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.
Though not strictly speaking a solar news story, we are pleased to note that the “fiscal cliff” deal agreed to last night by the House includes provisions from the Senate that will preserve federal tax credits for wind power systems. You can read more about it over at Renewable Energy World, “Wind Energy Tax Credit Extension Passes with Fiscal Cliff Deal.“
Of course, the extension is relatively short term and it begs the question of what will happen with the solar ITC which is presently scheduled to expire at the end of 2016. Still, anytime support for renewable energy - be it wind or solar - passes Congress, it is grounds for rejoicing. Here’s hoping that this is only the first of many legislative victories in 2013.
In this intense election season, we are accustomed to seeing lots of polls tracking the day-to-day changes in the “horse race” of the political process. But while various candidates struggle to “break out” of the pack, solar energy is an overwhelming consensus winner with strong support from 92% of the electorate - and when was the last time that 92% of us agreed on anything? Given that tomorrow night’s debate turns on domestic issues, it will be interesting to see how this issue plays, if at all.
We base our observation on a poll that was recently conducted by Hart Research Associates (Hart) for the Solar Energy Industry Association (SEIA). (You can find the poll results here.) The Hart poll got responses online from 1,206 registered voters, including an oversample of so-called “swing” voters (people who did not indicate a strong or consistent partisan voting history). The margin of error was ±2.8%.
Support for solar among voters cuts across party lines. 98% of Democrats and 95% of Independents think it is very important or somewhat important for the U.S. to develop and use solar power - but even among Republicans, support was at a very impressive 84%. And voters think that energy issues should be a factor in this year’s Presidential election with 27% saying such issues are one of the most important while another 47% say they are very important.
Despite an aggressive and well-funded ad campaign to support the quaint notion of “clean coal", of all of the different energy sources surveyed, only coal is upside down on its favorability rating: 34% of the electorate has an unfavorable view of coal, compared to only 32% with a favorable opinion. Solar energy, on the other hand, is on the opposite end of the spectrum, with 85% having a favorable opinion and only a miniscule 4% unfavorable. Here are the overall results:
Interestingly, the three greenest energy sources are at the top of the list while the two dirtiest, coal and oil are at the bottom.
As nice as it is to be supported, perhaps a more pressing question for policy makers/candidates is this: Which, if any, of these forms of energy should the federal government support through tax subsidies? Once again, solar energy was the clear winner with a full 64% of all voters (67% among swing voters) supporting federal tax subsidies for solar. In contrast, only 8% overall support subsidies for coal (4% of swing voters) and just 13% for oil (9% among swing voters). Yet subsidies for the coal and oil industries dwarf those provided to all renewable energy sectors overall and solar in particular. Here’s the overall chart:
These results, if not surprising, are nevertheless gratifying, particularly in an election year. We can only hope that voters will determine where the candidates stand on support for all energy sources, particularly solar, and use that knowledge to inform their vote next month.
We have written before about the importance of the federal section 1603 Treasury Grant Program as a means to spur further growth in solar. Well it is crunch time and if you agree with me that this is a program that needs to be continued, there are a couple of things you need to do, NOW.
The good news is that it is easy, thanks to the 1603 Coalition folks over at SEIA - here’s what you need to do:
We have railed in the past about the PR problems plaguing solar - well, here is a way for you to help counter some of that by making a little positive PR of your own. If everyone who supports solar were to take five minutes today to do these two things, we would be well on our way to getting the 1603 program extended for another year - and wouldn’t that be a swell way to ring in the New Year?
We previously wrote about how Congress could help grow the economy by extending the section 1603 Treasury Grant Program. Now there is a Coalition being formed to help get solar companies to sign on to a letter to Congress. Run on Sun is a signatory and we encourage our fellow solar participants to do so as well.
First some background. The section 1603 Treasury Grant program allows commercial solar power system owners to receive the 30% federal investment tax credit in the form of a grant. This has two grant advantages: first, not every commercial operation has a “tax appetite” that is big enough to fully utilize a tax credit of that size. The grant solves that by not being tied to the particular tax position of the receiving commercial owner. (Sadly, the grant program is not open to non-profit or government owners.) Second, because the grant is issued by the Treasury upon completion of the project, the 30% payment is received sooner than would the corresponding tax credit.
Unfortunately, the 1603 grant program is scheduled to expire at the end of this year - which is where the Coalition comes in. Organized by the folks at SEIA, the Coalition has a short letter that will be sent to members of Congress (the text of the letter is reproduced below and a pdf version is attached).
We urge all solar companies and organizations related to this field to join Run on Sun in signing on to the letter.
You can do so by following this link to the SEIA site.
The deadline to participate is November 23.
Here is the letter in full:
TEXT OF THE COALITION LETTER:
The undersigned companies, small businesses and organizations are writing to ask that you extend the highly effective Section 1603 Treasury Program before it expires on December 31, 2011. Extension of this program will create jobs, spur economic growth and promote private sector development of energy technologies.
The Internal Revenue Code provides a host of tax incentives designed to spur the development and use of domestic energy sources and technologies. Project developers commonly monetize these tax incentives by partnering with tax equity investors who have the liquidity and tax liability to utilize the credits.
The 2008 economic crisis and the economy’s subsequent downturn drastically reduced the availability of tax equity, severely limiting the financing available for energy projects. The Section 1603 Treasury Program, which was enacted in 2009 and extended in 2010, allows energy developers to receive a federal grant in lieu of taking an existing energy tax incentive they are otherwise entitled to claim. This is simply a change to the timing of when an energy incentive can be claimed. This change in timing, however, provides the liquidity needed for the further development of domestic energy projects.
The 1603 Treasury Program has been a resounding success. Since its enactment, the program has leveraged over $21.5 billion in private sector investment to support over 22,000 projects utilizing a wide range of energy technologies in all 50 states. This has resulted in thousands of new American jobs. The 1603 Treasury Program is an efficient finance mechanism that allows taxpayers and small businesses to maximize the return and value of existing energy tax incentives, and is technology neutral so it encourages the development of a wide variety of domestic energy technologies.
Lastly, there remains a need for the 1603 Treasury Program. The tax equity market modestly improved in 2010, but still has not recovered to pre-recession activity. A July 2011 survey of the major tax equity investors by the U.S. Partnership for Renewable Energy Finance estimates expiration of the program would shrink the total financing available for energy projects by 52 percent in 2012. This would stifle job creation and severely restrict the market’s ability to leverage private sector capital to finance new domestic energy projects.
Thank you in advance for your consideration. We look forward to working constructively with you to meet the nation’s economic and energy policy goals.
[Companies and organizations in alphabetical order]
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