May 31, 2021

How to Analyze the Economic Feasibility of a Distributed Generation Project

ANEEL's Normative Resolution No. 482/2012 on distributed generation projects (DG) allows Brazilian consumers to generate their own electricity from renewable energy generation sources or qualified cogeneration. It also provides for the possibility of injecting excess energy into the local utility’s grid for later use, promoting energy self-consumption.

But do you know how to conduct an economic feasibility analysis for a distributed energy generation project? Check out this article to find out!

What Is Distributed Generation?

When a consumer installs a distributed energy generation system in their home or business (for example, by installing solar panels), they remain connected to the utility’s electricity grid.

When the distributed generation project generates more energy than is being consumed at that moment, the excess is injected into the distribution grid, which sends this energy to other consumer units in need of electricity at that time. This system enables energy self-consumption, with the surplus energy stored as credits for future use.

Conversely, when consumption exceeds production (such as at night, when solar panels do not produce energy), the utility provides electricity to the consumer unit.

At the end of the month, the balance is compensated. If there is excess energy, the DG user receives an energy credit that can be used within up to five years. If consumption exceeds production, the equivalent amount is charged on the electricity bill.

In November 2015, Resolution 687/2015 by ANEEL established that it is possible to produce energy and compensate it at consumer units with the same ownership, meaning the same CNPJ or CPF, as long as they are within the service area of the same utility.

This means that a consumer could, for example, generate energy at their beach house and compensate it at their primary residence, further demonstrating the value of energy self-consumption.

It is also possible to form an association or cooperative to generate energy in one location and offset it against the consumer units participating in the contract, offering a collaborative way to implement a clean energy project with shared benefits.

Currently, distributed energy generation can be implemented through microgeneration projects (up to 75 kW) or minigeneration projects (up to 5,000 kW). According to a survey conducted by Absolar, based on data from ANEEL, Brazil already has more than 5.4 GW of installed distributed solar generation capacity.

How to Analyze the Economic and Financial Feasibility of a Distributed Generation Project?

To analyze the economic feasibility analysis of a distributed generation project, it is essential to evaluate the following aspects, each of which influences the distributed generation profitability and overall energy investment analysis:

• Technology, type of equipment to be used for generation, and associated costs: The choice of equipment, such as solar panels, wind turbines, or cogeneration systems, impacts the distributed generation costs and long-term profitability of the project.
• Size of the consumer unit and the generating plant to be installed: This involves assessing the installed capacity of both the load and the generation system, which will directly influence the cost of the system and its potential return as part of a broader feasibility study for distributed generation
• Projection of the electricity tariff/rates variation: A crucial part of the energy project feasibility analysis is to project the variation in electricity tariffs to which the consumer unit is subject. For this, it is necessary to rely on a tariff projection system to forecast how energy supply costs will behave over time. This allows consumers to compare future electricity expenses with the energy that will be self-generated, providing a clear cost-benefit analysis.
• Payback period estimation: One of the key metrics for evaluating a clean energy project return is the project payback period. Estimates made at the end of 2020, based on projections from the Energy Tariff Estimate System (SETE) by TR Soluções, indicated that, on average, the payback period for distributed generation projects ranged from three to seven years. This information highlights the financial attractiveness of investing in DG.
• Financing conditions for each project: Financing conditions play a vital role in the energy investment analysis. The terms of financing, such as interest rates, down payments, and loan durations, can significantly affect the project’s distributed generation profitability and payback period.

Did you enjoy learning how to analyze the economic feasibility of a Distributed Generation project? Check out our article on how to save energy in your business as well.