PV economics . . . Step two in calculating your return . . . How do you value the electricity produced by your PV system?

April 13, 2011 § 1 Comment

OK, based on the previous writing regarding PV system production, you now have a 40 year estimate of the electricity to be produced from your PV system.  That’s right, 40 years!

It may be longer.  In a long-term study by the Fraunhofer Institute, Schott modules achieved over 90% of their original performance after years.  25 years with Schott modules, and you are just getting started!  Your PV system is a long-term investment – just like your home or business.  Be cautious of someone who advises you otherwise.

To determine an annual economic value or income stream for the electricity produced by your PV system, simply multiply the annual kWh’s produced by an estimated electricity rate for each year.  This is a forward-looking estimate, so have some fun with projections.

Here are two things we know:

  1. A good place to begin is with your current electricity rate.  That’s year one.
  2. The rate will go up or down every year.

We know from historical reference that electricity rates likely will increase over time.  What are the variables that will impact rates?  Fuel cost for generating electricity, transmission and distribution charges, taxes, surcharges, inflation, environmental impact, and more.

So make it simple.  Consider low, medium and high forecasts for an escalation rate for electricity prices.  Maybe: 2%, 3%, and 4%.  Now assign a probability of occurrence to each:

Electricity rate escalation Probability Product
2% (low) 25% .50%
3% (medium) 50% 1.50%
4% (high) 25% 1.00%
Escalator 100% 3.00%

Estimated annual electricity escalation

Perfect, you have just completed a probability weighted analysis of future electricity rates.  It’s your own forecast!  If it doesn’t feel right, do it again!  This is your analysis!

Use this escalator to compound the first year’s rate for 40 consecutive years.  Multiply the adjusted rates with the electricity produced in each year.  Now you have a 40 year forecast of economic benefit or value stream from which you can determine a present value rate of return for your PV system.

If you are looking for some references for historical energy and economic data, consider the Federal Reserve Bank and the Energy Information Agency.  Caution, you can get lost in the data!

Remember, if your PV system is for a residential property, the monetary benefit of a PV system is not income; it is Avoided Cost.  You pay income taxes and FICA on income; you pay no taxes on avoided costs.  So for purposes of calculating and comparing an after tax rate of return, you should gross up your PV benefit using your marginal income tax rate.

For instance, if your benefit in year 1 is $300 and your marginal tax rate is 25%, your before tax benefit is:

$300 / (1-.25) = $400

Of course, this is not tax advice.  Check with your tax counselor.

Next, we will use the 40 year stream of economic benefits to determine a present value rate of return.  Easy!

Chet Boortz, CEO

SES21 USA

[The comments, positions, and opinions stated above are my own and may or may not represent those of SES21 USA and its affiliate companies.]

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