Time to reassess solar capability

Business plans to encourage solar electricity

by Kmar David-May 23, 2015, 6:54 pm

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/(10.05) 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.
Posted by Thavam