Time to reassess solar capability

Business plans to encourage solar electricity


by Kmar David

Not only information technology but other technologies too are moving forward fast; solar electric generation has taken three steps; (a) prices of solar-electric panels have been coming down, (b) their use has increased and the experience gained has opened up new possibilities such as (c) new business models which are catching on in the US – particularly in the sunshine states.

Solar electricity will not interest small domestic consumers who enjoy a large price subsidy in Lanka. A meaningful cut-off bench mark is a home using 400 units a month owning a fridge, freezer, kettles, illumination points and maybe an air conditioner. This corresponds to the middle or upper-middle class bracket with a roof large enough for a 2 or 3 kW solar panel. Currently the electricity bill for a 300 units a month domestic consumer is Rs 8,544 rising to Rs 22,046 for 600 units.

The price of solar modules had fallen below $ 1,200 per kW (solar cells only to below $ 700 per kW) in 2013, and falling. Inverters (which convert solar panel direct current to alternating current for interconnection with the mains) and protection equipment, wiring and mounts will cost say $ 1,000 per kW. Installation charges and labour are cheaper in Lanka, say Rs 100,000 for any installation size. It all adds to about Rs 700,000 for a 2 kW installation. Local vendors are quoting much more; maybe transportation, insurance and mark-up are more than I have anticipated.

Business models

What is more interesting is the variety of business models promoted in the US, particularly California. I will describe just one innovative model in detail and touch on another.

The $0-down Solar Lease

Most consumers do not wish to put, say $ 6,000 up front, for a 2 kW installation (higher than Rs 700,000 due to higher labour and inspection fees in the US). Vendors tried marketing outright purchase and failed to make progress and then switched to an innovative plan, the $0-down Solar Lease agreement. The requirement is a good site (physically strong, appropriately oriented roof) and willingness to enter a 20-year contract. The customer is then locked into a "secure and predictable rate much lower than the utility tariff". This means the vendor sells you solar electricity from your roof at a price less than the utility price up the limit of the solar power available at any time. At night, or when cloud cover reduces solar generation, or when the customer demand exceeds solar production, the excess is taken from the utility supply for which the customer is charged at utility tariff. [Daytime excess solar production can be stored for night-time use but requires batteries which drive cost up considerably; hence this option is not addressed here].

What’s in it for the customer? On sunny daytimes all or much the supply is from the sun at the low tariff offered by the vendor. [Furthermore, net power taken from the utility – CEB - is reduced and paid for at a lower rate in countries like Lanka were tariffs are graded to rise with rising usage]. Solar Lease contracts include free maintenance and repair for 20 years. The small type makes provision for tariff revision after some years but since the average annual sunlight at a given location is unlikely to vary, US fair trade regulations will permit tariff revision only if labour or maintenance costs change by a large amount. I describe below a case where the monthly bill fell from about $85 to about $60.

How does the vendor/supplier make money? The vendor faces no energy cost; it’s free from the sun. What he needs to recover is investment and a fair return on capital over a time period. If the income stream is spread over 20 years, present value after discounting is what matters. Or simply, if money is losing its value at say 5% per year one would need to recover Rs 105 next year to be worth Rs 100 in today’s money (actually 100/(1-0.05) or Rs 105.26). This has to be repeated for 20 years. Methods of discounting are not the point – the web and tables are there for that – the point is that the vendor will seek recovery of capital and a fair return over the project lifetime (maintenance and repair costs are small).

If the required annual income flow divided by the number of units produced is less than the utility tariff, both consumer and vendor can be winners. Therefore production must be large enough to ensure that the cost beats the utility tariff. Chart 1 shows the monthly electricity produced by roof panels covering 250 square feet (22.3 square meters) of a middleclass Los Angeles home.

The game is a little more complicated because solar production is during the day when no one is at home and consumption low. The excess energy (only fridge and the wine-cooler are running) is fed back to the mains and the vendor is reimbursed at the marginal price of saved utility energy. If the utility’s marginal generating cost is 13 US cents per unit – Rs 17 - by buying back, say 220 units, the utility saves $28.60 – Rs 3,718 – of its costs. By law this must be reimbursed to a green energy vendor. Some vendors, depending on the marketing plan, may share this with the householder. The average California tariff is 17 US cents per unit, which is more than the example avoided cost of 13 cents used above, because of other factors including fixed capital, transmission, distribution and establishment charges. (All these numbers are for illustrative purposes only and change year by year).

To press on with my Chart 1 example home, suppose that of the average 420 units a month 200 units are used by the customer during the day and 220 fed back to the supply. The customer pays the vendor, say 5 cents US (Rs 6.50) per unit for the 200 units of solar power, or $10 (Rs 1,300) a month. Assume that the off-solar electricity taken by the customer from the utility is another 300 units (customer total load 500 units a month) which attracts a fixed (in the US) tariff of 17 cents or a monthly bill of $51. To summarise then, the customer monthly bill is $ 61 or Rs 8,190. Without the solar installation the monthly bill would have been 500 units at 17 US cents or $ 85 (Rs 11,500).

Now consider the vendor’s perspective. By selling 200 units, which cost nothing, to the customer at 5 cents, the vendor is foregoing an income of 8 cents because the reimbursement benefit for green energy fed back into the supply was assumed to be 13 cents in this example. This therefore is a case of sharing benefits between vendor and customer. The vendor’s monthly income derives from the 220 units pumped into the supply at 13 cents and the 200 units given to the customer at 5 cents; that is a total of $38.60 a month or $463.20 a year.

In the third paragraph of this piece I estimated the investment cost at $2,200 per kWh ($4,400 for the 2kW example used here) excluding installation and labour costs which are higher in the US. A fair estimate of the vendor’s investment outlay would be $5,500 (see also Chart 2). The annual return, neglecting discounting of $463.20 (say $450), makes the payback period 147 months or 12 years and 3 months. This does not seem an attractive business proposition but it is necessary to take account of the 30% tax rebate offered by the government which shifts the economics markedly. If $1,650 of the investment cost is refunded then the payback period on the remaining $3,850 is reduced to 103 months (8 years and 7 months). Not marvellous, but its money for free for over 11 years after that.

Three lessons flow from this example. (a) A 2 kW installation producing 400 to 450 kWh per month is the border line; handsome profitability requires an installation of twice this size and a roof large enough to carry the panels. (b) California is remarkably cloud free; annual average daylight hours may not be much different from Lanka, but I am not sure of cloud cover comparisons. (c) Solar electricity will not be competitive unless a government subsidy of about 30% is offered.

The Outright Purchase Model

It is a pity that vendors are offering only outright purchase business models in Lanka; a solar lease agreement would attract many more takers. (Some sort of a capital repayment clause will have to be written-in for the case when a property is sold and the new owner does not renew the lease). The investment needed is around one million rupees for 2 kW, maybe 1.3 million rupees for a 3 kW installation. Enterprising and far seeing vendors can surely come up with plans demanding less capital from end users. The CEB domestic tariff for consumption above 180 units a month is a prohibitive Rs 45 per kWh (US cents 35). US tariff is below 10 cents in 10 states, the highest is 22 cents (Connecticut and Massachusetts) and the national average is only 12.3 US cents. As far as I know only Denmark at 41 US cents is higher, Germany 35 cents is equal and even Japan at 26 US per kWh cents is cheaper.

Of course these are flat tariffs and cannot be compared with the high tariff (for consumption above 180 units a month) paid by high-end consumers in the CEB’s price ascending block tariff. But that is a different matter whose only relevance here is that high end consumers may find it profitable to go solar. How helpful would it be on a national scale? Well if 10,000 homes were to regenerate 420 kWh per month (504 GWh per annum) it is about 4.7% of CEB generation of 11,800 GWh (2012). This is not huge but not to be neglected either. Solar has a brighter future than wind in Lanka and one way to tap this potential is to promote plans which prompt rich people to circumvent "discriminatory" CEB tariffs by going solar.

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