Much information is available about the energy sustainability and independence benefits of PVs (solar Photo-Voltaics) but not much about the available economic resources to deploy them in our neighborhood. This write-up aims to show that:
(1) Borrowing non-government money for installation and operation of PVs is good business for the homeowner, the installer, utility, county, state, country and world locations with average peak sun hours over 15%, i.e. 0.15 x 24 = 3.6 hours per day, and
(2) The sooner we do this the better
Most of us think that we cannot afford the investment of 7-8 $/W for a 2000 or 1000 watt (peak) PV, and that we would not have a notion of what to advise our elected officials about what the right level of incentives for installation and operation of PVs should be, as part of our contribution to reducing our addiction to imported fossil fuels.
Let’s remember that borrowing money to enable generation of valuable electricity from freely available solar energy is like going into business with a sound business plan to make a profit and guarantee repayment of the loan. This paper aims to quantify some of these benefits, vs. variable interest rates and tax credits.
There are concerns about:
1. The intermittency of solar PV electricity generation, which need to be allayed via properly sized storage and/or stand-by fossil-fuel-based generation, which can be installed in bulk by utilities and in a distributed fashion by residents,
2. The right amount (if any) of County/State/Federal incentives/subsidies to install PVs or other renewable energy generators, and
3. The right timing of this investment, as PV hardware and installation know-how become less costly each year, as the industry climbs up its learning curve
but this write-up will try to make a simple but sound business case, which calls for speedy deployment of PVs on available and sound roof-tops, and to do this with “new money,” borrowed from banks (as needed) and with little or no government money taken from other projects.
Performance, cost and payback of today’s solar PVs – As reported recently, the 2.1 kW(peak) PV system I had installed on my roof is generating an average of over 30% more energy (kWh) than I anticipated by assuming an average capacity factor of 15% and instead measuring one of 20%[1] in Kailua-Kona, on the Big Island of Hawaii. The average daily and monthly outputs from mid-November to mid-January were 2.1 x 0.20 x 24 = 10 kWh/day or 300 kWh/month. The total PV system cost (incl. fees and 4.166% tax) was $15,895, or 7.57 $/W(peak) DC or 7.95 $/W(peak) AC. See more recent trends of PV system prices towards 4.2 $/W(peak) DC in ref.[8].
The payback time w/o tax credits or cost of capital came out to 11 years, assuming a fixed electricity cost of 0.40 $/kWh and no PV performance degradation over time (if both effects were to amount to 1-2%/year they would cancel each other) . With Federal (30%) and State (35% capped at $5000) tax credits and 5% interest on the invested capital, the payback time shrank to 6 years.
However, if the capacity factor, defined as the averaged percent of the time that the PVs system is exposed to peak sun light, had only achieved a more conservative 15%, the monthly and annual outputs would be 225 kWh/mo and 2700 kWh/y, respectively, assuming a PV system life time of 25 years. The payback times, annualized average return of investment (AAROI) and other economic measures – versus the interest or cost of capital and available tax credits (State and Federal) -- are listed in Tables 1 & 2, and also plotted in Fig.1
Present incentives and rewards to install and operate PVs -- While the US presently imports ~$300 billion/year worth of oil, our Big Island only contributes $0.384 billion (25,930 billion BTU[2]/(120000 BTU/gal)/(45 gal/barrel)*80 $/barrel) to such imports, but which amounts to over 2x more than the average US on a per capita basis. The incentive to become less dependent on oil imports should therefore also be over 2x greater, if all other economic conditions were equal. The effect on Hawaii’s standard of living resulting from oil price hikes or from drops in availability would therefore be more severe, i.e. we have a strong (self-interest) incentive to become less dependent on imported oil.
Lets try to quantify what the rewards and justification are for the needed investments in solar PVs with a simple example:
1. Investment -- Knowing that Hawaii County imports $384 million/year worth of fuel for such uses as electricity generation and transportation, lets see what happens after residents take out a bank loan at 5% interest to install PVs on their roofs, e.g. totaling $1 million:
2. Oil import displacement -- These residents would generate (conservatively using the 15% capacity factor) $1 million/15895*2700 kWh/y = 169,865 kWh/year and displace ~3x of that energy equivalent worth of oil (1.94 billion BTU, because of the ~30% generation efficiency) worth 28,678 $/year, based on 80 $/barrel. The above kWh/y correspond to 0.169865 GWh/1120 GWh*100 = 0.0153 % of the annual consumption of Hawaii County[2]. If we were to use the $1M investment in PV electricity to only charge PHEV (Plug-in Hybrid Electric Vehicles) and improve gasoline vehicle system (incl. refining) energy efficiency by about 5x, the oil import reduction would increase to 28,678*(5/3) = 47,800 $/year
3. Homeowner benefits w/o tax credits(TC) -- The same residents, now with PVs on their roofs, would save an amount of electricity bills worth 0.40 $/kWh*169,865 kWh/year = $67,946/year or 6.8%/year of the invested capital, equivalent to a 14.7-year payback if the interest was zero, but 27.3 years if the interest or cost of capital is 5%/year. With an assumed PV life of 25 years (=warranty period), the total return-on-investment (ROI) would then be a negative 0.62 %, i.e. not recommended from a business point of view, see Table 1.
4. Homeowner benefits with tax credits --However, with available tax credits (and a variable interest cost, see Table 1) the above investment drops to $1 million*0.7*0.65 = $455,000 and the payback down to 8.35 years for an interest of 5% and still using the conservative15% PV capacity factor[1], rather than the measured 20%. The annual saving or PV “yield” is now 67,946/455,000*100 = 14.9%/year, and over the (conservatively assumed 25-year) life of the PV system, the net annualized average return or AAROI is 9.94%/y, see data and curves in green.
5. Installer benefits – Table 3 shows that the estimated costs of materials, labor and 10% miscellaneous expenses do not amount to more than 38 and 73 % of the PV system, so that the installer can make a profit between 52 and 27%, depending on his cost of the PV panels. The listed installation labor cost was based on my PV system, which 4 men installed in one day, and assumes a burdened labor cost of 100 $/hour.
6. Benefits for the utility: A) Conventional -- But the above also reduces the annual gross income of the electricity company by the above $67,946 minus the oil import expense of $28,678, i.e. a net loss of $39,268/year, while complicating the job of maintaining the grid voltage and frequency at the design level. This may force greater generator output load-following capability and investment in electricity storage, and may only in part be helped if the growth in distributed PVs about matches the growth in electricity demand. What the new residential and commercial PVs do for the utility is to postpone the need for investing in new generating equipment
7. Benefits for the utility: B) Proactive – The utility would get the $481k bank loans (see Table 3, first 3 columns), install, operate the PV systems on their customers’ roofs and agree with them to a 5 to 10 % discount in their monthly bill. The homeowner also benefits from the shading and cooling effect of the PV panels. This would increase the payback time from 8.95 to 9.52 and to 10.11 years, and reduce the AAROI for the utility from 9.07 to 8.33 and to 7.65 %/year, respectively. While this does not reach the profitability of many major European electric utilities of 11-40 %[5], it should look attractive to Hawaiian Electric Industries (parent to HELCO) with profitability indexes in the 2-6% for the 4th quarter of 2009[6]. Note that in this scenario, no Federal or State subsidies or tax credits are involved.
8. Government benefits – Each one-time investment in PVs worth the above 320 kW(peak), if financed by a bank loan rather than local government (which would involve less funding for other local projects), would boost economic activity and tax income by A) The new investment money minus imported hardware, plus B) The reduced oil imports of $28.678/year after the above payback periods. This tax income would be further augmented by the economic multiplier[7], which for green-energy investments typically ranges between 1.5 and 2.3. Comparing the government tax incomes for each of the above scenarios shall be the subject of a separate future article.
Conclusions – Just as centralized systems such as for machining, computing, process control and public transportation have evolved into favoring decentralized systems in the form of individual machine drives (motors), PCs, distributed control and small vehicles, so will the utility power industry most likely evolve into favoring distributed generation and storage, linked via “smart grid” controls to optimally manage generated, stored and user-demanded electrical energy.
Being at the beginning of this “distributed energy era,” and knowing that inertia inhibits change, government now provides incentives to overcome the inertia to become energy-independent and self-sufficient, as well as to speed up the green-energy hardware cost reduction via its learning curve.
As shown above the annualized average ROI for homeowners is presently about 10%, based on 5 %/y interest rates, PV "capacity factor" of 15% (rather than the measured 20%) and a 25-year PV panel service life, which are based on panel warranty periods of 25 years.
One can gamble with the chances that the cost of PVs will come down before government reduces its subsidies or tax credits – and before interest rates go back up. My recommendation would be to act and install a PV system now.
[3] Return On Investment (ROI). Definition: ROI is a performance measure used to evaluate the efficiency of one or more investments. To calculate ROI, the benefit (return or net gain) of the investment is divided by the cost of the investment; the result is expressed as a ratio: ROI = (Net gain of an investment) / (Cost of investment) over the total life of the equipment or investment. http://www.investopedia.com/terms/r/returnoninvestment.asp . This ROI can also be expressed as a percentage by multiplying the above by 100.
[4] Annualized average ROI (AAROI) enables direct comparison with the yield of an investment deposited in an interest-bearing bank account in %/year. Identical to ROA (Return on Assets) as defined by Wikipedia in http://en.wikipedia.org/wiki/Return_on_assets without taxation
[5] M. Grünig and A. Best, “Sector Report 2: The Electricity Industry,” in E.U. Annex Report 1: Sectoral Costs of Environmental Policy. Net sales and operating profit of selected European electricity companies (Source: Vattenfall 2005)
[6] Hawaiian Electric Industries, Inc. (electric utility and banking). Financials: 4th quarter 2009: Net profit margin 2.28% 3.68%; Operating margin 6.34%; Return on average assets 0.63% Return on average equity 3.83% Employees 3,560 http://www.google.com/finance?q=NYSE:HE
[8] John E. Bartlett (New West Technologies, LLC), Robert M. Margolis (NREL), and Charles E. Jennings (Financial Analytics Consulting Co), "The Effects of the Financial Crisis on PVs: An Analysis of Changes in Market Forecasts from 2008 to 2009," Tech. Report NREL/TP-6A2-46713 September 2009, http://www.nrel.gov/docs/fy10osti/46713.pdf, Figs. 15 and 16 project prices for c-Si (and CdTe) modules and PV systems to reach 2.5 (1.6) and 4.2 $/W-DC respectively. More recent module price forecasts for 2010 project values of 1.6 (and 1.35).
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