What table 5 illustrates is that if a consumer has acquired solar system 1 and IF they are
using the FIXED residential pricing schedule and continue to do so, they would have a
net expected bill of $ 1804 per year. If, using the same solar system 1, they swung all
their electrical usage to OFF PEAK, their electric bill would automatically benefit and the
solar electrical savings are maximized. Even more interesting, is the case where the solar
system is applied against the theoretical worst case TOU usage pattern – ALL the
consumer's electrical usage is ON PEAK. In this scenario the expected electrical bill
without solar is higher than FIXED BUT the expected electric bill 'after' is about equal
to FIXED case 'after' scenario. (bold) This means that any prudent buyer of solar MUST
switch to the TOU price schedule regardless of their usage pattern relative to
PEAK/NON PEAK since it is a riskless decision..
Thus far, our analysis establishes nearly certitude since rates are known and consumption,
both volume and pattern, can be estimated with a high degree of confidence. The balance
of this paper addresses items which also impact solar PV decision making but are in the
SWAG4 category.
The Crystal Ball
Having spent a number of years in both short, intermediate and long range market
forecasting, I've dabbled with various forecast sources from econometric models to
energy futures derivatives. The objective in using such sources is to develop an indicator
that might drive a market or market index like price. With a reasonable indicator and
some judicious application of regression analysis and curve fitting techniques it is
possible to arrive at a validated predictor of the future. All the approaches and methods
are quite sensible, especially the more macro they are. However, when one enters the
microeconomy of an individual State or electric utility, the job becomes more difficult
since a few individuals' decisions can greatly effect outcomes.
For example, the governor of NJ wants to reduce consumption of electricity as part of the
periodic Energy Master Plan the State is required to do. If this were to actually happen,
then electric production capacity would be sufficient for a number of years and if an
economic recession occurs and lingers, electric rates would likely drop. If, on the other
hand, the Master Plan only minimally succeeds, meaning the expected results are pushed
to the future, then it is mostly business as usual at least in the short run.
Most of the time it is conservative to assume things won't change radically from the past.
Some Forecast Subjects Important to Solar PV System Modeling and Evaluation
I. Solar system purchase price
Solar PV systems are sold on a dollars per watt basis so an 8 KW, or 8000 watt system,
might sell for $ 8 per watt, producing a final price of $ 64,000. A general rule of thumb
has the solar module (the solar panels themselves) component of that price being around
65 % of the total.
Over the long run solar panels are decreasing in price roughly 18 % each time the volume
of solar production doubles. Referred to as a production 'experience curve' this concept
of products decreasing in cost (price) has a well documented history and rationale.
Since solar panels exist in a worldwide market, one has to consider production on the
same worldwide basis. Recent studies show solar production increasing nearly 25 % per
year, meaning production approximately doubles in 3 years. If this occurs, then one can
estimate that the overall installed system price for standard solar PV systems could
decrease roughly 12 %, or to roughly $ 7 on a per watt basis. The question then arises,
wait or plunge?
Probably the prudent answer is to plunge, as long as government subsidies reward
investment decisions with reasonable discounted rates of return. Japan (the largest
manufacturer of solar PV equipments), for example, subsidized solar acquisitions until
volume caused prices to come down to acceptable consumer financial returns. Most State
subsidies, like the first to provide purchase rebates, Maryland, reckoned that early
subsidies would disappear over time as the solar system prices decreased. Consequently,
if a potential buyer were to buy later versus now, they might achieve a lower price later
but subsidy would be lower, making for an equal tradeoff. Why wait?
Technology makes a difference
More often than not, consumers want to maximize utilization of their fixed roof space
and in so doing they buy crystalline panels. There are numerous other technology
options such as thin film, where panel costs are lower. A drawback is that thin film
requires about twice as much space as does crystalline. If a consumer had space for a
10KW crystal system, then they'd only have enough room for 5 KW of thin film. Since
the price for thin film is roughly half of crystalline, a consumer might buy this system for
under $ 6 per watt. If you cut your electric bill by 60 % with crystalline, the thin film
would still be 30 % and a lower cost and better investment return. Is bigger always
better?
System residual value
In the late 1990's a study was run by The American Appraisal Institute that proposed
residential real estate should be appraised higher with appurtenances that reduced energy
bills. For example, if two homes were identical but the second could definitively show an
electric bill (or gas bill, etc) that was $ 1000 less per year than house one, the study
suggested (to Appraisal industry practitioners) that house two should have a valuation $
20,000 higher ( 20X the yearly energy savings).
In fact, that makes good sense for all installations for solar PV (residential, commercial or
industrial) and should be considered in any investment analysis. Solar PV panels are
usually guaranteed by the makers for a 25 year life or longer. So, if after a period of
time, say 15 years, the original owner sold the property, then there would still be 10 years
of productivity remaining on the originally purchased solar system. To keep things
simple, a 1 KW system might produce 1000 kwhrs (1250 kwhrs with excellent
orientation) of electricity each year. In the future period, one might assume electric rates
to inflate to $ .30 per kwhr. Therefore, that 1 KW system could produce another $ 3000
of value over the follow-on 10 years. Since the panel portion of an installed system (if
you did not DIY) is about 65 % and the installed cost of the system was $ 8 per watt, then
.65 X 8 = $ 5.20, or you actually paid $ 5200 for that 1 KW. But, with the 'residual'
reality check, that 1 KW is STILL worth about $ 3000, 15 years later… and you thought
only BMWs maintained excellent resale value! The solar evaluation model considers the
solar investment with and without the residuals to bracket a more realistic range of
financial returns.
II. Price increases for electricity
The solar PV analysis model considers a number of electric rate changes including
optimistic, pessimistic and most likely. All such forecasts are SWAGs. If one is lucky,
they might guess the right trend –up, down or the same; even that isn't easy. 'Optimistic'
electric price forecasting shows NO increase in rates over a 15 year period and reflects
general economic listlessness caused by business-as-usual governmental administration
in lieu of leadership. 'Pessimistic' has electric rates increasing by 10 % per year and
reflects underlying resource shortages, higher costs for new plant and equipment, and
continued and increasing competition with large, fast growing economies like China and
India, vying for those same resources. "Most likely" assumes a 2.5 % increase over the
15 year forecast horizon and reflects business as usual.
Note that the distribution portion of electric bills is still regulated and will always creep
upward. The generation portion is somewhat competitive but the status quo still exists –
same players - new names.
III. State solar production credits
There is still a State of NJ subsidy for residential solar systems and around mid-year 2008
the new solar transition program will begin to take effect. It appears to be well thought
out with a continuing $ 3 per watt rebate for residential systems. The rebate will fade
away over a few years along with its budget allocation.
In the old solar program's place is a new one with emphasis on production credits called
SRECs. A consultant was hired by the State to model ways that would facilitate utilities
in achieving their solar quotas mandated by law. With front end cash rebates too
expensive for the State, the SREC maximum payment, called the alternative compliance
payment (ACP), will be increased from $ .30 per kwhr to $ .71 per kwhr. The
assumption is that SREC values will approach the higher number, thus allowing solar
buyers to achieve their returns on capital expenditure even with small or no front end
cash rebates. These SRECs are not guaranteed. One hopes, however, that the consultant
modeling was valid and that SRECs will serve both the utilities and solar buyer as
modeled.
With the prior ACP of $ .30, the market value of SRECs achieved market valuations of
around $ .24 in 2006/7, or about 80 % of the ACP. Assuming a repeat, 80 % of $ .71 is $
.57 and, while still a guestimate, this has some probability of materializing. SRECs are
brokered to package larger quantities for the utilities to buy. The brokerage fee was
originally10% and probably will be halved since the SREC rates will likely have doubled.
The solar analysis model assumes more status quo thinking, or a continuance of the 10%
commission. The solar analysis model therefore uses $ .51 per SREC for first pass
results. Naturally, the higher the SREC the faster the discounted Cash flow payback.
For those existing buyers of solar, an unexpected bonanza is that while your prior
financials were justified on SREC values of around $ .20, they will now be perhaps 2
1/2X higher. It seemed to make sense to cap the existing buyers at the former ACP since
some early purchases were given 70 % purchase rebates. However, no cap appears to be
the plan. Paybacks on those early systems may now be embarrassingly short but they do
confirm that plunging is better than hesitating.
IV. Federal incentives
In 2005 the federal energy program increased investment tax credits (ITC) on solar from
10 to 30 %, with a lid on residential of $ 2000. For businesses the purchase also qualified
for a short term capital write-off, via accelerated depreciation. These both disappear at
the end of 2008.
It is possible both tax incentives may reappear before year. For example, a bad hurricane
season may re-kindle FUD (fear, uncertainty and doubt) about global warming, and get
politicians active again. The current solar analysis model assumes no such emotional
knee jerks and uses the 10 % ITC, for business only, after 12/31/08.
V. Financing and time value factors
The current model assumes a time value of money of 6 % for net present values. If one
were to lower that to 5 %, the discounted payback is faster by about a year. What is
prudent? The model remains conservative and uses 6 %.
Conclusion
There is some complexity in evaluating solar PV systems and numerous factors that
create many outcome permutations. Since electricity is a commodity, a prospective
consumer should emphasize highest return on their investment and should also
understand the assumptions and probabilities which are foundational to those returns.
Someone once said "if you don't know where you're going, you'll surely get there".
The advice of the day : know where you are going and how to get there.