Solar Power in the Real World

Let’s start with some facts. Over the last 15 years or so, solar photovoltaic (PV) power installations have been growing at a respectable rate of 25 to 30 percent per year worldwide. But, the global growth statistics mask a compelling domestic growth trend.

RE Insider – May 27, 2003 PV installations in the U.S. have grown by leaps and bounds in the last two years. Most estimates suggest that the domestic PV market is growing at 60 percent per year. Further, the share of those installations that are grid-connected has grown from just a small fraction to almost two-thirds of all domestic installations. And perhaps most compelling, the share of PV installations sold to businesses for commercial and industrial applications now accounts for almost half of the market’s size. The vast majority of this growth is occurring in just one state—California. At its current growth rate, California is expected to surpass Germany and Japan as the world’s largest market for grid-tied solar applications. Why has there been such sudden recent growth in PV in California? Why the radical switch to grid-tied systems? And why the shift to commercial customers? The answer is straightforward: the PV market in California has finally reached a tipping point whereby the economics of solar power, given the right conditions, are competitive with rates charged by the electric utilities. In other words, many businesses in California are making an economic, rather than ideological, business decision to generate their own power using solar energy. The key to understanding why businesses are making these decisions is understanding where solar PV fits into a broader generation portfolio—in other words, where the application works well and where it doesn’t. In this article we’ll take a close look at how solar power is being employed in the real world to reduce the total cost of energy for California businesses. Generous Incentives Drive Growth The main driver of California’s rapidly growing PV market is a combination of generous government incentives that include direct rebates and tax benefits. Other benefits like net-metering and simplified interconnection procedures further ease associated costs and engineering difficulties. These incentives and benefits act together to cover as much as 75% of a PV system’s cost. They effectively bring the real cost of solar power down to the point where it is competitive with retail electric rates. Without these incentives, the market for grid-tied solar power applications would dry up almost overnight. There is not enough space in this article to debate the “artificiality” these incentives introduce to the solar power market. Suffice it to say that all energy markets are “artificial” to the extent that they reflect the policy guidance deemed appropriate by our elected officials. In California’s case, the incentive programs have very strong political support at numerous levels. As a result, they have survived a gauntlet of legislative, legal and regulatory challenges unscathed. California’s rebate programs were originally launched in 1998 and expanded upon in 2000 and 2003. The program is currently funded through 2006. The stated goal of the program is to stimulate demand and thereby encourage PV manufacturers and suppliers to invest in bringing the market up to scale. If all works as planned, these economies of scale will result in reduced PV equipment prices and ultimately a self-sustaining PV market—without the rebates—sometime towards the end of this decade. Solar Power’s Place in the Generation Portfolio Discussions about solar power often devolve into whether or not solar is “the answer” to foreign oil and natural gas dependency. This may be the result of some over hyping of solar by its advocates or simply the result of a misunderstanding of solar power’s appropriate place in our overall electrical generation portfolio. While solar power may not be “the answer” to all of our energy needs, it does have an important role to play in how businesses generate and use energy. The reality is that solar PV is unlikely to ever make up more than a small single-digit percentage of our overall electrical generation unless something radically changes to make solar PV more space efficient There are some interesting technical innovations in solar thermal technologies that may have bigger prospects (e.g. Solargenix’s 50 Megawatt contract with Nevada), however any objective analysis has to conclude that solar PV has a somewhat more limited role to play. However, it is important at the same time to note that PV has some unique characteristics that make it ideal for on-site generation in commercial environments. In this sense, it has a very specific role to play in the overall generation portfolio. Unlike any other form of electrical generation, solar PV has zero-emissions, operates silently, adapts easily to existing structures, utilizes otherwise non-useable space and has no moving parts. This gives PV a decided advantage in populated areas where commercial buildings are often located and floorspace is at a premium. It is also attractive to businesses because periodic maintenance of a PV power system is minimal. Solar PV also has some unique limitations: it only generates when the sun is shining and peak power output is typically measured in the tens or hundreds of kilowatts. This means that solar power is not a great source of backup power nor is it ideal for replacing large-scale power demand. So where does solar PV fit in the portfolio? Solar PV is ideal for situations where other forms of generation are inappropriate because of noise, space, or emission requirements AND where the goal is to shave peak energy usage or modify a facility’s load to take better advantage of utility pricing schedules. That’s because a solar PV system generates the most energy during summer afternoon periods which typically coincide with higher electrical rates. In these situations, solar PV is an ideal solution for reducing a business’ total cost of power. A Case Study in Solar Savings For this case study, we’ve chosen a client with a 19,000 square-foot facility in the San Francisco Bay Area. Prevalent Power provided a 31.7 kilowatt-ac (kWac) solar power system projected to save $420K in energy costs over its lifetime. Prevalent Power financed 75% of the project costs through rebates and tax incentives. By financing the purchase with a tax-oriented lease, the client’s monthly lease payment is roughly the same as what they would otherwise be paying the utility for the energy they now generate on their own. Let’s see how. Phase I: Energy Usage Assessment The client’s average usage on site is roughly 117,000 per kilowatt-hour (kWh) per year at an annual cost of $21K per year. The cumulative cost of 30 years worth of power was estimated at $990K using CEC estimates for power rate inflation and their billing schedule. Prevalent Power analyzed the client’s power usage patterns and billing schedule to discover that the real summer power cost was over $0.22 per kilowatt-hour. Heavy summer usage combined with higher summer rates and demand charges were driving a disproportionate share of annual energy costs. This usage pattern is a good fit for solar because solar power systems generate more power during the summer when energy rates are high. Furthermore, because the company was based in a populated urban environment, solar PV’s clean and quiet operating characteristics significantly simplified permitting requirements. Phase II: System Engineering Prevalent Power determined that the engineering objective was to design a system large enough to reduce expensive summer energy usage. The energy usage assessment determined that the appropriate generation target was 92,000 kWh per year. The Bay Area receives around 1,869 hours of full sunlight on average per year. Determining the required system power rating is just a matter of dividing the energy target by the hours of full sun: 92,000 kW-hours / 1869 hours = 49.2kW (AC power rating) So, the optimal system size for the client would be a 49.2kW system. Taking into account standard electrical inefficiencies, this would require a solar array rated at roughly 59kWdc—or, about 396 panels. But, the facility’s roof was only large enough for 252 panels. So the maximum solar array that could be mounted on the roof was 37.8kW’s worth. The revised AC rating of the system, again accounting for electrical inefficiencies was 31.7kW. The average output of the system was projected to be 59,000 kWh, a little over half of their energy usage. The ratio of summer to winter output was 60:40, reflecting the fact that the system generates more power during the longer summer days. Phase III: Integrated Financing Prevalent Power developed an integrated finance package that combined state rebates and tax incentives to pay for roughly 75 percent of the project costs. Prevalent Power also arranged a tax-oriented lease for the client to finance the remaining cost after rebates. The tax-oriented lease enabled the client to transfer the tax incentives to the lease-provider and realize the savings immediately. The result is that they didn’t have to wait to claim the tax credits and deductions and the cost of the system comes down to one easy monthly lease payment of about $1,190—roughly the same as what they would have been paying the utility for the energy anyway! Bottom Line Results Annual power bill savings are projected to be over $11,000 per year (data coming from the system now suggests that actual savings may be higher). At that rate, the system is projected to pay for itself in just under 6 years accounting for inflation. The cost of the lease payments is roughly the same as what they would otherwise have been paying the utility for the energy, so there is no net cash flow impact of the purchase. After the lease term, the energy is free. Based on projected power rates, the lifetime savings of the system is expected to be over $420K. Conclusion California has taken a bold policy step that is yielding noteworthy results. The example above clearly illustrates how real world savings can result for California businesses when the situation warrants solar PV as a solution. The combination of rebates, tax incentives and lease-financing results in a package that delivers bottom line savings at no additional burden to the business—it’s hard to argue with those kinds of results. Detractors of solar PV will argue that these results are due to “artificial” market interference and that solar PV is not “the answer” to our energy problems. These arguments miss the point. Solar PV, like any technology, has appropriate and inappropriate applications and thus a role to play in the broader energy generation portfolio. California regulators have a long term goal to create a self-sustaining PV market in California. The numbers suggest they’re on to something. Bio Arno Harris is President of Prevalent Power, Inc. Harris is the founder of two successful companies: RedEnvelope and Novo Media Group, Inc (recently sold to Bcom3). His background combines marketing, engineering, and consulting with experience servicing such cients as Toyota Motor Sales USA, GlaxoWellcome, MCI, Apple Computer, Hewlett-Packard, Nikkon Precision, IKEA International, and NBC Digital Publishing. Arno is a published author, private pilot, and graduate of UC Berkeley.
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