Sensitivity And Simulation

)Data source: “Module Pricing,” Solarbuzz website, http://www.solarbuzz.com/facts-and-figures/retail-price-environment/module- prices (accessed Jul. 20, 2012).

 

As with all green power sources, PV power was not sensitive to pricing of carbon emissions, which was expected to be introduced sooner or later. But unlike some other green power systems, PV power was produced predominantly when electricity was at its highest demand (e.g., during hot, sunny summer days in the United States, when the need for air conditioning, which consumed a great deal of electricity, was greatest). In contrast, coal-fired power was produced at constant “base-load” levels, regardless of the demand for electricity; its price was expected to increase by $0.01 per kilowatt-hour (kWh) for every $10 per ton price of carbon.

 

As a result, solar energy production had reached grid parity in some areas of the United States, meaning that solar energy costs were equal to or less than retail electricity prices.

 

Factors Influencing Adoption of PV Systems

 

In addition to the technology-driven decline in the cost of PV systems, several additional factors influenced the growing adoption of PV power. (The following refers to the situation in the United States, but similar factors were at play in many other countries as well.)

Investment tax credit (ITC)

 

In 2008, as part of a federal stimulus bill, the U.S. federal government extended a tax credit equal to 30% of the cost of PV installation. The bill applied to commercial, residential, and utility installations of solar energy that took place through December 31, 2016.

Rebates: Solar Incentive Program (SIP) in California

 

As of August 2011, the utilities in California offered rebates of up to $2.50 for each watt of installed solar power systems of 30 kW or less to compensate for the installation cost.

 

 

 

 

 

8 This figure refers only to the price of the PV modules and excludes the price of inverter, installation, wiring, and other components comprising the PV system.

 

 

 

Modified Accelerated Cost Recovery System (MACRS)

 

MACRS was the depreciation system in use in the United States. MACRS permitted recovery of capitalized cost or tangible property faster than the useful life of the property. The depreciation deduction was usually calculated using either the straight-line method or declining balance switching to the straight-line method. Under MACRS, businesses were allowed to depreciate the capital costs of the PV systems over the five-year period even though the expected life span of most PV installations was more than 30 years.

Power purchase agreements (PPAs)

 

PPAs were a kind of financing arrangement used for both residential and commercial solar electrical systems. They involved a seller (typically a specialized leasing company) installing, at its own expense, a PV system on a buyer’s site (typically the owner of a building or land) and then selling the power generated by the system directly to the buyer—bypassing the utility—at a set price that tended to be less than the utility’s grid price. This ensured that the buyer accessed a supply of renewable power at a low price without needing to purchase the PV system and that the seller made money on the generated power and the investment tax credits. Many observers believed that such financing arrangements could substantially increase demand.

Net metering

 

Net metering referred to the legislation enacted by many states that required utilities to credit businesses and homes with solar installations for the excess generated electricity they put back to the grid. In essence, it allowed the electricity meter to roll backward.

 

Market Adoption Worldwide and in the United States

 

By 2011, solar PV was estimated to be responsible for the global production of 67,400 megawatt hours (MWh), or 0.5% of worldwide electricity demand.9 This market had been growing rapidly over the previous decade (Figure 2) with PV systems being used in more than 100 countries. In a single calendar year, the world’s power output was equal to 80 billion kWh.10 From 2009 to 2010, the demand for solar PV had increased by over 100% and was expected to double again in 2011 despite a lack of increases in government incentives. Some analysts expected PV sales to continue to increase as the economy stabilized. Improved technology was also reducing module cost and strengthening manufacturing. Forecasters did not expect the government to offer higher rebates for solar PV installations, but they also did not foresee the existing incentives being withdrawn.11

 

 

 

 

 

 

 

 

 

 

 

9 European Photovoltaic Industry Association, Global Market Outlook for Photovoltaics until 2016, May 2012, http://files.epia.org/files/Global-Market- Outlook-2016.pdf (accessed Jul. 20, 2012).

10 GE Energy Financial Services, “GE Invests, Delivers One of World’s Largest Solar Power Plants, Harnessing Portugal’s Sunshine, PowerLight’s Technology,” press release, March 28, 2007.

11 Galen Barbose, Naim Darghouth, and Ryan Wiser, Tracking the Sun III: The Installed Cost of Photovoltaics in the U.S. from 1998–2009, Lawrence Berkeley National Laboratory report, http://eetd.lbl.gov/ea/ems/reports/lbnl-4121e.pdf (accessed Jul. 20, 2012).

 

 

 

 

 

 

 

 

45,000

40,000

35,000

30,000

25,000

20,000

15,000

10,000

5,000

0

Figure 2. U.S. PV adoptions: Number of installs (left axis) and sizes (right axis).

Number of installs Size (MW)

 

 

 

1000

 

800

 

600

 

400

 

200

 

( 2011 )0

 

 

 

 

( 1998 ) ( 1999 ) ( 2000 ) ( 2001 ) ( 2002 ) ( 2003 ) ( 2004 ) ( 2005 ) ( 2006 ) ( 2007 ) ( 2008 ) ( 2009 ) ( 2010 )Data source: National Renewable Energy Laboratory website, http://openpv.nrel.gov/visualization/index.php (accessed Jul. 20, 2012).

 

California had been leading the market for solar PV installations in the United States (126,196); New Jersey was a distant second (7,536). California was forecast to continue to lead in number of installed units over other states. Favorable weather conditions in the U.S. Southwest and government incentives were attracting investment from the private sector.12 In the Northeast, high electricity prices were driving people to consider other alternatives and making solar more attractive.13

 

Wells Fargo’s Capital Investment Decision

 

After the success of the late 2010 renewable energy project in Colorado, Lucas was approached by the Los Angeles Regional (LA Metro) Community Bank, whose leadership asked Lucas to evaluate the investment of installing solar panel systems for three bank branches in Los Angeles. The community bank was considering the project largely because of the SIP offered by the Los Angeles Department of Water and Power (LADWP). These incentives were in the form of rebates to all rate payers, whether private or commercial, who installed and operated solar energy systems on properties within municipal territory. The participating rate payers would receive their rebates in two parts. The first part, issued upon installation, would be based on the system size. The second part, based on the amount of energy produced, would be awarded after one year of operation.

 

Lucas’s evaluation considered the initial cost of the capital investment, the ongoing operational expenses, the savings on utility bills, and financial incentives (rebates) earned by renewable power generation. She started by outlining the main assumptions she would use in the analysis of this capital investment decision:

Solar system purchase assumptions

· Each of the three Los Angeles Wells Fargo branches required a solar panel system size of 15 kilowatts. The total system cost (including modules, inverter, wiring, installation, etc.) was $7,000/kW. Lucas was

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