Residential Market ... Current Realities

Solar Electric systems, both for residential and commercial applications have become very popular for distributed electricity generation. In the 1990's, led primarily by Germany and Japan, financial inducements helped make a weak solar purchase decision into a good one. By 2000, buyer enthusiasm spread to California thanks to State financial incentives in the form of dollar rebates combined with mandated utility connectivity. Numerous other States followed suit in the past few years. All State subsidy programs are described in a National Online Database www.dsireusa.org, managed by the North Carolina State University Solar Center with Federal funding.

In New Jersey, various State sponsored incentive programs, administered by the New Jersey Clean Energy Program (NJCEP)¹, enabled consumers to buy complete installed systems with substantial cash rebates - initially up to 70 %. In late 2005, the Federal Government increased the solar investment tax credit, commercial and residential, further reducing a system's effective cost. With Hurricane Katrina causing gasoline prices to jump to over $ 3.00 per gallon in late 2005, consumer fear added an emotional segment to demand. About all that was needed was a supply 'scarcity' to create a marketing bandwagon effect.

... and that was provided by the State announcing that solar budget allotments were rapidly being consumed. To throttle demand the State announced a series of planned rebate reductions which meant potential buyers had to accelerate their decision making, lest they lose significant financial subsidy. Residential rebate amounts, for example, were reduced from $ 5.50 per watt in mid 2005 to $ 4.35 per watt by the first quarter 2006. For a typical 8,000 watt residential solar system, a purchaser's cash rebate would be reduced by over $ 9,000 and further reductions were planned.

High system demand applied against a fixed subsidy supply caused a large unplanned administration backlog within the State rebate approval authority (NJCEP). With this large orders backlog at the State awaiting rebate approval and a possible shortfall of rebate funding to handle the backlog, the State could either suspend the successful Solar Incentive program, as Pennsylvania did in late 2005, or they could place existing orders into abeyance. The State opted for the latter, approving orders from the backlog on a 'first-in first-out' basis with rebates to be approved from current or future budgets.

Concurrent with the problem of matching consumer orders with rebate funding, a question arose about the source of funding for the rebate pool. Even prior to the solar program startup, renewable energy subsidy funds were derived from tapping ratepayer bills a small amount in the form of a Societal Benefit Charge (SBC). The yearly sum of commercial and residential SBC charges accumulates a large State subsidy fund, even though the financial burden on each contributor is small. It was a sound concept until a shortfall in the rebate fund developed.

When demand exceeded the funding, a question of fairness arose regarding the distribution of rebate funds. For example, a residential buyer wanting, say, a 5 KW system, recognized, as did the NJCEP, that a commercial buyer may have acquired a 200KW system consuming nearly 40X the residential buyer's funding need, even though both buyers contributed small amounts to the rebate funding pool. This caused the State to make some immediate policy changes, like creating a separate funding pool for large and small systems to more fairly allocate the rebates. The changes are working to reduce the administrative backlog but there are still many customer orders with extended installation dates and some not yet approved for rebates.

The rebate subsidy, generically known as a Capacity Credit, is only one mechanism for improving a buyer's financial return. In addition to the rebate, NJ, as well as a number of other states and foreign countries, provides a Production Credit, paid for by the electric utilities. In NJ this credit is known as a Solar Renewable Energy Certificate (SREC). While the value of these cash credits is not guaranteed, there is a high probability of their being paid at a predictable rate. SRECs are independent of rebates.

At the present time, the State continues to reduce rebate levels to better align demand with existing and anticipated SBC funding but the SREC method or some other subsidy strategy may take center stage in the future. Subsidies are not going away because electric utilities are legally bound to achieve a growing solar market in NJ through the year 2020². Without some form of subsidy, consumers could not financially justify solar and the State would not achieve its mandate. So, although precise financial returns on a solar investment will have some ups and downs in the future due to the challenging subsidy situation, solar PV is destined to continue as a mainstream consumer energy alternative in New Jersey.

Solar PV Return on Investment

Most business capital investment is driven by financial 'returns'. Oftentimes the analytic calculations are based on engineering facts with no guesswork; outcomes are certain. These are easy decisions to make since they are riskless, assuming the funding is available and prioritized. Other decisions are based on 'future' scenarios. These are considerably more complex decisions since futures are based on judgments and assumptions. They always contain risk due to errored judgments, or, even if judgments are flawless, external factors over which there is no control.

'Consumer' solar electric purchases are capital investment decisions and they fall into the more complex category. In hundreds of discussions with buyers and potential buyers, almost all start with an interest in doing something about global warming, pollution and energy shortages. And, at least in Germany, there is some value in dressing up structures with solar apparatus - a kind of PR effect. But, excepting standalone solar installations in remote areas, many self-installed, no one buys solar electric systems without competitive prices. Competitive prices in the sense that the capital expenditure must generate financial benefits to preclude overpaying for a commodity. Electricity is a commodity. Commodity markets are price elastic - at high prices there are no buyers; for low prices, numerous buyers; in between, some buyers.

For this reason, solar vendors provide an economic analysis to illustrate how a buyer might save money relative to doing nothing. If, after adding up the numbers, there is no expected financial advantage over the status quo, no purchase is made. If the analysis shows a positive outcome, the investment might be made. Some vendor outcomes may be more positive than others either because the 'cash out' is lower or the 'cash in' is higher, or both.

A critical point to understand is the probability associated with 'cash out' and 'cash in' - 'cash out' is almost certain³ - there is a contractual buying price. 'Cash in' is more of a 'likelihood' and not certain. This is important in comparing one solar vendor's illustration to another.

In analyzing your potential investment you have to make decisions regarding what kind of 'return' you'd like to make on your investment. In business, companies define hurdle rates to evaluate investments. For example, if a company must spend 6 % to acquire capital, they won't make an investment unless the return on that investment is minimally 6 %. Similarly, a consumer might be able to earn 6 % compounded on a savings account. If the solar purchase generates a return on their investment less than that, then the solar investment might not be made.

An alternative way to evaluate investments is using a method called payback. Simplifying, one can see that if they compounded a one-dollar investment at 6 % then they would double that to two dollars in 12 years. At 8 %, it takes only 9 years, and so on. Reversing the thinking, if you made an investment that would generate cash inflows that would allow you to get back all your outlay in 9 years it is like saying your return on investment is 8%⁴.

What is a good investment for one household may not be for another. However, in today's world anything over 5 % seems reasonable and that equates to an approximate 14-year payback. The State of NJ generally targets incentive program levels so that payback for residential purchases is about 10 years.

While investment aspects are the main buying motivator for solar PV, there is some minor product and installation differentiation. Minor because installations and product specifications are governed by a set of National and State approved vendor specs. Solar components require certain warranties and approved vendors must warrant an installation for 5 years, for example, in NJ. Installations must comply with various National Electric Code provisions, be approved by the State as well as the local inspection authorities in addition to local electric utility inspection for grid connectivity.

Some installation vendors have greater experience than others, but, over time, the NJ vendor approving process becomes an equalizer. NJCEP recommends prospective buyers seek at least 3 vendor proposals.

Note that while the basic deliverable isn't much different from one installer to the next, there can be a wide variation in what vendors offer sizewise, contracturally and pricewise to consumers.

System Configurations and Energy Production

Solar electric production has a scientific basis at least at the atomic level. Unfortunately, that's usually where the exactitude ends and individual system designer judgment takes over. A prospective solar buyer, for example, when asking 5 vendors to design a proposed system will likely end up with 5 different configurations, 5 different sizes and 5 different energy production levels. What's more, given the exact same size and configuration the energy output projected by a given vendor will vary.

The most critical factor determining residential system size is roof orientation. Great care is taken to find the 'true south' compass heading. Once that is determined, the vendor simply looks up from the compass to find unobstructed roof areas that have the proper facing. A roof facing south, east or west, or some combination thereof is where the solar array(s) will be configured. Once the roof angle, or pitch, is measured on each of the target areas, usually from ground level, the designer has all they need to size up the job. If the roofs best oriented directionally are cluttered with dormers or shaded with untrimmable trees, the site is usually not suited for solar arrays. If another building on the site or some open area cannot be found, solar power is not an option for that prospect.

Once the target roofs are decided, a solar panel template is used to see how many solar panels of a given dimension can be fitted (as neatly as possible) unto those roofs. Sometimes panels placed landscape versus portrait, possibly a combination of both, will allow a greater quantity. It is also true that there are more expensive solar panels that produce more power per given unit of area, so given a certain space more power can be generated by some panel types than others. Another solar panel technology (non-crystalline) requires greater space, meaning more installation costs, but the panels are less expensive and some produce more energy output in the long run.

Using the template, the designer adds up the panels on each of the target roofs and with the known roof angles and compass orientation, the design is ready for energy output determination.

In order to determine how much 'power' the proposed solar array will deliver, you need to know the average sunlight at that given location over a year; this is also known as insolation. Thanks to the US Government's National Renewable Energy Lab (NREL), this data has already been compiled and made available on the internet. Plugging the site data and parameters into a computer program will give the 'expected' monthly power output. However, not all vendors use the same programs and assumptions so the energy outputs can vary.

For example, if a we looked at a fairly typical 10,030 watt fixed panel⁵ proposed system (59-170 watt panels which is the maximum size now allowed for NJ residential rebates) with an orientation of 190 degrees (nearly dead south) and 28 degree pitch (a typical NJ roof angle) in Williamstown, NJ we have a distribution of power outcomes.

So, if you went to a number of solar vendors for a solar PV proposal and if they each designed the exact same system, the power produced could vary by 10 % as shown in the table. There are a number of reasons for this including varying system derate factors each program uses. Using the NJ Clean Power Estimator doesn't allow a specific input of numbers but requires you to round off. In this table, for example, an interpolation between 'South' and 'SSW" orientation is used since there are no numeric inputs for degrees. PVWATTS version 1 calculates based on Newark in the north and Atlantic City in the south so you need to use the city closest to your location. PVWATTS V2 segments US geography into smaller squares for more accuracy.

This illustration is not meant to fault or favor one approach or vendor over another. It is intended to show that, not only can the design aspects of a given configuration vary from vendor to vendor, and they do, but even if different vendor designs were identical, the resulting power output is subject to interpretation and depends on what solar production program is used. If the differential effects are considered over a 10 year period, one vendor may show a 1 year shorter investment payback than another while, in reality, there is no difference.

Vendor Financial Projections

As already suggested, a solar PV purchase is an investment based on a buyer's economic motivation. In order words, you're willing to invest if you can realize outcomes which are no worse and hopefully are better than if you did nothing.

There are two sets of numbers to consider when buying a system - the system price and financial return (payback). The price, along with the starting 'base' electric rates you pay the utility, are all known quantities. Now comes the hard part.

It is fair to say that 'you will get back the money you spend on your investment'. The question is how long will it take. For example, If a 10,000 watt system is acquired for a price of $ 80,000 and it generates enough electricity to defray about $ 1,800 of electric bills per year, it will take you 80,000/1,800 = 44.4 years to get your money back, not a reasonable payback period.

Early in the NJ subsidy⁶ program, the State rebated up to 70 % of the full purchase price so instead of paying $ 80,000 you'd pay $ 24,000 (80,000 less 70 %). The investment now looks a lot better and would take much less time to pay back. In fact, 13.3 years, which is $ 24,000/1,800 = 13.3.

Most State utilities pay SRECs to meet their solar generation quotas under the RPS². The projected consumer cash value of these SRECs is greater than the electric savings. Using our example, the $ 24,000 net after rebate system cost would still generate electric savings of about $ 1,800 per year but in ADDITION the subsidy for SRECs would add another approximate $ 2,400 per year. The revised payback is now -- $ 24,000 investment / $ 4,200 yearly cash benefit = 5.7 years.

In addition, the Federal Energy bill in late 2005 added a $ 2,000 federal Investment Tax Credit⁷ for residential solar installations. Since this is a subtraction from the yearend tax bill it amounts to being another $ 2,000 off the investment. So, hypothetically, the investment becomes $ 22,000 ($ 24,000 after State rebate less the tax credit of $ 2,000). The investment would still pay out the $ 4,200 per year cash benefit thus yielding a payback period of 5.2 years. For businesses the payback periods are substantially less.

Vendor assumptions determine expected financial outcomes

While the State subsidy has been reduced⁸ to match demand with State funding pools, it still remains as one of the best programs in the US today. California, the leader in US solar PV installations with nearly 10 times the number as NJ, currently has a rebate of $ 1.92 per watt, on an equivalent basis, compared to NJ's $ 3.80 a watt. That means the largest US market has only 1/2 the price discounts that NJ has. And California does NOT offer an SREC equivalency program.

But just as installing vendors in NJ can produce varying system designs with varying power outputs, the financial projections can be a 'choose your own adventure' because one vendor's financial assumptions about the future may be much different than another's.

For example...

Conclusions and Alternative Thoughts

Buying a residential solar PV system is a good buy since it generates a payback. It will take about 10 years but thereafter a buyer is insulated from some portion of their electric bill, essentially forever.

Some things to consider ...

While 'futures' prognosticating is anybody's guess, it is unlikely there are any short term energy production miracles on the horizon and, even if there are, it takes years, if not decades, to make them commercially available. Solar PV is available now and will save on a consumer's energy bill.

Lowest initial price ($/watt) is the single most important economic factor to consider. Price is a known quantity and since the State of NJ mandates product and installation performance, one vendor's solution will not vary much from another's. The State, for example, will not approve a system installation (for subsidy) unless that installation generates a minimal amount of electrical output.

Subsidy scenarios may improve. It is possible Federal credits will increase in addition to State or even local programs. The Federal Energy Independence Act, recently introduced, may be passed into law in 2007. This bill would substantially increase tax credits and, as proposed, it would be retroactive to 1/1/07. Various State Laws require continuing programs which may be different than what currently exists.

Do-it-yourself is an option. For single story homes, a homeowner may save about 40 % on a total system installation. There is currently a small equipment cash rebate for such installs but even if there was no self-install rebate, the tax credits, energy savings, and production credits still apply. Installation inspections and approvals are still made by State and local authorities to insure safety.

The sun's energy can also be used by a fluid heat exchange process known as solar thermal. Applications include heating water but additional uses in space heating, air-conditioning and even electricity production exist. The consumer financial return on 'thermal' is better than PV even without State subsidies.

PV Solar trackers are pole mounted structures that track the sun and improve electric output between 25 and 30 % over roof mounted fixed arrays. They require some open space but are often worth the incremental investment.

Notes:

¹ the State solar cash incentive program is currently administered by the New Jersey Clean Energy Program (NJCEP) which is an operating group within the State Board of Public Utilities (BPU)

² Known as the Renewable Portfolio Standard (RPS). Each year utilities are required to sell increasing amounts of energy produced by renewables including a set aside amount for solar PV. The requirements are set through 2020. Although the percentage of required solar PV production is small, it is a percentage of a very large total energy production number which means significant amounts of solar PV are forecast. The percent in year 2006 was .017 and in 2009 it is .16 percent, a near tenfold increase. By year 2020 the percent is 2 %, or about a hundredfold increase. With State subsidy funding problems already evident in 2006, and buyers unwilling to pay retail for a commodity, the State is exploring alternative future funding scenarios.

³ Some vendors include contract language to escalate final pricing indexed to a price index such as that published by Solarbuzz. This can increase the contract price if order placement to installation leadtime is extended.

⁴ While this illustrates compounding it does not account for discounting cash flows which is beyond the scope of this white paper

⁵ Most residential roof PV systems are fixed. Single axis trackers, usually ground mounted, can add 25 - 30% to the array energy output

⁶The specific name for the NJCEP rebate program is CORE ( Customer Onsite Renewable Energy ) program.

⁷ The enhanced 2005 Investment Tax Credit, or ITC, allowed for a 30% tax credit with a $ 2,000 cap for residential investments. In addition, businesses were allowed to use accelerated depreciation of 5 years. The ITC was recently extended to 12/31/08.

⁸ NJ rebate history: NJ Residential Rebate Table Max 10KW System

Date	Rebate $/Watt
1/1/05	5.50
7/1/05	5.30
12/31/05	5.10
3/15/06	4.35
9/1/06	3.80