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Economic Currents

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The Costs and Benefits of Installing Solar PV

Renewable energy presents many new challenges at the system level. Before we get to that, it helps to first look at things from a homeowner’s perspective.

The Homeowner’s Solar PV Decision

If you’re a homeowner, and you haven’t already installed PV solar, you may want to look into doing it very soon.  To see why, and how much you could benefit, we’ve developed a calculator to help you sort out the costs and benefits of your particular situation.  Our wonky calculator includes a few extra features to take into account uncertainties that can factor into your bottom line, or battery backup if you’re inclined to consider it.  This calculator should help you to decide how large of a system to install and maybe help you comparison shop across solar providers.


Homeowner Solar PV Calculator

Value to Homeowner
Internal Rate of Return
Annual Energy Use
Annual Energy Production
Up Front Costs
Up Front Battery Costs

To get started, you need to estimate your electricity use per day, averaged over the whole year.  You can find this number on your electric bill.  Make sure you average over all twelve months of the year.  Adjust that number up or down depending on you future plans: Do you expect to install more air conditioning? Thinking about buying an electric car? If so, you might want to bump the number up.  Do you plan to install solar hot water, more energy-efficient appliances, air conditioning or LED lights?  If so, you might want to start with a lower number.

Your guess may be a little high or low.  Also, generation from your solar panels and your electricity use may vary depending on the weather or other factors.  To account for uncertainty, you can enter a number for how far off you expect your estimate to be.  A conservative number might be 20% of your estimate (say, 4kWh / day if your best guess for average use is 20kWh/day). 

You also need to account for how much sunlight your panels will be exposed to.  This can vary a lot across each island.  Online resources are available to help you approximate this.  Here is an example for Oahu.  Enter the equivalent hours of peak sun for your location. On Oahu this can vary from around 4 to 6 hours.

Uncertainty about electricity generation and use can make a big difference to your bottom line under the standard net-metering agreement.  That agreement allows you to obtain credit for excess generation from your panels in one month, which you may use in a later month when your use exceeds the energy generated by your panels.  But there’s a limit to the amount of credit you can build up.  Each year, any surplus generation is zeroed out.  So far, homes typically install far more solar than they need.  And as you will see, there’s a fairly strong incentive to over-install, especially if you’re highly uncertain about your electricity use.

The default values in the calculator are those for my house.  I don’t have solar yet.  I’m still waiting for my net metering agreement.  My recent quote for installed cost of my panels, $4.04/Watt, is from a large reputable company.  You can find quotes for less if you shop around.  And keep in mind that prices have been falling fast, and may continue to do so.  You can find this number by dividing the size of the system you plan to install (mine is 3.51 kW) by the total cost BEFORE tax credits, and including taxes and everything else.  Once you have the other numbers pinned down, you’ll want to adjust the size of the system to make the net present value as big as possible (do not maximize the internal rate of return).

The Federal tax credit is currently 30 percent, and the Hawai’i tax credit is 35% up to a maximum of $5000 per 5kW installed.  In my case, the Hawai’i tax credit is just under the cap, $4,963.14. 

Finally, you need to include an interest rate.  If you’re borrowing to finance your solar installation, include the rate on the borrowed funds.  If you’re using savings, you might enter the rate of return you expect on a safe investment vehicle, like a savings bond, certificate of deposit, etc.  This number goes in the first line of the calculator.  I’m using 5 percent.

You can adjust the other assumptions in the list, or just take the default values we’ve entered.  You might ask your solar provider about decay rate, life expectancy of the panels, maintenance, etc. and adjust accordingly.  The price of electricity is assumed to stay constant over the lifetime of the panels.  This may be conservative: most projections we’ve seen anticipate rising prices.  But you can adjust the price level up or down to account for your own expectations.

We’re not considering battery backup now, but some rough numbers are in there in case you want to consider it.  In the not-too-distant future it’s possible our grid may not be able to handle any more solar, which may require you to unplug and use a substantial battery backup if you want to install PV solar.  Note that battery costs vary a lot, depending on the kind of battery, how much you want to store.  Batteries remain expensive, but costs are falling

What’s the bottom line?  Installing this system on our house should net us a present value of approximately $19,949*, with an internal rate of return of 54.4% on our out-of pocket expense of just $5,167, after tax credits. My “pay back” period is about 2.5 years.  Needless to say, you would be very hard pressed to beat this kind of return for any other investment.  Note that I expect to use less electricity than I generate, but installing fewer panels would reduce my net present value. 

Note that I would still net almost $15,000 without the state tax credit and over $10,000 without state or federal tax credits.  Also note that without tax credits, it pays less to over-install.

Hawaiian Electric’s Bottom Line

Although HECO loses sales of 5.5mWh each year when I install solar, amounting to a revenue loss of about $2026, they also save about 7mWh in generation.  At a levelized generation cost of 22 cents/kWh, HECO saves about $1550.  Factoring in a monthly connection fee of $17, HECO nominally loses a net of about $272 per year from my solar installation.

This loss, however, doesn’t account for revenue decoupling, which allows HECO to raise prices on everyone else to make up the full $2026 revenue loss, ultimately providing a net gain of  $1,754.  We expect HECO’s grid management costs have gone up due to high penetration of solar and wind, and these costs would have to be subtracted from this net gain.  Nevertheless, it’s easy to see how HECO can benefit from the revenue decoupling rule and current net metering agreements.

The data do show Hawaiian Electric’s net generation has fallen by a lot more than sales have, a clear indication of widespread over-installations.  In 2009, EIA reports that Hawaiian Electric generated an average of 917.5 million kWh each month, falling to 817.8 in 2013.  Sales, in contrast, fell from 844 to 791.7 million kWh, or just over half the decline in net generation.

Incentives for Energy Efficiency

One side effect from current net metering agreements is that households over-installing solar typically will have little incentive to conserve electricity.  Once it becomes clear that a household will not use all of its solar generation for the year, there is zero cost for leaving lights on and zero benefit from upgrading to LED light bulbs, buying more energy efficient appliances, and so on.  This disincentive is tragic, because most efficient way of reducing greenhouse gas emissions, dependence of foreign oil and generally saving money, is through energy efficiency, even without distorted incentives.

In subsequent posts we’ll discuss alternative regulatory and policy structures that might be more efficient.

- Michael Roberts


* Numbers in the text may be slightly different than the calculator due to a random “Monte Carlo” evaluation of uncertainty.  If you refresh the page, the numbers change very slightly each time.

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