a comparison of the cost and financial returns for solar photovoltaic systems installed in business...

8/9/2019 A Comparison of the Cost and Financial Returns for Solar Photovoltaic Systems Installed in Business Across the Unit

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A comparison of the cost and nancial returns for solar photovoltaic

systems installed by businesses in different locations across the United

States

Kenton D. Swift*

School of Business Administration, The University of Montana, 32 Campus Drive, Missoula, MT 59812, USA

a r t i c l e i n f o

Article history:

Received 3 July 2012

Accepted 8 January 2013

Available online 24 February 2013

Keywords:

Photovoltaics

LCOE

Solar nance

Grid parity

Solar economics

a b s t r a c t

Depending on what one reads, the cost of solar photovoltaic energy systems (solar PV systems) has

already reached parity with grid produced electricity or, at the other extreme is far from parity. This

leaves potential end users who are considering the installation of solar PV systems confused as to

whether such an investment makes economic sense. These contrasting views are not surprising for

several reasons. First, many analyses of the costs and nancial returns of solar PV systems ignore

important factors impacting the potential costs of such systems. Second, the factors impacting costs and

nancial returns such as levels of solar insolation, government and utility incentives, and the cost of grid

produced electricity vary dramatically based on location. Finally, the cost of solar PV systems is declining

rapidly over time. This study compares the costs and nancial returns of solar PV systems installed by

businesses, to grid produced electricity, in four specic locations across the US for 2012. The amounts are

calculated after taking into account local solar insolation, and all available tax incentives and other

available incentives and rebates. The results demonstrate that costs and nancial returns of solar PV

systems vary dramatically depending on the location where they are installed. The differences are pri-

marily the result of variations in state incentives, electricity prices, and the level of solar insolation. This

conrms that detailed, site specic, information about incentives, grid produced electricity rates, andlevels of solar insolation is needed to determine whether the installation of a solar PV system makes

economic sense in a particular location.

2013 Elsevier Ltd. All rights reserved.

1. Introduction

Parity with grid produced electricity is the economic holy grail

for solar photovoltaic energy systems (solar PV systems). Depend-

ing on what one reads, the cost of solar PV systems has already

reached parity with grid produced electricity [1] or, at the other

extreme the cost is far from parity with grid produced electricity

[2e

4]. This leaves potential end users who are considering theinstallation of solar PV systems confused as to whether such an

investment makes economic sense.

These contrasting views are not surprising for several reasons.

First, many analyses of the costs and nancial returns of solar PV

systems ignore important factors impacting the potential costs of

such systems. Second, the factors impacting costs and nancial

returns such as levels of solar insolation, government and utility

incentives, and the cost of grid produced electricity vary dramati-

cally based on location. Finally, the cost of solar PV systems is

declining rapidly over time. The result is that solar PV systems are

likely to become cost-effective in more and more locations as costs

continue to decline.

The purpose of this study is to compare the costs and nancial

returns of solar PV systems installedby businesses, to grid produced

electricity, in specic locations acrossthe US for 2012. The costs andnancial returns are calculated after taking into account local solar

insolation, and all available tax incentives and other available in-

centives and rebates. The results are valuable in identifying the

factors that are likely to make installed solar PV systems econom-

ically viable in some locations, but more expensive than grid pro-

duced electricity in other locations. In addition, in locations where

solar PV systems arenot currentlyeconomically viable, it is possible

to estimate thecost at which a systemis likelyto achieve grid parity.

The method used to complete this analysis is capital budgeting,

which is a standard method used for analyzing potential capital

expenditures by organizations. Capital budgeting can be used by* Tel.: 1 406 243 4182; fax: 1 406 243 6925.

E-mail address:[email protected].

Contents lists available atSciVerse ScienceDirect

Renewable Energy

j o u r n a l h o m e p a g e : w w w . e l s e v i e r . c o m/ l o c a t e / r e n e n e

0960-1481/$ e see front matter 2013 Elsevier Ltd. All rights reserved.

http://dx.doi.org/10.1016/j.renene.2013.01.011

Renewable Energy 57 (2013) 137e143
mailto:[email protected]://www.sciencedirect.com/science/journal/09601481http://www.elsevier.com/locate/renenehttp://dx.doi.org/10.1016/j.renene.2013.01.011http://dx.doi.org/10.1016/j.renene.2013.01.011http://dx.doi.org/10.1016/j.renene.2013.01.011http://dx.doi.org/10.1016/j.renene.2013.01.011http://dx.doi.org/10.1016/j.renene.2013.01.011http://dx.doi.org/10.1016/j.renene.2013.01.011http://www.elsevier.com/locate/renenehttp://www.sciencedirect.com/science/journal/09601481mailto:[email protected]


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businesses to determine whether the installation of a solar PV

system makes sense in the rms specic set of circumstances.

2. How companies make capital budgeting decisions

In making a solar PV system purchase decision, businesses have

little interest in generalized discussions of potential parity between

such systems and grid produced electricity. Rather, the organization

wants tomake a specic comparison between itspresent andfuture

grid produced electricity costs, and the net cost of a solar PV system

over itsuseful life. Simpleparity with grid producedelectricity is not

enough. This is because theorganization will have to commit capital

to purchase the solar PV system. Since capital is limited companies

need to invest in those projects that produce the greatest return.

Thus, an investment in a solar PV system must provide a nancial

return in comparison to grid produced electricity that compares

favorably with other investment opportunities.

2.1. Selecting a method for analyzing capital investments

A variety of methods are available for analyzing and comparing

potential capital investments and, in aggregate, these are normally

referred to as capital budgeting techniques. The net present value(NPV) method discounts future cash ows to their present value

using the organizations cost of capital as the discount rate[5]. The

present value of the future cash ows is then compared to the

initial investment. A positive NPV occurs when the present value of

the future cash inows exceeds the initial investment. When the

present value of the future cash inows equals the initial invest-

ment, the NPV is zero. A zero NPV means that the projects future

cash ows are exactly sufcient to repay the invested capital and to

provide the required rate of return on the capital. Thus, a positive

NPV means the projects future cash ows exceed the amount

necessary to repay the invested capital and to provide the required

rate of return on the capital.

A common way of reporting the present value of the cost of

a solar PV project is the levelized cost of electricity (LCOE). LCOE isthe estimated present value of the cost of 1 kWh of electricity.

Rather than comparing the present value of the cost directly to the

benets of the solar PV system, it is compared to the cost of grid

produced electricity. A review of the methodology for calculating

LCOE is provided in Branker et al.[1]. Making such a comparison is

critical in an organizations decision process because they are

interested in identifying the least expensive source of electricity.

The LCOE of the solar PV system is often compared to the current

cost of grid produced electricity, rather than the LCOE of grid pro-

duced electricity. This type of comparison is really a comparison of

apples and oranges because the current cost of grid produced

electricity ignores future ination in energy prices. A better alter-

native is to calculate the after-tax LCOE of grid produced electricity,

taking into account expected ination, and compare this to theLCOE of the solar PV system.

The internal rate of return (IRR) method is closely related to the

NPV method. The IRR method provides a rate of return from an

investment, rather than using a cost of capital in the calculation,

and it is dened as the rate of return, or discount rate, that forces

the NPV of the investment to equal zero. Thus, it is not necessary to

select a discount rate, as it is in NPV calculations.

For the capital budgeting cases presented in this article two

types of results are presented for comparing the lifetime cost of

a solar PV system to the cost of grid produced electricity. The results

provide both a comparison of the LCOE of the solar PVsystem tothe

LCOEof grid produced electricity, and a presentation of the IRR of

the installed solar PV system. The IRR calculation includes the

future savings from not having to pay for grid produced electricity.

2.2. Considering loans in the capital budgeting analysis

In the literature on the nancial performance of solar PV sys-

tems, the cashows related to debt nancing are often included in

the analysis[1,6]. In capital budgeting, however, debt nancing is

normally separated from the analysis of the nancial return on the

asset being purchased, except for the determination of the weigh-

ted average cost of capital used in the discounting of future cash

ows. So,for instance,the availability of low-interestdebtnancing

for a solar PV project impacts the potential return of the project

indirectly, by changing the rms cost of capital. Bierman and Smidt

[7]state:

Cash disbursed for interest is normally excluded from the cash

ow computation used in analyzing investments. The interest

factor is taken into consideration by the use of the present value

procedures. To include the cash disbursements for interest

would result in double counting (p. 64).

In the uncommon circumstance in which debt nancing is

included in a capital budgeting analysis there is another important

issue to consider. An analysis that includes debt cash ows must

use a discount rate that reects the expected return to the rms

owners, or equity holders, not the overall cost of capital to the rm.This is because the return being calculated is really the return to

equity holders after considering debt. The expectedrate of return to

equity holders is, by denition, higher than the rms weighted

average cost of capital, which is normally used in capital budgeting.

This additional expected return creates the positive leverage that

provides the incentive for rms to borrow money. Thus, in such an

analysis the discount rate used in the LCOE calculations must be

increased to reect the expected return to the rms owners.

The cost of capital normally used in capital budgeting is the

weighted average cost of each type of capital including both debt

and equity. The cost of each type of capital is multiplied by the ratio

of the market value of the securities (debt or equity) representing

that source of capital to the market value of all securities issued by

the company[7]. Thus, if 60% of a companys total capital is debtwith an after-tax rateof 6.5%, and 40% of the companys total capital

is equity with a required return to investors of 15%, the weighted

average cost of capital for the company is 9.9%

((0.6 0.065) (0.4 0.15)). This is the rate the company would

use in its capital budgeting analyses. Projects that provide a rate of

return equal to, or exceeding, the weighted average cost of capital

are acceptable, and those that have a rate of return that is less than

the weighted average cost of capital are not acceptable.

Forthe LCOE calculations in this article a weightedaveragecostof

capital is used. The rate used is 7.0%, which is the weighted average

cost of capital across US public companies as of January 2012. The

rate is taken from Damodaran Online, which provides the weighted

average cost of capital across 5891 US public companies [8].

3. Factors to consider in the solar PV system analysis

The information needed for analyzing a solar PV system in-

vestment decision can be divided into four general categories.

These are:

Cost of electricity: The electricity costs, both present and

future, that will be saved by installing a solar PV system.

Sunlight: The amount of sunlight, or solar insolation, available

to provide power for the solar PV system.

PV system costs and performance: The cost and performance

of photovoltaic panels and related components of the solar

energy system.

K.D. Swift / Renewable Energy 57 (2013) 137e143138


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Financial incentives: The tax and other incentives provided by

federal, state, and local governments, and by utility companies

[9].

Each of the factors listed above can vary dramatically based on

location. That is, to accurately estimate the cost and rate of return

on a solar PV system the devil really is in the details of the cir-

cumstances in each location. To illustrate the impact of these fac-

tors on the cost and nancial return from the installation of a solar

PV system, case studies are provided for 2012 installations in four

different locations across the US. All signicant factors impacting

the cost and nancial return, including taxes and other incentives,

are included in the analysis.

The rst step is to calculate the net initial project cost of the PV

system using the following formula. Table 1provides a key to the

formula nomenclature.

Net initial project cost:

NIPC IPC FTC STC UR 1 MTR (1)

In this study the following formula is used to calculate the solar

PV system LCOE. The formula includes tax benets and all other

incentives available for the installation of solar PV systems.

Levelized cost of electricity (LCOE) of solar PV system:

LCOE NIPC

PTt1

MAINT INVERTER DEP PBI SREC

1 rt

PTt1

E 1 dt

1 rt

(2)

The LCOE for the solar PV system is compared to the after-tax

LCOE of grid produced electricity in the location where the sys-

tem is installed. The after-tax LCOE of grid produced electricity is

calculated using the following formula.

Levelized cost of electricity (LCOE) of grid produced electricity:

LCOE

PTt1

E 1 dt PRICE

1 MTR

1 rt

PTt1

E 1 dt

1 rt

(3)

4. Case studies e general information

Case studies are performed for the commercial installation of

a 50-kW solar PV system in the following locations:

Honolulu, Hawaii

Newark, New Jersey

Phoenix, Arizona

Minneapolis, Minnesota

For each case it is assumed that the system is installed by

a corporation with a marginal US federal income tax rate of 34%,

plus a marginal state income tax rate equal to the maximum state

corporate income tax rate where the system is installed. The Na-

tional Renewable Energy Laboratory (NREL) gathers data on the

installed cost of solar PV systems through its Open PV Project. For

the period January 1, 2011 through December 31, 2011 the average

installed cost of systems between 40 and 60 kW was $5.81 per DC

watt before incentives. This average is based on 119 different in-

stallations with a total capacity of 5.9 MW[10]. For the 2012 case

studies an installed cost of $5.25 per DC watt is used, which is

approximately a 10% decrease in costs over 2011. For a 50-kW

system this is a total installed cost of $262,500 before incentives.Other assumptions used in the case studies are described below. A

complete summary of assumptions is also provided inTable 2.

4.1. Cost of electricity

The Energy Information Administration (EIA; www.eia.doe.gov)

provides statistics on the average retail price of electricity in each

US state. The information is updated monthly. The current price of

electricity used in each case study is the average retail electricity

price for commercial and industrial customers for 2011 in the state

where the solar PV system is installed[11].

Table 1

LCOE calculation nomenclature.

Nomenclature

NIPC Net i ni ti al project co st ($)

IPC Installed cost of solar PV system (including sales taxes,if any) before tax benets and rebates

FTC Federal income tax credits

STC State income tax credits

UR Upfront utility rebates

MTR Marginal combined federal and state income tax rate

T Life of the project (years)

t Yeart

MAINT Mai nt enance co st fortnet of income tax savings ($)

INVERTER Cost of replacement inverter fort($)

DEP Income tax benet of depreciation for t($)

PBI Pe rfor man ce- based i nc enti ve fort, net of income tax cost ($)

SREC So lar r enewable ener gy ce rticate revenue for t, net of

income tax cost ($)

E Energy output of system (kWh)

d Degradation rate (%)

PRICE Price of one kWh of electricity for t

Table 2General assumptions used in IRR and LCOE calculations for case studies. These as-

sumptions are used in the case studies unless otherwise noted in the discussion.

System:

- The solar PV system is pointed due south and tilted at an angle equal to

the latitude of its geographic location.

- The system is tied to the utility grid and net metering is permitted.

- The performance of the system degrades 20% over its 25-year useful life.

Degradation takes place in equal increments each year.

- The system inverters must be replaced after 13 years, and the replacement

cost is 9.5% of the initial cost of the PV system, adjusted for ination.

- The DC-to-AC derate factor is 77%. That is, the actual AC output of the

PV system is 77% of its DC power rating.

- The system has a zero scrap value at the end of its 25-year useful life.

General:

- The cost of electricity in year 1 is the average retail price of electricity

for commercial and industrial users for the state in which the system is

installed, for 2011.

- The ination rate for grid produced electricity is 1.6% per year.

- The annual maintenance and insurance cost is 1.0% of the initial cost of

the PV system, adjusted each year for ination.

- There is no incremental cost for the space occupied by the system.

Taxes:

- All grants and rebates are fully taxable in the year received.

- The federal income tax rate for the taxpayer is 34%.

- The PV system is depreciated for income tax purposes using normal

MACRS depreciation over ve years. In the rst year 50% bonus

depreciation is taken as allowed by IRC Sec. 168(k). No IRC Sec. 179

expensing election is made.

- SRECs received by the taxpayer are sold as they are received and are

taxable at ordinary income rates.

K.D. Swift / Renewable Energy 57 (2013) 137e143 139
http://www.eia.doe.gov/http://www.eia.doe.gov/


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Since solar PV systems have useful lives of 20e30 years it is also

necessary to consider future changes in the price of electricity. The

EIA forecasts the expected price of electricity in the US for 25 years

into the future. In its Annual Energy Outlook 2011, the EIA predicts

a nominal average annual increase of 1.6% per year through

2035[12].

4.2. Solar insolation

The fundamental requirement for a successful solar PV system is

solar insolation. The reality is that different parts of the US receive

dramatically different levels of sunlight. For instance, in Anchorage,

Alaska the average daily hours of solar insolation is 3.0 kWh/m 2/

day for a at-plate collector pointed south with a xed tilt angle

equal to the sites latitude. This compares to Phoenix, Arizona

where the average daily hours of solar insolation are 6.5, more than

double the level in Anchorage[13].

The NREL PVWatts calculator is used to determine the annual

level of solar insolation in each case study location. The calculation

assumes the use of a at-plate collector pointed south with a xed

tiltangle. In addition,A 77% DC-to-AC deratefactor is assumed [14].1

4.3. Solar photovoltaic system costs

Solar panels require little maintenance and should last a long

time. A manufacturers guarantee typically provides that the panels

will produce at least 80% of its original capacity for 25 years. The

other critical piece of hardware in a solar electric system is the

inverter. It is a relatively small part of the entire system, making up

approximately 9.5% of the total cost [15]. Inverters do not last as

long as solar panels and the case studies assume that they must be

replaced after 13 years.

4.4. Financial incentives

There are a variety ofnancial incentives available to businesses

investing in solar PV systems. These include federal tax incentives,

state tax incentives, state and local government rebates, and utility

rebates.

4.4.1. Federal income tax incentives

One of the biggest incentives for installing solar energy systems

in the US is the federal business energy credit described in IRC Sec.

48 and which is partof the investment tax credit. The amount of the

credit is 30% of the cost of property placed in service during the

year, and the credit is available through December 31, 2016.

Businesses also receive a tax benet from deducting the

depreciation on the solar energy property. US tax law requires that

when the business energy credit is taken for this property, thepropertys basis for depreciation must rst be reduced by one-half

the amount of the credit. Solar energy property described in IRC

Sec. 48 is ve-year property for purposes of federal tax (MACRS)

depreciation [16]. For 2012, solar energy property is also eligible for

50% bonus depreciation in the year of purchase under IRC Sec.

168(k).

4.4.2. State, local government and utility incentives

State and local government tax incentives for solar energy sys-

tem installations generally consist of income tax credits, property

tax exemptions, and sales and use tax exemptions. For state income

tax credits the percentage of the credit varies widely by state, and

can make a dramatic difference in the net cost of an installed solar

PV system.

States, local governments, and utilities also offer a myriad of

grants and rebates to promote the installation of renewable energy

systems.The form of thegrantor rebateis typicallyeither an upfront

payment to reduce the initial cost of the system, or a performance-

based incentive (PBI), in which the producer is paid based on elec-

tricity production. Solar energy producers participating in a PBI

program receive a double benet: the incentive payment plusthe

electricity costs saved by using a solar energy system. Fortunately,

there is an online comprehensive database of state and local in-

centives called the Database of State Incentives for Renewables &

Efciency (DSIRE), at www.dsireusa.org. Funded by the US Depart-

ment of Energy, DSIRE is an ongoing project of the North Carolina

Solar Center and the Interstate Renewable Energy Council.

Policymakers in several states, including New Jersey, have also

created Solar Renewable Energy Certicates (SRECs) to ensure that

a certain amount of solar energy capacity is installed in a des-ignated area. States with SREC programs have a renewable portfolio

standard (RPS) that requires utilities to secure a portion of their

electricity from solar generators. In order to demonstrate that they

meet this requirement, the utility is required to earn or purchase

SRECs. One SREC represents 1 MWh of production. The SREC is

separate from the value of the electricity itself. In states with these

programs, SRECs provide an additional incentive to invest in solar

PV systems over and above the electricity savings. This is because

SRECs generated by a solar PV system can be sold to a utility

needing to meet its solar RPS requirement.

In order to produce SRECs, a solar PV system must rst be cer-

tied by state regulatory agencies. Once the system is registered,

SRECs can be issued based on electricity production. SRECs are not

assigned a monetary value. Instead, prices are set in the market-place and are a function of supply and demand. Utilities can pur-

chase SRECs in the marketplace or pay a penalty instead. The

penalty is referred to as a solar alternative compliance payment

(SACP), and the amount of the penalty sets an effective cap on the

market price of a SREC.

5. Case studies e results

Using the assumptions discussed above, case studies for a solar

PV system installation were created for Honolulu, Newark, Phoenix,

and Minneapolis. The results demonstrate the dramatic variation in

the cost and nancial return from the installation of a solar PV

system depending on location.

5.1. Honolulu, Hawaii

There are a number of factors that make Hawaii an ideal location

for solar PV systems. Theaverage annual solar insolation is high, the

cost of electricity is high, and the state offers substantial income tax

credits for installing solar PV systems. Honolulu gets an annual

average of 5.7 h of solar radiation perday. The average retail price of

electricity in Hawaii for 2011 for commercial and industrial busi-

ness sectors was $0.304/kWh, and the state offers a 35% income tax

crediton the cost of commercial solar PV systems, up to a maximum

of $500,000[17].

The maximum state corporate income tax rate in Hawaii is 6.4%

[18]. Solar PV systems are also subject to an excise tax of 4.0% at the

time of purchase, and in Honolulu there is an additional excise tax

1 The PVWatts calculator determines the solar radiation incident of the PV array

and the PV cell temperature for each hour of the year. The DC energy for each hour

is calculated from the PV system DC rating and the incident solar radiation, and

then corrected for the PV cell temperature. The AC energy for each hour is calcu-

lated by multiplying the DC energy by the overall DC-to-AC derate factor and

adjusting for inverter efciency as a function of load. Hourly values of AC energy are

then summed to calculate monthly and annual AC energy production.

http://www.dsireusa.org/http://www.dsireusa.org/


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of 0.5% for a total of 4.5%[19]. The 4.5% excise tax must be added to

the cost of a solar PV system. In Honolulu, solar PV systems are

exempted from property taxes[20].Consider an installation of a 50-kW PV system in Honolulu. The

30% federal tax credit on a $274,313 ($262,500 $11,813 excise tax)

solar PV system amounts to $82,294 and the 35% state income tax

credit is $96,010. Thus, the net cost of the system after tax credits is

only $96,009. As indicated in Table 3this combination of incentives

results in a 31.60% IRR over the assumed 25-year life of the system!

The LCOE of the system is $0.055/kWh versus an after-tax grid

produced LCOE of $0.208/kWh. Clearly, the installation of a solar

electric system in Honolulu is likely to provide a substantial eco-

nomic return.

Thefederal andstate incometax credits have a signicant impact

on the return of the solar PV system. If the $96,010 state income tax

credit were not available in the example just described, the IRR

would be reduced to 9.10%, and the LCOE of the system wouldincrease to $0.176/kWh,as indicated in Table 4. But even without the

state tax credit, the solar PV system has a better rate of return than

grid produced electricity. If both the federal and state income tax

credits were not available the IRR is still positive at 4.44%. The LCOE

of the solar PV system, however, increases to $0.262/kWh which is

greater than the LCOE of grid produced electricity of $0.208/kWh.

5.2. Newark, New Jersey

At rst glance, Newark may seem like a poor location for com-

mercial solar PV systems. Theaverageannual solar insolation is only

4.5 h per day and there are no state income tax credits. But, because

of a robust market for SRECs in New Jersey, the city of Newark could

be a good location for the installation of solar PV systems.

Businesses installing solar PV systems in New Jersey receiveSRECs that can be resold in the marketplace. Under New Jersey law,

solar PV systems can qualify to generate SRECs for 15 years from the

date of installation. The amounts received from the sale of SRECs

are in addition to the electricity cost savings from installing a PV

system. The State of New Jersey Board of Public Utilities sets the

SACP payment which, in turn, sets the effective cap on the market

price of a SREC. In a document dated September 21, 2011, the Board

recommended a declining set of SACP payments for the next 15

years. These amounts set the theoretical cap on the sales price of

SRECs. Unfortunately, the availability of SRECs in New Jersey has

created an oversupply of solar PV installations in relation to New

Jerseys mandates for solar power. Thus, resale prices for SRECs

have become volatile and for the rst three months of 2012 New

Jersey SRECs sold for an average of 54.6% of the SACP. In this casestudy 54.6% of the recommended SACP for each of the next 15 years

is used as the resale price for SRECs.2

Consider the installation of a 50-kW PV system in Newark at

a total installed cost of $262,500. In New Jersey the maximum state

corporate income tax rate is 9.0%[21]. Solar PV systems are exempt

from state sales taxes and state property taxes [22]. The federal

income tax credit amounts to $78,750. As indicated above there are

no state income tax credits but the benets from selling the SRECs

are substantial. For the system described in this case study the

SRECs sold in the rst year would amount to revenue of approx-

imately $20,702, or about $0.35 per AC kilowatt-hour. The result is

that the IRR for a solar PV system installed in Newark, using the

assumptions described here, is 7.71%, which is slightly greater than

the 7% weighted average cost of capital used in the LCOE calcu-

lation. Thus, the LCOE of the system is $0.073/kWh versus a grid

produced LCOE of $0.082/kWh. That is, installing a 50-kW solar PV

system, as described, should have a slight advantage over the

purchase grid produced electricity.

5.3. Phoenix, Arizona

Located in the southwestern part of the US, Phoenix, Arizona

receives signicantly more sunlight than most other parts of the

Table 3

Returns for case studies inclusive of all benets.

Honolulu $5.25/DC

watt

Newark $5.25/DC

watt

Phoenix $5.25/DC

watt

Minneapolis $5.25/DC

watt

Inputs:

Installed system cost per DC watt $5.49a $5.25 $5.25 $5.25

Initial system cost before rebates and credits $274,313 $262,500 $262,500 $262,500

Federal income tax credit e30% $82,294 $78,750 $78,750 $78,750

State income tax credit $96,010 $0 $25,000 $0Maximum state corporate income tax rate 6.4% 9.0% 6.968% 9.8%

Utility rebates/performance-based payments $0 SRECb PBIb $0

Average annual hours of solar insolation per day 5.7 4.5 6.5 4.6

Initial price of electricity per kilowatt-hour $0.304 $0.125 $0.080 $0.076

Outputs:

LCOE of PV system after tax benets and all other incentives $0.055 $0.073 $0.081 $0.180

LCOE of grid produced electricity after tax benets $0.208 $0.082 $0.054 $0.049

Internal rate of return (IRR) over 25-year life 31.60% 7.71% 3.34% 8.27%

a The installed cost includes the 4.5% excise tax on the purchase of solar PV systems in Honolulu.b Seethecase study discussions fordetailsof the specic benets of the performance-based incentives (PBIs) in Phoenix, and the solar renewable energy certicates (SRECs)

in New Jersey.

Table 4

Returns for Honolulu, Hawaii solar PV system case study e with and without federal

and state income tax credits.

Returns with both

federal and state

income tax

credits available

Returns without

35% state income

tax credit

Returns

without 35%

state income

tax credit and

without 30%

federal income

tax credit

LCOE of solar PV

system ($/kWh)

$0.055 $0.176 $0.262

LCOE of grid produced

electricity ($/kWh)

$0.208 $0.208 $0.208

Internal rate of return

(IRR) over

25-year life

31.60% 9.1% 4.44%2 Data on New Jersey SREC pricing is available at http://www.njcleanenergy.com/

renewable-energy/project-activity-reports/srec-pricing/srec-pricing , 2012. Also, see

New Jersey Statute Sec. 48:3-51 et seq. and New Jersey Administrative Code Sec. 14:

8-1.1 et seq.

http://www.njcleanenergy.com/renewable-energy/project-activity-reports/srec-pricing/srec-pricinghttp://www.njcleanenergy.com/renewable-energy/project-activity-reports/srec-pricing/srec-pricinghttp://www.njcleanenergy.com/renewable-energy/project-activity-reports/srec-pricing/srec-pricinghttp://www.njcleanenergy.com/renewable-energy/project-activity-reports/srec-pricing/srec-pricing


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country. The average annual solar insolation per day is 6.5 h. While

this high level of sunlight would seem to make solar PV systems

a good bet, there are other factors in Phoenix that reduce the po-

tentialnancial benets. For instance, the average 2011 retail price

of electricity in Arizona for commercial and industrial businesses

was just $0.080/kWh.

Arizona provides a 10% state income tax credit for non-

residential solar PV system purchases, up to $25,000 in any one

year[23]. This is a great benet, but it is much less than the income

tax credit Hawaii offers. Utility companies in Arizona, however, also

have rebate programs. APS, one of the utilities serving the Phoenixarea, offers both upfront grants and performance-based incentives

(PBIs). The PBI offered for 50-kW solar PV systems is $0.08/kWh up

to a total incentive of $105,000.3 The maximum state corporate

income tax rate in Arizona is 6.968%[24], and solar PV systems are

exempted from sales taxes and property taxes[25].

The IRR from a 50-kW system installed in Phoenix over the 25-

year life of the system is 3.34%. This is a positive IRR, but it is less

than the weighted average cost of capital used in these case studies

of 7.0%. The result is that the LCOE of the solar PV system is $0.081/

kWh while the LCOE of grid based electricity is $0.054. Thus, even

with the high level of sunlight in Phoenix the cost of such a system

does not beat the cost of grid based electricity. This is because grid

based electricity in Phoenix is inexpensive, and state income tax

incentives are limited.All may not be lost however. If the installed cost of a 50-kW PV

system were to drop by $1.00 per watt to $4.25 per DC watt, all else

being equal, the IRR would rise to 7.23%. The LCOE of such a system

would be $0.053/kWh compared to a $0.054/kWh LCOE for grid

based electricity. At this price the installation of a solar PV system

begins to make economic sense in Phoenix.

5.4. Minneapolis, Minnesota

Making a solar PV system pay is difcult, if not impossible, in

Minnesota. The average annual solar insolation per day in Minne-

apolis is 4.6 h, and the average cost of electricity in 2011 for com-

mercial and industrial users was only $0.076/kWh. Consider the

installation of a 50-kW PV system in Minneapolis. In Minnesota themaximum corporate income tax rate is 9.8% [26], and solar PV

systems are exempt from state sales taxes and state property

taxes[27].

The federal income tax credit amount is $78,750. But the state

provides no state income tax credits or rebates for installing solar

PV systems. Combining this with the low cost of electricity and the

limited sunlight, results in an IRR for a solar PV system installed in

Minneapolis of8.27%. The LCOE of the solar PV system is $0.18/

kWh and the LCOE of grid provided electricity is only $0.049.

To make matters worse, a 50-kW solar PV system is not eligible

for net metering in Minnesota. In Minnesota only solar PV systems

with a capacity of less than 40-kWare eligible for net metering [28].

Thus, if an organization installing such a system cannot use all of

the electricity generated from the system, some of the savings

would be lost.

6. Achieving parity with grid produced electricity

The case study information in Section 5 can also be used topredict the installed cost of solar PV systems that would be needed

to achieve parity with grid produced electricity. As discussed ear-

lier, solar PV systems, installed in Honolulu and Newark, with all

federal and state incentives available and using the assumptions in

the case studies, already have a lower LCOE than grid produced

electricity (see Table 3). In addition, in Hawaii, even if the state

incentives are removed, the LCOE of a solar PV system is less than

that of grid produced electricity (seeTable 4).

We can also predict the installed cost at which a solar PV

system would achieve parity with grid produced electricity for all

locations, with and without, federal and state incentives. This is

the cost at which the LCOE for the solar PV system equals the LCOE

for grid produced electricity. Table 5provides a summary of the

installed cost, per DC watt, that would be needed to achieve gridparity in each of the case study locations, using different

assumptions.

In Phoenix and Minneapolis, grid parity, with all federal and

state incentives available, would occur at $4.30 and $1.43 per DC

watt, respectively. A low cost is required to achieve grid party in

Minneapolis because solar radiation is relatively low (average of

4.6 h/day), electricity in Minnesota is relatively inexpensive

($0.076/kWh), and the state provides no incentives for installing

solar PV systems.

As discussed above, a solar PV system in Honolulu has a lower

LCOE than grid produced electricity, even without state incentives.

This is because of the high cost of electricity in Hawaii. In Newark,

Phoenix, and Minneapolis, parity without state incentives is ach-

ieved at installed costs of $2.16, $1.89, and $1.43, per DC watt,respectively. Newark achieves parity at the highest installed cost

because electricity is relatively expensive in Newark ($0.125 per

kWh) andthe topstatecorporate incometax rate is a relatively high

9%. Minneapolis provides no state incentives so the cost to achieve

grid parity is the same as that with all incentives available ($1.43

per DC watt).

If both federal and state incentives are removed, even lower

installed costs are required to achieve grid parity. In Honolulu,

Newark, Phoenix, and Minneapolis, parity without federal or state

incentives is achieved at installed costs of $4.36, $1.44, $1.27, and

$0.95, per DC watt, respectively. Based on these results, solar PV

systems are likely to achieve grid parity, or be less expensive than

gridproduced electricity, across the US as installed costs approach

$1 per DC watt.

Table 5

Installed cost per DC watt to achieve parity with grid produced electricity.

Honolulu

Installed cost per DC watt

Newark


Phoenix


Minneapolis


Installed cost to achieve grid parity

with federal and state Incentives

a a $4.30 $1.43

Installed cost to achieve grid parity

with federal incentives, but no state incentives

a $2.16 $1.89 $1.43b

Installed cost to achieve grid paritywith no federal or state incentives $4.36 $1.44 $1.27 $0.95

a Returns were greater than parity with grid produced electricity.b Minneapolis provides no state incentives.

3 The rebate amount offered by APS for a particular solar PV system can be

estimated using the worksheets available at www.aps.com/main/green/choice/

solar/Business/default.html, 2012.

http://www.aps.com/main/green/choice/solar/Business/default.htmlhttp://www.aps.com/main/green/choice/solar/Business/default.htmlhttp://www.aps.com/main/green/choice/solar/Business/default.htmlhttp://www.aps.com/main/green/choice/solar/Business/default.html


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7. Summary

The results from the four case studies demonstrate that costs

and nancial returns of solar PV systems vary dramatically

depending on the location where they areinstalled. At one extreme,

the case study for Honolulu has an IRR of 31.60%, while at the other

extreme the case study for Minneapolis has an IRR of8.27%. The

differences in the returns from the solar PV systems case studies are

primarily the result of variations in state incentives, electricity

prices, and the level of solar insolation. This demonstrates that

detailed, site specic information, about incentives, grid produced

electricity rates, and levels of solar insolation are needed to

determine whether the installation of a solar PV system makes

economic sense in a particular location.

In addition, by varying the installed cost of solar PV systems in

specic locations it is possible to estimate the installed cost at

which such a system becomes economically attractive. For instance,

if the installed cost of a solar PV system in Phoenix, Arizona de-

creases by $1.00 per DC watt from $5.25 to $4.25, the IRR on the

system increases from 3.34% to 7.23%, and begins to make economic

sense.

Finally, it is possible to predict the installed cost at which solar

PV systems reach parity with grid produced electricity, both withand without federal and state incentives. Without incentives the

installed cost of solar PV systems would need to drop substantially

to achieve grid parity. The cost at which this is likely to occur de-

pends on the level of solar radiation and top state income tax rates

in a given location. It is certain, however, that as the price of solar

PV systems continues to drop they will become economically viable

in more and more locations.

Acknowledgments

An early version of this study was presented at the World

Renewable Energy Forum 2012 in Denver, Colorado. The author

wants to thank the participants in the session for their helpfulcomments.

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