White Paper Series

Economics of Solar Electric Systems in
New Jersey
Modeling Options and Results
January 2008

Richard Barbarics
Principle Consultant
Solar Site Services
Williamstown, NJ


For the past few years New Jersey has seen rapid growth in the installation of solar electric systems also known as photovoltaic, or PV systems, for short. The growth is primarily due to State of NJ subsidies that reduced both the capital investment for such systems (the State paid up to 70 % of the initial cost for such systems initially), cash rebates for solar production to supplement electric bill reduction and federal tax credits.

Some 2351 PV systems were installed as of 8/31/07. However, at that same point in time there were a total of 3,800,404 electric customers (excluding municipal electric companies which makes the total larger), so there is considerably more room for market penetration. Investor owned utilities are also required by law to have 1500 megawatts of installed solar PV capacity by the year 2022 to meet solar production requirements. 1500 Megawatts seems like a large number but size-wise equates to only about 1 typical utility power plant.

The impetus driving solar, as well as other alternative energy solutions, is to supplant existing production of energy with environmentally friendly renewable alternatives. This will reduce generation of greenhouse gases, supporting efforts to prolong the effects of global warming, as well as reducing demand for time-limited earthly resources like coal, oil and uranium.

What makes solar so interesting is its distributive aspect. Essentially, photons from the sun are converted them to useable energy such as electricity. This can be done locally on a rooftop, side of building, or open area. Electric utilities are presently needed because they provide historical cost advantages due to generation economies of scale and a substantial in-place wired network. The existing utility infrastructure has been paid for over the past 100 years and fortunately helps keep down the costs of moving watts from the centralized generation locations to us consumers.

The solar electric industry is analogous to, and will follow, the lead of the data processing industry since the 1960's. Large central computers lost their cost effectiveness when smaller machines, mini-computers, performed their same functions closer to the business action and at less cost. Computer time-sharing brought computing power to an end user's desk oftentimes eliminating the need for the central machine altogether. Personal computers replaced time-sharing by providing the same power but at greater cost savings. What started out cost effectively as a centralized operation evolved to a 'distributed' processing model in about 25 years.

Solar electric is clearly traversing the same path that computing already has. Why would any consumer buy watts from an environmentally destructive production facility 50 miles away when they could produce it themselves onsite for the same costs? The main reason, of course, is that costs have yet to reach parity.

It should be noted and remembered that electricity is a commodity.

In your house or the one down the street, the utility wires deliver the exact same power capability, so are producer choice should be based on price. We want to pay the lowest price for the electric commodity whether it comes from the utility or self-generated on our rooftop.

Understanding the twists of electrical billing

While in the California Wine country in 2005, I came across a number of large installations of solar PV systems. At one winery, Cline Cellars, I discussed their solar PV decision with one of the owners. He mentioned that the economics were pretty commanding since the capital investment payback was only a few years. This was surprising since, at the time, the Energy Policy Act of 2005 had not liberalized the federal investment tax credit and accelerated depreciation rules. He then shared the nature of the wine production business relative to their electric use. In the summer, there isn't much activity other than the grapes basking in the great California sunlight. The vintage occurs in the fall and it requires substantial electric usage for crushers, conveyors, tank storage controls, and refrigeration. The solar insolation is much less during this time of the year. Further discussion revealed that the electric utility, PG&E, which also serves San Francisco, uses a Time Of Use (TOU) rate structure. With TOU an electric buyer pays very high prices for 'peak time' electrical consumption in the summer when air- conditioning loads are most demanding.

By itself, TOU can possibly be a money saving concept but relative to solar electric production, it magnifies cost effectivity due to 'net metering'. The majority of States (including California and NJ) have net metering rules. In it simplest description, net- metering means a utility pays 'retail' for distributed system generation connected to its utility network. For example, if the utility rates are 5 cents a kilowatt hour in the winter and 15 cents in the summer, then any solar generation made in the summer is 3 times as valuable in the summer than fall. So if they generated 1 watt in the summer with solar, it translated to 3 watts of usage in the fall. Wow! A bullseye for wineries where they have the large storage roofs and open areas for solar systems to collect the sunrays at the highest prices in the summer only to use those high priced credits at a multiple of value in the fall.

Your friend - TOU

Back home in NJ, I looked at the residential schedule for ACE (Atlantic City Electric). Indeed, ACE had both a FIXED pricing option and TOU option. TOU, while not as variable as PG&E, did show a good spread between ON PEAK/OFF PEAK rates. ACE TOU hours are defined as PEAK between the hours of 8AM to 8PM, Monday through Friday; electric usage at any other times is categorized as OFF PEAK. Using a proprietary solar PV analysis model1 with current information (late 2007) shows how electric bills can vary, depending on which pricing schedule you opt for. The model assumed a seasonalized monthly pattern for consumers that use air conditioners during warmer months.

Consumer's yearly electric use in kwhrs
Yearly electric bill using FIXED schedule
Yearly electric bill assuming ALL electric usage ON PEAK TOU
Yearly electric bill assuming ALL electric usage OFF PEAK TOU

Electric bills at ACE comparing FIXED to TOU schedules
Table 1

What table 1 shows is that there is the wide 'boundary' for electric bills dependent on your consumption pattern. For example, if you are a typical ACE customer using 12,000 kilowatts per year (about $ 2,000 yearly electric bill), you might be able to save some bucks by simply moving to the TOU rate schedule. What is extra-interesting are the upside/downside potentials. A 12,000 kwhr TOU consumer theoretically can reduce their electric bill by nearly 19 % relative to FIXED if they consumed all their watts only during OFF PEAK periods. On the other hand if they only consumed their watts during ON PEAK hours, their price risk is only about half that. Iterating the model with a wide range of wattages and usage patterns suggest almost all consumers that use air conditioning2 in the summer should be on the TOU schedule.

The Solar Evaluation - Near Certainty vs SWAGs

Based on this, one can reliably predict that TOU has a significant impact on investment returns for solar PV systems. This is simply because ALL3 solar PV is generated ON PEAK daylight.

Consider, for example, two equally sized 8000 watt solar systems. The first case is ideally situated facing true south with a typical NJ roof pitch of 28 degrees. The second is a compound solar system consisting of 3 separate arrays facing in 3 directions, all with different roof pitches. In both examples, plain vanilla standard crystalline panels are assumed. Both systems easily qualify for current State of NJ minimum solar production requirements.

Sample solar system 1
azimuth direction (degrees)
roof pitch
size (watts)
power output

Three Pitch Roof
Table 2

Sample solar system 2
azimuth direction (degrees)
roof pitch
size (watts)
power output

Ideal Single Pitch Roof
Table 3

Using these examples, it is possible to determine the 'monthly' production of each which will be different due to their varying orientations. The estimated yearly dollar savings due to solar production is then:

Yearly Watts Production
$ Value of yearly production using TOU
$ Value of yearly production using FIXED utility pricing schedule
Sample solar system 1
Sample solar system 2

Dollar Value of Solar Production
Table 4

Looking at table 4, it looks like solar production under TOU is much better than under the FIXED pricing schedule. It's not quite that easy, however. It also depends on your usage pattern during a 24 hour day – how many watts are consumed ON PEAK vs OFF PEAK. In other words, while it always appears to make sense to use solar under the TOU schedule, one has to consider 'when' they use their watts. Using the more conservative solar system 1 example shows the following:

Yearly electric bill 20,000 kwhrs
Bill reduction due to solar system 1
Electric bill after solar production
NO solar system - FIXED Schedule
$ 3226
$ 1408
$ 1804
NO Solar system - using TOU - ALL NON-PEAK USAGE
$ 2609
$ 1712
$ 897
NO Solar system - using TOU - ALL PEAK USAGE
$ 3515
$ 1712
$ 1803

8000 Watt Solar System 1 Impact Analysis on 20,000 kwhr
Residential ACE Electric Bill
Table 5

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 %.


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.

1 Proprietary model CYCLOPS designed for Solarsiteservices by Axis Associates Consulting
2 model parameters can be set for various seasonalities including no A/C and electric heating
3 there ARE certain specialty solar cells that perform in darkness thanks to their spectral sensitivity
4 SWAG a term learned while working for General Electric long range forecasting - Scientific Wild Assed Guess