February 4, 2011 § 3 Comments
. . . What time is it now?
The centennial of Ronald Reagan’s birth is February 6, 2011. Ronald Reagan was the 40th President of the United States, and he is idolized today by admirers for his conservative leanings. The impact of his fiscal, social, and foreign policy agenda is still unfolding, and it will take another 30 years for scholars the write the book on his presidency and its aftermath.
The Reagan period is symbolized by his 1984 reelection campaign and his television spot: It’s Morning in America. It’s a highly acclaimed political campaign television commercial . . . pure Hollywood and pure Reagan.
So, if it was morning in 1984, what time is it now? In terms of U.S. energy policy, it’s Dawn in America! Ten years after the 1973 Arab oil embargo, the supposed energy ‘wakeup call’ for U.S. energy policy makers, we celebrated morning; now, nearly 30 years later it’s dawn, but remember dawn is not dusk! It’s just time to move in the other direction. America does not do well with wake up calls
The above EIA chart does not need interpretation. The 2008-2010 downturn is related first to $4.00 gasoline and then to The Great Recession. Of course, oil prices are rising again.
Here is what we know: so many of the social, health, economic, trade, foreign policy, fiscal, and environmental issues confronting America are related to the lack of a cohesive long-term energy strategy. Over and over, the status quo, intransigent politicians, and vested interests prevail.
So, let’s move up the clock – just a little. In terms of energy: IT’S SUNRISE IN AMERICA.
We cannot expect policy makers and their flock of insiders to solve our energy issues. It just will not happen. This is America; we are empowered by independence, individual choice, and economic freedom. So, if you like the way things are . . . perfect, nothing to think about. But, if you would like to make a difference . . . you are the catalyst, you are the movement, you are the solution; and your politicians will follow in line after the fact.
If you are connected to the electricity grid, consider PV solar electricity for your home or business as a supplement to your electricity consumption. In a small-scale, become your own independent power producer (IPP). Produce a portion of your electricity using light as a fuel with your own PV system, and purchase the balance of your electricity from your electric utility. It’s that easy.
PV solar electricity is a groundswell popular movement, not a government policy. It’s renewable and sustainable, affordable, a hedge against rising energy costs, and an attractive long-term investment for your home or business.
Say no to political folly. Say yes to taking charge . . . to clean and affordable solar electricity. Light from light. It’s an economic choice today!
It’s sunrise in America.
Chet Boortz, CEO
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:
- The total cost of the system is incurred upfront; operating costs are nominal.
- 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:
- 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.
- 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
February 1, 2011 § 3 Comments
So what do I mean by residual value? It’s the increase in the market value of your residential or commercial property once you have installed a distributive generation PV system. It cannot be ignored!
I will contend over and over that an investment in a PV system is an attractive economic investment for a residential or commercial property owner. Whatever your metric, whatever your catch phrase, PV is an economic investment now, and ‘grid parity’ is a fete di compli in many U.S. markets.
One of the tools of those with an adversarial view of PV is to argue that PV is simply too expensive, it’s a technology and a dream for another time, but not now. Since there is no convention for analyzing PV economics, it is easy for the naysayers to pick and choose variables for their analyses.
Payback seems to be the most prominent . . . it takes too long for an investment in PV to payout! Payout is the wrong measure, and we will discuss these metrics one at a time. But, whatever the metric, a frequent mistake is to omit the incremental residual value of the PV system that becomes part of your residential or commercial property. This increase in value is immediate.
When you make an investment in a long-term capital asset that reduces the operating expenses of your home or business, the unmistakable result is that your property has more value than a like property without a PV system. This is not a remarkable concept, yet residual value is rarely included in determining the economic return for a PV system.
Consider a house. If you have lowered your expenses by $500 a year, you have $500 a year more to spend on purchasing a house; and if you have an 80% LTV mortgage at a 5% rate, then you have increased the value of the house by $8,000 ($500*.80/.05). Twenty times the first year savings is the most common metric for determining the increased value associated with a residential PV system. Critics contend there is not enough ‘market’ data to be conclusive.
This relationship will stay in place for a long while, because your savings increase in time with higher utility bills. Your PV system most likely will have a 25 year warranty for 80% of its rated power output. A high quality system will perform better and last much longer. (see our high quality pv solar components here)
For a business, it’s simply a no brainer. Businesses and commercial real estate most often are valued at a multiple of NOI (net operating income). If your NOI is higher, because your operating expenses are $500 per year lower; and you are selling your business at an 18 PE multiple, then you have enhanced the value of your business by $9,000 ($500*18). This is real basic and real easy!
Finally . . . in many jurisdictions, the investment in a distributive PV system is not included in the taxable value of your property. This is important.
I just paid my property taxes in Dallas, Texas, and my combined tax rate for 2010 was 2.21%. An investment in PV lowers the operating costs of my house, but it does not increase my property taxes. Alternatively, a $30,000 home improvement increases my annual taxes by $663 ($30,000*2.21%) for the rest of time – and even more with inevitable tax rate increases
Remember, residual value is an important effect of any capital investment. PV is no different. Its function is to generate electricity on the load side of your electric meter and to save you money. That’s real value!
PV . . . it’s economic today. It’s a grass-roots movement in distributive generation. It’s time.
Chet Boortz, CEO
SES 21 USA