GEOGRAPHIC COST-BENEFIT ANALYSIS OF PURCHASE SCHEMES FOR RESIDENTIAL SOLAR PANELS Energy & Energy Policy – Fall 2015 Team 4: Dylan Finley Navea Frazier Karin Gorski Hailey Kim Jean Lee Angel Sun Abstract The purpose of this paper is to propose an optimal purchase scheme of residential solar panels for California, Colorado, and New Jersey households. The study evaluates two financing scenarios, cash upfront payment and power purchase agreement, for each of the states through cost-benefit analyses. To start the discussion on the economic efficiency of each purchase scheme, we first explain the current and future photovoltaic technology, federal and state policies including financial incentives for solar energy, market size of residential solar energy, and possible purchase schemes for residential solar panels. Following the presentation of background information, we examine the methodology, assumptions, and findings of the cost-benefit analysis. The cost-benefit analysis results reveal that cash upfront is the optimal financing scheme for California residents due to the higher power purchase agreement prices and lower energy consumption. For Colorado and New Jersey residents, the power purchase agreement scheme is the optimal scheme because of the significantly lower power purchase agreement prices relative to the retail electricity pricing.
Transcript
GEOGRAPHIC COST-BENEFIT ANALYSIS OF PURCHASE SCHEMES
FOR RESIDENTIAL SOLAR PANELS
Energy & Energy Policy – Fall 2015
Team 4:
Dylan Finley Navea Frazier Karin Gorski Hailey Kim
Jean Lee Angel Sun
Abstract
The purpose of this paper is to propose an optimal purchase scheme of residential solar panels for California, Colorado, and New Jersey households. The study evaluates two financing scenarios, cash upfront payment and power purchase agreement, for each of the states through cost-benefit analyses. To start the discussion on the economic efficiency of each purchase scheme, we first explain the current and future photovoltaic technology, federal and state policies including financial incentives for solar energy, market size of residential solar energy, and possible purchase schemes for residential solar panels. Following the presentation of background information, we examine the methodology, assumptions, and findings of the cost-benefit analysis. The cost-benefit analysis results reveal that cash upfront is the optimal financing scheme for California residents due to the higher power purchase agreement prices and lower energy consumption. For Colorado and New Jersey residents, the power purchase agreement scheme is the optimal scheme because of the significantly lower power purchase agreement prices relative to the retail electricity pricing.
Acknowledgements: The authors would like to thank Professor R. Stephen Berry, Professor George Tolley, Jaeyoon Lee, and Jing Wu for their guidance on the project. Additional guidance and comments by SunEdison, SolarCity, Gerald Robinson of Lawrence Berkeley National Laboratory, Ross C. Hemphill of ComEd, and Paul Hesse of the U.S. Energy Information Administration are also appreciated.
Table of Contents Section One: Introduction ............................................................................................................ 1
Section Two: Literature Review ................................................................................................... 3 Section Three: Mechanics and Overview of Current and Future Solar Technology .............. 8
3A: Photovoltaic Effect ........................................................................................................................... 8 3B: Silicon Solar Cell .............................................................................................................................. 9 3C: Grid Connected Solar Power ........................................................................................................ 11 3D: Research and Development ........................................................................................................... 12 3E: Net Metering ................................................................................................................................... 13
Section Four: US Government Policy Incentives for Residential PV Solar Energy ............. 16 4A: History of United States Renewable Energy Policy .................................................................... 16 4B: An Overview of EPACT 2005 and the Solar Investment Tax Credit (ITC) ............................. 17 4C: Distinguishing Federal and State Solar PV Policies and Financial Incentives ......................... 19 4D: Current Solar PV Financial Incentives in California, Colorado, and New Jersey .................. 25 4E: Concluding Review ......................................................................................................................... 26
Section Five: The Solar Market ................................................................................................. 28 5A: Overview of The Solar Market ..................................................................................................... 28 5B: Growth Factors ............................................................................................................................... 30 5C: Geographical Considerations for Solar Market .......................................................................... 32 5D: Future Outlook and Trends .......................................................................................................... 34
Section Six: Purchase Schemes for Residential PV Solar Systems ......................................... 37 6A. Overview of Financing Methods ................................................................................................... 37 6B. Self-Financing Options ................................................................................................................... 38 6C. Third-Party Ownership ................................................................................................................. 40 6D: Utility and Public Financing ......................................................................................................... 44 6E: Concluding Discussion ................................................................................................................... 47
Section Seven: Cost-Benefit Analysis ......................................................................................... 49 7A. Introduction .................................................................................................................................... 49 7B. Methodology of State Selection ...................................................................................................... 49 7C. Assumptions on Solar Panel Installation ...................................................................................... 54 7D: Assumptions & Calculations on Solar Panel Energy Production .............................................. 55 7E: Cost-Benefit Analysis for Cash Purchase Scenario ..................................................................... 58 7F. Cost-Benefit Analysis for Power Purchase Agreements (PPA) Scenario .................................. 65 7G. Findings of the Cost-Benefit Analysis ........................................................................................... 68 7H: Limitations of Cost-Benefit Analysis ............................................................................................ 83 7I: Externalities ..................................................................................................................................... 85
Section One: Introduction With the escalating crisis of global warming and the limited supply of fossil fuels, there
has been heightening pressure to switch from conventional electricity generation to renewable
energy. Burning fossil fuels to generate electricity emits carbon dioxide and contributes to the
greenhouse effect, increasing the temperature of the Earth with the trapped heat (Mooney 2015),
which is exhibited with the 1.7 degree increase since the industrial revolution (Greenstone 2015).
Furthermore, if we continue to utilize fossil fuel as electricity sources with fossil fuel reserves,
which are deposits profitable to exploit with current technology and prices, then the Earth’s
temperature will increase to 4.5 degrees, which is above scientists’ 3.6 degree threshold
(Greenstone 2015). Furthermore, with developing countries’ greater need for energy, which will
increase energy demand by 56% from 2010 to 2040 (U.S. Energy Information Administration
(US EIA) 2013), the fossil fuel supply will be depleted at a quicker rate. For example, the Klass
model predicts that the depletion time for oil, coal, and gas are approximately 35, 107 and 37
years (Shafiee and Topal 2009). The growing problem of fossil fuels with global warming and
diminishing supply against increasing demand has called for a focus on renewable energy.
Because 67% of the electricity in the United States is generated from fossil fuels,
consisting of coal, natural gas, and petroleum (US EIA 2015), renewable energy has the potential
to take over much of the fossil fuel’s share in the electricity market. The different renewable
energy sources include solar, biomass, geothermal, and wind. Because of the accelerated growth
for solar energy and the capability for solar energy to become a leading renewable energy source,
the paper focuses on solar energy as the optimal alternative for average household residents. As
solar capitalizes on technology innovation more easily and is feasible for average residents to
install and use solar panels (Levi 2013), it is critical to analyze the relationship between solar
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energy and residential energy consumption. The objective of our paper is how residents from
California, Colorado, and New Jersey should convert to solar energy with solar panels, which
will be explored with two purchase schemes—cash purchase and power purchase agreements.
The paper will first establish the background information necessary to understand solar
panel’s penetration in the residential electricity consumption market. The paper will describe the
current and future technology of solar panels and then delve into the federal and state policies, in
addition to the financial incentives for solar energy, which will be utilized in the cost-benefit
analysis. After analyzing the subsidies and policies, which are crucial elements in the solar
energy market growth, the paper will examine the solar energy market growth and the possible
purchase schemes for residents. Following the background information on solar panels, the paper
will evaluate the cash purchase and PPA scheme for California, Colorado, and New Jersey
residents with a cost-benefit analysis.
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Section Two: Literature Review One of the first considerations we looked at was whether or not solar was consistently
cheaper than grid electricity, which is crucial to the feasibility of residential solar projects’
sustained growth. The article “Economic and Policy Analysis for Solar PV Systems in Indiana”
focuses on the economics of solar PV systems under different combinations of policy
instruments. Jinho Jung and Wallace E. Tyner (2014) examine the probability of solar being
cheaper than grid electricity for each scenario. This paper focuses exclusively on the state of
Indiana; Indiana is one of the states rapidly expanding solar energy with solar photovoltaic
systems yet there is a lack of studies conducted for mid-western states. A cost benefit analysis is
conducted to determine the economics of adopting solar PV systems in Indiana based on policy
instruments that could increase adoption of solar PV systems first under the current policy and
then under potential policy options. By investigating the cost distribution of solar PV systems
compared with grid electricity in homes and estimating the probability that solar can be cheaper
than grids under these different policy combinations, the results are important for government
policy makers to determine how effective alternative policies are for encouraging solar PV use.
There are three policies currently available for solar PV systems: federal tax credits, net
metering, and financing with tax deduction for interest paid. The two potential policies are tax
deduction for depreciation of solar and carbon tax. A cost-benefit analysis is used to evaluation
the economics of solar PV systems in Indiana with a key indicator of economics viability being
the comparison of a breakeven cost of electricity of a residential solar PV system with the
expected annualized cost of electricity supplied from the grid ($/kWh).
The study concludes that under current policies of federal tax credit, financing, and net
metering in Indiana, there is only 50-50 chance of solar being cheaper than electricity from grids.
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However, with implementation of potential policies such as a carbon tax, solar PV systems can
be more economical than grid electricity. These results are beneficial in showing that even with
all the current incentives, the cost of solar can be lowered by considering other policy incentives.
With the tax deduction for depreciation, the breakeven cost decreases below the electricity cost
of the grid and the probability of solar being less expensive rises substantially.
Our research motivation was due in part to a curiosity to understand why certain
homeowners would prefer one purchase method to another. We noticed a trend in the residential
solar market toward third party financing, and questioned why this would be preferred toward
direct purchasing. Ayton (2006) takes a detailed look at the market for loans available to
consumers, and the fundamental lacking of it. Due to the limited history of widespread
residential PV solar panel, there is a lack of data that clearly supports to financial institutions that
switching to solar correlates with energy savings, which is a significant risk factor to potential
investors. In addition, the volatile rates of natural gas also add to the uncertainty of whether or
not solar would be a cheaper alternative. These are unfortunate barriers that prevent investors
and lending institutions from providing sufficient financing to residential PV projects, however
other institutions like third party solar aggregators who collect portfolios of power purchase
agreements (PPAs) have taken advantage of this hesitation and shown this by increasing market
share. From Ayton, we can derive that part of the drive toward PPAs is due to the lack of ample
private financing opportunities.
Another factor to consider is are the costs and benefits of owning versus leasing a
residential system. Rai and Sigrin (2013) explore residents’ rationale for buying versus leasing
rooftop solar panels by analyzing 365 surveys of residents who bought or leased rooftop PV in
Texas. Utilizing a financial model to assess the resident’s financial choice, Rai and Sigrin
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calculated the expected costs and revenues for the two scenarios of buying and leasing the PV
systems, in addition to conducting a sensitivity analysis with regards to various projections.
System costs for buyers include down payments and loan payments, assuming residents financed
the solar panels with loans, and periodic O&M and inverter replacement expenses. This contrasts
from the lessee’s costs as the household only needs to pay for lease payments. The revenue
stream for both the buyer and lessee include the reduction in electricity bill expenses.
Accounting for different projections with nominal retail electricity price, system lifetime, system
loss rate, O&M costs, and inverter replacement costs, five scenarios were evaluated, ranging
from very conservative to very optimistic.
Rai and Sigrin discovered that while installed costs of leased systems were significantly
higher than those of bought systems, a lessee’s cost of ownership, $0.7/Watt, was less than that
of a buyer, $2.64/Watt. Thus, a lessee had a greater NPV per capacity ratio (NPV/DC-kW) than
buyers. Because leasing companies can take advantage of economies of scale, retain some
residual value as leasing contracts are shorter than the solar panel’s expected lifespan, and
because lessors can access additional financial incentives by accounting for depreciation, lessors
achieve lower cost of ownerships compared to buyers. Although leasing rooftop solar panels is
the financially optimal choice for the resident, many residents still purchase rooftop panels
because they do not have the option to lease, gain greater utility from the status of owning a
“green” technology, or prefer the simple contract of purchasing solar panels. Because there is a
lower cost of leasing rooftop solar panels, Rai and Sigrin propose that the leasing system is
allowing for lower-income households with tighter cash flows to adopt PV systems. The research
paper concludes that leasing solar panel system will be a financially better solution compared to
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purchasing, but only focuses on the Texas market of residents and does not account for financial
incentives with purchasing solar panels.
To review research on power purchase agreement and the factors that highly influence
the efficiency of these agreements, we examined National Renewable Energy Laboratory’s
report, “Break-Even Cost for Residential Photovoltaics in the United States: Key Drivers and
Sensitivities”. The break-even cost uses two rate scenarios, one based on the most common rate
structure with typically flat structure and one based on time-of-use rate structure. The power
purchase agreement purchase scheme will be similar to the common rate structure as federal and
state rebates flow to the utility company and as cost of electricity escalates year by year, which is
consistent with the power purchase agreement case. Thus, research on common rate structure
may reveal important factors to focus on when researching on power purchase agreements.
Overall, research indicates that the key drivers of the break-even cost of residential
photovoltaic are non-technical factors, including the cost of electricity, the rate structure, and the
availability of system financing, as opposed to technical parameters such as solar resource or
orientation (National Renewable Energy Laboratory (NREL) 2009). Through the sensitivity
analysis, research reveals that the electricity price is the biggest driver of break-even price
variation followed by finance factors, policy issues, and technical performance. Furthermore, the
differences in electricity prices are attributable to the price charged by state utilities than the
variation in the price escalations. Therefore, when carrying out a cost-benefit analysis of
residential solar system through power purchase agreements, it is important that we should focus
on varying contract prices per kWh of electricity rather than escalation rates for PPA contracts or
technical parameters such as tilt of solar panels and degradation rate.
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Because there has not been any previous literature on comparing optimal financing
schemes of residential solar panels for various geographic locations, we will conduct a cost-
benefit analysis for three different states to determine which financing scheme is most beneficial
for the household.
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Section Three: Mechanics and Overview of Current and Future Solar
Technology
Section 3A: Photovoltaic Effect The discovery of the photovoltaic effect by Edmond Becquerel established the foundation
for solar panel technology. In 1839, Becquerel discovered that solar radiation energy could be
converted into electric energy at an atomic level when a silver chloride (AgCl) electrode was
illuminated with ultraviolet light from the sun (Haram, 2007). Bell Laboratories researchers
further analyzed this photovoltaic effect when they studied the photochemical reaction with
germanium (Ge) electrodes and realized the electrodes were affected by the impurity levels in Ge
(Haram, 2007). The impurities, foreign atoms incorporated into the semiconductor, are the
crucial factors for the conversion from solar energy to electrical energy.
The photovoltaic effect occurs with photovoltaic cells, which consist of two regions with
specially added impurities, dopants. One region has an excess of electrons, “type n” while the
other region type has an excess of positive holes left by electrons, “type p” (Scienzagiovane
2006). When the photons from solar radiation come into contact with the photovoltaic cell, they
break the ties between electrons in the semiconductor material, which allows the electrons to
move freely in the semiconductor (Scienzagiovane 2006). Because of the internal electrical field,
the electrons will move in opposite directions, in which the electrons will move toward the “n
side” and the holes will move toward the “p side” (Scienzagiovane 2006). Thus, this generates a
tension (electromotive force, emf) between the positive and negative regions, which can then
form an electrical circuit when electrical conducts are attached to the positive and negative sides
(Knier 2002).
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Section 3B: The Silicon Solar Cell
Most commercially utilized solar technology is based off a silicon solar cell, the
rudiments of which were developed a half-century ago. In 1953, three scientists, Calvin Fuller,
Gerald Pearson, and Daryl Chapin working at Bell Telephone made the discovery that boron
could be diffused into silicon to capture energy from the sun and be converted into a current of
electricity, the first solar cell. The silicon solar cell was able to produce energy substantial
enough to power small electronics and this led to experimenting with the use of silicon in
photovoltaic cells, to function as solar panels. Between the 1970's to the 1990's there was a trial
period in the various functional uses for solar cells. They began to be used on railroad crossings,
in remote places to power homes, and in Australian microwave towers to expand
telecommunication capabilities (Reece, 2015). Due to the astronomical costs associated with the
technology, it took several decades and incentive policies for the technology to take hold as a
commercially feasible option. Figure (3i.) below is an image of a standard silicon solar cell.
Figure (3i.) Diagram of Silicon Solar Cell (SEIC, 2015)
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There are two different types of silicon atoms: the n-type, which possesses an excess of
electrons in its structure and the p-type that is lacking electrons in its structure, as, mentioned in
3A. The two atoms are positioned next to each other inside of a photovoltaic cell. The resultant
interactions of these two atoms with different properties but close proximity results in either
insulating or electricity generating functions of the photovoltaic cell. When photons from the
sun come in contact with the silicon atoms, the energy in the sunlight pairs with the loose
electrons, which are channeled into an electric current.
As aforementioned, a PV cell consists of multiple layers of semiconducting materials
with the most common being silicon. Grouping the PV cells together in panels and installing a
series of panels side-by-side, a flow of electrons create DC (Direct Current) electricity. DC
electricity is constant and moves in one direction; however, the energy used in households
requires AC (Alternating Current) electricity. Through solar inverters, DC electricity can be
converted to AC electricity, which can be used, directly by occupants and electricity grids (Solar
Choice n.d.).
Solar panels produce the most solar energy when they are exposed to a lot of solar
resources (e.g. sunlight), which is an important fact to consider when installing residential solar
panels. When there are multiple panels next to each other, often referred as a solar panel string,
the panel with the lowest amount of sunlight exposure sets the amount of solar power that can be
produced by all of the panels in the string. If the strings are connected to an inverter, the
problem can be solved; however, this still increases the necessity for even and high exposure to
sunlight. Thus, solar panels will perform best in regions with consistent and strong sunlight, such
as areas in the Southwest region of the United States.
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3C: Grid Connected Solar Power
Current solar systems utilize a grid-connected power system. With the grid-connected
solar power system, people can access electricity even when there is limited sunlight. A key
feature of this system is that it does not require batteries as any excess electricity generated is
directed to the grid that is connected to the home. When an individual panel system is not
exposed to sufficient sunlight, the grid channels electricity to the home, making it possible to
utilize solar electricity when sunlight is limited or not available. Energy companies also offer
affordable pricing for grid-connected systems wherein one only pays for the difference between
energy generated and energy needed. Figure (3ii.) details the relationship between the electricity
that a household produces or uses, and the resultant charges imposed by the energy company.
The inverter shown in green is needed to change DC electricity produced by solar panels to AC
(specifically 240 watts) electricity that households need. The diagram below reveals that for
every individual grid connected solar power system, it is necessary to have an inverter.
Figure (3ii.) Diagram of Residential Grid-Connected Solar System (Global Environment
Services 2009)
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3D: Research and Development
With the increase of solar panel use, research and development regarding solar panel
efficiency and its related technology is rapidly expanding to support growth trends. Despite the
amount of progress the scientific community has made, solar power still only consists of 1% of
the world’s energy source. To make solar energy a major global source of electricity,
improvement of the materials and designs for the silicon cells that are currently used is crucial.
Current silicon cells are approximately 15-16% efficient - this is a low percentage of conversion
of sunlight into useable electricity. New materials and designs are focused on increasing the
conversion efficiency and thus the practically of current systems. Some of the new technologies
being developed include multi-junction cells with layers of light-harvesters that each gather
energy from separate slices of the solar spectrum. Additional improvements being developed are
increasingly efficient semiconductor materials, such as perovskite and gallium-arsenide, and tiny
cells made with powerful solar-absorbing “quantum dots” (Katz 2014). Researchers postulate
that these new materials would be able to increase solar panel efficiency to 50%, representing a
major step forward for solar energy. Along with investing in the research and development of
these materials, there are challenges to consider such as making these materials long lasting and
affordable.
One particularly prominent new technology of interest currently in research is
perovskites. Perovskite solar cells are a type of solar cell that includes a perovskite structured
compound - a “salt-like crystalline structure” with its main benefits being that it is easy to build
and inexpensive. Although perovskites are relatively new, they are already exhibiting 20%
efficiency, a higher efficiency than that attributed to silicon cells which have been around for
many more years. Perovskite solar cells are the fastest-advancing solar technology to date and
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not only require less energy to manufacture than silicon cells but are also cheaper to produce.
However, a major challenge for perovskite solar cells, similar to that of other new materials
previously mentioned, is stability. For instance, perovskite crystals are highly prone to rapid
degradation in humid conditions, which is an issue for many regions in those environments
desiring solar energy (Katz 2014). Research is currently being conducted to address the
efficiency of layering perovskites and silicon cells to eliminate some of the stability liabilities in
singular perovskites. One promising study at the University of California, Berkeley is
investigating the layering of different semiconductors with each layer targeting different areas of
the solar spectrum to maximize energy gained from sunlight. It is clear that there is both room
for improvement in current silicon cells and room for expansion into different materials with
both requiring more time and research.
3E: Net Metering With the interest growing across the country in using rooftop solar panels and distributed
generation, many states approved a billing system called net metering to encourage the
introduction of these systems. While these policies vary by state, net metering is a billing
mechanism that credits solar energy system owners for the electricity they add to the grid. This
process allows residential and commercial customers who generate their own electricity from
solar power to feed unused electricity back into the grid (SEIA 2015). In the case of the
residential consumer with a PV system on the home’s rooftop, it may generate more electricity
than the home uses during the day. With net metering, the electricity meter will run backwards to
provide credit against electricity consumer at night or other periods where usage exceeds the
system’s output. With this system, customers are billed only for their “net” energy use and
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distributed solar generators are compensated at the retail price for electricity they supply to the
grid rather than at the wholesale price received by grid-scale generators.
Net Metering Debate
Even with the legislative support for net metering in many states, there is concern and
dissent over the benefits of net metering among researchers. A 2015 report by the MIT Energy
Initiative recently warned that the United States should move away from net metering policies
for distributed solar (Pyper 2015). While solar costs have fallen drastically in recent years, MIT
researchers warn against relying on the belief that the trend of rapid growth in solar is a
continuous phenomenon. In the report, Richard Schmalensee, an economics professor at MIT’s
Sloan School of Management, asserts that net metering will result in an eventual pushback
against residential solar. Net metering provides an additional incentive to distributed solar
customers by reducing their contribution to covering distribution costs, and shifts those costs
onto utility customers who don’t have solar. Because cost shifting has become so controversial in
certain states, Schmanlensee argues that it is in solar’s “best interest” to eliminate retail pricing
in net metering policies and to treat utility and residential-scale solar equally.
MIT’s conclusion has been supported by several other reports, including the Louisiana
Public Service Commission. These findings drew ire from solar advocates and have been
contested by several more studies, including in Nevada, Vermont, and Mississippi, finding just
the opposite; these studies claim that distributed solar does not impose a significant net cost to
ratepayers and in many cases produces a net benefit to all ratepayers (Kaufman 2015). In a 2013
study commissioned by the Solar Energy Industries Association, some of the benefits of
distributed solar include reduced investments in transmission and distribution infrastructure and
deferred investments in expensive and polluting conventional power plants (Richardson 2015).
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The SEIA also argues that distributed solar provides an affordable way to meet state renewable
energy mandates.
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Section Four: US Government Policy Incentives for Residential PV Solar
Energy
4A: History of United States Renewable Energy Policy
The United States is notable for its unique approach to renewable energy policy.
Differing from countries in the European Union, where renewable energy policies have remained
a top-level of concern, the hesitation to "distinguish between a policy and a plan" is a major
barrier to renewable energy policy in the US (Elliott 2013). Since the Nixon Administration,
known to many policymakers as the dawn of environmental policy, the actual enactment of
policies regulating and incentivizing renewable energy development and production has stalled.
In the place of policy, national energy plans are published every two years by the federal
Department of Energy. While informative, the plans reveal the United States' hesitancy to be a
leader in the renewable energy race (Elliott 2013). Further barriers to renewable energy policy
implementation include the divisive nature of renewable energy development across political
party lines. Renewable energy is subjected to polarizing public opinion when it comes to
environmental concerns, and as environmental considerations divide ever-changing majority
congressional bodies, renewable energy suffers from a lack of sustained enacted policies.
Furthermore, a final impediment to renewable energy policy is the lobbying power of private oil,
coal, and electric utility companies, all of which have a direct stake in discouraging the
establishment of renewable energy policy.
Despite the precedence in discouraging renewable energy policy, the United States has
established key renewable energy legislature. The bolstering of renewable energy policy runs
concurrent to United States energy crises. During the 1970s, the U.S. faced two energy crises,
leading to the rash development and implementation of renewable energy policies under the
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Carter Administration (Kwan 2012). However, as public concern for the lack of energy resources
waned, so did the sustainability and development of current and future renewable energy
policies. A third energy crisis during the 2000s once more brought the potentials of renewable
energy to the forefront of public concern. Differing from past concern, the elevating threat of
climate change on the U.S. environment prompted the development of new renewable energy
policies.
Unlike renewable energy policy of the past, where political and economic responsibility
depended on energy service and utility providers to regulate energy consumption, current
renewable energy policy looks towards citizens to promote renewable energy aims and
objectives. One such objective includes the promotion of solar photovoltaic installations on
residential homes. The latest renewable energy policy, the Energy Policy Act of 2005, hereby
referred to as EPACT 2005, highlights citizen-centric initiatives utilized in federal renewable
energy policy.
4B: An Overview of EPACT 2005 and the Solar Investment Tax Credit (ITC) The first energy policy act of its kind in over ten years' time, EPACT 2005 was
introduced to the US House of Representatives on April 18, 2005. The bill was sponsored by
Representative Joe Barton (R-Texas) and moved quickly through the 109th Congress, as it was
passed by the House on April 21, 2005 and edited, then passed by the Senate on June 28, 2005
(EPACT 2005). After agreements by both the House and the Senate, the bill was then enacted
and signed by President George W. Bush on August 8, 2005. While the energy crisis of the
2000s played a contributing role in the enactment of EPACT 2005, it is worth noting that the
109th Congress operated with a Republican majority, a party whose political platform typically
opposes renewable energy policy.
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Under Title IX of EPACT 2005, the act outlines a number of federal tax credits,
promoting the implementation of renewable energy sources including solar PV. The tax credits
extend to a number of parties, especially residential property-owning citizens. Section 25d.
outlines the Residential Energy Efficient Property Tax Credit, also known in solar literature as
the solar investment tax credit (ITC), hereby referred as such in this paper. Under the ITC, there
is a 30 percent credit allowance towards qualified PV property expenditures made by federal
taxpayers during each year. In defining terms, subsection (d.) Definitions outlines qualified PV
property expenditures as "expenditures for property which uses solar energy to generate
electricity for use in a dwelling unit...used as a residence by the taxpayer." Special rules
pertaining to labor costs associated with solar PV property installation expenditures include the
costs associated with on-site preparation, assembly, original installment, in addition to any
piping or wiring necessary to interconnect solar PV property to residential dwelling units. A
consideration within EPACT 2005 related wholly to solar panels states that all expenditures
related to solar panels or property installed as a rod should be constituted as structural
components of the installation structure and treated as property thus credited by the act. Further,
solar PV expenditures with respect to the equipment are treated as made when the installation is
completed.
As with many of the tax credits established in Title IX of EPACT 2005, the ITC was set
to expire at the end of the 2007 calendar year. However, following EPACT 2005, a number of
key revisions were implemented through the American Recovery and Reinvestment Act of 2009,
the main revision extending the tax incentives outlined in EPACT 2005 to the end of 2016. With
this, the timeline placed on the ITC states that any creditable solar PV property must be placed in
service on or after January 1, 2006, and on or before December 31, 2016. In the initial version of
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EPACT 2005, there was a maximum tax credit of $2000 applied with respect to any qualified PV
property expenditure, however the tax credit cap was removed with the 2009 act. As such, if the
ITC exceeds tax liability, the credit has the potential to be carried forward to the succeeding
taxable year, up until the current ITC expiration date.
With a pending expiration date of the ITC, much current literature surrounds the benefits
of extending the tax credit. Discussion on the solar market impacts of the ITC occurs in Section
Five.
4C: Distinguishing Federal and State Solar PV Policies and Financial Incentives One of the major contrasts between United States and international renewable energy
policy is the "fragmented authority" that constructs and implements policies (Elliott 2013).
Where renewable energy policies in other nations feature top-down implementation, the US finds
difficulty in developing a coordinated national policy amongst the numerous power centers. As a
hotly debatable topic, renewable energy and the policies constructed for it feature the influence
of federal, state, and private authorities such as energy and utility providers. Coupled with the
sheer size and geographic differences of the US, a one-size-fits-all approach to renewable energy
production, distribution, and policy-making is inefficient. Due to these contributing factors, solar
PV policy in the United States is divided amongst two implementable bodies at federal and state
levels. While there is a third level of local solar PV policies that is incredibly diverse and
impactful in its objectives, for the aims of this paper local solar PV policies will not be
discussed.
Both federal and state solar PV policies aim to address the restrictive cost barrier that
hinders solar inclusion in the US energy portfolio. According to the U.S. Energy Information
Administration, just 0.1% of the nation's current energy can be attributed to solar technology.
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This figure is commonly attributed to the high costs associated with developing solar technology
and establishing solar infrastructure. Because of this, federal and solar PV policies focus heavily
on financial incentives, including investments in R&D and subsidies for solar technology
production companies. At the taxpayer interface, financial incentives are utilized to spur
consumer adoption of residential solar property. Previous literature on this topic has established
four types of solar financial incentives: income tax incentives, cash incentives (typically in the
form of rebates or grants), sales tax incentives, and property tax incentives (Sarzynski 2012).
Federal financial incentives are typically pertaining to income tax credits, and the ITC is the
major solar PV financial incentive with national applicability. At the state level solar financial
incentives can be representative of all four types and differ across states in scales of scope, fiscal
value, and eligibility.
Previous literature has drawn considerable relationships between the influence of both
federal and state solar financial incentives and consumer adoption of residential solar PV
property. Modeling the influence of economic variables such as the number of available financial
incentives has been shown as an important influencing factor on the adoption of residential solar
PV property. The second regression model of a 2012 statistical study seen in Figure (4i.) reveals
such correlations. Incentives were measured in terms of dollars/kW of installed DC solar PV.
The regression results indicate a 34.5% increase in residential solar PV share for every one-
dollar increase in available incentives. (Kwan 2012) Empirical support for conclusions such as
these are found in many ways at the federal level. Directly following the enactment of the ITC,
there was a significant increase in national solar installations, as shown in Figure (4ii.).
21
Figure (4i.) Regression Model of Solar PV Installations and Financial Incentives (Kwan 2012)
Figure (4ii.) Yearly U.S. Solar Installations (DSIRE 2015)
The influence of financial incentives on residential solar installations also helps to
explain the disparities in solar installations nationwide. Figures (4iii.) and (4iv.) piece together a
22
national map of residential solar PV installations. Given the numerous economic factors in
addition to the environmental, social, and political variables that have an impact on solar
installations, it is not surprising that California remains the top state for residential solar PV
installations. However, high concentrations of residential solar PV installations in the
Northeastern region of the US can be explained by the numerous financial incentives geared
towards solar energy in the area. A state included in our cost-benefit analysis, New Jersey ranks
as one of the top states for solar PV installations, although it is among the bottom ten states in
terms of solar power potential. The volume of solar financial incentives in the state can explain
such results; New Jersey zip codes average the highest available financial incentives at $5.70 per
installed kWh of DC solar PV power (Kwon 2012). Revealing data such as this shows the
benefits of increasing the number of solar financial incentives statewide.
Figure (4iii.) Distribution of National Residential Solar PV Installations (Kwon 2012)
23
Figure (4iv.) Breakdown of Top Ten States for Solar PV Installations (Kwon 2012)
The differences in the four types of state level financial incentives can also impact the
adoption of residential solar PV property amongst consumers. Figure (4v.) reveals the changing
state level makeup of the four types of solar financial incentives. Cash (such as rebates and
grants) and tax (such as federal or state income, sales, and property tax exemptions and
deductions) initiatives can be compared by factors of effective size and scope, monetary savings
value, and ease of claim for the consumer (Sarzynski 2012). National trends detail that cash
incentives tend to not only be larger in savings value, but also easier for consumers to claim, in
periods of time as short as 90 days. Funding resources for cash incentives is also more diverse,
with incentive programs headed by state, private, and non-profit bodies (DSIRE 2015). The
empirical results from a 2012 study analyzing the differential effects of cash vs. tax solar
financial incentives reveal that the presence of cash incentives in any given state are associated
with an average 248% higher amount of residential solar PV installations. (Kwon 2012) Further,
states with cash financial incentives installed 23% more solar PV capacity per year as opposed to
states that do not offer cash incentives. Figure (4vi.) displays the composition of state solar PV
financial cash incentives. Currently twenty-four states have grant programs that promote energy
renewable energy technology such as residential solar PV property. For tax incentives, forty-five
states have a total of 203 tax incentive programs for renewable energy technology.
24
Figure (4v.) Evolution of State Level Solar Financial Incentives (Sarzynski 2012)
Figure (4vi.) Map of States with Grant Programs for Renewable Energy (DSIRE 2015)
25
4D: Current Solar PV Financial Incentives in California, Colorado, and New Jersey The three states (California, Colorado, and New Jersey) chosen for the paper's cost-
benefit analysis were chosen because of their consistent high rankings for residential solar PV
installations. Below is a summary of current state level financial (cash and tax) incentives for
residential solar PV property in the three states. Following with previous literature, this paper
categorizes solar financial incentives as state level cash (grants and rebates) and tax (income,
property, sales) incentives.
California:
While the state leads nationally in number of renewable energy incentives, there is
currently no state level financial incentives geared towards residential solar PV property. In the
past, California has had a number of programs such as the California Solar Initiative and
CaliforniaFIRST, however the programs have ran out of the funding necessary to continue. The
latest financial incentive program to expire was GoSolar California, which offered up to $4.13
billion worth of rebates for residential solar PV installations beginning in 2007. While the
program was initially set to last for ten years, the reservation amount ran out in early November
2015, and the program is effectively closed until additional funding can be procured.
Colorado:
The state of Colorado currently has two state level financial incentives for residential
solar PV installations. The Property Tax Exemption for Residential Renewable Energy
Equipment and the Sales and Use Tax Exemption for Renewable Energy Equipment both
provide 100% tax exemption from any property, sales, or usage taxes associated with residential
solar PV property. Requirements for the exemptions include that the energy generated from the
systems must be used at the dwelling unit. The Property Tax Exemption was implemented in
26
January 1, 2010 and passed its recent annual review for continuance, and the Sales and Use Tax
Exemption was implemented on July 1, 2009 and is set to expire on July 1, 2017. There are
currently no state level cash incentives for residential solar PV property in the state of Colorado.
New Jersey:
Like Colorado, New Jersey currently has two state level financial incentives for
residential solar PV installations. The Property Tax Exemptions for Renewable Energy Systems
and the Solar Energy Sales Tax Exemption offer 100% tax exemption from any property or sales
tax associated with residential solar PV property. Both tax exemptions were implemented in
October 2008 and are not currently up for state review or expiration. There are currently no state
level cash incentives for residential solar PV property in the state of New Jersey.
4E: Concluding Review Reviewing the body of state level financial incentives provides a number of key outlooks.
While past literature has pointed out the importance of the four types of financial incentives,
there has been a recent trend towards differing types of financial incentives available to
residential solar PV consumers. As a whole, state level implementation of cash incentives has
declined due to the decrease of funding available. In its place, state policymakers look to the
private sector to incentivize consumer adoption of residential solar PV property. Each state has a
major private energy and utility provider, and said providers may offer solar PV cash rebate
programs. Of the top private electricity providers in the three states in our analysis (California's
Pacific Gas and Electric, Colorado's Holy Cross Electric, and New Jersey's Public Service
Electric and Gas Company), only Holy Cross Electric offers a residential solar PV cash rebate.
Further, while initial state level financial incentives previously focused on lessening the
costs associated with procuring residential solar PV property, nationwide states are now aiming
27
to improve the financial benefits consumers receive from installing residential solar PV systems.
Due to this, the adoption of state wide net metering policies, in addition to private utility
company net-metering agreements is a growing trend nationwide. Figures (4vii.) and (4viii.)
reveal the timeline of net metering state level financial incentives. The three states included in
this study have as recently as the third quarter of 2015 implemented statewide net metering
policies (NC-CETC 2015). As current federal and state level solar financial incentives are set to
expire, the presence of net metering and similar financial incentive policies is essential to the
continued growth of residential solar PV installation nationwide.
Figure (4vii.) Evolution of State Level Net Metering Policy 1997-2009 (Sarzynski 2012)
Notes: RPS=Renewable Portfolio Standard; Carve=Solar Carve-Out in RPS; Meter=Net-Metering
Figure (4viii.) Map of 2015 State Level Action on Net Metering Policy (NC-CETC 2015)
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Section Five: The Solar Market
5A: Overview of The Solar Market The solar market as a whole has seen large upside in recent years and is one of the U.S.’s
fastest growing industries. The market size of the US Solar industry set a record year in 2014: the
industry grew by 34% over 2013 to install nearly 7,000 megawatts (MW) of solar electric
capacity (Kann et al. 2014). In the photovoltaic sector, over 6,200 MW of solar capacity was
installed, led by the residential and utility segments, which grew respectively by 51% and 38%
(Kann et al. 2014). These figures show that solar power is the fastest growing source of
renewable energy in the United States. Now second only to natural gas in the US, solar growth is
expected to continue with an additional 20,000 MW of solar capacity projected over the next 2
years and is forecasted to present 25-50% market growth across US solar sectors by 2016
(Trabish 2015).
Utility and Residential
When breaking down the solar industry operations, it is relevant to look at primarily two
segments: the utility and residential sectors. The utility segment currently holds the largest share
of the market. With over 20,000 MW of cumulative solar electric capacity operating in the US,
we still see a predominant fraction of the industry within the utility sector despite the rapidly
increasing growth rate of the residential sector. The utility solar market is still significantly
bigger than the market share for homes ast 729 MW worth of solar panels are installed in solar
farms for utilities compared to the 473 MW of panels on homes (Kann et al. 2014). In 2014, the
utility sector saw a 38% growth rate over the year of 2013 to nearly 4 gigawatts (GW). However
despite the traditionally showing large market share, the utility solar market may decrease.
Important subsidies such as the federal Investment Tax Credit, offering solar farm owners 30%
29
tax credit could drop to 10% in 2017. As a result, power companies are racing to build solar
farms for utilities, leading to an oversaturated market in the short term and an undersaturated
market in the future.
Meanwhile, the residential sector just crossed the 1 GW barrier, but is showing trends of
strong growth as it grew at a rate of 51% over 2013 (Kann et al. 2014). However, as Figure (5i.)
demonstrates, the market is showing a trend of increasing residential solar market growth taking
up a larger fraction of the solar industry. The U.S. residential solar market grew 76% over 2014
and residential installations of rooftop PV panels increased at a rate of 11% through Quarter 1 of
2015 (Kann et al. 2014). This marked the 6th consecutive quarter in which the U.S. added more
than 1 gigawatt of solar PV, even with the Northeast experiencing one of the worst winters ever
recorded, which was expected to heavily dampen the residential solar energy market.
Figure (5i.) Market Segmented Solar PV Installations by Fiscal Quarter 2010-2015 (Solar Energy
Industries Association (SEIA 2015)
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Developments in recent years show that the residential sector will be a primary driver of
not only solar market growth but also overall electricity generation mix. Residential solar
currently makes up about 51% of all new electric generating being installed and brought online
and can expect to produce over 3 million residential solar installations in the next five years.
Additionally, what has been notable about the residential solar market growth has been the
observation that 25% of residential solar installations came online without any state incentives.
In 2012, only 2% came online without state incentives (Trabish 2015). This development can be
attributed to the trend of solar power reaching price parity with other forms of energy due to net
energy metering and leasing of 3rd party owned systems. Millions of dollars have and continue to
be spent on residential electricity domestically; combined with policies working in its favor and
costs being driven down, the residential solar market still has enormous room to grow in the
long-term. With the significant upside and growth potential in the residential sector of the solar
industry as a whole, residential is set to become the leading fraction of the domestic solar market.
5B: Growth Factors The recent rise of solar energy and the positive trend of growth in the market are
influenced by growth factors. Two of the most important considerations that factor into solar
panels are sun exposure–geographical location combines with PV panels to produce the energy–
and cost.
Cost Decrease
While solar panel usage and effectiveness can vary depending on geographical location
and solar exposure, the high cost of power from solar panels has historically been the strongest
deterrent to the technology’s market penetration. As Figure (5ii.) shows, the cost of solar energy
has fallen sharply over the last twenty years with accelerating price declines in the last five years.
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With growing global demand influencing manufacturing and supply chain efficiencies, prices of
installation have been declining and predicted to even drop below retail electricity rates in many
parts of the country before 2018. For small to medium-scale solar installations, including single
family homes, electricity costs around 12 to 30 cents/kilowatt-hour and prices will continue to
decrease thanks to falling installation costs, accessible and low-cost long-term financing, and a
number of incentives and tax packages offered by the government (Kann et al. 2014).
Figure (5ii.) Graph of Solar Industry Scales and Pricing 2005-2014 (SEIA 2014)
As a major driver of solar energy growth, the cost to install solar capacity has dropped by
more than 73%, demonstrating a substantial change that impacted subsequent market growth
(Munsell 2015). A major factor of decreasing cost has been the effect of the Solar Investment
Tax Credit (ITC), one of the most important federal policy mechanisms to support the
deployment of solar energy in the United States. The Solar ITC is a 30% tax credit for solar
systems on both residential and commercial properties and has been a main force in supporting
the continuous upside in the market. The ITC through 2016 provides market certainty for
companies to development long-term investments that drive competition and technological
32
innovation, thus lowering costs for consumers. Figure (5iii.) further details the impacts of the
ITC on the market.
Figure (5iii.) Value of Solar ITC 2008-2014 (Munsell 2015)
5C: Geographical Considerations for Solar Market The second consideration for solar energy market penetration is geographical location.
Because of its reliance on the sun as its primary energy resource, it is natural that geographical
regions with increased sun exposure can more effectively harness solar energy and thus
command a greater share of the market size. Our analysis focuses on three states: California,
Colorado, and New Jersey.
California:
In the residential solar boom, California has been the dominant source of residential solar
demand, constituting nearly half of all U.S. residential solar (SEIA 2015). While the California
Solar Initiative rebate program expired a year ago, the California market continues to grow by
33
leaps with no state-level incentives besides net metering and rate structures. Supportive solar
policies combined with high sun exposure have created an ideal solar market. Three key factors
fuel California’s continued momentum: geographic diversification in expansion to increased
towns and cities, above-average electricity bills from summer heat waves, and standardizing
financing and installation solutions (Kann et al. 2014). As of 2014, California currently installed
11,535 MW of solar energy, ranking the state first in the country in installed solar capacity
(SEIA 2015). While California remains key in market expansion, recent years have seen a slow
but consistent trend with other states growing even faster than California.
Colorado:
Colorado currently ranks ninth nationwide in terms of overall solar power capacity and
13th in terms of amount added in 2014. Colorado’s biggest solar gains came in the residential
market segment in which 67 megawatts of solar power systems were added representing $212
million in investment (Johnson and Hobson 2015). While Colorado is friendly to solar and has
seen similar trends of market growth, there has not been notably substantive annual growth in
recent years. The Solar Energy Industries Association is fighting challenges to net metering to
encourage solar opportunity throughout Colorado, and the state is expected to show substantial
potential growth in coming years (Thomas 2013).
New Jersey:
In 2014, New Jersey ranked sixth highest nationwide for new solar capacity, maintaining
its Top Three ranking in total installed capacity (Johnson and Hobson 2015). New Jersey added
240 megawatts of solar electricity capacity, bringing its total to 1,451 MW. While New Jersey’s
biggest solar gains rely on commercial installations, residential installations have seen strong
growth in recent years. The country’s fourth-smallest state has seen such encouraging figures
34
partly due to its aggressive approach to incentivizing solar, such as the state’s Clean Energy
Program dating back to 2001. While New Jersey does not currently offer cash rebate incentives
for solar projects, the Solar Renewable Certificates Program (SREC) serves as a driving force in
increasing solar system construction and generation of electricity. New Jersey is also expected to
see rapid growth in the next few years with nearly 400 MW projected in new capacity (Thomas
2013).
5D: Future Outlook and Trends The solar market is expected to continue its recent trend of decreasing costs and
increasing market growth across the country. Solar panels will be cheaper and increasingly
efficient thanks to cheaper raw materials, improved production methods, and government
support initiatives. By 2016, the U.S. is expected to generate enough clean solar energy to power
8 million homes, enough to offset 45 million metric tons of damaging carbon emissions (Kann
2015). While volume and demand is growing at a double digit pace, policy support will be key in
continuing the trend of strong market growth. The market is expected to double the US existing
solar capacity in the next few years, but this is not possible without congressional action.
One key factor will be the expiration and reduction of the Investment Tax Credit—a
move that is expected to lead a 57% decline in installed solar capacity in 2017 (Farrell 2015).
On December 31st, 2016, the ITC may fall to 10% for business and to zero for residential solar
customers in a change some have termed the “solar cliff” (Kann 2012). The 30% ITC has been
available for almost 10 years following an 8-year extension in 2008, and was a crucial tool in
making solar energy more cost-competitive with conventional electricity generation by lowering
costs. Figure (5iv.) shows the price convergence for nearly half of twenty states in the residential
market prior to the expiration of 30% ITC (Kann 2012). Losing the federal tax credit can
35
significantly impact the market: the competitiveness of solar may be reduced and diminish
marginal markets in states outside of California and New York as solar panel prices increase.
The post-ITC graph below shows the difference the change makes, as only three residential state
markets will have solar generation costs below grid prices (Kann 2012). Even though states like
Hawaii, New York, and Arizona no longer need the tax incentive to have solar generation costs
compete with grid electricity prices, many other states require the ITC to have the solar market
remain robust. This regional difference is apparent in the way states like Hawaii, New York, and
Arizona no longer really need a tax incentive to have solar compete with grid electricity prices,
but many other states do.
Figure (5iv.) Impacts of Decreased ITC on Distance to Grid Parity (Farrell 2015)
However, there exists a silver lining to losing the tax credit. Although the method of
expiration is undesirable in the sudden change, the impact could have some short-term benefit to
the solar industry in efficiency gains. According to SunEdison representatives, the top 10% solar
providers would increase production by 3-5 times the volume in 2016-17 and the other 90% of
36
players would phase out of business in 2017 simply because they are not able to keep up with
efficiency (Farrell 2015).
37
Section Six: Purchase Schemes for Residential PV Solar Systems
6A: Overview of Financing Methods A crucial element of our analysis is the financing method used to purchase the residential
PV solar system. Residential systems have been getting progressively more affordable over the
years, but are still expensive purchases that many families cannot afford alone without debt
financing or other means. Over the past few decades, the cost of technology required to produce
and install crystalline silicon photovoltaic cells has decreased significantly, mainly due to
increases in efficiency and improvements in technology as seen in Figure 5ii. Leading analysts in
the financial energy research field predict this trend to continue, and for global market
competition along with further cuts in production cost contributing to a 40% price decrease
between 2015 and 2017 per panel installed (Parkinson 2015).
Although system costs have been consistently decreasing, many projects still cost
upwards of tens of thousands of dollars, which is not financially feasible for a lot of homeowners
to pay upfront. In response to this, many banks, solar corporations, and government policies have
established easy ways to finance residential photovoltaic installation. The possibilities of
methods to purchase these systems are classified into three schemes, as shown in Figure (6i.).
38
Figure (6i.) Residential Solar PV System Purchase Scheme Overview (NREL 2012)
6B. Self-Financing Options Self-Financing involves the upfront payment of the residential PV system through the
homeowner: funded by cash on hand, home equity, debt, or mortgage refinancing. In this
scenario, the ownership of the system legally belongs to the homeowner and they are in charge
of operation and periodic maintenance of the system, per the purchase agreement contract with
the solar PV panel provider. This is reflected in our cost-benefit analysis as the up-front cash
bullet payment signifies the installation of the PV system, and the annual O&M expenses are
incurred with the solar panel’s use and weathering.
Cash Purchase:
In this scenario, a homeowner uses cash upfront to finance the purchase of the PV
system. The average size of a residential PV system in the U.S. is 5 kW so at the national
average installation cost in January 2015 of $0.65/W the cost would amount to $4,225, after
taking into account the 30% ITC tax credit tax liability, although many homeowners do not have
39
the tax liability necessary to take advantage of these savings, so this figure is a generous price
(PWC 2015).
There are several other considerations when deciding whether or not to purchase a
residential PV system with cash as demonstrated in Figure (6ii.).
Figure (6ii.) Pros & Cons to Cash Purchasing (NREL 2012)
The main benefit to the cash purchase scheme is the lack of financing costs associated
with borrowing, and flexibility to handle the operation of the panels. However, a lot of
homeowners would likely prefer to not be directly responsible for O&M and rather incur
additional costs through third parties.
40
Other Self-Financing:
In addition to cash purchases, residential solar systems can be purchased with home
equity loans (HEL), home equity lines of credit (HELOC), and cash-out mortgage refinancing
(COMR). These provide some of the same benefits to cash purchases, such as flexibility with
O&M, and having direct ownership of the system, but with an additional benefit of not having to
pay such a high upfront cost. However, there are drawbacks: some of these financing tools can
be limited or charged at high interest rates, adding to the net cost of the system and making it a
less attractive option. There is also a risk aspect added to this with regards to the financial burden
of making periodic interest payments to financial institutions.
6C: Third-Party Ownership
Third-Party ownership provides homeowners with the option to pay on a monthly
schedule for the electricity produced by their system, in a similar manner as done with other
conventional electricity utility bills. The two main commercial structures for these third-party
arrangements are solar leases and power purchase agreements. They both apply a similar concept
of third-party ownership and installation of the residential PV system with a monthly payment
required by the homeowner. However, the financial structuring between the two is very different.
Solar leases provide a flat-rate model, charging consumers a fixed monthly rate for the energy
produced by the residential PV system, whereas PPAs charge consumers on a monthly basis at a
rate per kWh produced and consumed by the homeowner. Figure (6iii) further details third-party
ownership.
41
Figure (6iii.) Third-Party Owned Systems as Percentage of New Installations (DOE 2014)
This type of purchase scheme is becoming increasingly prominent recently, primarily due to the
advantage larger corporations have in utilizing ITC over homeowners. Between PPAs and solar
leases, PPAs are much more common and widely used, thus in our cost-benefit analysis we will
be analyzing a residential PV system acquired through PPA.
Power Purchase Agreement (PPA):
Residential PPAs are contracts constructed by solar companies where typically one party
provides the purchase and installation of the PV system to the homeowner and retains ownership
rights to the system, while charging the homeowner a predetermined rate per kWh produced and
used. This rate usually escalates on an annual basis at a low predetermined rate, to adjust for
projected inflation and system depreciation. All excess kWh produced are typically sold back to
a utility company through net metering, and if the homeowner needs additional electricity they
42
can purchase it from a utility company determined in the contract. Figure (6iv.) provides the
We observe that depending on the discount rate and power purchase agreement, the discounted
return on investment varies but does not vary significantly that it our conclusion that power
purchase agreement is better for residents of Colorado like New Jersey. For Colorado, the net
present value for the cash upfront purchase scheme was not significantly lower compared to the
net present value for the power purchase agreement scheme. However, the substantial installation
cost at the beginning lowered the return on investments for the cash upfront purchase scheme.
Since both New Jersey and Colorado results showed that the power purchase agreement
is beneficial for residents, we question whether this would be the case for California as well.
78
Since California has the largest cumulative solar power installations and is known to be the solar
state we will try to see if the efficiency of power purchase agreements also apply to the state of
California.
We provide the following table of total savings, total cost, and net savings / (net loss) for
each year for California in the cash upfront payment scheme:
79
Figure (7xxii.) California Cash Upfront -
Total Savings, Total Costs, and Net Savings / (Net Loss)
80
One thing to note is that California has the lowest system installation cost mainly because
average California residents require less 𝑊!" to meet their average energy consumption needs.
Thus, the one-time installation cost at year 1 is lower for California compared to the other two
states.
We have a net present value of $7,927.7 for the total net savings when using our base
case discount rate of 5.00%. The discounted return on investment is 40.88% utilizing the net
present value and our base case discount rate. To extend our analysis for different discount rates,
we produced the following sensitivity analysis where we can observe a range of return on
investment using cash payment scheme:
Figure (7xxiii.) California Cash Upfront - Sensitivity Analysis
From the sensitivity analysis we can see that California, compared to the other two states, has the
highest discounted return on investments in the cash payment scheme.
Now we will figure out the total savings and total costs for California’s power purchase
agreement scheme to verify if power purchase agreements are beneficial for average California
residents than the cash upfront purchase scheme:
81
Figure (7xxiv.) California PPA - Total Savings, Total Costs, and Net Savings / (Net Loss)
82
From the power purchase agreement scheme we can figure out that the total cost starting from
year 1 to year 30 is significantly higher compared to Colorado and New Jersey because the PPA
price is high at 15.00 cents/kWh while Colorado prices 6.50 cents/kWh and New Jersey prices
7.00 cents/kWh.
We have a net present value of $176.9 for the total net savings when using our base case
discount rate of 5.00%. The discounted return on investment is 0.81% utilizing the net present
value and our base case discount rate. To extend our analysis for different discount rates, we
produced the following sensitivity analysis where we can observe a range of return on
investment using power purchase agreement scheme:
Figure (7xxv.) California PPA - Sensitivity Analysis
From the sensitivity analysis we get a range of discounted return on investment that even results
in a negative return on investment when discounted. With the produced range, we can conclude
that unlike the case of Colorado and New Jersey, California residents will be better off paying
cash upfront to install solar panels. Furthermore, depending on the PPA price per kWh, we can
get a negative return indicating that it might even make residents worse off to use power
purchase agreement than to use traditional energy sources provided by utility companies.
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We conclude from the series of cost-benefit analysis and sensitivity analysis that the
optimal purchase scheme for the states of New Jersey and Colorado is PPA, while the optimal
purchase scheme is cash upfront payment for California. Furthermore from the case of
California, we can observe that discounted return on investment is dependent on PPA prices as
well as on discount rates. Thus, PPA prices, which are often held by utility companies as
confidential information, and economic situations that may influence discount rate are crucial
and may influence our analysis if they fluctuate.
7H: Limitations of Cost-Benefit Analysis
While the cost-benefit analysis we conducted are appropriate for the fundamentals of a
cash purchase and PPA purchase scheme, there are limitations to our analysis due to the
constraints of publicly available data and variables between individual solar panels. Our cost-
benefit analysis does not account for the solar panel system’s degradation over the 30 years, as
the solar panels will not produce the same amount of DC power in Year 30 as it had in Year 1.
Additionally, because our cost-benefit analysis takes a broad perspective using only the average
household, which will affect the benefits a household would receive from net metering and
different positioning of the solar panels. While the limitations of our analysis does indicate that it
is necessary to analyze more minute details specific to the household, the conclusions of the
optimal purchase from our cost-benefit analysis still hold for the average household in each state.
The cost-benefit analysis did not account for the depreciation of the solar panels because
solar panels cannot produce the same amount of power at the end of its lifespan as it was able to
produce in the beginning of the project. Because a solar panel’s deterioration rate is dependent
on many variables like the solar panel brand, we did not account for the depreciation since high-
quality solar panels could maintain their rated efficiency while lower-quality solar panels can
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lose up to 3% efficiency when they are first exposed to sunlight (SunPower n.d.). In addition,
since solar panels have various warranty and replacement policies and requirements for power
production (Maehlum 2014), we simplified our model so that the solar panel produces the
average monthly energy consumption from Year 1 to Year 30. Furthermore, while our cost-
benefit analysis model assumes that the household works to maintain and clean the solar panels
every year with the O&M costs, the weather conditions of a specific year could damage the solar
panels even more than what an annual maintenance and cleaning can repair. For example, if
there are unusual long periods of dry weather or if a recent construction project begins near the
household, then the solar panels will attract debris that can undermine the solar panel’s
performance and efficiency (SunPower n.d.). The solar panels’ diminishing energy production
will affect the electricity bill savings for both the cash purchase and PPA schemes. Because the
solar panels’ productivity will decrease with each year, they might not be able to produce the
average monthly energy consumption the household needs, in which the household will require
more energy from the grid. This will decrease the energy bill savings annually for both the cash
purchase scheme and PPA scheme.
Even though our cost benefit analysis model assumes that the solar panels fully provide
the household’s energy needs and will not provide any credit from net metering over a year
period, the household could incur net metering benefits when the electric company must buy the
excess energy from the household. Though the size of our solar panels are assumed to produce
only the required monthly energy consumption, the household might consume less energy per
month than the average or the solar panels can produce more energy than necessary due to higher
than average amount of sunlight. This will be another cash inflow for the household in both the
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cash purchase and PPA schemes as the household can sell the excess electricity to the utility
company for the full retail price.
In addition to the household’s discrepancy from the average monthly energy
consumption, the household’s solar panel positioning could affect the cost-benefit analysis. The
tilt of the solar panels will affect how much power the solar panels will produce, which will in
turn affect the electricity bill savings and how much dependence the household will have on the
electricity company. Because the hours of PV solar radiation are dependent on the LATILT
angle, which assumes that the solar panels are at the optimal tilt for highest solar irradiance, if
the solar panels are placed on a rooftop that does not have an optimal tilt, the solar panels will
produce less than the optimal amount of DC power. For example, because one’s roof pitch may
not match the optimal latitude tilt and the solar panel array tilted 15 degrees off from our latitude
might only produce 95% of the energy from an array tilted at latitude (Del Vecchio 2009). Thus,
this will affect the electricity bill savings since the solar panels might not produce the monthly
energy consumption of the household and it must depend more on the utility bill and grid.
7I: Externalities
Generating electricity through solar energy impacts third parties other than the producer
of the power source and the consumer of the electricity, which is not accounted for in the cost-
benefit analysis. These impacts are referred to as externalities, both positive and negative. Main
negative externalities of residential solar energy can be grouped into four main categories of land
use, water use, hazardous materials, and global warming emissions (Anderson 2014). Residential
solar energy systems require a negligible amount of land space when placed on an existing
structure, such as the rooftop of a home. In comparison to utility scale solar systems, larger
amounts of land are required to produce electricity on a commercial scale, raising concerns about
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the potential impact of such projects on natural habitats. This concern is being addressed by
redirecting renewable energy projects on contaminated lands and mine sites.
Generating electricity from solar energy is not associated with global warming emissions;
however, there are emissions associated in other stage of the life-cycle of solar systems,
including manufacturing, transportation, installation, maintenance, decommissioning and
dismantlement.
Solar PV cells do not use water to generate electricity, however water is used to
manufacture solar PV components. Like all thermal electric plants, concentrating solar thermal
plants (CSP) require water for cooling with usage depending on plant design, location, and type
of cooling system. SP plants that use wet-recirculating technology with cooling towers withdraw
between 600 and 650 gallons of water per megawatt-hour of electricity produced. Dry-cooling
technology can reduce water use at CSP plants by approximately 90% - however, the tradeoffs to
water savings are higher costs, lower efficiencies, and less effectiveness (Pettinger 2014). Many
of the regions in the United State with the highest potential for solar energy also tend to be those
with the driest climates, thus careful consideration of water tradeoffs is essential.
The PV cell manufacturing process includes a variety of hazardous materials, such as
those used to clean and purify the semiconductor surface. Furthermore, workers face risks
associated with inhaling silicon dust; PV manufacturers thus must follow U.S. laws to ensure
worker safety and proper disposal of manufacturing waste products. Not only do these materials
pose potential serious environmental or public health threats, but manufacturers also have a
strong financial incentive to ensure that these highly valuable and often rare materials are utilized
efficiently or recycled rather than thrown away (Pettinger 2014).
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Lastly, the visual impact of solar energy is highly dependent on the type of the scheme
and the surroundings of the PV systems and largely a matter of taste. It is obvious that a PV
system near an area of natural beauty, historic, or cultural value will have a significantly higher
visual impact. Rural areas would also have more visual intrusion than installations in a façade of
buildings. Historically, “integration” used to be synonymous with “invisibility” in considering it
more desirable to hide the fact that solar elements were different than other building elements.
This trend, fortunately, has shifted recently. Architects have discovered that solar panels can be
used to enhance the aesthetic appeal of a building and their clients are increasingly seeing the
positive effects of advertising the fact that they are using solar energy to create more value
(Heath 2014). In this way, solar panels are used as architectural elements in increasingly
attractive and visible ways, especially with modern designs and technology.
Solar power has significant positive externalities, including reducing environmental costs
associated with fossil fuels, such as pollution and global warming. The fall in the price for solar
energy impacts demand for coal and gas and substitutes in both the short term and long term.
With the sharp downward trend in residential solar energy to become cheaper as technology
improves, consumers are increasingly switching to the solar alternative and the coal/gas industry
will face a fall in demand. Aside from market incentives, adopting solar power helps reduce air
pollution and carbon dioxide emissions that have contributed to global warming. As shown in the
figure below, out of the main electricity generating technologies powered by renewable
resources, solar energy is one of the resources that contributes the least amount of greenhouse
gas emissions. Additional positive externalities include reduction of required transmission lines
of electricity grids. In regards to the socio-economic perspective, benefits include increase of
significant work opportunities and diversification and security of energy supply (Anderson
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2014). Furthermore, the growth of solar power impacts other industries; there may be greater
incentive to develop electric powered cars or trains, further reducing demand for oil and petrol
along with natural gas. Ultimately, these positive externalities all factor into the long-term global
externality of climate change.
Figure (7xxvi.) Electricity Generation Technologies Powered by Renewable Resources
Section 8: Conclusion
Findings from the cost-benefit analysis reveals that to achieve maximum savings from
electricity bills and minimum costs from installation of panels, cash purchase is appropriate for
California and the power purchase agreement is appropriate for Colorado and New Jersey. This
is mainly attributable for variations in power purchase agreement pricing and energy needs for
each state. Therefore, residents with specific electricity needs and contract prices could add and
vary details of the cost-benefit analysis such as panel degradation, solar panel positioning, net
metering policy, etc. to evaluate net savings and costs of financing options to figure out the
appropriate purchase scheme for their houses.
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