Monday, November 16, 2009

Electricity in NH - Residential Solar PV

Thanks to generous federal and state incentives, solar PV electric systems are currently ON SALE in NH for almost 50% off!

Energy efficient solar home built by Heather Parker in Portsmouth, NH

New Hampshire resident Heather Parker included solar photovoltaic (PV) electric modules as part of her ambitious project to construct a super-efficient solar home in Portsmouth, NH.  This new home lives and breathes energy efficiency, right down to its bones.  The house sports a passive solar design,  super-insulating materials throughout, and a solar-thermal hot water heating system.  Each of these systems is interesting on its own, and you can read more details here and here.  But for this post, I'd like to focus on the home's solar photovoltaic electric system.

Solar Electric Systems - A case study

The photo above shows the array of 16 SunPower 210 watt PV modules, mounted on the right-hand side of the home's roof.  The 3.4 kW solar electric system was designed and installed by ReVision Energy, of Liberty, Maine.   Because Heather's home is so efficient, this 3.4 kW system should provide a large portion of the home's annual electricity needs.

inverter (right), solar meter (top left), PSNH  meter (bottom left)

In the photo above you can see the SunPower 3000m inverter, which was mounted on an outside wall to conserve indoor living space.  In addition to the inverter, ReVision Energy also installed a separate solar meter between the inverter and the home's main circuit panel.  Just underneath the solar meter is PSNH's electric meter.  This appears to be an Itron model C1S solid-state watt meter.  According to Itron's website, these meters can be equipped with optional "personality modules" to provide advanced features such as time-of-use (TOU) metering,  load profiling, and RF-transmission.

PSNH owned Itron C1S Digital Watt Meter

Solar Electric Systems - Price trends and sizing

The cost of photovoltaic (PV) solar modules has dropped rapidly recently and the efficiency of PV systems is ever increasing.  You'd think that generating clean electricity from the sun would be an economic no-brainer.  Well, as usual, it's not so simple.

According to the retail price summary, PV modules currently retail for around  $4.34 per watt in the US.  An inverter to convert the system's DC output into AC that can be tied to the power grid runs another $.71 per watt.  Add in the cost of other supplies and installation and the total cost for a complete solar electric system can easily range between $6 and $10 per watt.   A new PV solar electric system, sized at 5kW-7kW to cover a good portion of a typical NH home's electricity usage of 7,000 kWh per year, could easily cost upwards of $50k.  That's a serious investment!  Of course, the easiest place to start reducing costs is with lower consumption, which Heather's house shows is possible.  Thanks to its super energy-efficient design, it uses about half the power that a conventional house uses each year.

OK you say, the upfront cost for a new solar electric system may be high, but it's a one-time charge and in exchange you get clean and free energy for years to come.   Also, in New Hampshire there's a $3 per watt rebate from the RGGI renewable energy fund, administered by the state of NH and the NH Public Utilities Commission (up to $6k max).  In addition, residential installations can qualify for a federal tax credit worth 30% of the installed cost of the system.  With all these great incentives, it's should be much easier for PV solar electric systems to be economical, even here in New Hampshire.

Running the numbers - Can a PV project make economic sense?

To find out how economical a new solar electric system might be, we need some data.  We need to determine how much electricity the system will generate.  A system that's rated at 5 kW, can only produce that peak output with perfect conditions.  As with other electricity generation approaches, we need to know the system's "capacity factor" or it's annual production rate.  Also, solar panels produce DC current that must be converted to AC for home and electrical grid use.  This conversion, along with other system losses, reduces efficiency.  We need to somehow find a way to take all this into account and extrapolate from raw system capacity into a realistic estimate of actual kWh production.  Then we need to somehow convert that production into dollars so we can perform a discounted cash flow analysis to see if it's all worth it.

Sound like a lot of work?  Well, as usual, there's an app for that.  No, not an iphone app.  I found a neat website that has the perfect tool for conducting financial analysis on residential PV projects.  It's called PVCalc.  This great tool integrates data on regional solar radiation, local electricity rates, and state and federal tax credits to provide users with an estimate of how much money a PV project can save each year and over its lifetime.  PVCalc is based on a calculator made by the National Renewable Energy Laboratory (NREL) called  PVWatts. Although PVWatts is very similar to PVCalc, I found the user interface on PVCalc to be much friendlier.  (FYI, I used this advanced version of the tool for the analysis below)

Composite of output from Heather's Sunpower 3000m inverter

As I said before, Portsmouth solar home owner Heather Parker was generous enough to share the details of her solar electric project, so we can use this "real world" data in our analysis.   The image above is a composite of four photos that shows the alternating output from Heather's DC to AC inverter.  I took these shots late in the afternoon near sunset, so the array was only producing 527 watts at the time.  In the mid-afternoon, the array produces as much as 2,700 watts.  Another inverter display shows that the system produced a total of over 9 kWh of electricity on the chilly November day I visited.  You can also see that since the system was installed a couple of months ago, it has produced a total of 735 kWh of electricity.  Finally,  the home's reduced intake of electricity from PSNH has already lowered carbon emissions from local power plants by an estimated 1,250 pounds.  

That all sounds good so far.  The environmental benefits of solar electric systems are undeniable.  But to figure out the economics, we need to do some number crunching.  For that, we turn to the PVCalc tool.  Here are the inputs that I fed into the tool (detailed descriptions of each input):
  • Location - Portsmouth, NH 03801 - Pease Intl TradePort
  • Electricity from PSNH, rate R - residential service
  • Array type is fixed
  • 3.4 kW DC rating
  • 77% derate factor (more info on derate factor)
  • 45 degree array tilt (on roof)
  • 155 degree azimuth (direction roof faces)
  • $23,450 installed system cost
  • $840 annual electric bill (before project)
So how will Heather's project fare?  Well, as you can see below, the summary information tells us right away that this project has great promise.  If the analysis is correct, the payback time is just over 15 and a half years and the money saved over the 30-year life of the project is estimated at over $23k.   But those results just scratch the surface.  Take a look at the tool's output below:

Running the Numbers - Digging into the PVCalc output

Summary information and estimated annual savings

System Cost after Tax Credits and Rebates

Lots of good stuff in the PVCalc output, that's for sure.  You really can see that the tax credits and rebates are an important part of the equation.  In Heather's case, the credits covered almost 50% of the system's installed cost.    For fun, I manually calculated a break-even kWh price for the project.  It worked out to 22.1  cents per kWh without the tax credit and rebate factored in and 11.5 cents per kWh after subtracting them out.

Running the Numbers - Discounted cash flow analysis 

The PVCalc tool also does some sophisticated capital project analysis.  In particular, the tool performs a discounted cash flow (DCF) analysis to compute an internal rate of return (IRR) and net present value (NPV) for the project (these are shown on the amortization tab).  You may recall that I mentioned DCF when we did our analysis of commercial wind projects in NH.  When analyzing capital projects, even home solar electric projects, DCF is the gold standard because it factors in the idea that a dollar received today is worth a lot more than a dollar received in 30 years.

Estimated yearly cash flows for project (non-discounted)

To compute a net present value, the project's future cash flows are "discounted" or adjusted to "today's value" dollars.  Next,  these "present values" are added together and the initial project cost is subtracted from the sum or netted out.   If the resulting NPV is positive, the project will yield net savings (because the present value of future cash flows is greater than the project's cost).  If NPV is negative, the project is not likely to be economical.  Also, the higher the NPV, the better.  NPV is computed using a "discount rate" that takes into account the project's riskiness.  Since home energy efficiency projects are pretty low risk, a discount rate of 5% (which is the PVCalc default) seems appropriate.  It might even be little on the conservative side, but better safe than sorry.

Running the Numbers - What if things don't go as planned?

Below I made a table that shows what happens to the PVCalc outputs when some of the key input parameters are changed.   This "sensitivity analysis" helps identify how dependent the project's success is on the accuracy of the inputs.  Since it's impossible to predict the future with certainty, sensitivity analysis is helpful to show whether a project will still be economical if things don't turn out exactly as planned.

Right away, you can see that success for Heather's project is highly dependent on how fast PSNH's electricity rates increase over the life of the project.  The tool's default assumption is a 5% annual increase in rates.  The table above shows that with a more modest 3% annual increase, the NPV of the project declines significantly.  That's no surprise, since the value of the electricity produced by Heather's solar array is directly related to PSNH's electricity rates.  Still, even with a very modest 3% annual increase in rates (we wish!), the project still has a positive NPV, which means it will be economical even in that unlikely circumstance.  On the flip side, should electricity rates increase by 7% a year, the project's NPV would increase to nearly $9k, more than double the NPV of the baseline scenario.  A 7% rate of increase in electricity prices may sound high, but when you consider expected inflation rates,  the long-term outlook for fossil fuel prices, and pending carbon-pricing initiatives, 7% doesn't seem far-fetched at all.

You can also see from the table above that the system's derate factor has a huge impact on the project's economics.  The derate factor represents the overall efficiency of the system.  The solar array's raw DC output is multiplied by the derate factor to determine net electricity production, so the higher the derate factor the better.  With a 69% derate factor, instead of the 77% default, the NPV practically drops in half.  Conversely, with an 85% derate factor, the NPV increases by nearly 50%.  This shows that the PV array's nameplate rating is only part of the story.  The efficiency of the whole system has to be considered.  As an example, according to this NREL derate calculator,  increasing inverter efficiency by just 3% and keeping the panels from getting soiled could increase a system's derate factor from  77% to over 83%.  

Next, I varied the azimuth angle to see what that would do.  When Heather was deciding how to position the house on the lot, she had a dilemma.  By positioning the house so the roof faced south east instead of due south, she got a much nicer view.  However, Heather knew that facing the solar array at 155 degrees instead of due south at 180 degrees would reduce her available solar energy.  Using PVCalc, we can see that this decision only dropped the NPV by $500 and still left her with plenty of net savings.  Considering the nicer view, it seems like a smart tradeoff.  I also experimented with a 40 degree roof pitch to simulate what mounting the array on a 10/12 roof would do, compared to using Heather's 12/12 pitch roof (45 degrees).  That change actually resulted in a slight improvement in the NPV.  

Finally, I experimented with some financing options to see how they might affect the project's NPV.  I assumed cash payment for all my earlier scenarios, but I wanted to see how using a home equity loan would impact the results.  Since a home equity loan is usually tax deductible, part of the interest paid on the loan is "refunded" and that will defray the project's costs.  You can see that with a 5% home loan, the NPV of the project increases from $3,719 to $4,971.  That increase in NPV is largely the result of the tax break on the financing, as shown on the last page of this pdf report.  To do a complete cash vs. finance analysis, you'd need to also factor in the after-tax return you expect to receive by investing the cash instead of using it to pay for the project.

Solar Electric Systems - What's the bottom line?

As you can see, varying these input parameters causes the NPV to bounce around all over the place.  This is why sensitivity analysis is so important.  It let's you evaluate a project under a range possible of outcomes.  Based on this analysis, it's a pretty good bet that the project's NPV will fall somewhere between $0 and $9000, and any of these outcomes would be great for Heather.   Our sensitivity analysis has shown that in the face of many uncertainties, the project's economics are quite robust.

So after lots of number crunching, it looks like Heather's solar electricity project is a winner, both for the environment and for her pocketbook.  Even if some of her assumptions about the system's efficiency or PSNH's future electric rates turn out the be wrong, it's very likely that this project will still be a great investment.  Plus, no matter how you slice it, dumping 2 tons less of carbon into the air every year can't be a bad thing!




    Heather and I often lament that there is almost no useful analysis available for any aspect of the home renewable energy market. Your analysis is awesome and Granite Viewpoint is a world class winner. I would put you up there one step below, and the NYTimes DotEarth blog.

    Congratulations, Chris

  2. Hey Chris,

    Thanks for the kudos. This project was both fun and educational for me. So much so in fact, that we're thinking about taking the solar plunge ourselves.


  3. Excellent analysis. But wny no mention of the implications of net metering?

    So, how about this "what if" sensitivity analysis:

    Calculate payback and NPV with a New Hampshire Feed In Tariff similar to Vermont's. (Assume PV is eligible for $0.30/kWh with a fixed 20-year contract.)

    It might make better financial sense to invest in a larger PV array and capture more kWh which, of course, will help PSNH meet its present and future electrical requirements ;-)

    Farrell S.

  4. Hi Farrell,

    Ask and you shall receive - With PV electricity paid at $.30 per kWh fixed for 30 years the NPV goes from $3719 to $4930. The IRR goes from 7.1% to 8.7%.

    The Vermont model that you mentioned and similar approaches taken in Germany, may sound overly-generous, but...

    The NY Times article I linked to above mentions that solar electric actually behaves like a "peaking" resource. It usually produces max power exactly when it's most needed by the grid. As a result, more widespread deployment of residential solar electric could save us the cost of more transmission capacity, natural gas plants, and expensive and dirty peaking generators.

    So in that respect, daytime solar electric kWhs should be credited at a higher rate than the overall average kWh price.

    IMO, we'd probably be better off on balance if we all had time-of-use meters and got billed according to the cost of electricity at the time we used it. Given the variations in hour-by-hour power costs, it seems like the only fair way to do it.


  5. So far, the emphasis in NH has been on small residential PV installations with a state and federal tax credit. In terms of installed kilowatts, residential PV does not yet have a big impact.

    But there may be more rooftop opportunities available for PV on commercial and industrial buildings (and using a Commerical and Industrial electricity rate schedule).

    Would a commercial PV financial analyis also be attractive to a business (for example, Stonyfield & PSNH) incorporating tax credits, accelerated depreciation, etc.

  6. Nice job on the blog, Jim.

    It's great to see information out there about the payback of PV, and a robust number to go with it. 14 years is about the blink of an eye, if you're a sea turtle.

    The derate and performance will all vary year to year with the weather, of course. This September & October (2009) were uncommonly sunny- maybe this was some net weather credit from June?

    Among the best ways to stimulate the green economy is the renewable feed in tarriff, which may be under consideration by the states of NH, ME soon. Vermont's is evidently quite popluar. Germany has had one for several years now, and they have roughly 200,000 solar industry jobs to show for it. Don't ask how many there are in the U.S. it is a small number.

  7. Will,

    Thanks for the comment. I hear what you're saying about the payback period being pretty short when you consider the expected life of the system.

    Also, IMO, the IRR and NPV numbers are even more impressive. Under all the scenarios that we looked at for Heather's system, the IRR came in between 5% and 10%. I can't think of any other investment (stocks, bonds, CDs, etc) where you can get a 5-10% return with so little risk.

    As for net-metering and feed-in tariffs, I agree it would be helpful to remove some uncertainty there. With a feed-in tariff and a guaranteed long-term rate for power, PV projects would be even less risky. Long term power rates are the last remaining uncertainty in the system. With power rates locked-in, the investment becomes a virtual sure bet.

    Then, the only risk left would be a catastrophic failure of the system, from wind or lightening or the like, and that seams like something that homeowner's insurance could eventually cover (maybe it already does?).


  8. Jim -
    I have an interesting question that I hope I can use your econimic and solar sense. I am in the process of doing my taxes and looking forward to cashing in on my 30% back from the federal government for my solar installs this year, but I found a snag that I hope you can help me with. On form 5695 and again on 1040, there actually is a cap on the 30%... it's how much taxable income you made. For example, I owe $4500 in taxes, but my solar credits amount to $11,000. I can not put in a negative number, if the credit is higher than the taxes owed, you must put in $0. Curious as to your take on this. This hurts the people who need it most, not advertised this way in any publication I have seen, and could really hurt the ROI calculations.

    Marc Batchelder

  9. Jim,

    Sorry to chime in again, I was checking out your numbers and had a question for you. The installed cost of the Parker's system was $23,450 but you have the Fed. Incentive at $5235, I calculated 30% to be $7035. The pie chart also shows the Fed. to be 22.3%, I expected that to be 30%. Just wonder if there is something I missed?


  10. Marc,

    You bring up an important point about the limits of the tax credit that I hadn't considered.

    Generally, there are two types of tax credits, refundable and non-refundable. Refundable credits, such as the Earned Income Tax Credit, can result in a negative tax bill and a check from the government. Unfortunately, the Residential Energy Credit (form 5695) is a non-refundable credit as you indicated.

    But all is not lost. The credit seems to include a "carry-over provision" that allows you to carry any excess credit into future years until as late as 2016. This source has some details on the credit along with the carryover:
    "If the federal tax credit exceeds tax liability, the excess amount may be carried forward to the succeeding taxable year. The excess credit can be carried forward until 2016, but it is unclear whether the unused tax credit can be carried forward after then."

    Standard disclaimer here - I'm no tax expert. I just got the above quotes from some quick googling.


  11. Also, it appears that the federal credit is calculated "net" of the state credits. So in other words, it's 30% of the cost of the system after subtracting out any state credits. That's why it only comes out to 22.3% of the total cost.

    Based on my reading of the federal credit rules, I think this is the correct way to calculate it.


  12. Jim,

    Great info. I will look deeper into these issues, but I really appreciate your feed-back.


  13. Jim,

    I wanted to forward you this link regarding ground source heat pumps. I talked to you a bit about my opinion of them while at the Parker house a couple months back. THe article is short but somewhat informative. I wasn't sure if you were looking for more info on the topic.


  14. Marc,

    Thanks for that link. Great info there. I've seen so much conflicting info on GSHP systems that I can't tell what to believe. Although the more I learn the more I tend to think that the economics aren't great with the current technology.

    I've been hoping to do an analysis on these systems similar to what I did with the solar stuff, but robust data is very tough to find.



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