Tuesday, February 7, 2012

A better way to structure a Solar Feed In Tariff (FIT)

A better way to structure a Solar Feed In Tariff (FIT):

I see the same issue each time I see a proposed solar FIT.  The FIT provides a small amount of guaranteed revenue over a very long time, generally 20 years.  The array returns investment in the first ten years and the investor or system owner generates revenue for the balance of the FIT.  

This is a great and very successful model, but if you ask anyone who is interested in building a solar array, other than utility scale investors, they are only interested in the lifetime of free power it provides and how long it will take to pay for itself.  Any extra income is just a bonus.  All they really want and need to make a decision to build solar is to feel confident it will pay for itself in a reasonable timeframe which in this market is about five years.  

The current FIT model invests too much money per installation for too long a period of time. 
Let’s look at Palo Alto’s proposed FIT for a model.

They have proposed a $0.13/kWh produced for a period of 20 years.  If I build a 10kW array with a PVWatts Factor of 1.2, it will have a projected production of 12,000kWh per year.  The FIT will pay out $1,560/year for 20 years on this array for a grand total of $31,200 of incentives.  

If we use an assumed cost of electricity as $.16/kWh then the value of solar generated energy would be $1920/yr.  This, combined with the FIT brings our Simple ROI to 11+ years which is not a very strong incentive to install solar but good enough that I am sure the program will reach capacity every year and end up on a waiting list like every FIT before it.  

The real question is how much solar did we create for the invested incentive dollars verses other options?  In this case, if we assume we will spend $1 million per year for the next twenty years, we can install 32 each 10kW arrays per year.  Since our incentive is flat and fixed, this number does not vary over duration of the FIT.  We will install a total of 641 systems or 6.41MW which will produce an estimated 154 million kWh over the 20 year run.

So we invested $20 million and in return we generated 154 million kWh so our cost /kWh is $0.13/kWh.  The invested incentive dollars per installed Watt would be $3.12/W.

So here is another option…

We will use the same $20 million dollars over the same period of time but apply it a bit differently.  In this case our FIT will start at a much higher rate /kWh.  A rate high enough that it will drop our ROI for the system owner to five years.  However, at the end of this five years, we will also end their FIT incentive and then give the remaining money to someone else so they can build an array too.

Now in order to pay off the system in five years, using the same cost of energy as the first scenario, we will need to bump the FIT incentive value to $0.25/kWh.  So for five years we will pay out $3000/year for a total incentive of $15,000.  Now the array has totally recouped its investment based on the same Simple ROI parameters as the first scenario and we have spent less than half of what the first scenario did per system so we can fund twice as many arrays.  Our cost /kWh produced is only $0.063/Kwh versus the $0.13/kWh in the original scenario.

But I am not finished yet...

Since at the end of five years we no longer need to continue to pay out on this array, we can fund another.  But what will the cost per installed Watt be in five years?  Much lower if the trends of the past five are any indication.  And what will the value of solar generated energy be in five years?  Much higher if the trends of the fast five years are any indication.  So because of these two moving variables, the new FIT payout in five years will be much lower than the one today because our parameter is to ensure the array pays for itself in five years.  Lower construction cost and higher energy offset revenue reduces the required payout of the FIT /kWh.  

The numbers get complicated and I have a spreadsheet to show where I came up with them that I can make available for you to scrutinize but let’s assume my trends are correct…the FIT amount in five years has dropped to $0.205 /kWh produced or $2,460/year or a total incentive from the FIT of only $12,300.  Each year this ratio gets more impressive until the point where in about 15 years, we no longer even need the FIT to reach our five year Simple ROI goal.  At this point, Solar has already achieved grid parity.

So for the same invested dollars by the FIT of $1 million per year for 20 years, we get 35.65MW of installed power that generates 855 million kWh over the FIT life.  This has a net cost of only $0.023/kWh of invested incentive, a fraction of the current FIT model.  This means our high impact short term rolling FIT has 556% more impact than the standard FIT model.  The invested incentive dollars per installed Watt would only be $0.56/W which is lower than most grant and rebate incentives.

Government entities and utilities can get over 5.5 times the impact of invested incentive dollars by making these simple changes to the model.

Home Owners and businesses do not need a 20 year FIT, they just need to know that the array is a good investment that will pay off in a reasonable timeframe.  The key to a workable FIT is not a long term FIT, it is a short term FIT that pays just enough to ensure an array will recover investment in five years or less.  

If you would like a copy of my spreadsheet, feel free to email me at joe@EISsolar.com and I will send it to you. 

Joe Morinville
Energy Independent Solutions

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