within this range were considered—0.5%, 1.5%, and 2.5%—representing varying levels of panel performance and longevity [6].

The initial performance of the system is heavily influenced by the efficiency of its components, particularly the inverters, wiring, and joints. Inverter efficiency can vary widely, from a low of 0.496 to a high of 0.99 [17,18,19]. Additionally, energy losses due to wiring and joint resistance are estimated to be around 1–2% [17]. Considering these factors, initial system efficiencies were estimated to be 0.95, 0.85, and 0.75.

Finally, determining specific interest rates for the 40 GW projects was challenging due to varying execution timelines. As per the Saudi Central Bank, the current benchmark interest rate in Saudi Arabia stands at 5.50% [36]. This is not the rate that large companies would necessarily pay on a loan. The actual interest rate for a company loan depends on several factors, including the company’s creditworthiness, the type of loan, and the size of the loan. Given the strong creditworthiness of companies operating PV projects in Saudi Arabia, they are typically able to secure favorable interest rates. To account for potential variations, we have considered a range of interest rates: 0%, 2%, and 4%. The 0% rate represents a scenario with potential government incentives or subsidies. The 2% and 4% rates represent more realistic financing scenarios. By considering these three interest rate scenarios, the analysis aims to evaluate the projects’ financial viability under different assumptions.

3. Results

To conduct this study and to evaluate the impact of PV panel degradation rate, initial system efficiency, and interest rate on the LCOE for PV projects, six key factors were identified: the initial investment (USD/W), SSPR (W), APSHs (kWh/m²), selling price (USD/kWh), degradation rate (Deg.R), initial system efficiency ($\eta$), and interest rate ($r$). Based on the available data, the installation cost was averaged to be USD 0.86/W, the SSPR was determined to be 40 GW, and APSHs were estimated to be 8 kWh/m². The selling price of electricity was determined to be USD 0.064/kWh, with generation costs accounting for 70% of this amount, or USD 0.0448/kWh. To address the uncertainty in the PV panel degradation rates, initial system efficiency, and interest rates, a range of values were used for PV panel degradation rates, initial system efficiency, and interest rates. For PV panel degradation rates, three values were assumed: 0.5%, 1.5%, and 2.5% annual degradation. Similarly, initial system efficiencies were estimated at 0.95, 0.85, and 0.75. Finally, interest rates were set at 0%, 2%, and 4%. Given that there are three possible outcomes for each of the three variables being considered, we can expect a total of 27 different scenarios. These scenarios are spread across nine figures, each representing a unique combination of the three variables.

3.1. 0.5% PV Panel Degradation Rate (Deg.R)

This set of results focuses on a specific scenario where the annual degradation rate is consistently 0.5%. Within this scenario, three different subgroups will be explored. Each subgroup will have a fixed initial system efficiency level but will demonstrate the impact of varying interest rates.

3.1.1. Initial System Efficiency of 0.95

Within this subgroup of results, PV panels were modeled with a constant annual degradation rate of 0.5% and an initial system efficiency of 0.95. Figure 3 illustrates the LCOE for PV projects under these conditions, with the interest rate varying from 0% to 4%.

Figure 3 demonstrates that the LCOE for PV projects with a 0.5% degradation rate, 0.95 initial system efficiency, and 0% interest rate was USD 0.0156/kWh. Increasing the interest rate to 2% raised the LCOE to USD 0.0165/kWh, a 5.77% increase. At a 4% interest rate, the LCOE rose further to USD 0.0177/kWh, representing a 7.27% increase from the 2% rate. Overall, a 4% interest rate resulted in a 13.46% increase in LCOE compared to a 0% interest rate.

3.1.2. Initial System Efficiency of 0.85

Within this subgroup of results, PV panels were modeled with a constant annual degradation rate of 0.5% and an initial system efficiency of 0.85. Figure 4 illustrates the LCOE for PV projects under these conditions, with the interest rate varying from 0% to 4%.

Figure 4 demonstrates that the LCOE for PV projects with a 0.5% degradation rate, 0.85 initial system efficiency, and 0% interest rate was USD 0.0174/kWh. Increasing the interest rate to 2% raised the LCOE to USD 0.0185/kWh, a 6.32% increase. At a 4% interest rate, the LCOE rose further to USD 0.02/kWh, representing an 8.11% increase from the 2% rate. Overall, a 4% interest rate resulted in a 14.94% increase in LCOE compared to a 0% interest rate.

3.1.3. Initial System Efficiency of 0.75

Within this subgroup of results, PV panels were modeled with a constant annual degradation rate of 0.5% and an initial system efficiency of 0.75. Figure 5 illustrates the LCOE for PV projects under these conditions, with the interest rate varying from 0% to 4%.

Figure 5 demonstrates that the LCOE for PV projects with a 0.5% degradation rate, 0.75 initial system efficiency, and 0% interest rate was USD 0.0197/kWh. Increasing the interest rate to 2% raised the LCOE to USD 0.0214/kWh, an 8.63% increase. At a 4% interest rate, the LCOE rose further to USD 0.0233/kWh, representing an 8.88% increase from the 2% rate. Overall, a 4% interest rate resulted in an 18.27% increase in LCOE compared to a 0% interest rate.

3.2. PV Panel Degradation Rate of 1.5% (Deg.R)

This set of results focuses on a specific scenario where the annual degradation rate is consistently 1.5%. Within this scenario, three different subgroups will be explored. Each subgroup will have a fixed initial system efficiency level but will demonstrate the impact of varying interest rates.

3.2.1. Initial System Efficiency of 0.95

Within this subgroup of results, PV panels were modeled with a constant annual degradation rate of 1.5% and an initial system efficiency of 0.95. Figure 6 illustrates the LCOE for PV projects under these conditions, with the interest rate varying from 0% to 4%.

Figure 6 demonstrates that the LCOE for PV projects with a 1.5% degradation rate, 0.95 initial system efficiency, and 0% interest rate was USD 0.0179/kWh. Increasing the interest rate to 2% raised the LCOE to USD 0.0191/kWh, a 6.7% increase. At a 4% interest rate, the LCOE rose further to USD 0.0202/kWh, representing a 5.76% increase from the 2% rate. Overall, a 4% interest rate resulted in a 12.8% increase in LCOE compared to a 0% interest rate.

3.2.2. Initial System Efficiency of 0.85

Within this subgroup of results, PV panels were modeled with a constant annual degradation rate of 1.5% and an initial system efficiency of 0.85. Figure 7 illustrates the LCOE for PV projects under these conditions, with the interest rate varying from 0% to 4%.

Figure 7 demonstrates that the LCOE for PV projects with a 1.5% degradation rate, 0.85 initial system efficiency, and 0% interest rate was USD 0.02/kWh. Increasing the interest rate to 2% raised the LCOE to USD 0.0214/kWh, a 7% increase. At a 4% interest rate, the LCOE rose further to USD 0.0233/kWh, representing an 8.88% increase from the 2% rate. Overall, a 4% interest rate resulted in a 16.5% increase in LCOE compared to a 0% interest rate.

3.2.3. Initial System Efficiency of 0.75

Within this subgroup of results, PV panels were modeled with a constant annual degradation rate of 1.5% and an initial system efficiency of 0.75. Figure 8 illustrates the LCOE for PV projects under these conditions, with the interest rate varying from 0% to 4%.

Figure 8 demonstrates that the LCOE for PV projects with a 1.5% degradation rate, 0.75 initial system efficiency, and 0% interest rate was USD 0.0226/kWh. Increasing the interest rate to 2% raised the LCOE to USD 0.0244/kWh, a 7.96% increase. At a 4% interest rate, the LCOE rose further to USD 0.027/kWh, representing a 10.65% increase from the 2% rate. Overall, a 4% interest rate resulted in a 19.47% increase in LCOE compared to a 0% interest rate.

3.3. PV Panel Degradation Rate of 2.5% (Deg.R)

This set of results focuses on a specific scenario where the annual degradation rate is consistently 2.5%. Within this scenario, three different subgroups will be explored. Each subgroup will have a fixed initial system efficiency level but will demonstrate the impact of varying interest rates.

3.3.1. Initial System Efficiency of 0.95

Within this subgroup of results, PV panels were modeled with a constant annual degradation rate of 2.5% and an initial system efficiency of 0.95. Figure 9 illustrates the LCOE for PV projects under these conditions, with the interest rate varying from 0% to 4%.

Figure 9 demonstrates that the LCOE for PV projects with a 2.5% degradation rate, 0.95 initial system efficiency, and 0% interest rate was USD 0.0209/kWh. Increasing the interest rate to 2% raised the LCOE to USD 0.0223/kWh, a 6.7% increase. At a 4% interest rate, the LCOE rose further to USD 0.024/kWh, representing a 7.62% increase from the 2% rate. Overall, a 4% interest rate resulted in a 14.83% increase in LCOE compared to a 0% interest rate.

3.3.2. Initial System Efficiency of 0.85

Within this subgroup of results, PV panels were modeled with a constant annual degradation rate of 2.5% and an initial system efficiency of 0.85. Figure 10 illustrates the LCOE for PV projects under these conditions, with the interest rate varying from 0% to 4%.

Figure 10 demonstrates that the LCOE for PV projects with a 2.5% degradation rate, 0.85 initial system efficiency, and 0% interest rate was USD 0.0234/kWh. Increasing the interest rate to 2% raised the LCOE to USD 0.025/kWh, a 6.84% increase. At a 4% interest rate, the LCOE rose further to USD 0.027/kWh, representing an 8% increase from the 2% rate. Overall, a 4% interest rate resulted in a 15.38% increase in LCOE compared to a 0% interest rate.

3.3.3. Initial System Efficiency of 0.75

Within this subgroup of results, PV panels were modeled with a constant annual degradation rate of 2.5% and an initial system efficiency of 0.75. Figure 11 illustrates the LCOE for PV projects under these conditions, with the interest rate varying from 0% to 4%.

Figure 11 demonstrates that the LCOE for PV projects with a 2.5% degradation rate, 0.75 initial system efficiency, and 0% interest rate was USD 0.0265/kWh. Increasing the interest rate to 2% raised the LCOE to USD 0.0287/kWh, an 8.3% increase. At a 4% interest rate, the LCOE rose further to USD 0.0317/kWh, representing a 10.45% increase from the 2% rate. Overall, a 4% interest rate resulted in a 19.62% increase in LCOE compared to a 0% interest rate.

4. Discussion

The discussion section delves into the effects of three key variables on LCOE: PV panel annual degradation rate, initial system efficiency, and interest rate. To assess the sensitivity of LCOE to each variable, a one-at-a-time sensitivity analysis (OAT-SA) will be conducted. A comparative analysis will be conducted between the most and least favorable scenarios to assess the impact of these variables on project viability. Subsequently, a comparative assessment will be conducted between the findings of this study and existing research in the field.

4.1. PV Panel Degradation Rate (Deg.R)

The annual degradation rate of PV panels constitutes a significant factor influencing the LCOE for PV projects. Figure 12 presents the findings of a one-at-a-time sensitivity analysis (OAT-SA) focusing on the relationship between the annual degradation rate and LCOE. The blue curve illustrates this relationship under the most favorable conditions, characterized by an initial system efficiency of 0.95 and an interest rate of 0%. Conversely, the red curve depicts the same relationship under the least favorable conditions, with an initial system efficiency of 0.75 and an interest rate of 4%.

The blue curve, representing the most favorable scenario, is characterized by an initial system efficiency of 0.95 and an interest rate of 0%. Under these conditions, a linear correlation was observed between the PV panel degradation rate and the LCOE. As the annual degradation rate increased from 0.5% to 1.5%, the LCOE experienced a 14.74% rise, from USD 0.0156/kWh to USD 0.0179/kWh. A further escalation of the degradation rate to 2.5% resulted in an additional 16.76% increase in LCOE, reaching USD 0.0209/kWh. The detailed data for this most favorable case study are presented in

Table 1. The effect of different PV panel degradation rates (0.5%, 1.5%, and 2.5%) on the LCOE, assuming a fixed initial system efficiency of 0.95 and an interest rate of 0%.

Case Study	LCOE (USD/kWh)	Changes (USD/kWh)	Changes (%)
0.5%, 0.95, 0%	0.0156	-	-
1.5%, 0.95, 0%	0.0179	0.0023	14.74
2.5%, 0.95, 0%	0.0209	0.0030	16.76

.

The red curve, representing the least favorable scenario, is characterized by an initial system efficiency of 0.75 and an interest rate of 4%. Under these conditions, a linear correlation was observed between the PV panel degradation rate and the LCOE. As the annual degradation rate increased from 0.5% to 1.5%, the LCOE experienced a 15.88% rise, from USD 0.0233/kWh to USD 0.027/kWh. A further escalation of the degradation rate to 2.5% resulted in an additional 17.41% increase in LCOE, reaching USD 0.0317/kWh. Detailed data for this least favorable case study are presented in

Table 2. The effect of different PV panel degradation rates (0.5%, 1.5%, and 2.5%) on the LCOE, assuming a fixed initial system efficiency of 0.75 and an interest rate of 4%.

Case Study	LCOE (USD/kWh)	Changes (USD/kWh)	Changes (%)
0.5%, 0.75, 4%	0.0233	-	0
1.5%, 0.75, 4%	0.0270	0.0037	15.88
2.5%, 0.75, 4%	0.0317	0.0047	17.41

.

This paragraph delves into the combined effect of degradation rate, initial system efficiency, and interest rate on LCOE. When the initial system efficiency is fixed at 0.95 and the interest rate at 0%, a 1% increase in degradation rate corresponds to a 14.74% increase in LCOE, as seen in Table 1. This impact is slightly amplified under less favorable conditions: with an initial efficiency of 0.75 and a 4% interest rate, the same degradation increase results in a 15.88% LCOE rise, as seen in Table 2.

4.2. Initial System Efficiency

The initial system efficiency directly influences the LCOE for PV projects. Figure 13 illustrates the results of an OAT-SA examining the impact of initial system efficiency on LCOE. The blue curve represents the relationship between initial system efficiency and LCOE under the most favorable conditions: an annual degradation rate of 0.5% and an interest rate of 0%. Conversely, the red curve depicts the same relationship under the least favorable conditions: an annual degradation rate of 2.5% and an interest rate of 4%.

The blue curve represents the most favorable scenario, characterized by a degradation rate of 0.5% and an interest rate of 0%. Under these conditions, the LCOE is inversely proportional to the initial system efficiency. When the initial system efficiency decreased from 0.95 to 0.85, LCOE increased by 11.79%, from USD 0.0195/kWh to USD 0.0218/kWh. Further reducing the initial system efficiency to 0.75 resulted in an additional increase of 13.3% in LCOE, reaching USD 0.0247/kWh. The detailed data for this most favorable case study are presented in

Table 3. The effect of different initial system efficiencies (0.95, 0.85, and 0.75) on the LCOE, assuming a fixed degradation rate of 0.5% and an interest rate of 0%.

Case Study	LCOE (USD/kWh)	Changes (USD/kWh)	Changes (%)
0.95, 0%, 0.5%	0.0156	-	-
0.85, 0%, 0.5%	0.0174	0.0018	11.54
0.75, 0%, 0.5%	0.0197	0.0023	13.22

.

The red curve represents the least favorable scenario, characterized by a degradation rate of 2.5% and an interest rate of 4%. Under these conditions, the LCOE is inversely proportional to the initial system efficiency. When the initial system efficiency decreased from 0.95 to 0.85, LCOE increased by 12.08%, from USD 0.024/kWh to USD 0.0269/kWh. Further reducing the initial system efficiency to 0.75 resulted in an additional increase of 17.84% in LCOE, reaching USD 0.0317/kWh. The detailed data for this least favorable case study are presented in

Table 4. The effect of different initial system efficiencies (0.95, 0.85, and 0.75) on the LCOE, assuming a fixed degradation rate of 2.5% and an interest rate of 4%.

Case Study	LCOE (USD/kWh)	Changes (USD/kWh)	Changes (%)
0.95, 4%, 2.5%	0.0240	-	-
0.85, 4%, 2.5%	0.0269	0.029	12.08
0.75, 4%, 2.5%	0.0317	0.0048	17.84

.

This paragraph delves into the combined effect of initial system efficiency, interest rate, and degradation rate on LCOE. When the interest rate is fixed at 0% and the degradation rate at 0.5%, a 0.1 decrease in initial system efficiency corresponds to an 11.54% increase in LCOE, as seen in Table 3. This impact is slightly amplified under less favorable conditions: with a 4% interest rate and a degradation rate of 2.5%, the same initial system efficiency decrease results in a 12.08% LCOE rise, as seen in Table 4.

4.3. Interest Rate

The interest rate on initial investment directly influences the LCOE for PV projects. Figure 14 illustrates the results of an OAT-SA examining the impact of the interest rate on LCOE. The blue curve represents the relationship between interest rate and LCOE under the most favorable conditions: a degradation rate of 0.5% and an initial system efficiency of 0.95. Conversely, the red curve depicts the same relationship under the least favorable conditions: a degradation rate of 2.5% and an initial system efficiency of 0.75.

The blue curve represents the most favorable scenario, characterized by an initial system efficiency of 0.95 and degradation rate of 0%. Under these conditions, the LCOE increased proportionally with the interest rate. When the interest rate rose from 0% to 2%, LCOE increased by 5.77%, from USD 0.0156/kWh to USD 0.0165/kWh. Further elevating the interest rate to 4% resulted in an additional increase of 7.27% in LCOE, reaching USD 0.0177/kWh. The detailed data for this most favorable case study are presented in

Table 5. The effect of different interest rates (0%, 2%, and 4%) on the LCOE, assuming a fixed initial system efficiency of 0.95 and a degradation rate of 0.5%.

Case Study	LCOE (USD/kWh)	Changes (USD/kWh)	Changes (%)
0%, 0.95, 0.5%	0.0156	-	-
2%, 0.95, 0.5%	0.0165	0.0009	5.77
4%, 0.95, 0.5%	0.0177	0.0012	7.27

.

The red curve represents the least favorable scenario, characterized by an initial system efficiency of 0.75 and a degradation rate of 2.5%. Under these conditions, the LCOE increased proportionally with the interest rate. When the interest rate rose from 0% to 2%, LCOE increased by 10.84%, from USD 0.0332/kWh to USD 0.0368/kWh. Further elevating the interest rate to 4% resulted in an additional increase of 16.03% in LCOE, reaching USD 0.0427/kWh. The detailed data for this least favorable case study are presented in

Table 6. The effect of different interest rates (0%, 2%, and 4%) on the LCOE, assuming a fixed initial system efficiency of 0.75 and a degradation rate of 2.5%.

Case Study	LCOE (USD/kWh)	Changes (USD/kWh)	Changes (%)
0%, 0.75, 2.5%	0.0265	-	0
2%, 0.75, 2.5%	0.0287	0.0022	8.3
4%, 0.75, 2.5%	0.0317	0.0030	10.45

.

This paragraph delves into the combined effect of interest rate, initial system efficiency, and degradation rate on LCOE. When the initial system efficiency is fixed at 0.95 and the degradation rate at 0.5%, a 2% increase in interest rate corresponds to a 5.77% increase in LCOE, as seen in Table 5. This impact is amplified under less favorable conditions: with an initial system efficiency of 0.75 and a degradation rate of 2.5%, the same interest rate increase results in an 8.3% LCOE rise, as seen in Table 6.

4.4. Comparison Between the Most and Least Favorable Scenarios

In the most favorable scenario, with a 0.5% degradation rate, 0.95 initial system efficiency, and a 0% interest rate, the LCOE was USD 0.0156/kWh. However, under the least favorable scenario, with a 2.5% degradation rate, 0.75 initial system efficiency, and a 4% interest rate, the LCOE increased to USD 0.0317/kWh, representing a 103.2% increase. The detailed data for this comparison are presented in

Table 7. Comparison between the most and least favorable scenarios.

Case Study	LCOE (USD/kWh)	Changes (USD/kWh)	Changes (%)
0.5%, 0.95, 0%	0.0156	-	0
2.5%, 0.75, 4%	0.0317	0.0161	103.2

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4.5. Comparison Between the New Results and Existing Research

The LCOE is an important metric used to evaluate the economic viability of various energy generation technologies. It provides a standardized way to compare the long-term costs of different energy sources, considering factors such as capital investment, operation and maintenance expenses, fuel costs, and the expected lifetime of the project. However, when this metric is used to assess PV projects’ viability, it faces several challenges. The basic LCOE equation, as presented in [7] and shown in (3), does not account for the time value of money, degradation rate, or initial system efficiency. While this simplified approach can provide a preliminary assessment, it fails to accurately capture the true cost of PV projects due to these omissions. The LCOE equation, as presented in [37] and shown in (4), incorporates both discounted costs and output energy. In this equation, the costs of ${O\&M}_t$ are reduced based on the interest rate. While it is appropriate to discount the costs due to their monetary nature, discounting output energy is less practical. Energy, unlike money, does not inherently lose value over time. In fact, future energy may be even more valuable due to advancements in global efficiency. Environmental impacts on the LCOE of PV projects were studied in several Asian countries, including Malaysia, Thailand, and Indonesia. The lowest LCOE recorded was USD 0.0491/kWh. The study recommended degradation rates below 0.2% but did not provide specific details regarding initial system efficiency [38]. The International Renewable Energy Agency (IRENA) reported that the global average LCOE for utility-scale PV projects in 2023 was USD 0.044/kWh [39]. Several PV projects in Saudi Arabia have demonstrated significantly lower LCOEs, including Sakaka PV (USD 0.023/kWh) [40], Al-Khushaybi PV (USD 0.0167/kWh), and Haden PV (USD 0.0158/kWh) [4]. The LCOEs for utility-scale PV projects in this study ranged from USD 0.0156/kWh to USD 0.0317/kWh. These significantly lower LCOEs in Saudi Arabia, compared to the global average, are primarily attributed to two factors: high solar irradiance and favorable land availability [41]. Similarly, for onshore utility-scale wind projects, the global average LCOE in 2023 was USD 0.033/kWh [39]. Saudi Arabia’s wind energy sector is also highly competitive, with projects such as Wa’ad Al Shamal (USD 0.017/kWh) and AlGhat (USD 0.0156/kWh) achieving notably low LCOEs [42]. A direct comparison of the specific LCOE derived from this study with prior research was precluded due to the influence of several confounding variables, including average peak sun hours, initial investment, and selling price. Nevertheless, a methodological comparison with previous studies was conducted. Furthermore, the LCOEs associated with recent PV projects in Saudi Arabia were observed to fall within the range of the results obtained in this study

5. Conclusions

This study investigated the impact of PV panel degradation rate, initial system efficiency, and interest rate on the LCOE for PV projects. A comprehensive analysis was conducted using a scenario-based approach to assess the sensitivity of the LCOE to these factors.

Higher PV panel degradation rates, lower initial system efficiencies, and increased interest rates all lead to a higher LCOE. Higher degradation rates significantly increase LCOE. A 1% increase in degradation rate, from 1.5% to 2.5%, can result in an LCOE increase of up to 17.41%, depending on initial system efficiency and interest rate. Lower initial system efficiency translates to a higher LCOE. A decrease in efficiency from 0.85 to 0.75 can increase LCOE by up to 17.84% across different degradation rate and interest rate scenarios. Higher interest rates lead to a rise in LCOE. This effect is more pronounced with lower initial system efficiencies and higher degradation rates. A 2% increase in interest rate, from 2% to 4%, can result in an LCOE increase of up to 10.45%, depending on the degradation rate and initial system efficiency.

The main recommendation of this study is to implement strategies to minimize the impact of factors such as PV panel degradation, initial system efficiency, and interest rate on the LCOE. To achieve this, prioritizing high-quality PV panels with proven low degradation rates is crucial. This will minimize long-term performance loss and subsequently reduce LCOE. Furthermore, efficient system design and installation practices can maximize initial system efficiency, leading to reduced energy losses and improved overall project economics. Lastly, seeking out favorable financing options with lower interest rates, such as government subsidies or incentives, can significantly reduce the financial burden on PV projects, thereby improving their economic viability.

In this study, three key factors—PV panel degradation rate, initial system efficiency, and interest rate—were identified as variables. Six other factors, including initial investment, solar system power rating, average peak sun hours, electricity selling price, and operation and maintenance costs, were held constant based on available data in the literature review. While this study focused on a limited number of variables, future research could expand the analysis by considering additional factors such as solar tracking systems, and operation and maintenance costs. This study employed an OAT-SA sensitivity analysis to assess the individual impact of each variable on the LCOE. Future research could delve deeper into the combined effect of these variables on the LCOE through more advanced statistical techniques.