Net Metering Value
By Jonathan Teller-Ellsburg
This series started in our December 2016 edition of Green Energy Times, followed by part 2 in February, 2017. You can read parts 1 and 2 at http://bit.ly/GET-12-16 and http://bit.ly/GET-2-17, on pp. 8-9.
Cost Per Watt (aka “apples to oranges”)
In addition to quoting the overall cost of your proposed solar array, an installer is likely to quote you the “cost per watt” of the array. So if the overall array costs $20,000 and the claimed output is 5 kW (5,000 watts), then your cost per watt is $20,000 divided by 5,000 watts, which equals $4 per watt.
What is this “watt” that is being bandied about? It is a measure of the ability of the solar array to produce electricity, if and when it is exposed to a standard intensity of sunlight (and subject to other standard conditions). So our hypothetical 5 kW solar array will produce a flow of 5,000 watts of electricity for as long as the sun is shining on it with that intensity. If the sunlight is less intense, then the flow of electricity will be reduced. Reduced intensity of light may be the result of clouds, haze in the atmosphere, or from the light coming in from a shallow angle. Nighttime doesn’t help either.
What you really want from a solar array are the kilowatt-hours it can produce. The wattage of the solar array is merely a means toward this end. You are billed by your utility based on kilowatt-hours (kWhs), and a solar array saves you money only to the extent that it supplies kWhs.
That means that to properly compare the cost effectiveness of different solar proposals, you need to compare the “cost per kWh” of delivered energy. (See part one, “Predicted solar output,” for a review of how much delivered energy to expect.)
For sake of mathematical simplicity, I recommend using “cost per first-year kWh,” which is the cost of the array divided by the number of kWhs to be produced in the first year. Needless to say, your solar array will produce electricity long after the first year, and your long-term cost of electricity from the array will be on the order of pennies. Limiting the math the first year simply makes it quicker and easier to get a number that is useful for comparisons.
If the proposals you are considering are all for nearly identical arrays—say, on the same piece of your roof—then comparing their costs on a per-watt basis will give you pretty much the same result as comparing them on a per-kWh basis.
But if there are differences in how the proposed solar arrays will experience sunlight, then cost-per-watt is a misleading metric. Consider two hypothetical solar arrays:
This is a rooftop array 5 kW in size with a basically clear, due south view of the sky, which is reasonably expected to generate 6,500 kWhs in the first year. It costs $22,000. It has a cost-per-watt of $4.40 and a cost per first-year kWh of $3.38.
This is a rooftop array also 5 kW in size, but which faces southwest and which is partially shaded by a nearby tree. It is reasonably expected to generate 4,900 kWhs in the first year. It costs only $17,000. It has a cost-per-watt of $3.40, which is 22% less than option A. However, its cost per first-year kWh is $3.47, which is 3% more than option A.
Assuming you can afford option A, it is a better choice. For each dollar invested, it gives you more energy, which is to say more value. That is shown by its lower cost per first-year kWh.
Few solar installers include “cost per first-year kWh” in their proposals, but it is something you can easily calculate for yourself. As long as the proposal includes a reasonable prediction of electricity to be generated in the first year, you simply divide the total cost by the number of such kWhs. You can do this based on the total cost either before or after accounting for government incentives. Do the calculation the same way for all proposals, and you will get a useful, fair, apples-to-apples number with which to make comparisons of cost-effectiveness.
Many proposals include some version of financial analysis. The two most common are “simple payback” and “return on investment.”
Simple payback is the estimate for the number of years until the value provided by the solar array adds up to the original cost. People can’t help but like this measure, which gets applied to many energy-related investments, though it is a bit of an odd duck. When was the last time you asked for the simple payback on a mutual fund or a new roof?
Regardless, if you are going to compare predicted simple payback from different solar proposals, you have to make sure the proposals are apples to apples in all their essential elements. As noted above, the installer’s assumptions on solar panel degradation and electric rate inflation, for example, can cause significant variation in predicted value. Any installer can make their solar array look like it has a seven year simple payback simply by cranking up the assumption of electric rate inflation and minimizing or ignoring panel degradation.
Return on investment (ROI) is calculated as:
Lifetime net metering value – Cost of solar array
Cost of solar array
where the cost of the array probably is assumed to include any and all government and utility incentives that are available. The result will be in the form of a percentage. This is sort of okay as a measure of return, except that different installers will calculate it based on different lifetimes (for example, 20 years vs. 25 years vs. 30 years), making it no good for comparison purposes.
And some installers don’t even calculate ROI this way. Instead, they calculate it as:
First year’s net metering value
Cost of solar array
Technically, this is not supposed to be called “ROI,” which only goes to show that people in the solar business are in the solar business, not the investment advice business. But once a competitor starts claiming to offer double-digit returns, how can an installer avoid throwing some finance-y numbers into their proposals?
Anyhow, some installers avoid ROI, due to its many pitfalls (see the entry in Investopedia for more examples: http://goo.gl/kt8Me) or offer it as one among other forms of financial analysis.
Among the other forms of financial analysis, perhaps the next most common measure used by solar installers is “internal rate of return” (IRR). Like ROI, IRR is shown in the form of a percentage value. Unlike ROI, IRR can be used to compare the return on a solar investment with other types of investments, such as CDs, money market accounts, municipal bond funds, and so on.
The key technical advantage of IRR is that it takes into account the amount of time involved in the investment. For example, two investments which have the same up-front cost and which return the same monetary gain will have the same ROI, even if one of them provides the return in five years and the other in 20 years. However, the IRR will be higher for the first and lower for the second, in recognition of the fact that something that provides value to you more quickly is more valuable, all else being equal.
A solar array is a long-term investment. Solar equipment tends to be reliable and durable, but nothing is perfect. To the extent that you are able, you probably will want to enter into this sort of long-term business relationship with a provider you feel you can trust—and it’s nice to use your money to support honest business practices, too, even if they aren’t always the ones with the lowest sticker price.
Before you plunk down tens of thousands of dollars, or enter into a twenty-year lease agreement giving control over the very roof on your home to a distant corporation, take a little time to look carefully through the proposals you receive. Check to see that the predictions being made are reasonable and defensible.
A provider seeking to sell you an array has an interest in presenting optimistic versions of the different variables involved. And that might indeed be how things play out: utility rate inflation might be high, global warming might give us a sunnier climate, and your solar panels might degrade more slowly than the average.
But why set your expectations on only optimistic assumptions? If the numbers look good even with cautious assumptions (low inflation, traditional climate, maximum panel degradation), then you will sleep better with your solar purchase.
The keys here are double-checking the predicted quantity of electricity that will be provided by the array and the way the proposal translates that into predicted monetary value. When comparing proposals, be sure that predictions of energy production and monetary value are based on equivalent assumptions.
When in doubt, ask for explanations. No one knows the future, and the best any solar installer can do—even the most honest and cautious in the world—is give an educated guess. The best you can do is go into solar (and you should go into solar!) with reasonable expectations and open eyes.
Jonathan Teller-Elsberg works for Solaflect Energy, a Vermont-based manufacturer and installer of solar trackers. He has a masters degree in Energy Regulation and Law from Vermont Law School.