An End User Perspective on the Cost of Solar

Photovoltaic Energy Systems Installed by

Commercial Organizations

Kenton D. Swift

May 14, 2012

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

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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

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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

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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

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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

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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

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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%

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Debt Equity

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

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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

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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

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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%

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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

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Case Studies - Location Information

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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 5.7 4.5 6.5 4.6 Initial price of electricity

per kilowatt-hour $0.301 $0.127 $0.082 $0.076

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%

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Newark

• Inputs:

• Solar radiation per day = 4.5

• 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%

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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%

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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%

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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%

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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

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