Solar Costs and Paybacks Shift for Consumers :
By: Leslie Martel Baer
The abrupt restructuring of Xcel Energy's Solar*Rewards last spring shook up Colorado's solar photovoltaic (PV) installation industry and raised more than a few eyebrows among potential PV residential buyers. While a new agreement on installation rebates and a pay-for-performance structure was hammered out, the most commonly asked question remains: How much will PV for my home really cost me now?
The PV Industry and Pricing in Colorado
The solar PV industry is strongly rooted in Colorado, with the Solar Energy Research Institute, later the National Renewable Energy Lab, founded in Golden in 1977. The solar industry at large blossomed under the national solar incentives launched by the Carter Administration in 1979.
The boom busted across the nation when the Carter incentives expired under the Reagan Administration. In Colorado, a much smaller solar industry continued on against huge price barriers. According to SolSource President Jeff Scott, consumers faced high module prices in 2000, given the incentive vacuum and worries over Y2K systems failures resulting in shortages. At that point, consumers experience module prices of around $7.50 to $8.00 per watt of capacity installed.
As fossil fuel prices were falling at the same time, there really was no return on investment (ROI) on a PV system. At the same time, consumers had only about 4 solar installers from which to choose within the state.
Incentives Recharge the Industry
Much changed in Colorado in 2004 with the passage of Amendment 37, which required investor-owned utilities (IOUs) to reach a minimum of 10% generation through renewables, including solar PV. To accomplish this goal, IOUs such as Xcel Energy set upfront incentive programs (UFIs) to reduce the capital expense of PV systems to consumers, thereby encouraging more installations.
At this point, consumers could take advantage of prices as low as $3.00 to $3.50 per installed watt. But, that pricing was to continue to drop with tax incentives carried in the Federal Energy Policy Act of 2005 (EPAC), which brought prices to the $2.00–$2.50 range for Colorado consumers. The EPAC incentives were extended in 2009 out to 2016, providing the industry with some stability at the Federal level.
Colorado saw per Watt prices continuing to drop due to a number of factors. Between 2007 and 2010, module manufacturers held excess inventories, driving prices down. At the same time, Colorado experienced a glut of installers: in 2007, there were still only 4–8 sizable solar PV installers in the state. By 2010, Scott estimates Colorado was home to around 400 installers. Considering that Colorado’s population was roughly 6 million in 2010, the state was crawling with PV installers compared to states like California, which had 100 installers to serve a population six times the size.
Incentives Switch Gears
These factors drove retail installation prices down to around $1.00–$1.50/W by 2010—President Obama’s target for solar PV nationally. But this direction was not to continue. In February of 2011, Xcel Energy—Colorado’s largest IOU—shut down its incentive program. The following month, the program was reinstated with smaller UFIs and a new structure for performance-based incentives (PBIs). According to Scott, SolSource has seen net install prices increase to $2.28/W, when the new UFI structure and the Federal tax incentive are considered (but excluding the new PBI; see Chart 1).
Calculating a Payback in Colorado Today
Several variables are considered when determining the payback period on a solar PV system: how much electricity you use, the size of the system you are considering, and the incentives (UFIs and PBIs) available at your location.
Table 1 outlines the basic figures needed to determine the system size and the potential savings for my home, which houses three people and a consulting business. The “derate factor” of 80% addresses generation lost to things like DC-AC conversion, snow and my lack of interest in cleaning the panels. To more than meet our needs—and conveniently track the data in our chart above—we arrive at a 5kW system (5kW * 5.5 hours/day * 30 days/month * 80% production = 660 kWh/month).
Chart represents medians derived from data provided by Dan Yechout, Residential Sales Director, Namasté Solar and Jeff Scott, President, SolSource, Inc. Data do not reflect state property tax incentives.
It is important to recognize that electricity prices are expected to increase each year, whereas my system will continue to generate without price hikes. Xcel anticipates a 34% increase in residential electricity prices over the next 10 years.
Table 2 illustrates the financial return on a system based upon various rate increases. And, as Dan Yechout of Namasté Solar points out, the calculations become more interesting if you look at your electricity costs on a pre-tax basis: doing so makes these calculations more comparable to a dividend-paying investment of $14,250 in another instrument.
So far, whether or not a PV system still looks like a solid bet for residential consumers depends largely on your view of where electricity prices are going and how patient you are in seeing your return. And, our calculations have only factored in UFIs.
Where Do PBIs fit in?
Today, IOU customers also receive PBIs, such as Xcel’s shown in Table 3.
Upfront rebates will phase out in favor of increasing PBIs. The system described above would earn me an average of $33/month for 10 years. That $3,960 and drops my payback under the 3.4% rate increase scenario to about 10 years.
What Should Consumers Do?
At this point, whether or not a PV solar system makes sense for you still depends largely on your situation. If you have the cash and can be patient in achieving your return, it still makes sense to buy your own system, thereby owning your own electricity production with the potential for a strong ROI.
If you don’t have the cash today, you have two options. A system lease saves some of the headaches of maintenance but should still result in a net reduction of your home utility expenses. Alternatively, given that energy efficiency and renewable energy investments have been demonstrated to increase home value, many banks are willing to support these projects for customers with good credit ratings and healthy debt-to-equity ratios through loans.
Finally, as Scott agrees, it may be worth starting with solar thermal. Our home, for instance, has higher natural gas costs than electricity costs. Solar thermal may also make sense for homes at higher elevation, running on propane or that suffer from space-heating inefficiencies. For this technology, the payback period in Colorado averages around 9 years and an ROI of 8–10% might be realized in year 10, depending upon prices for fuels like natural gas.
Despite the shake up in programs affecting many residential energy consumers across the state, solar still makes sense—if you can take a long-term view. And, because of all of the competition for projects among installers, Scott notes that today we are still experiencing a buyer’s market. It may be as good a time as any to dive into generating your own power in Colorado.
Leslie Martel Baer, MA, is President of Mountain Muse Strategies, LLC. This article is an expanded version of a piece that originally appeared in CRES News. Thanks to CRES for permission to post.
The complete picture of incentives, including income and property tax incentives, rebates, grants and loans is complex and involves federal, state and local entities, as well as electricity providers such as IOUs (Xcel Energy and Black Hills Energy in Colorado), rural electric associations (REAs) and municipal providers. Learn more about local incentives through the CRES Local Clean Energy Policy Guide (visit http://www.cres-energy.org, click on “Policy”) and the Database of State Incentives for Renewables & Efficiency (http://www.dsireusa.org).
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