SOLAR TODAY - Getting Started Fall/Winter 2011

FINANCIAL

does it Pay?

Figuring the financial value of a solar or wind energy system.

By Andy Black
How long will it take for a new solar or wind electric sys- tem to pay for itself? That depends on your local cli-
mate, utility rates and incentives. In sunny or windy states
with expensive electricity, the payback is faster than in
calm or cloudy states or where power is relatively cheap.

The most important factors for making solar an attrac-
andy Black is Ceo of
tive investment include high electric rates, financial incen-
ongrid Solar, providing
tives, net-metering policies and good sunlight (almost all
solar financial analysis
of the continental United States is within plus-or-minus 20
tools and consultation. he
percent of Miami’s sunlight level).
recently served as a board
Where net-metering laws exist ( 43 states plus the
member of the american
District of Columbia and Puerto Rico), solar energy off-
Solar energy Society and is
sets the retail cost of the electricity generated.
on the advisory board of the
In some regions, solar systems are allowed to operate
norCal Solar association.
on a time-of-use rate schedule, enabling users to sell back
© 2011 andy Black.
electricity to the utility at peak rates, which can be even
more valuable. Time-of-use rates vary in price by time

Please consult a certified
of day (see charts below), with higher rates during times
tax advisor to check the
of power shortage (for instance, when air-conditioning
applicability and taxability
loads are high). That’s when the utility must pay more to
of incentives for a particular
purchase electricity from generators. These higher electric
situation.
rate periods often occur in the heat of the day, when solar
systems are most productive.

Direct incentives can include tax benefits such as credits or depreciation. The most celebrated recent incentive is the federal tax credit for solar systems that was expanded on Jan. 1, 2009. The credit is for 30 percent of the system cost and can be coupled with state, local and utility incentives. The Database for State Incentives for Renewable Energy ( dsireusa.org) lists state and federal incentives around the country for all types of renewable energy and energy efficiency.

Western U.S. Typical Residential Time-of-Use Pricing Periods
Midnight - 8am
6am - Noon
Noon - 6pm
6pm - Midnight
Sunday
Off-Peak
Off-Peak
Off-Peak
Off-Peak

Monday Off-Peak Off-Peak Peak Off-Peak

Tuesday Off-Peak Off-Peak Peak Off-Peak

Wednesday Off-Peak Off-Peak Peak Off-Peak

Thursday Off-Peak Off-Peak Peak Off-Peak

Friday Off-Peak Off-Peak Peak Off-Peak

Saturday Off-Peak Off-Peak Off-Peak Off-Peak

Eastern U.S. Typical Residential Time-of-Use Pricing Periods
Midnight - 9am
9am - Noon
Noon - 9pm
9pm - Midnight
Sunday
Off-Peak
Off-Peak
Off-Peak
Off-Peak

Monday Off-Peak Peak Peak Off-Peak

Tuesday Off-Peak Peak Peak Off-Peak

Wednesday Off-Peak Peak Peak Off-Peak

Thursday Off-Peak Peak Peak Off-Peak

Friday Off-Peak Peak Peak Off-Peak

Saturday Off-Peak Off-Peak Off-Peak Off-Peak

Some states have rebates of up to $2.75 per watt (up to
50 percent of system cost), cutting the up-front expense.

Others have performance-based incentives (PBI) that pay 5 to 30 cents per kilowatt-hour (k Wh) for power produced over three to 10 years. Some also use solar renewable energy credits (SRECs, also called green tags), which are similar to PBIs in that they produce value based on system performance.

SRECs represent the bundle of legal rights to the green
part of each kilowatt-hour produced by a solar system.

SRECs are valuable to utilities in certain states like New Jersey, Maryland, Pennsylvania and 18 others because those utilities must comply with renewable portfolio standards (RPS), requiring that a certain percentage of electricity sold must be derived from solar sources. New Jersey SRECs have recently been the most valuable, trading in their auction market for as high as 61 cents per kilowatt-hour, thus earning five times the price of the electricity savings they are also producing. SREC values will probably be much more modest going for ward.

Feed-in tariffs (FIT) are yet another type of perfor-mance-related incentive, but one that foregoes the net-metering benefit. The customer continues to pay the regular electric bill, but gets paid for all electricity fed back to the grid. Gainesville, Fla., has a FIT of 32 cents per kilowatt-hour for 20 years, but it is so popular that the program is currently sold out. Ontario, Canada, also has a FIT program, with payments between 44 and 80 cents (Canadian)

per kilowatt-hour for 20 years, depending on system size
and mounting type. Georgia, Hawaii, California and Ver-
mont also have feed-in tariffs.

Another factor in the economics is escalation in electric rates. Solar and wind are escalation-protected investments because they offset electricity costs at the current prevailing rate. As rates rise, the owner saves even more (see figure facing page).

Several useful ways to measure the economic value of a generating system are: compound annual rate of return, increase in property resale value, and cash flow if the purchase is financed. In strong economic cases, the annual returns are over 10 percent, the cash flow positive and the increase in resale value greater than system cost.