Unveiling the Economics of Degradation: Optimizing Financial Models for Sustainable Solar Investments

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If you have ever built a solar plant financial model, one thing to take note of in your modeling is Degradation.

So, what is Degradation?

Degradation refers to the gradual loss of efficiency and power output of solar panels over time due to various environmental and operational factors.

Degradation is a critical factor in the performance of solar panels and can have a significant impact on the overall electricity output of a solar plant over its operational life.

Understanding It is an important consideration in financial models for solar projects, as it directly influences the long-term energy production and revenue generation.

In modern solar technology, high-quality solar panels undergo degradation at an average rate of 0.25% to 0.50% per year.

Across the standard 30-year lifespan of a solar plant, this results in a cumulative decrease in electricity output ranging from 8.0% to 15.0%. The significance of this reduction underscores the crucial role that degradation plays in influencing the financial outlook of solar projects.

Several factors contribute to the degradation of solar panels:

Light-Induced Degradation (LID): This occurs within the first few hours or days of a solar panel’s exposure to sunlight. It is caused by the interaction between the silicon in the solar cells and light, leading to a temporary reduction in efficiency. Manufacturers often take measures to minimize LID during the production process.

Additionally, factors such as shipping, mounting, and microcracks induced during the construction phase can contribute to a slight reduction in power output.


Potential-Induced Degradation (PID): PID is a phenomenon where the voltage potential between the solar cells and the grounded frame of the panel causes a gradual decline in performance. It is more common in systems with high humidity and temperature variations.

PID leads to voltage leaks and a subsequent decrease in overall energy output.


Temperature-Related Degradation: Elevated temperatures can accelerate the degradation process. High temperatures can cause materials to break down faster, and thermal cycling (fluctuations between high and low temperatures) can also contribute to degradation over time.


Mechanical Stress: Environmental factors such as wind, hail, and snow, as well as the general wear and tear associated with a solar panel’s exposure to the elements, can lead to mechanical stress and degradation.


Chemical Degradation: Exposure to environmental factors like moisture, pollutants, and chemicals can contribute to the deterioration of materials in solar panels.

For practical modeling purposes, assuming an initial degradation of 1.0% in the first year of operation and long-term losses ranging from 0.25% to 0.50% per annum is reasonable.

To accurately model degradation in financial models for a solar plant, it’s essential to consider historical performance data, manufacturer warranties, and industry standards. Monitoring and maintenance practices can also play a role in mitigating degradation and ensuring optimal performance over the project’s lifespan.

However, for precise estimations tailored to the site-specific conditions, consulting with a technical advisor is strongly recommended.

Their expertise can ensure a more accurate analysis of degradation losses, ultimately contributing to more reliable financial models for solar energy investments.

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