Solar Surprise

I was recently asked to analyze the economic feasibility of a large scale solar array for a private college in Ohio. Even though you may not be considering solar for your facility it may be interesting to know what generation technologies are available and if they make economic sense in a real life scenario. To that end, I thought I would share my review process and discoveries.

I went into the project thinking there was no way solar could compete with the all-time low prices provided by the current electricity market. Large-scale solar installations in many states are a no-brainer but here in Ohio, it just didn’t seem like it would be viable. I was wrong.

My approach was to model the benefits solar could bring to the current cost structure vs. the cost to purchase the solar output. This particular customer was considering an array which nearly satisfied its peak (kW) and accounted for around 20% of its overall consumption (kWh). This left the balance of 80% of the consumption to be sourced from the market. Since the solar array would be providing electricity during the high-priced peak hours when the sun shines, much of the remaining power needed from the market consisted of lower-cost off-peak power. Supply rates from retail suppliers proved this to be true. The best rate obtained for this new projected consumption profile was 7% lower than what would have been offered if no solar was installed.

The second benefit that solar would bring to the current cost structure is a reduction in the delivery charges from the utility. The utility charges are based on both monthly peak and overall consumption. Since I knew approximately how much the solar array would produce each month I could determine how much of the peak and consumption would be displaced. Once this was identified and modeled the results showed that the utility delivery charges could be reduced by 9%.

Now that the benefits were identified I turned to the solar offer. The solar transaction was structured as a Power Purchase Agreement (PPA) whereby the customer purchases all the output from the array at a fixed rate with a known escalator every year for 25 years. The solar company would own the array and would be responsible for maintenance. Any tax incentives and renewable credit value would go to the solar company. (It is important to note that many of the tax incentives have a sunset date of December 2016.)

The benefits were identified and the costs were modeled. Now it was time to put it all together. The assumptions around future energy and capacity pricing will certainly impact the outcome of the economics. Since we were talking about a period of 25 years I thought it was prudent to be fairly conservative with these assumptions. By holding these variables steady (which is conservative considering we are at all-time lows) and assuming a modest increase on delivery charges, the project shockingly ended up a break-even. The projected cash flow showed benefits during the first half of the 25 year term and premiums on the back-end of the term. If the assumptions regarding the energy and capacity markets are increased modestly then the economics become a win.

Solar is certainly not for everyone but it is interesting (and surprising for me) to know that the cost of a large scale array can compete with the market even when it is providing all-time low prices.