Q&A: Alternative formula for compound degradation

Hello there,

My understanding of degradation is that the first year we operate at 100% capacity and then we loose each year the percentage capacity that is in cell F10. If this is correct i came up with another formula:

J12*(1-(J11-1)*\$F\$10)

So this basically is the time flag multiplied by 100% - (the year operating-1)*degradation.

In first year we have 100%-(1-1)0,05%=100% Year 2 100%-(2-1)*0,05%=99,50% and on

Is this correct or not ? At the end i have a slight difference in electricity revenue, mine are at 370 419 000.

Othman

Hi Othman,

Thanks for this. Always good to test things out for yourself and make sure you're happy with how the formula is working. With your formula, you are deducting a constant amount each year. i.e. performance is reducing at a steady rate of 0.05% per annum. In the formula I've used, performance is reducing by 0.5% of the previous period's performance. This means that over time, my formula will give a slightly higher level of performance than yours since the amount of the reduction is decreasing over time. This is due to my calculation taking 0.5% of a smaller number each time. Does that make sense?

See this chart comparing the results over time. My formula is the red line, yours is the blue - and I've extended the time period to show the difference better:

The formula I've used is labelled "Compound degradation" to make it clear that this is a "compounding" rather than linear effect.

Hope this helps!

Best

Kenny