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Business case for PV

Lets face it the PV industry has had a hard time of late. Mainstream media tricks, Osbourne and his gas cronies, and DECC”s seeming revolving door employment policy have all contributed to the uncertainty that is unfortunate at best, given the impending peril we seem intend on ignoring. This blog (slightly technical i”m afraid, but any questions let me know) covers electricity usage data, generation data from an onsite photovoltaic (PV) solar array and the relationship between them.

 

It examines the business case and finds that while PV remains borderline using traditional appraisal methods, a further understanding and a more detailed model shows PV to be a far more attractive proposition to businesses than first appears. Background Gardner and Scardifield is a Sussex based builders merchant. G&S Energy an energy efficiency specialist, was set up to help the group better understand the components of Sustainability and help businesses move forward in the advent of rising energy costs, inconsistent legislation and emerging technologies and philosophies surrounding all things “green”. Property The building in question is located in Penhill Road, Lancing, West Sussex. It operates as a traditional builders yard with a sizeable retail presence. It is also home to a good proportion of the Groups” admin. Installation The 10 kWp capacity installation, carried out by NRG Renewables, consists of an east / west facing lightweight Sun Beam framing system with a 15 degree tilt, an SMA inverter and 125 x 80 watt First Solar FS 300 series thin film panels. The estimated annual energy generation was 7,304 kWh (Sap 2009) or 730.4 kWh/kWp. The installation cost was £26,602.90 ex VAT Initial Business Case An initial financial model produced by G&S Energy, which included a sinking fund for a replacement inverter, cost of insurance and an annual maintenance inspection, panel degradation inline with manufacturers guarantees (i.e 90% output after 10 years and so on) and a flat retail electricity price, showed a simple return on investment in year 1 of 11.1 % and an IRR 11.5 % (25 year contract period and annual RPI increases*), based on the then Feed in Tariff (FiT) generation rate of £0.378 and guaranteed export rate of £0.031. The decision was taken to proceed based upon the long term index linked returns on capital available, the impending feed in tariff rate reduction, the understated nature of SAP 2009 figures and Director”s view that future energy price rises pose a threat to the business” profitability. Performance As of 30/8/2012 the system has produced 7337 kWh, which equates to FiT payments totalling £3,000.83 (£2,773.38 generation and £227.48 50 % deemed export) with the months of September, October and November remaining. Detailed Electricity Consumption Profiling A detailed analysis of onsite electricity usage, carried out by G&S Energy highlighted a crucial issue that I am sure many with PV installed must wonder – just how much am I using?   The daily usage graph shows the split of the origin of the electricity. For the week monitored 100 % of the electricity generated was used on site. The usage profile of the business revealed by the monitoring mirrors the generation output of the PV, which in my experience is common. i.e. demand increases and peaks around midday consistently as does the supply of electricity from the PV panels. This is illustrated by the graph below which plots consumption and PV generation of the same day.   The data shows that a far higher proportion than thought and indeed modelled, of generated electricity is consumed onsite (caveat, I note that this assumption can be questioned and consumption was only monitored for a week). This is significant in terms of the financial performance of the system. A total of £787.99 (£0.1074/kWh of imported electricity) is displaced rather than the estimated £392.22 adding further value. Extrapolated Annual Figures I realise I could wait for December to annualise but I am impatient. Thus, given the months that remain PV GIS anticipates a further generation of 1496 kWh. This results in an annual generation figure of 8833 kWh. A financial model of year 1 using 90 % on site consumption (100 % usage Mon-Sat and base load usage only Sun) across the year the financial model shows a net ROI of 14.8 % or a return in year one of £4,329.51. Modelled over the contract period this shows an IRR of 15.84 % again with no growth in the unit price of retail electricity. Post FiT Changes – where are we today So armed with accurate consumption data (it makes such a difference) what sort of returns could a business with a similar consumption pattern expect from installing today? Scenario A A 10 kWp system today would cost somewhere around £16,000, perhaps less, to install. The FiT generation rate until 1st December 2012 is £0.145/kWh, the export rate is £0.045/kWh and the contract period, while still linked to RPI, has been shortened to 20 years. It is also worth noting that a number of installs can be completed without planning under permitted development rights shortening the timeframes significantly. So taking these figures, a south facing installation on a 30 degree tilt, a flat retail electricity price of £0.10/kWh, 50 % deemed export (this is generally the case up to 30 kWp) and an on site usage of 50% the model (SAP 2009) shows a net (after inverter sinking fund, insurance and maintenance allowance) return of £1,715 or 10.7% on capital (IRR 8.2%) Scenario B If you increase onsite consumption to 90% returns increase to £2,055 or 12.8 % return on capital (IRR 10.74%) Scenario C Modelling starts to get very interesting when you model increases to the retail electricity price currently paid. Thus far the model has kept electricity prices flat so as not to overstate onsite usage. However, recent reports have suggested that the UK can expect increases to the retail electricity price of between 85 % (projections by Power Efficiency – part of Balfour Beatty by Waters Wye Associates) and 167 % (Inter-departmental Analysts Group – IAG) by 2021. At the low end of this scenario (7.7% electricity price inflation) increases in the value the electricity consumed on site over the contract period pushes the IRR to 16.8%. Scenario D At the higher end of the price predictions a 10 % electricity price inflation pushes the IRR to 18.7% Accurate Generation Estimates The final step in the analysis is to discard SAP 2009 as the generation estimate tool and use real data from existing installations. I have access to a number of installations many of which have produced more than 1000 kWh/kWp in recent years. For the final section of analysis 950 kWh/kWp is used. Please note this assumes a relatively optimum orientation. The model has been run for the 4 scenarios outlined above, the results are as follows: Scenario A – 11.9 % net ROI / 9.7 % IRR Scenario B – 14.2 % net ROI / 12.4 % IRR Scenario C – 14.2 % net ROI / 18.5 % IRR Scenario D – 14.2 % net ROI / 20.4 % IRR To sum up, the returns offered from the installation of PV using the significantly understated figures from SAP 2009 are unlikely to attract business investment. However, additional investigations into onsite consumption and use of actual generation data in your area prior to installation result in a more accurate financial model, which presents are far more attractive investment case. Finally if electricity prices rise as they are predicted then businesses investing in micro generation (these principles apply to technologies other than PV) today will have not only a sound financial and environmental return on investment but surely an edge on the competition.   *N.B unless stated RPI is set at 3.5 % applied to income and costs unless otherwise stated

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