Our Four-Part Series on Comparing Commercial Solar Bids concludes today with Part 4: Comparing Return on Investment (ROI) and Levelized Cost of Energy (LCOE). (You can read our earlier installments here: Part One: Comparing Solar Modules; Part Two: Comparing Solar Inverters; and Part Three: Your Utility Savings Analysis.)
We learned in Part Three what should be contained in a Utility Savings Analysis - power and energy production over the system lifetime, savings in Year 1, and savings over the subsequent years as a function of guesstimated utility cost increases over time. Given the energy saving starting in Year 1, the cost of the system, any Operations & Maintenance costs, the anticipated rebate from the utility, and the tax benefits anticipated for the system, your prospective solar contractor should map out for you the cash flows associated with your system.
The O&M piece is worth pausing on for a moment as the system design will play a major role in estimating what your annual O&M costs will be. It is true that for the most part, solar power systems require little or no maintenance. Indeed, the solar modules will most likely still be producing plenty of power long after everyone associated with the project is long gone! (NREL has solar modules that have been producing power for forty years with no sign of stopping and the modules being manufactured today - at least from the top tier manufacturers - are of much higher quality than what was available in the 1970’s.)
The inverter(s), however, are another story. There is a reason that central inverters and string inverters come with relatively short warranties - typically five years standard for central inverters and ten years for string inverters - and that reason is heat. Since large inverters process very large amounts of power they also generate a lot of heat and that ultimately takes its toll on the electronics. If you add in adverse environmental conditions - high humidity, dust, the occasional rodent, etc., and sooner or later that inverter will fail. A proper ROI analysis will factor in the cost of inverter replacement over the lifetime of the project. If the included warranty is ten years, then inverter costs should appear every ten years. If the warranty is five, then replacement costs should be included every five.
Conversely, one of the main selling features of microinverters in the commercial marketplace is the length of the warranty provided. At a full twenty-five years, that means that inverter replacement is covered over the modeled lifetime of the system. (Of course, offering a warranty and being able to honor that warranty are two different things and there are few inverter companies that have been around for twenty-five years.) If you can reduce or eliminate inverter replacement costs, that will have a significant impact on O&M costs over the lifetime of the system.
Other O&M items include system monitoring (if not included in the purchase price), security (if conditions warrant), and cleaning (a very nominal expense).
For commercial systems the O&M expense is often modeled as a percentage of the purchase price per year, rather than discrete payments representing replacement events. In this way the O&M expenditure is actually more like a set-aside for a maintenance fund to be used as needed over time. It should accumulate to at least the value of inverter replacement within the inverter warranty period.
The other wildcard element in this analysis involves calculating the cash value of any received tax benefits. While we don’t provide tax advice (and accountants shouldn’t be designing solar power systems, either!), we can say that aspects of tax benefits to be considered are: the 30% federal investment tax credit, plus state and federal depreciation, the latter elements being a function of the tax rate of the system owner who will try to utilize the benefits. Of course, if the client is a non-profit, there will be no tax benefits to consider - the primary reason why the payback on solar for non-profits is so much longer.
The final piece - the rebate from the utility - should be factored in either as a lump-sum payment if the rebate is an EPBB rebate, or in annual payments over time (typically five years worth) if it is a PBI rebate. In California, these will be based on the output from the CSI rebate calculator, and those calculations should be made available.
Put all of that together over time and you have a series of cash flows, positive and negative, from which an Internal Rate of Return can be calculated and, more importantly, the payback period determined. Keep in mind, however, that this calculation is dependent in part upon assumptions about utility rate changes which, while possibly quite accurate in the short term, become increasingly speculative over time. Still, if the calculation is done in a manner where the assumptions are properly identified, the ROI calculation should provide a reasonable means of comparing competing bids as to relative value.
While it is common in the solar industry to express the cost of the system in dollars/Watt, that is a misleading statistic at best since it masks variables affecting real world performance. A far better metric - and one that your installer should be able to provide you - is the cost per kWh for the energy that will be produced by the system over its anticipated lifetime.
The calculation is actually quite simple - determine the total out-of-pocket costs for the system owner over the system’s lifetime (including purchase price less rebate and tax credits, plus all O&M costs) and divide it by the total amount of energy to be produced (allowing for the system’s performance degradation over time).
We prefer this number because it reflects the real world performance and it allows for direct comparisons against the client’s previous costs for energy. Indeed, we typically find costs per kWh in the 8-10¢ range compared to utility costs of 15-25¢ starting in Year 1. But because the energy cost for the solar power system is fixed over its entire lifetime versus the cost of energy from the utility which is constantly rising (even if we don’t know how fast), the comparison is quite compelling.
Note that by applying an agreed upon (or at least disclosed) rate for utility increases, a graphical comparison over time can be produced – but the underlying LCOE is not at all dependent upon future utility rate changes. This gives the client the ability to compare multiple proposal against a true value proposition – how much will the energy from the proposed system cost? From a financial perspective, this is the best comparison point that we have been able to identify. A potential solar contractor who balks at providing this should, you guessed it, be scratched from your list!
The preceding is an excerpt from Jim Jenal’s upcoming book, “Commercial Solar Step-by-Step,” due out in July.
We learned two, somewhat related things this past week - atmospheric concentrations of CO2 exceeded 400 parts per million for the first time in three million years, and the Republican Party is internally divided on how, or whether, to address that fact. Way more than the electoral fate of the GOP may hang in the balance. (H/t - Climate Denial Crock of the Week.)
First the bad news - the chart above shows CO2 concentrations over the past 300 years. The really steep bend in the curve is our recent history with the unprecedented 400 ppm point being reached just now. Keep in mind that 350 ppm was the level that scientists thought we could tolerate without experiencing radical environmental changes.
But as some of the news reporting makes clear - not only have none of us ever seen this much CO2 in the atmosphere - neither has any human being. Indeed, the last time CO2 levels were this high - based on ice core data - was roughly three million years ago, long before human beings appeared on the scene.
I say some of the reporting because you don’t have to poke at the underbelly of the Interwebs for long before you find denialist sites that will ask, “Hey, what’s the big deal? CO2 is good for plants so why are you folks all freaking out." As if sea level rise and massive changes in weather leading to crop failures around the world were just a walk in the park.
Which brings me to the second story from last week - that of a “civil war” within the Republican Party over how to address the issue of climate change. This is a fascinating piece at the National Journal by Coral Davenport and it describes how there is a growing divide in the GOP between politicians who refuse to admit climate change is happening and rank and file members who have become convinced based on recent events. For example, the article describes the efforts of MIT professor of atmospheric science, Kerry Emanuel, to reason with Republican Presidential hopefuls during the last election cycle. It didn’t go well:
In January 2012, just before South Carolina’s Republican presidential primary, the Charleston-based Christian Coalition of America, one of the most influential advocacy groups in conservative politics, flew Emanuel down to meet with the GOP presidential candidates. Perhaps an unlikely prophet of doom where global warming is concerned, the coalition has begun to push Republicans to take action on climate change, out of worry that coming catastrophes could hit the next generation hard, especially the world’s poor.
The meetings didn’t take. “[Newt] Gingrich and [Mitt] Romney understood, … and I think they even believed the evidence and understood the risk,” Emanuel says. “But they were so terrified by the extremists in their party that in the primaries they felt compelled to deny it. Which is not good leadership, good integrity. I got a low impression of them as leaders.” Throughout the Republican presidential primaries, every candidate but one—former Utah Gov. Jon Huntsman, who was knocked out of the race at the start—questioned, denied, or outright mocked the science of climate change.
Soon after his experience in South Carolina, Emanuel changed his lifelong Republican Party registration to independent. “The idea that you could look a huge amount of evidence straight in the face and, for purely ideological reasons, deny it, is anathema to me,” he says.
Emanuel predicts that many more voters like him, people who think of themselves as conservative or independent but are turned off by what they see as a willful denial of science and facts, will also abandon the GOP, unless the party comes to an honest reckoning about global warming.
That doesn’t sound like good news for the GOP as a party, but in the short term it is even worse news for the planet. If the USA cannot lead on climate change very little will happen. If Republican politicians fear for their political survival if they acknowledge climate change is real and we need to make changes to prevent its worst consequences - then they will do nothing to help, and all too often actively work to obstruct progress. (See, e.g., Senator Inhofe.) That is a missed opportunity that we can ill afford.
As I said, the piece is fascinating reading and I commend it to you.
Amidst the continuing sturm und drang between the solar industry and the Investor-Owned Utilities (IOUs), we came across this interesting piece over at REWorld documenting some revealing observations by Duke Energy’s CEO, Jim Rogers. Duke - the nation’s largest utility owner, sees the writing on the wall and is not sanguine about what it portends:
“It is obviously a potential threat to us over the long term and an opportunity in the short term… If the cost of solar panels keeps coming down, installation costs come down and if they combine solar with battery technology and a power management system, then we have someone just using us for backup,” Rogers said.
Rogers’ observation comes at a time when the conventional energy industry is facing “anemic” growth in power demand - due to increased efforts at energy efficiency and the growing impact of consumer-owned generation. Since IOUs make a guaranteed return on investment in building, mostly, added power generation capacity, if there is no need for additional capacity, there is no basis for future returns. Not a promising prognosis for an industry that has grown accustomed to those sweet, sweet guaranteed returns.
And that, in a nutshell, is the IOUs’ dilemma - as renewables become ever more cost-effective, and particularly once intelligent storage solutions become a part of standard solar offerings, the justification for the guaranteed existence of IOUs becomes weaker and weaker. Contrast this with the municipal utility model which is owned by the city in which it is based and which exists for the benefit of its residents. If their preference is for distributed generation, then the muni’s goal should be to facilitate the adoption of such systems. Since its customers are also its owners, the interests are aligned.
But not so with IOUs who exist to make a profit for their shareholders and those interests are not necessarily aligned with those of the monopoly-provided customers they “serve". Not surprisingly, it is the IOUs leading the charge against net metering and questioning the “fairness” of local solar power.
Which raises the question: Can we as a society afford to have IOUs anymore? In an era of carbon-driven climate change, are IOUs a dinosaur determined to fight their extinction to the bitter end, even if they take th rest of us with them?
Today during his Second Inaugural Address, President Obama committed the Country to respond to the Threat of Climate Change and emphasized the need to make rapid progress on sustainable energy sources - watch:
Which makes us wonder - were you listening, members of the Los Angeles City Council?
Tomorrow you will be taking a vote on your long-time-coming Feed-in Tariff program. Will you take our President’s admonition to heart? Or will you vote for yet more delay and uncertainty in a program that has already been delayed for far too long?
The country is watching you. Please follow the President’s lead and clear the way for this program to go into effect, Now!
Yesterday we wrote about articles questioning the benefits of solar power to utility rate payers. But another story should provide some context - Coal is set to become the dominant global energy source by 2022, with serious repercussions for all life on Earth.
Writing over at the Greener Ideal blog about a recent report from the International Energy Agency (IEA), th post - The Future of Coal. by Susmita Baral - is full of sobering facts about the increasing use of coal throughout the world, particularly in China and India. If changes are not made, coal will equal oil as a global energy source by 2017. By 2014, according to the blog post, China will account for half of the world’s coal consumption and India will consume more coal than the U.S. Indeed, the U.S. is the only part of the world forecast to actually reduce its consumption of coal over the next decade, driven largely by the availability of cheap - sometimes fracked - natural gas.
This coal consumption comes with a terrible price in terms of CO2 emissions and subsequent climate change. One possible solution - introducing a price on carbon emissions like the cap and trade program that California has now implemented with the first auction of carbon credits taking place last November.
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