Bacon's Rebellion

Democracy Thrives in Sunlight

Solar: Not Yet Ready for Prime Time in Virginia

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by

James A. Bacon
in

Photovoltaic solar cells have an undeniable “cool” factor, but they’re not yet ready for prime time in Virginia. An Arlington blogger who goes by “X Curmudgeon” describes the economics of a 14-cell solar array he installed on his roof. The installation job cost him $24,000 — or $22,000 after a federal tax credit. He expects to cut his electric consumption about 17 percent, saving roughly $300 a year at current electric rates. That’s less than a 1.4 percent return on investment.

Of course, the return will increase as electric rates increase, which they surely will do when Dominion lifts its rate cap in a few years. And X Curmudgeon will always have the knowledge that he’s guaranteed enough electricity to keep the refrigerator running in case of a Dominion power outage. But under current conditions, only hard-core greenies are likely to invest their money this way.

However, things may change. Global production bottlenecks on solar units could ease, allowing prices to come down. Likewise, technological breakthroughs could improve solar PV efficiency. Virginia lawmakers still need to ensure that there are no regulatory barriers to widespread adoption should solar PV become economically competitive.

(Hat tip to Ray Hyde for pointing me to this blog entry.)

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19 responses to “Solar: Not Yet Ready for Prime Time in Virginia”

  1. Scott Avatar
    Scott

    What a horribly irresponsible title. Once again I lose a lot of respect for you Jim.

    1) Thermal solar is very ready for prime time.

    2) Small scale, especially portable PV solar can be very effective and cost efficient. Why not make at least one room of your house solar based? Why not use solar abttery packs instead of noisy, polluting generators?

    3) Solar tech is changing very quickly- new solar concentrators and nanotchnology are creating a revolution.

    I am glad you are taking on the state and Dominion for their share of culpability, but dammit, misleading statements like “Solar is not ready for prime time” are not helping energy independence at all.

  2. Jim Bacon Avatar
    Jim Bacon

    Scott, I’m a huge fan of the potential for solar energy, but no one helps the cause by over-selling its potential. You are quite right, solar is getting increasingly competitive in a number of niche areas. And, as I observed in my post, technological breakthroughs may be forthcoming. But the fact remains that investing in PV solar generates a lousy return on investment for most homeowners at this point in time. I’m hoping that will change — but wishing won’t make it so.

  3. Scott Avatar
    Scott

    I urge you to change the title and educate people about thermal solar.
    That’s not ‘a niche’. That’s old school tech that is not only still kickin’ but vastly improved.

    Countries like Israel and Spain are making it MANDATORY on buildings now, and I have seen $250 setups work in colder climates like Montana.

    If yuo mislead people about solar than you are doing a great disservice to our country.

  4. Waldo Jaquith Avatar
    Waldo Jaquith

    The term that would be far more suitable is “Active Solar.” Passive solar has been working out nicely for mankind of millions of years, and for the homes we build for thousands of years. 🙂 Try living in the high arctic without sunlight for a month and let me know how you do without it. I think you’ll find that it is very much “ready for prime time in Virginia” and everywhere else. 🙂

    I’m a bit puzzled by your ROI calculation, which is based on a single year. If the fellow were only using his PV array for one year, yeah, it’d be 1.4%. But he’s not. It’ll function for the next 30 years. If electricity prices remain constant, he’ll save $9,000 on his utility bills in that time, which is a 40% return on investment.

    But let’s take this a bit further. I’m not a betting man, but I say utility rates will go up. In which case he’s now got an insurance policy against 17% of that price increase. Now, if he’s got this system on his mortgage, it’s tax deductible, unlike his utility bills. So we can chop another third off of the cost there. Ever lost power for a few days and had to throw away all of your spoiled food? I have to do that about once a year. There’s another couple of hundred bucks saved every year or three. Speaking of power outages, what’s it worth to your family have some heat and light when everybody else has no juice? I say I’d pay $100 a day for that privilege, though others may value that at a higher or greater rate.

    I gotta say, Jim, this ROI is looking pretty sweet. The way I do the math, it’s getting up over 80%. But no matter how you slice it, it’s a far sight better than 1.4%.

  5. Larry Gross Avatar
    Larry Gross

    well..what is the return on investment for those us who choose coal power?

    First… do we know how much coal we “burn” for our homes electricity? (1/2 ton per day I believe)

    what if you had to burn that much coal at your home for electricity and you had to either put up with the pollution (including the mercury) or pay out the nose for a system that did not pollute?

    So.. perhaps the title should be “Coal Power – people not ready to give it up”

    or “mercury pollution – preferred by most folks to solar or wind power”

    I think this is one of those deals that is about how you hold your mouth when you say something..

    and its easy to get the “em fas sis” on the wrong “sy la ble”.

    and it’s also a deal where many folks simply don’t know and don’t care as long as their electricity is cheap.

    … think about this.. most folks pay LESS per day for electricity than they do for gasoline or cable tv….

  6. Scott Avatar
    Scott

    http://www.grist.org/news/maindish/2006/11/30/roberts/index.html?source=daily

    “It’s not just that we’re moving toward alternatives, it’s that we’re moving toward distributed [power generation] as well. If both of those are true, solar is the only viable option.

    Solar is different from other energy technologies in that it delivers energy at the point of use, directly to the end user. That allows it to circumvent the entire supply chain. It’s not another option for a utility, it’s a competitor to a utility — the first time utilities have really had a competitor.”

  7. Anonymous Avatar
    Anonymous

    As the blogger who installed the solar PV array referred to here and wrote about it, I’d say “not ready for prime time” is pretty fair, but there are some important caveats.

    First, if homeowners got the same subsidies from the government for installing solar electric cells as oil companies do to extract their minerals, solar energy would be a lot more economical.

    Second, in some countries they make solar more attractive by requiring utilities to pay for the electricity so generated at a pretty high rate. That could be quite fair in various situations. For example, in the summer, my solar cells will be most efficient at periods of peak power use, when Dominion’s marginal cost of the extra power requirements are highest. Why not credit me at a higher rate reflective of that? Similarly, the cost of building new power plants and new transmission lines (the debate is just getting started over Dominion’s plans to run a new high voltage transmission line through Northern Virginia) is quite high. Encouraging solar can put off those expenditures, benefitting all ratepayers.

    Third, over time, the rate I pay for electricity undoubtedly will go up–we’re slated for a big increase next year. As it goes up, my rate of return goes up as well.

    What I wanted to point out, however, is that, for now, solar electricity is certainly not going to work out for the average joe. Even if it was economical, most estimates I’ve seen suggest that only 25% of homes are suitable (due to shading, roof pitch, lot siting, etc.). For businesses, prospects are brighter–they have more open roof space and often are surrounded by parking lots.

    Finally, I hope folks will check out my other post on the compelling economics of replacing your standard light bulbs with compact fluorescent bulbs, which use 75% less electricity and last 7-10 times as long as regular bulbs. For a very modest investment of a couple hundred bucks, most homeowners can easily reduce their electric consumption by at least 10% by taking this simple step.

  8. Jim Bacon Avatar
    Jim Bacon

    Hi, Curmudgeon, Delighted to hear from you. For the background of my post, I would refer you to my earlier column, Big Grid: Creeping Crisis endorsing exactly what you’re doing. I offered your real-world example as a counterpoint to my somewhat naive enthusiasm.

  9. Anonymous Avatar
    Anonymous

    I’m an environmentalist, and $22,000 installation cost vs. $300 per year savings doesn’t seem to be so hot (no pun intended). But doesn’t the 1.4% return on investment assume he’s going to tear off the solar cells after one year? Sounds like fuzzy math. In this case, it seems like you could’ve made your point without skewing the numbers.

  10. Ray Hyde Avatar
    Ray Hyde

    There is good solar technology out there, and I encourage people to use it.

    Just check the math very carefully and don’t listen to hucksters.

    XCurmugeon also rightly noted that manufacturing solar cells is one of the nations dirtiest industries.

  11. Ray Hyde Avatar
    Ray Hyde

    Sorry Waldo, that isn’t a forty percent return on investment. ROI assumes that you get the investment back at the end of thirty years, not that it is worn out at the end.

    Under your scenario what he’s got is a sixty percent loss.

    I make about 10% on my stocks, every year, and at the end of the year I still have the money I invested, plus the ten percent.

    Our friend might have done better to invest in Dominion stock: they seem to make an excellent return by stealing people’s property. He might have actually made enough to pay his electric bill.

  12. Larry Gross Avatar
    Larry Gross

    Doesn’t Dominion get to write off their equipment?

    How about farms – don’t they write off equipment?

    why not solar arrays?

  13. Jim Bacon Avatar
    Jim Bacon

    Looks like I need to explain the concept of Return on Investment. Take $10,000. You can stick it in a money market fund and earn 4.5 percent interest. At the end of a year, you end up with the original $10,000 plus $450 interest for a 4.5 percent return on investment.

    Alternatively, you can take $10,000 and invest in a biotech start-up. There is no guarantee that you’ll get any of your money back. And there is no way to convert your investment to cash until the company is successful enough to be sold or go public. Therefore, venture capitalists tend to demand a higher return on investment, typically on the order of 20 percent or even higher. That means the original $10,000 investment must be worth more than $20,000 when cashed out in five years.

    Now, let’s look at an investment in solar energy. You invest $10,000 and get $150 back the first year in the form of lower electric bills. That’s a return on investment of 1.5 percent, equivalent to a 1.5 percent interest rate on your money market account. As Waldo points out, this is an after-tax return, equivalent (depending on your tax bracket) to a pre-tax investment of maybe 2.2 percent. We’re still far short of money-market rates.

    Meanwhile, you also have to figure in depreciation. Solar cells don’t last forever. Let’s assume they last 40 years — in other words, at the end of 40 years, your original $10,000 investment is worth zero. That means they’re depreciating at a rate of 2.5 percent per year — faster than you’re saving money. In other words, you’re generating a negative ROI — you’re LOSING MONEY.

    I’ll concede the value of Waldo’s point that solar PV has value by providing a source of back-up electricity. But you have to compare that to the cost of installing a natural gas-powered generator for about $5,000 that’ll supply all of your electricity needs when the grid goes down. A $5,000 generator is a lot cheaper than a roof full of PV cells.

    Yes, as Scott says, solar is competitive in niche applications. Yes, the cost of solar PV will come down as new technologies are developed, manufacturing processes invented, and short-term supply shortages worked out. And, yes, coal-fueled electricity doesn’t take into account the costs imposed on society through pollution, a deficiency that needs to be addressed.

    But the fact remains, as virtuous as solar PV is, for the average Virginia homeowner, it makes a lousy financial investment at this point in time. Hopefully, the calculus will change in a few years. Let’s make sure that Virginia has a electric-power regulatory apparatus ready for when that day comes.

  14. Scott Avatar
    Scott

    Again, you really should make the distinction better between PV and thermal.

    And, if this state and country gets off its collective asses, there is even better stuff available:

    http://newsblaze.com/story/20061205093826tsop.nb/newsblaze/TOPSTORY/Top-Stories.html

    40.7% conversion efficiency and Spectrolab did it by the promised end of 2006.

  15. Scott Avatar
    Scott

    December 6, 2006
    Habitat for Humanity Installs Sharp Solar Modules
    Mahwah, New Jersey [RenewableEnergyAccess.com]
    Sharp’s new Solar Racking Systems (SRS), which include 187-watt ND-187U1 solar modules, mounting structure and a Sharp Sunvista inverter, are being installed on several Habitat for Humanity homes in Suffolk County, Long Island, New York, producing a nearly zero electricity bill for the homeowners.

    “Sharp solar energy systems are helping people around the world realize the financial and environmental benefits of renewable energy.”

    — Ron Kenedi, Sharp,Solar Energy Solutions Group, VP

    Each array of Sharp modules will be 3-4 kilowatts (kW) in size — enough to provide most of the electricity used by each household. Five such homes in the Brookhaven, LI, area have been outfitted with Sharp modules, which carry a 25-year warranty, and Habitat for Humanity plans to continue fitting the homes with the energy-producing equipment. Up to 10 other newly constructed homes on LI will have solar modules installed over the next year.

    “Sharp solar energy systems are helping people around the world realize the financial and environmental benefits of renewable energy,” said Ron Kenedi, Vice President of Sharp’s Solar Energy Solutions Group. “By incorporating Sharp’s solar energy solutions into their projects, Habitat for Humanity of Suffolk County is making a smart decision that will benefit homebuyers and the community for years to come.”

    In addition to the home installations, Habitat for Humanity will install 10 kW Sharp modules on its own corporate offices in Suffolk County.

  16. Larry Gross Avatar
    Larry Gross

    I do understand the ROI.. but was not paying particularly close attention to the semantics.

    Isn’t there is a distinction between investing money for an ROI – and buying something (that you want/need) that has a purchase cost, annual operational costs and depreciation?

    Say a heat pump or a refrigerator or an automobile. There is the initial purchase cost, operational costs plus the annual depreciation.

    You never get any money back and the calculation is how long the unit will last and how much it will cost to operate it.

    Would we ever expect a heat pump, refrigerator or auto to actually bring an ROI?

    So why would we judge solar arrays in terms of ROI?

    and I still have the question… why can’t individuals write off the depreciation for solar arrays if the traditional provider of electricity – Dominion can write off their depreciation?

  17. Ray Hyde Avatar
    Ray Hyde

    In the case of a heat pump, solar arrays, or other capital investment, you use a concept call internal rate of return or net present value.

    What you do is take you represent invetment and determine what that costs you in terms of a stream of payments: so much a month for electricty or fuel, so much a quarter or year for maintenance. Then, based on your time value of money, you calculate what a five ten or twenty year stream of payments is worth to you in todays dollars.

    Your time value of money depends on what is the highest rate of return you presently get. IOf you are getting 10% a year in the stockmarket, then that is your time value of money, but if you are making 15% a year on on your real estate, then that is your time value of money. Or you can just use the inflation rate or some such figure.

    So you do that for the heat pump, the solar array, the thermal solar array, adding passive thermal to your house, recaulking the windows and doors, adding a programmable thermostat, etc. And you do it for your present oil burner.

    Assume the comfort level in the house is the same for all options.

    If one of thos options, like the programmable thermostat reduces your oil consumption, then that appears in the string of cash flows as a lower expense. If it actually increases the value of your home, like a sunroom, then it appears as a positive cash flow at the end of the analysis.

    Then you pick the option with the highest Net Present Value or Internal Rate of return. If the IRR isn’t higher than your present value of money, then you are better off to do nothing.

    If your IRR for the solar panel is 1.4% and the IRR for your Stock market investments is 10%, then you are better off to put the money in the market, and continue wasting fuel. Except the stock market won;t keep you warm, so you must schoose among options with an equivalent end result.

    If you like, you can assess various options their external costs in terms of environmental damage: greenhouse gas for the oil burner, and the cost of greenhous gasses emitted in manufacturing glass for the solar arrays. You just estimate what those are and add them to the string of cash flows.

    Excel has built in functions for IRR and NPV. You just list the months in one column with negative cash flows in the next caloumn, positive cash flows in the thrid column, and the sum in the fourth column. Then light up the fourth column ans selct the function you wish to use.

    BUT

    This only works if you are comparing alternatives. If you just say Solar panels have an IRR of 5%, it doesn’t mean anything unless you also know that the IRR on your oil burner is 20%.

    This why I so often say that in considering the things we discuss here, you must first postulate several sytems with nearly equivalent end results: we have housin, we have transportation, we have jobs, we have schools, we have parks.

    Then comes the hard part, set up ALL of the positive and negative cash flows for the systems. And then compare the results.

    Too often we propose something that looks better in isolation, like toll roads, without considering either the total system costs, or how it compares to other alternatives.

  18. Ray Hyde Avatar
    Ray Hyde

    As far as write-offs go, now you are back to govenment subsidies/incentives.

    If you have a rental home, you can write off your investment, because you have a csh flow to write it off against. But,if the investment actually increses in value, you may be subject to recaptured deprecition when you sell.

    In the case of you rown home, you can borrow the money and get your tax subsidy that way. When you sell the home, then you have cash flow related to the investment, and you can subtract the cost of whatever you spent from whatever you get,so that is how you write it off. Just as with the rental, if your investment actually increases in value, you will have to pay tax on the difference.

  19. greenfuture Avatar
    greenfuture

    I am constantly amused by the assumption that people are rational economic actors who put things in or on their homes on the basis of financial return. Perhaps I should ask my wife what her expected ROI is for the new curtains (“window treatments”) we just got. Ha!

    Purchasing solar, like purchasing a jacuzzi, is as much a lifestyle and consumer preference decision as choosing granite or marble counters instead of tile or formica. The value of the amenity is intrinsic to the purchaser and may or may not have residual value to a new purchaser of the property. Real people make the vast majority of their purchasing choices driven by much more compelling options than cold economic calculation. When the purchase costs over $10k, this reality is even more pronounced. Vehicle purchases are a fine illustration of this.

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