An End User Perspective on the Cost of Solar Photovoltaic Energy Systems Installed by Commercial Organizations. Kenton D. Swift May 14, 2012

Transcription

1 An End User Perspective on the Cost of Solar Photovoltaic Energy Systems Installed by Commercial Organizations Kenton D. Swift May 14, 2012

2 2 Do Commercial Solar PV System Installations Make Economic Sense? Potential users of solar photovoltaic energy systems (solar PV systems) are confused as to whether such systems make economic sense

3 3 Why are potential end users confused? The factors impacting returns from solar PV systems vary dramatically based on location, and across time These factor include: Levels of solar radiation, Government and utility incentives, and The cost of grid produced electricity

4 4 Purpose of Study The purpose of this study is to compare financial returns from the installation commercial solar PV systems in specific locations across the US for 2012 Returns are calculated using local solar radiation levels, and electricity costs, and all available tax incentives and rebates

5 5 For Business Organizations the Solar PV System Purchase Decision is a Capital Budgeting Decision Site Specific Information is needed Business organizations want site specific comparisons between the total cost of a solar PV system and grid produced electricity Simple parity is not enough capital must be committed to purchase a solar PV system, and capital is limited The return from the solar PV system must be favorable An investment in a solar PV system must provide a return that compares favorably to other investment opportunities

6 6 This Study Provides Capital Budgeting Results in Two Forms The results are provided in two forms: 1. Internal Rate of Return (IRR) othe internal rate of return of the solar PV system compared to grid produced electricity 2. Levelized Cost of Electricity (LCOE) othe levelized cost of the electricity (LCOE) produced by the solar PV system compared to the LCOE of grid produced electricity

7 7 Considering Loans in the Analysis In capital budgeting, financing is normally separated from the analysis of the return on the asset being purchased --- except, for calculating the cost of capital rate used in discounting future cash flows

8 8 Cost of Capital A cost of capital rate must be used in the LCOE calculations A firm s cost of capital is the weighted average cost of each type of capital including DEBT and EQUITY The weighted average cost of capital used in this study = 7.0% Debt Equity

9 9 Factors to Consider in Solar PV System Investment Decision Present and Future Cost of Electricity Solar Radiation Financial Incentives Tax and other incentives provided by federal, state, and local governments, and by utility companies PV System Cost and Performance Note: the data used in the study is site specific to the extent possible

10 10 Case Studies for This Study 50-kilowatt commercial installation of a solar PV system in the following four locations: Honolulu, Hawaii Newark, New Jersey Phoenix, Arizona Minneapolis, Minnesota

11 11 System Assumptions System size - 50-kilowatts System life 25 years Installed cost before incentives - $5.25 per DC watt ($262,500 total) DC-to-AC Derate factor 77% Performance degradation 20% over the system s 25 year life Inverter cost 9.5% of the installed system cost; replaced after 13 years

12 12 General Assumptions Solar radiation panels are flat-plate collectors pointed south with a tilt angle equal to the site s latitude Initial price of electricity - Average retail price for commercial and industrial users for the first 10 months of 2011 in the state where the solar PV system is installed Nominal annual electricity inflation rate 1.6%

13 13 Income Tax Assumptions Income tax rates Marginal income tax rate is the top corporate federal rate (35%), and the top state rate Depreciation The solar PV system is a 5-year MACRS asset, and 50% bonus depreciation is allowed in the first year under IRC Sec. 168(k) for 2012 Federal income tax credit A 30% federal income tax credit is available Grants and rebates Fully taxable in the year received

14 14 Case Studies - Location Information Honolulu Newark Phoenix Minneapolis Initial system cost before rebates and credits $274,313 $262,500 $262,500 $262,500 State income tax credit 35% 10% Maximum state corporate income tax rate 6.4% 9.0% 6.968% 9.8% Utility rebates/performance-based payments SREC* PBI* Average annual hours of solar radiation per day Initial price of electricity per kilowatt-hour $0.301 $0.127 $0.082 $0.076

15 15 Honolulu Inputs: Solar radiation per day = 5.7 Top corporate income tax rate = 6.4% Sales (excise) tax on purchase = 4.5% State income tax credit = 35% of installed cost Price of electricity = $0.301 Results: LCOE of solar PV system after incentives = $0.038 LCOE of grid produced electricity = $0.202 Internal Rate of return on system installation = 33.32%

16 16 Inputs: Solar radiation per day = 4.5 Newark Top corporate income tax rate = 9.0% Significant Solar Renewable Energy Certificates (SRECs) available for 15 years Price of electricity = $0.127 Results: LCOE of solar PV system after incentives = $0.042 LCOE of grid produced electricity = $0.081 Internal Rate of return on system installation = 10.16%

17 17 Phoenix Inputs: Solar radiation per day = 6.5 Top corporate income tax rate = 6.968% State income tax credit = 10% of installed cost up to $25,000 Performance Based Incentives (PBIs) available - $0.08/kwh Price of electricity = $0.082 Results: LCOE of solar PV system after incentives = $0.068 LCOE of grid produced electricity = $0.055 Internal Rate of return on system installation = 5.36%

18 18 Minneapolis Inputs: Solar radiation per day = 4.6 Top corporate income tax rate = 9.8% Price of electricity = $0.076 Results: LCOE of solar PV system after incentives = $0.162 LCOE of grid produced electricity = $0.048 Internal Rate of return on system installation = -4.59%

19 19 Results - Summary Honolulu Newark Phoenix Minneapolis LCOE of PV system after all incentives $0.038 $0.042 $0.068 $0.162 LCOE of grid produced electricity $0.202 $0.081 $0.055 $0.048 Internal rate of return (IRR) over 25-year life 33.32% 10.16% 5.36% -4.59%

20 20 Summary and Conclusions The results demonstrate that financial returns from solar PV systems vary dramatically depending on the location where they are installed The IRRs from the case studies vary from a return of 33.32% to a return of -4.59% The reasons for the variations in return include: State incentives Grid produced electricity rates Levels of solar radiation