Solar payback assumptions

[sensij]

In reality few people have it due to not wanting it or poor location. When that person buys a house how interested will they be?

I don't think any of us are talking about installing PV in a bad location solely for the purpose of increasing home value. A good install in a good location may not appeal to everyone, but it only takes one buyer who sees the value for that to turn into a sale that would otherwise not have happened. The things buyers respond to sometimes are irrational... and yes, that means it is also possible that someone looks at the roof and says "I don't like the way it looks", even if that system would be saving them $1k / yr.

I continue to use zero resale value in my own assumptions because it feel safest, although hoping for more than that is not entirely unfounded.

[russ]

What percentage of homes have solar installed? Few -

SEIA org loves to throw numbers around knowing people won't understand them - for example

California has 672 mW installed - the capacity factor is what? 10%? even at 25% it is not much - a 500 mW gas turbine generator is not at all large - 3 GE 100 mW turbines in combined cycle.

http://www.seia.org/research-resourc...-industry-data

In reality few people have it due to not wanting it or poor location. When tat person buys a house how interested will they be?

[SunEagle]

My first post here but since I'm deciding on system size for a grid tie, net metered installation I will comment on my perception:

In terms of resale value a solar system that offsets part of your use can be valued against the offset utility price and you could calculate a value for that. It could make the buyer feel good about generating some of their own power and the hedge against top-tier utility prices.

On the other hand a system that nets zero or less than zero annual consumption is a much bigger sell. I can imagine that telling a buyer we haven't paid a power bill in x years would be compelling.

Jim

While most who want a solar pv system on their home feel it would be a value added appliance you would be surprised by the comments from people that try to sell their home with a pv system (owned or leased) where the desire is not as high as you would imagine.

Best to talk to a Real Estate person in your area to see what level of desire (or not) a solar pv system adds to the new home buyer's decisions.

[sensij]

My first post here but since I'm deciding on system size for a grid tie, net metered installation I will comment on my perception:

In terms of resale value a solar system that offsets part of your use can be valued against the offset utility price and you could calculate a value for that. It could make the buyer feel good about generating some of their own power and the hedge against top-tier utility prices.

On the other hand a system that nets zero or less than zero annual consumption is a much bigger sell. I can imagine that telling a buyer we haven't paid a power bill in x years would be compelling.

Jim

I agree! That is one of the "soft" reasons why I'd really prefer to have a SolarEdge inverter installed. Being able to point to a public website showing the generation history of each panel in the system seems like it would be a great way to show it off to a potential buyer. There a few forum users who have their sites shared... you might look for posts by user "thejq", a link to his is in his signature.

[jimqpublic]

My first post here but since I'm deciding on system size for a grid tie, net metered installation I will comment on my perception:

In terms of resale value a solar system that offsets part of your use can be valued against the offset utility price and you could calculate a value for that. It could make the buyer feel good about generating some of their own power and the hedge against top-tier utility prices.

On the other hand a system that nets zero or less than zero annual consumption is a much bigger sell. I can imagine that telling a buyer we haven't paid a power bill in x years would be compelling.

Jim

[Jason]

Solar panel return Calculators

Hi Sensij

I am Andy the new owner of Solar Panel Talk. I haven't set up myself a login yet so I am still logged in as Jason.

I think your discussion on how to value solar systems is a very important area of contemplation.

Typically when looking at an investment you look at it from a perspective of either doing it or not doing it at a point in time. It is very hard to incorporate into any valuation methodology the value of how you might invest the cash flow generated by a project in other things. I think to try and do so may over complicate the issue.

The discount rate you choose to enter into any financial model depends on the level of risk you perceive to be involved with the investment and the alternative returns you could get from deploying the same capital.

For most people this should be a simple calculation based on the fact that most people looking at solar are in one of two situations.

1. They are paying off a home and have a home loan.

In this case the alternate use of the the capital they might invest in a solar system is to pay down their homeloan and so the value of this return in simply your home loan rate.

Any number of solar panel calculator on Solar Estimate can tell a consumer their return from installing a home solar power system but it is up to each person to determine whether they use a discount rate higher than their home loan rate to reflect any risk there is with the ongoing running of a solar system. Obviously paying down home loan debt has zero risk and owning a solar system has some risk and so a higher discount rate probably should be applied. However, with home loan rates around 3-4% and returns on solar being better than 10% in many states solar is still a good investment for many people.

2. A person has paid off their home and has money in the bank.

In this case a consumer is depleting money in their bank to purchase a solar system so the return from the alternative is the rate of interest they get on money in the bank. Currently maybe 1%. For these people solar seems a no brainer to me as returns on solar systems vary across the country but are always above 5%. In some cases they are up over 15% and so even if the consumer chooses to apply a much higher discount rate to the analysis of the solar investment over the discount rate he or she applies to the choice to have money in the bank a home solar power system seems like a good bet.

[sensij]

For the analysis I discussed earlier in the thread, the assumption of an upfront cash purchase was assumed. However, the existence of very low financing rate (<2%) seems attractive and requires some more thought on integration into a model. Let's say you have $10k on hand, and intend to purchase a $10k PV system. Let's look at two choices:

1) Spend $10k cash on the PV system
2) Invest the $10k in a hypothetical risk-free bond yielding 2.2% compounded annually, maturing in 10 years. Finance the PV system for zero-down at 1.99% for 10 years.

In Option 2, the monthly payment amortizes to $91.92. At the end of 10 years, the total spent would be $11030.40. However, you would also collect $12430.93 from your bond that matured, netting about $720 into your pocket after taxes. It is like owning a mint, right?

What that first cut doesn't account for is the fact that the $91.92 monthly payment has to come from somewhere, and has time value as well. To keep the comparison fair, the Option 1 could also be given $91.92 / mo to invest, and although an equivalent risk-free bond maturing in progressively shorter amounts of time would not have the same yield, let's say for now that it would. At the end of 10 years, the interest earned on those monthly investments would total up to about $742 after taxes. Based on that result, Option 1 is better by $20, but requires the work of remembering to make the $91.92 investment each month, unless you set up an auto-invest system. Option 2 would have the $91.92 bill each month, which your lender is unlikely to let you forget.

Even though it isn't a fair comparison, this first cut could probably be a realistic prediction of what someone might do. That extra $91.92 per month might disappear into some soft of discretionary spending that would otherwise have been done without. In other words, by requiring the upfront investment in Option 2 in parallel to the financing, even though it is slightly non-optimal, the expected return might actually be higher.

Another way to guarantee that two scenarios are being compared fairly is to require that the monthly finance payment comes out of the account where the $10k was invested. Since there is less money overall in the system being invested at the 2.2% rate, and there is no way to forget making an investment, Option 1 comes out even further ahead, by about $240.

Of course, investments with some risk might offer a higher return than the risk-free 2.2%, and once the after tax yield exceeds the APR of the loan, Option 2 will come out ahead. For example, with a 6% investment return, and with payments coming out of the investment account, the net benefit would be about $1534 after 10 years.

Ok, so now what? Does that $1534 mean that the PV system is "cheaper" than it seems? On a relative basis, the answer should be yes, if the calculation for the all cash purchase had yielded a positive value, then the financed version will be more positive, or will break even quicker. Using that same 6% discount rate, it could also be said that $1534 in 10 years from now is worth $857 dollars today. In other words, by going the financing route under these assumptions, you could take the original $10k system cash flow analysis, change the year 0 cost of the PV system from $10000 to $9143, and leave the rest of the cash flow unchanged, and see how much more quickly the PV system reaches your desired payback level.

If you work often with discount rates, the scenario above might seem trivial to you. For me, by working through the example, it helps reinforce exactly what it means when a particular discount rate is used for analysis. A key point is that when reductions in utility bills are projected, what is done with the savings? Does it get spent on something else, invested, or used to pay off debt? The answer to that question (and ultimately the follow-through) is essential to determining what discount rate is appropriate for a given situation.

Is it worth trying to figure this out? Aren't there calculators that exist to do it automatically? Certainly, SAM does a lot of heavy lifting. My discussion above is built around the net present value concept, and SAM does a good job calculating that. However, to go deeper into payback analysis, there is a lot to learn from what NREL has published showing a detailed comparison of the different metrics that people might use. The NPV based metrics like profitability index and benefit-to-cost ratio are new to me, and I think generally represent my goals in performing the analysis. I will try to understand them better. LCOE, simple payback, IRR, and other methods people might prefer are also discussed, although in conclusion, IRR is dismissed as a poor decision making tool. There is a section on assumption sensitivity, and they cleverly scale the sensitivity into the equivalent purchase price, as I attempted to replicate in my buy vs finance example above.

Unfortunately, SAM does not generate some of these metrics directly, so it seems that once a cash flow is generated, there is still some work to do (I haven't googled yet to see if there are other calculators). The analysis period in the paper is 30 years, much longer than a typical residential customer is interested in, so it is hard to draw any payback conclusions directly from the paper itself. For anyone who is actually interested in the content of this thread, I thought you might find it interesting in its own right.

Figuring out how to apply the different metrics to my small 3 kW system will take more time, although I hope to post the results when I do.

[sensij]

Apparently, I'm not the only one who sees LCOE as inadequate for evaluating residential rooftop solar. My understanding of it above was incorrect, due in part to the way NREL has chosen to present its calculations in their spreadsheet (and also in part to my initial lack of reading comprehension while reviewing their detailed manuals). After a query with NREL and further review of their documentation, the energy is not in fact being discounted, the cash flow is essentially being discounted and then un-discounted. The result is that LCOE is not meant to be interpreted as a present value lifecycle metric, but instead simply satisfies the equation: Average Energy cost (in year n) = LCOE (constant over all years) x energy consumed (in year n). It is a neat math trick, but even its usefulness in the economics of large scale generation is questioned.

Alternatively, the analysis I described above attempts to answer the question, "What $ / kWh will I pay in today's dollars for my electricity consumption over the next N years?". Neither this, nor LCOE is very suitable for evaluating energy efficient upgrades, since reducing energy consumption reduces the denominator and therefore understates the value of the upgrade. Simple NPV cost calculations are a better starting point for those types of decisions, but studies have shown that many of us pursuing solar are already aware of the benefits of conservation.

Solar payback analysis is not a wheel that has already been invented, but is evolving. The approach I've described to this problem is not new or innovative, but is a simple enough formulation that I can understand it and communicate it to others, and since it is based on established total lifecycle cost methods, the accuracy will be as good as the starting assumptions. Sensitivity analysis of those assumptions is an extension of the analysis that can help determine how trustworthy the results really may be.

Why the deep dive into cost calculations? I've hypothesized that a current tier 2 electric user in San Diego could benefit from switching to solar, and a solid framework in which that hypothesis can be tested is needed. If you have suggestions on how to make that framework better, I'd love to hear them.

[sensij]

The comments above may be sourced here.

The impact on solar payback is interesting. On one hand, the marginal reward for replacing upper tier consumption drops significantly, and the increase in monthly fee hurts solar payback across the board. It isn't clear if the fee will be instead of the existing $0.17 minimum charge per day (which is effectively $5.17 / mo), or on top of it. On the other hand, the relatively large increase in the lower tier rates improves the marginal reward for replacing that energy with solar.

If your payback analysis under the existing rate structure shows optimum reward for replacing all or nearly all of your electric with solar, then the new structure is unlikely to change that conclusion. In that scenario, your last panel is replacing low tier power in either case, and that is likely to be more valuable in the future, not less. However, the overall benefit may be reduced, since the Tier 3/4 replacement is not contributing as much.


Some other documentation that is related is SDG&E's filing for rate increases in 2015 at the beginning of the year. The projected impact, as detailed on page 59, is a 4.2% increase for the "average" consumer of 500 kWh per month, while net decreases would result for the upper tier consumers.

That filing was updated here, at the end of February.

It is clear from the documentation that a significant factor in the rate and tier restructuring (over 5 years) will include redefining the "baseline" usage to a level at or near the legislative minimums. For users who are near the upper limit of tier 2 today, it is reasonable to believe at least a portion of the usage will be classified as "upper tier" in the new structure.

Hearings are ongoing, but clearly, changes will be coming.

[J.P.M.]

We just moved from our smaller home of 20 years into a much larger house, and SDG&E was nice enough to send us a $1,000+ electric bill for the August-September billing cycle. Granted, we ran quite a bit of AC and we have an electric car, but holy guacamole! Hard to see how solar would not pencil out for us, especially since SDG&E has aggressively increased rates and shows no signs of ceasing such practice in the future.

Be careful what you believe about rates. They are changing. Your money, your choice, but a bit of homework may change your opinion some about the future of SDG & E and other CA POCO rate increases. If SDG & E is to be believed (???), they published something recently that said they intend to go to 2 tiers with rates much closer together, by an approx. increase in what were the lower tier rates of about 8%, and a DECREASE in what were the upper tier rates of about 30%, pending PUC approval. They intimated about a 2+yr. phase in. Thus, large users will probably see their bills go down some. Small bills will increase some. Root around on their website for confirmation. I'd suggest being skeptical of what those with money to make by using consumer ignorance to fear monger folks into solar or other things with unsubstantiated and often exaggerated claims about supposed rate increases that may or may not happen as much as being skeptical of the POCO's blurbs.

Nothing cuts an electric bill as effectively as not using the POCO's product. Conservation is usually the next most cost effective measure. Solar electric is about the least cost effective and only then probably to a point of replacing most of a conservation reduced bill, rather than the whole thing.

[scswickman]

We just moved from our smaller home of 20 years into a much larger house, and SDG&E was nice enough to send us a $1,000+ electric bill for the August-September billing cycle. Granted, we ran quite a bit of AC and we have an electric car, but holy guacamole! Hard to see how solar would not pencil out for us, especially since SDG&E has aggressively increased rates and shows no signs of ceasing such practice in the future.

[sensij]

@J.P.M. as you say, it's a free country. do what you like.

For others who are interested in payback assumptions and calculations, I would love to continue a dialog about best practices and ways in which the industry standards may not represent the interests of the typical homeowner. You can see I strongly advocate supporting opinions with data, and understanding the data well enough to explain how it is derived. Based on the sales pitches I have been receiving, there are many in the industry who are willing to profit on ignorance, and encourage decision making that may not be in our best interests.

Having said that, solar in San Diego is a rational economic decision under many sets of assumptions, and I hope that others who might be on the fence are willing to take a close look and see if their situation is consistent with those assumptions.

[J.P.M.]

A comment or 2:

I suggested Sensij share his results with the forum. The data is indeed for my system and were supplied by me.

1.) The real LCOE from my SAM analysis for my system using data and electric rates from my 10/17/2013 startup is $.18112/kWhr.

2.) Sensij's methods are his, not mine. While respecting his opinion, I believe his analysis is incomplete and flawed in some ways. I'll continue to use the LCOE method similar to SAM's as I believe it to be a better, more thorough and more accepted way of doing an energy cost analysis.

3.) FWIW, that analysis used 3% fouling. So far with 4 days to go to the 1st anniv. of startup, the system has produced 9,489 kWh.

J.P.M.

[sensij]

J.P.M. was kind enough to share some of his system data and SAM analysis he used when evaluating solar, so that the calculations could be reviewed with a known set of assumptions. Those assumptions are:

1) 5.232 kW system (16 x Sunpower 327 with 5 kW inverter)
2) First year production set to 9389 kWh (predicted in SAM)
3) 0.4% annual degradation (Sunpower is better than most panels)
4) $4.50 / W installation cost (pre-incentive)
5) 30% federal tax credit + $912 state rebate (CA state rebates are no longer available for residential customers)
6) SDG&E Inland All Electric DR rate schedule ("All Electric" allows much higher baseline usage in winter for heating), September 2013 pricing
7) Annual usage of 10307 kWh, seasonally distributed to yield $0.21776 / kWh average cost.
8) Total electric rate inflation of 3.08% (2.33% base inflation + 0.75% electric rate inflation)
9) System is purchased cash, not financed or leased
10) Nominal discount rate of 6% (for zero-down financing, it would be reasonable to use the loan APR).
11) Analysis period of 12 years
12) Asset value of the system is zero at the end of the analysis period
13) Effects on assessment and property taxes are ignored.
14) Nothing is spent on maintenance.

With these assumptions, the following table can be built:
1st column = year
2nd column = cost of electricity without solar
3rd column = cost of electricity with solar
4th column = amount saved by solar


0_____________0____23572____(23573)
1__________2244____(7802)_____5558
2__________2313______186_____2127
3__________2384______189_____2195
4__________2458______193_____2265
5__________2533______197_____2336
6__________2612______200_____2412
7__________2692______204_____2488
8__________2775______207_____2568
9__________2860______211_____2649
10_________2948______214_____2734
11_________3039______218_____2821
12_________3133______221_____2912
____________________________$3939 = NPV of savings
LCOE (nom)_0.253____0.205
PVEC (nom)_0.167____0.135

The LCOE (levelized cost of energy) and PVEC (present value energy cost) are both reported in $ / kWh, by taking (total cost) / (total energy). LCOE is an industry recognized calculation that uses the NPV of costs divided by the NPV of usage, using the same nominal discount rate to calculate both. The PVEC calculation is as I described earlier in the thread, in which the NPV of costs is divided by the SUM of usage, since I see no reason to discount the future energy production.

Despite the difference in calculations, both averaging methods and also the simple NPV of solar savings agree that the breakeven point occurs early in year 10. Breakeven is the point at which the cost of electricity with solar is equal to the cost of electricity without solar.

For systems in San Diego, breakeven seems to typically be somewhat over 10 years when the system is sized to cover 100% of energy usage. For systems sized to cover only tiers 3 / 4 power, the breakeven point will occur much more quickly, although the long term cumulative savings may be less. If you live in another part of the country and would like some help applying these calculations to your system, just PM or email me and I would be happy to help.

Whether you use SAM, your own calculations, or whatever the solar salesman has pitched you, make sure that the assumptions being used are realistic! This kind of analysis is a powerful way to estimate the cost-effectiveness of solar, or any long term investment, and is not too difficult to perform.

Despite my frustration with SAM's LCOE calculation, it has a lot going for it. Among those are the ability to easily incorporate property taxes and other operating or maintenance costs, along with other cost models that are less uniform than the assumptions I've used here. It also has some interesting production estimation tools, including a 3D shading modeller.

[J.P.M.]

Opinions vary. I think it does a decent job. Not perfect, but then not much is. Explanations could be a bit more forthcoming, there is a land mine or two in there and some results are squirrely for reasons unclear. But, I've found my patience usually rewarded and there is always Paul Gilman at NREL.