Thinking about PV Solar for your Home or Business?

September 26, 2011 § Leave a comment

Photovoltaic solar panels on the roof of a hou...

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Good idea … now, consider these additional ticklers.

If you have been following this industry you know that solar PV component prices are down 60% in the last two years.  Never has there been a more compelling time to consider a grid-tied PV system for your home or business.

PV systems are an affordable and economic investment now — yes now!  In addition to perfect timing, consider these additional benefits for grid-tied PV systems:

Avoided costs . . . a tax benefit for homeowners.  As a homeowner with a grid-tied PV system, you will purchase less electricity from your utility.  You will avoid that additional cost.  OK.  Since you pay for electricity with after tax income, your PV benefit, for investment comparison purposes, is properly measured in before tax income.

For instance, if you save $30 a month with your PV system and you are in a 28% marginal tax bracket, your before tax equivalent savings is $30/(1-.28) or $41.66.  It takes $41.6 of before tax income to pay $30 to an electric utility.  This is the proper monetary measure of the PV benefit for a homeowner.  Caution: this does not apply if your lease your PV system.

No increase is property taxes.  In most jurisdictions, the capital investment of a PV system for your house will not increase the assessed value of your home or you annual property taxes.  Quite the opposite for a kitchen remodel or swimming pool!

Grid-tied PV systems are scalable.  2kW is as efficient as 5kW or 20kW.  So start small.  You can always add to your PV system at a later date.  A PV system equal to 15% to 20% of your electricity consumption is perfect and costs well less than $10k.  You do not need 25 panels or a $25k investment.  For home or business . . . go small.

A grid-tied PV system will increase the value of your home or business.  Of course it will; your PV system is virtually maintenance free and lowers the cost of operation.

For a home, a recent Lawrence Berkeley National Laboratory report affirms a 20:1 value ratio: that is, the value of your home increases 20 times the first year savings.  Spend $6,000 to save $300 a year: 20 x $300 = $6,000.  Payback?  It’s done!  Caution: this does not apply if your lease your PV system.

For a business, reduced operating expenses equal increased NOI.  Business are valued at a multiple of NOI . . . the increase in value is automatic.

PV systems are a very long term investment!  Most PV panels are warranted to 80% of rated power performance after 25 years, but these panels can last for 40 years or more!  Think about it.  2051 and you still are producing a lot of electricity.  Can you imagine?  A grid-tied PV system of any size is a terrific hedge against rising electricity costs.

Environmental attributes . . . Light from light.  PV systems are sustainable and renewable . . . no fuels, no water, no emissions, and no noise.  How do you measure the value of clean air over 40 years or more?  Ask your children, not your politicians!

Chet Boortz, CEO

SES 21 USA

[The comments, positions, and opinions stated above are my own and may or may not represent those of SES 21 USA and its affiliate companies.]


SES 21 USA featured in summer issue of Energy Leaders Today

August 29, 2011 § 1 Comment

In late spring Energy Leaders approached us, if we would be available for an interview regarding Ignite Solar’s project for Pasadena School District, Texas.

Metin Altay, Director of Sales and Marketing here at SES 21 USA had a good share in making this project come true and so we were pleased to share this success story of a perfect synergy between a solar wholesale distributor and solar installers.

Read the complete article about the project and Metin Altay’s interview on page 42-43.

Metin Altay interviewed by Energy Leaders Today

Metin Altay interviewed by Energy Leaders Today - Summer 2011 - Copyright Energy Leaders Today 2011

So while we were talking to the editors, they found out about Chet’s desk, our CEO’s blog. Chet has a PhD in political economy, 20 years of experience in oil & gas and has switched to the solar industry 14 years ago. With his background and broad knowledge about the industry, markets and technologies, he is definitely of value to a lot of readers of our PV solar energy blog. Therefore we are really happy to see him being featured on Energy Leaders Today.

Energy Leaders Today features SES 21 USA

Chet Boortz, CEO of SES 21 USA - Solar Energy Solutions featured on Energy Leaders Today - Summer 2011 - Copyright Energy Leaders Today 2011

For more information about SES 21 USA, Solar Energy Solutions click here: www.ses21usa.com

PV economics . . . Let’s do the math!

April 16, 2011 § Leave a comment

The purpose of this Economic Series is to demonstrate with real numbers and basic analysis that an investment in a grid-tied PV system for home or business is a very economic proposition.  Now!  Yes now; not someday in the future but at the present.

In these writings, I have discussed important variables in determining a present value rate of return:

  • PV as an avoided cost
  • PV and residual value
  • Payback is the wrong metric
  • Determining electricity production from your PV system
  • Calculating the value of your electricity production
  • Performing the present value rate of return calculation
  • Grid parity is here!

None of this analysis is based on local incentives, rebates, feed-in or performance tariffs, REC’s, and certainly not on any social cost/benefit analysis . . . just simple numbers.  There is one exception; I do consider the beneficial 30% federal PTC or ITC for residential and commercial PV installations.

I hope in the process, I have made PV economics more approachable.  You should not simply rely on canned PV calculators to make your decision; understand the basics, and think through the analysis yourself.

Here are my assumptions and economic results for a 1.84kW (8 Schott 230W modules) residential installation in Fort Worth, Texas:

Assume*

  • A 1.84kW grid-tied PV system
  • Fort Worth, Texas location
  • 180°  azimuth, and 32.9° tilt
  • PV Watts power calculation (77% derate factor)
  • $5.00/W installed costs
  • 30% personal tax credit for installed costs
  • Inverter replacement allowance at year 15
  • 12.02¢ kWh electricity costs (average U.S. residential rate, EIA, 08. 2010)
  • Efficiency loss based on module warranty (20% after 25 yrs.)
  • After FIT (avoided cost) calculation (28% marginal tax rate)
  • Residual value at 25 years: 10X annual savings
  • All cash; no leverage
  • Twenty-five years present value rate of return
  • NO REBATE !!

IRR calculation table

IRR calculations graph
*These are the primary variables for determining a present value rate of return for your PV system.  Your actual return will be more or less depending on site characteristics and your actual system performance.  Remember, Quality Counts!

I recently attended a North Dallas Chamber of Commerce Energy Forum with a panel comprised of local utility executives.  The Chairman of Atmos Gas, a large Texas-based natural gas utility, while expounding the virtues of producing natural gas by fracking tight shale rock formations from South Texas to the Adirondacks Mountains of New York, assured the audience of a 100 year supply of natural gas for electricity generation.  Really, 100 years?  In the Q & A, when asked about renewable energy, the notion was summarily dismissed with an authoritative response that renewable energy was ‘5 or 6 times’ more expensive than conventional resources.  Really?  Mr. Chairman, do the math please.

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.]

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.]

PV economics . . . Step one to calculating your return . . . how much electricity will your PV system produce?

April 9, 2011 § 1 Comment

Calculating the rate of return for you PV system does not need to be so mysterious.  Forget the calculators, let’s do some simple math.

We need to determine the benefit or income stream from the PV system over a certain period of time (25 to 40 years) and then calculate a present value rate of return (Internal Rate of Return) which includes the initial capital investment.  This is the way investment decisions are made, so why not do the same for your PV system?

Remember, payback is a misplaced metric!  What if your PV system has a payback of 7 years but an economic life of only 8 years?  Oops . . . not good thinking!  PV is a long term investment, and so is the economic return.

So, the very first step is to determine how much electricity your PV system is likely to produce.

Your best resource is PV Watts

PV Watts logo

PV Watts is a performance database developed by the National Renewable Energy Laboratory (NREL) to provide performance estimates for grid-tied PV systems.  It is incredibility easy to use:

  • Click on your state
  • Click on a nearby city with similar topography
  • Under PV System Specifications . . .
    • Enter the system size (DC Rating), and
    • Enter variables for the AC to DC Derate Factor, Array Tilt, and Array Azimuth Factor only if different than the default settings
  • If you like, enter your Cost of Electricity
  • Click Calculate!

In one second, you will have a first year monthly calculation of estimated AC energy produced by your system and its corresponding Energy Value.  How easy is that?  Do not be concerned if the site location is not an exact address.  This is an estimate, and if your location is close to the chosen city the difference is not material.

OK, now you have a very credible estimate of your first year’s electricity generation from your PV System.  Let’s convert this into a 40 years projection.

The place to start is your module warranty.  Reduce your power production in accordance with the warranty specifications.

I will use Schott as my example.  The Schott warranty specifies 97% of rated power at the end of the first year, and for years 2 through 25 the power will degrade no more than .7% per annum of the original rated output.  Actual field data has been considerably better.

 

Estimated power output of a high quality PV system over 40 years

Estimated power output of a high quality PV system over 40 years

Your PV system will not disappear after 25 years.  A high quality system will keep on keeping on!  For my calculation, I apply the .7% power derate factor until year 40.  At that time, the system output is approximately 70% of the original rated power.  Now I have a 40 year projection of power produced.

 

Year Annual power reduction
1 3%
2 – 25 .7%

 

 

 

Next, how do I convert this 40 year power projection to a monetary income stream?

Chet Boortz, CEO

Total Solar Direct

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

PV economics . . . calculating the present value rate of return (IRR)

February 19, 2011 § 5 Comments

What is this?  OK, you are considering a serious capital investment in your home or business; so you should consider a serious investment metric to qualify your investment!

The present value rate of return, aka internal rate of return (IRR) is the interest rate at which the net present value of costs equals the net present value of benefits.  The IRR metric considers the time value of money – that is, the concept that $100 today is worth more to an investor than $100 20 years from now.  This is how sophisticated investors consider the desirability of a capital investments.

Light From Light

Light From Light ... it's a very good idea

An IRR of 0% means that the time value of costs and benefits over the investment horizon are equal or breakeven.  If the IRR is less than zero, you have lost money.  If the IRR is greater than zero, you have received a compounded rate of return on your investment over the investment horizon at that interest rate.

Yikes!  How do I do this?  Well, it only takes minutes with a spreadsheet; longer with a financial calculator, or if you must, Google IRR for the formula and take a day of vacation.  Let’s assume the spreadsheet!

Remember, a PV system is a long-term investment, so we are going to reduce all costs and benefits to a single row of annual cash flows that sum costs and benefits.  In previous writings, we have discussed how to estimate the electricity generated from your PV system and how to convert these kWh’s to a 40 year monetary value stream. 

We know that for a PV system, the capital costs are incurred in year one.  Maintenance and operating expenses are nominal.  You effectively are purchasing 40 years of electricity with an upfront investment. 

There is one exception.  Your PV system includes a component called an inverter.  The inverter is the electronic component that converts the DC current produced by the modules to AC current connected to your electricity panel on the load side of your meter.  Most inverters have a warranted life of 15 years.  So, when calculating the costs and benefits, include the cost of a replacement inverter in years 15 and 30.

Create your spreadsheet with a 40 year annual cash flow summing benefits and costs.  Your capital investment is in the first year, so that year will have a negative cash flow.  Now, simply select a rate of return function to apply to the data (for Excel, it is IRR), and in less than a second your IRR calculation is complete.

Once the IRR is determined, you can perform sensitivity analysis on your result by making changes to your system costs and benefits and seeing how those changes impact the IRR.

Congratulations!  It’s your home or business; it’s your PV system investment; and it’s your analysis.  Don’t rely on a canned solution.  You know best.

The three most important variables are:

  1. How much electricity will your PV System produce?  (See PV Watts)
  2. How do you value that electricity?
  3. What does your PV system costs? 

Remember; do not sacrifice long-term performance for lesser upfront costs.  Quality counts!  It’s a long-term investment, so strive to maximize your price/performance ratio.

 Chet Boortz, CEO

SES 21 USA

Payback of PV? What? Why payback . . . it’s the wrong investment metric!

February 4, 2011 § 1 Comment

In the conversational world of PV economics . . . the issue always is the same.  It’s a conditioned response.   PV is a great technology, but it costs too much, and the payback is way too long!

What?  Whose idea is this, and why has it stuck?  Payback is simply the wrong economic measure for evaluating a PV system.

Payback = cost of project / annual cash inflows

Two things we know about PV:

  1. The total cost of the system is incurred upfront; operating costs are nominal.
  2. The economic return (electricity generated) is measured over a very long period of time (25 to 40 years).

There are two major problems with using payback as the all-encompassing measure of economic success:

  1. It is simply a measure of time for the return of initial capital investment.  It ignores costs and benefits after the payback period.  It is not a measure of system profitability.
  2. It does not pay attention to the time value of money.

Payback is a risk-weighted relic of oil and gas exploration economic analysis.  This oil well will payback in six months!  OK, that’s fun to think about, but what if it is a dry hole?  A PV system is never a dry hole.  Payback is not a measure of investment return.  It is simply a time period. 

So when asked the question: what is the return on your PV investment?  The answer is a discounted (time valued) rate of return of ___% over 25 years.  This metric respects initial and ongoing cash investments, operating expenses, income,  residual value, tax implications, and the value of money over a finite period of time.  This is the measure of economic value.

Quality counts.  A user may choose an inexpensive, low quality PV system and save 20% on initial system costs and thereby reduce the payback from 10 years to 7 years.  But, a PV system should last 25 to 40 years.  If the system has a short payback but produces electricity at a lower rate after 10 or 20 years, the investment return will be low.  In this sense, a short payback is a false economy.

Also, when you invest in a PV system (home or business), you become a small-scale independent power producer (IPP).  It’s as simple as that.  As such, the amount of power you produce over thirty years is most important, not the payback.

When you make a capital investment in a PV system that lowers your operating costs of your home or business, you immediately increase the value of your home or business.  How could it be different?  If you include this incremental value (15 to 20 times the annual value of the electricity produced) in your payout calculation, the payback will invariably be less than 5 years. 

So, payback is not the perfect measure, but if someone insists on asking, feel comfortable saying less than five years and that assumes no increase in utility rates for thirty years. 

Is PV economic?  Yes it is – from every angle.  Just do it!

Chet Boortz, CEO

SES 21 USA

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