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  • Equation for avoided cost?

    Hey guys. Trying to wrap my head around some sales #'s, and I'm getting different chatter. long story short - the value I'm looking for is 'avoided costs' and i see it defined several different ways, or, at least, I'm translating what i hear as several different methods.

    Anyone have a good simple definition I can work with? hwo does it compare to consumers electric rate before hand? hwo does it change if a utility has a pre-solar rate and a seperate post-solar rate? is it calculated on a 20 year life-cycle? are Utility rate increase assumptions always calculated with this?

    Thanks for any help!

  • #2
    Perhaps JPM can respond more accurately but I think you know what it is and we'll be unable to help unless we have more details, like your proposal sheet. I suspect they are using the term avoided costs because ROI is a bit more complicated, esp over a longer term. Again, I suspect they also use Avoided costs because that is simplest and allows them to ignore any utility side increases by going PV, like minimum monthly, standby meter, or per demand charges. It also let's them avoid calculating costs for inverter replacement in year 10 or whenever and inflation rates of money. In essence, its the best looking number to make the case of buying solar pv.

    Does their number look something like (current annual utility bill) + (compounded est increase escalatation) * (years) ? It's a compound interest plus contribution function, like

    Balance(Y) = P(1 + r)Y + P[ ((1 + r)Y - 1) / r ]

    It's similar to that function, if I had access to excel I'd send you a sheet. But that function isnt right because I belive it's compounding the total rather than only compounding raising cost each year.

    if you make a simple sheet where the row is what you pay each year in utility charges, but add a column for a small increase r each year, like 3% is what I've seen sales use ( but may be completely unrealistic). Then sum the 30 rows. Tada, cost avoidance. Something like $70,000 ballpark can be avoided for a mere $15000 PV Install if your bill is 2000 per year! Sign here, must do it today for this price....
    Last edited by cebury; 01-17-2017, 09:21 PM.

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    • #3
      Here's how I would calculate "avoided cost". Build a spreadsheet and calculate your energy costs on a going forward basis as if you did nothing. That becomes your base.

      Now compare your new energy costs based on your net meter billing plus your cost of production of energy used internally or sold externally. You have to install monitoring devices to know your internal use of PV energy, such as a TED system or similar (many systems out there). To know your cost of production for any period you have to calculate your cost of production per kWh......ie total system cost plus maintenance costs plus financing costs divided by total projected lifetime production times the kWh used internally or sold externally for the period under review. You cannot ignore your costs of production.

      The difference between your new energy costs and the base is your avoided cost.
      Last edited by DanS26; 01-17-2017, 09:38 PM.

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      • #4
        The broadest definition of avoided cost I've found that's useful for home PV applications goes something like this:

        Avoided cost is the marginal cost of supplying the same amount of energy by constructing alternate means of providing that same amount of energy.

        That's the simple definition. Unfortunately or otherwise, there are almost as many ways of coming up with a number and as many arguments about the validity of what goes into calculating that number or numbers as there are people to offer suggestions or opinions.

        One simple method, but misleading and prone to result in poor decisions, or at least uninformed ones: Whatever the PV system costs, it must be less than: (estimated current annual savings) * (estimated service life in years). To some, that's the max. avoided cost . That's a limit That's the moron method. So, if a system will save you $2,000/yr. and you're moving/dying/whatever in 12 years, you better not be spending more than $24K after tax credit.

        Cebury's offering adds a bit of necessary complication that accounts for some additional variables. It may or may not be adequate, depending on what the person paying the bills thinks.

        DanS26 gets a bit more involved and his method is somewhat similar to what I do, but from reading his post I think I use a different definition of what avoided cost actually is. The way I leaned it, avoided cost is the cost of the equipment to avoid incurred electric charges. It looks like he's considering avoided cost on a per period or per kWh basis while I use the total net up front cost as the definition. There's /- 's to either way. I also try to take some account of tax considerations as applicable, and the effect of possible rate inflation and general inflation, discounted to present value (they're not necessarily, and probably aren't the same).

        About the best and most appropriate SHORT treatment of the subject that can be quickly and easily absorbed that I've seen is in Duffie & Beckman, "Solar Engineering of Thermal processes", Chap. 11 titled "Solar Process Economics". It packs most of what homeowners need to know and probably more in about 30 or so pages, doesn't talk down but doesn't leave much out either.

        There is also something called Levelized Cost of Energy (LCOE) analysis for which NREL has a calculator. I'm not crazy about the calculator itself because I think it can lead to false confidence unless the inputs are reasonable and realistic - GIGO - and I'm skeptical about most folks ability to understand the what the variables are. See the NREL website for details or Google LCOE.

        NREL also has an online manual: "A Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies", NREL/TP-462-5173, Short, Packey and Holt, authors, March, 1995. It explains a lot. 120 pages and lots of good info.

        Most methods of any analysis with respect to alternate energy systems are a form or variation of something called process economics or sometimes also called Life Cycle costing.

        There's also another related but somewhat different tool known as comparison of alternatives analysis. That method, as the name implies, looks at various ways to invest a sum of money (now), and essentially compares what will happen when that investment is used in various ways. A very simple example: Given some assumptions about the future, it asks a very simple question: Which investment will give the owner the biggest ROI (Return on Investment) over, say, 12 years - a PV system, or buying a long term corporate bond fund and reinvesting the dividends. Lots to consider and every situation is different.

        If you're looking for a one line equation or answer, I can't give one. It ain't a one line kind of subject like many want to make it.

        Good luck.

        Take what you want of the above. Scrap the rest.

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        • #5
          You can actually make an energy monitoring system (such as TED) do a lot of the detail calc work for you especially if you are on a TOU billing system. I use TED so I can speak to that system. I set the TED calc parameters up using the old TOU rates and tiers, thus recreating my old electric bill. That becomes the base for almost all of my financial calculations......cash flow, IRR, payback and avoided cost.

          Most people use TED to recreate their current utility bill.....and that is what it was designed for and it works well for that purpose. I just stepped out of the box a little bit and re-purposed it for my calculations.

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          • #6
            Originally posted by DanS26 View Post
            You can actually make an energy monitoring system (such as TED) do a lot of the detail calc work for you especially if you are on a TOU billing system. I use TED so I can speak to that system. I set the TED calc parameters up using the old TOU rates and tiers, thus recreating my old electric bill. That becomes the base for almost all of my financial calculations......cash flow, IRR, payback and avoided cost.

            Most people use TED to recreate their current utility bill.....and that is what it was designed for and it works well for that purpose. I just stepped out of the box a little bit and re-purposed it for my calculations.
            It's usually pretty slick to find uses for things perhaps not within the originator's intent.

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            • #7
              Originally posted by DanS26 View Post
              You can actually make an energy monitoring system (such as TED) do a lot of the detail calc work for you especially if you are on a TOU billing system. I use TED so I can speak to that system. I set the TED calc parameters up using the old TOU rates and tiers, thus recreating my old electric bill. That becomes the base for almost all of my financial calculations......cash flow, IRR, payback and avoided cost.

              Most people use TED to recreate their current utility bill.....and that is what it was designed for and it works well for that purpose. I just stepped out of the box a little bit and re-purposed it for my calculations.
              I don't have a TOU plan so my calculations are much simpler. My issue is that I never know what my rates are for each month. I've found the rate information published online but the actual rates never match the published ones. They're usually close but not quite there. Then the rates vary every month even though the published rates should be in effect for the entire season. Also, rates vary a tiny bit for me by usage. I believe 600 is the cutoff where rates go up in the summer. However, I frequently see rates change in the winter as well, when they shouldn't.

              The one nice thing is that my utility only bills me for my net usage, as if that was all I used. For example, say in August the meter read 900 kWh used and 800 kWh produced, I only get billed for the 100 kWh at the sub-600 rate. They don't calculate the full cost of the 900 used and then credit the 800 which would have me paying that last 100 kWh at the higher rate for usage above 600 kWh. On the other hand, my utility doesn't bank dollars only kWh. So if I banked in the summer when kWh are more valuable, I don't get credit for that extra value.

              The one annoying thing is that I get billed monthly on any excess usage. So for example, if my solar year starts in August and I had net usage for the first 2 months, I have to pay that bill for the net usage. They don't wait until the end of the year to bill my annual net usage. So I can have a year where I produce more than I use but yet I was a net negative due to the timing. On the positive side, they do let you change your solar year start date one time. So you can change the start month to March which is likely the best month.

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              • #8
                Originally posted by NYHeel View Post

                I don't have a TOU plan so my calculations are much simpler. My issue is that I never know what my rates are for each month. I've found the rate information published online but the actual rates never match the published ones. They're usually close but not quite there. Then the rates vary every month even though the published rates should be in effect for the entire season. Also, rates vary a tiny bit for me by usage. I believe 600 is the cutoff where rates go up in the summer. However, I frequently see rates change in the winter as well, when they shouldn't.

                The one nice thing is that my utility only bills me for my net usage, as if that was all I used. For example, say in August the meter read 900 kWh used and 800 kWh produced, I only get billed for the 100 kWh at the sub-600 rate. They don't calculate the full cost of the 900 used and then credit the 800 which would have me paying that last 100 kWh at the higher rate for usage above 600 kWh. On the other hand, my utility doesn't bank dollars only kWh. So if I banked in the summer when kWh are more valuable, I don't get credit for that extra value.

                The one annoying thing is that I get billed monthly on any excess usage. So for example, if my solar year starts in August and I had net usage for the first 2 months, I have to pay that bill for the net usage. They don't wait until the end of the year to bill my annual net usage. So I can have a year where I produce more than I use but yet I was a net negative due to the timing. On the positive side, they do let you change your solar year start date one time. So you can change the start month to March which is likely the best month.
                Sometimes POCO's have monthly adjustments for fuel cost or other items as allowed by the governing bodies. Such was the case when I lived in NYS.


                Figuring any utility bill can be tricky. I'm pretty sure I know mine, but I always get a surprise. Spending time learning and really digging in to tariffs is not something most folks enjoy, but I'm pretty sure if you do, most of the surprises will go away. I've found that POCO's do not cheat on their billing, and from a common sense standpoint, seems to me they've more to lose than to gain by cheating on billing. Still, there's probably no law that says POCO's must be forthcoming or make it easy to understand the gory details of any rate structure, and they usually don't.

                My guess is if you really dig into your tariff and the billing, it'll make sense - not in a pretty or easy to understand way - just sense.

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