Wednesday, January 25, 2012

Economics of residential PV Systems

My previous post on this blog focused on utility-scale installations of PV systems, and I pointed out that for those systems achieving a parity of the levelized cost of electricity (LCOE) with the price paid by consumers is not the most appropriate comparison. The LCOE of PV should be compared with the LCOE of competing power generation systems. Since one of the big advantages of PV is that it can be deployed in a distributed manner, it behooves us to examine the economics of those systems too. For the customers the operative comparison is indeed based on the price they pay.
Residential users pay different rates for electricity from a low of around 7 cents/kWh to as much as 36 cents/kWh. The variation depends on the operative schedules as agreed upon between the local utilities and the governing commissions. The large variation in price also means that the outcome of economic analysis could differ substantially depending on an individual’s circumstance. Also, let us bear in mind that economic considerations are not necessarily the primary drivers for individual actions.
Installation costs for rooftop PV systems are somewhat higher than those for utility scale systems. According to a recent report from the Lawrence Berkeley Laboratory, Tracking the Sun IV, the average cost of installing a 1-2 kW system in 2010 was $9.80/W, and it decreased in increasing size. The cost for a 9-10 kW system in 2010 was $6.60/W. The capacity-weighted average of residential systems, most of which were in the 2-5 kW range, was $7.3/W.  At this rate the cost of a 3-kW system would be $21,900. To soften the rather steep up-front cost, the federal government offers investment tax credits, and there are also rebates available from the utilities. Together, these can bring down the cost of the 3-kW systems to about $10,800.
At a capacity factor of 25%, such a system would produce 6,570 kWh of electricity over the course of a year. My utility, Pacific Gas and Electric, charges users based on a tiered system. The base usage is billed at 12 cents/kWh; the rate goes up to 14 cents/kWh for usage between 100 and 130% of the base, and above 130% electricity costs 34 cents/kWh. My electricity rarely exceeds 130% of my base allocation; the economic value of PV electricity for me is at best 14 cents/kWh. Thus, it would take me about 12 years to recoup the cost of the PV system. My neighbor’s electricity usage is substantially higher, and his marginal rate for electricity is 34 cents/kWh. The period to recoup his outlay would be only about 5 years. To recover the total installed cost—because the tax credits and rebates are ultimately paid by the society as a whole—the time for recoup the cost of installations would be 24 and 10 years respectively in the two cases.
The foregoing analysis is grossly simplified. I have not considered any escalation of the cost of grid electricity, nor have I included any financing charges for installing the PV system. For a rigorous analysis and policy implications I refer you to the work of Prof. Severin Borenstein. 

To go a bit deeper, we should also examine why the pricing is the way it is, and what choices have we made that led to that structure. The tiered structure was designed to promote efficiency, and encourage homeowners to reduce energy usage by upgrading the insulation and installing more energy-efficient appliances. Since the economics on a personal level are rather favorable for my neighbor, he is also considering purchasing an electric car, for which he would also receive a significant tax credit. I sincerely hope that he has also made significant investments in reducing his electricity consumption too. If not, our policy for supporting the growth of PV would be in a perverse way encouraging profligate use of energy.