Economic analysis of a grid-connected commercial photovoltaic system at Colorado State University-Pueblo

Energy 52 (2013) 289e296

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Economic analysis of a grid-connected commercial photovoltaic system at Colorado State University-Pueblo } seyin Sarper Ananda Mani Paudel*, Hu Colorado State University-Pueblo, 2200 Bonforte Blvd, Pueblo, CO 81001, USA

a r t i c l e i n f o

a b s t r a c t

Article history: Received 4 August 2012 Received in revised form 8 January 2013 Accepted 25 January 2013 Available online 7 March 2013

The paper presents economic analysis of a 1.2 MW capacity grid-connected photovoltaic (PV) power plant installed at the Colorado State University-Pueblo, in December 2008. The project was commissioned by a regional utility company as per the renewable energy portfolio standards guidelines of the state. The system is installed on the customer’s property funded by a third party investor. The investor will receive tax credits and rebates in addition to monthly revenue from the energy sales. Array efficiency is used to measure the performance of the PV system and predict the amount of energy generation and resulting cash flows. Based on the project investment, costs and revenues, an economic model of the project is proposed. Economic analysis of the PV installation is performed using Microsoft Excel 2007 and validated by the RETScreen software. It is identified that the cost of the PV system, financial assistance program, and energy pricing are crucial for the economic viability of PV project in addition to a favorable climatic condition. IRR of the project is 10.7% for the given tax credits and rebates. At least 4% tax credit is required to have a breakeven of the project. Different economic scenarios were analyzed, and price of the PV generated energy at different levels of tax credits and IRR is presented. This analysis is applicable to large size customers who want to invest in or own a PV plant in the US. The economical model could be applicable to other regions to devise investment option instruments. The current cost scenario presented in the paper provides readers a notion of cost improvement witnessed by PV system in last four years. Published by Elsevier Ltd.

Keywords: Solar photovoltaic (PV) system Economic analysis Efficiency Tax credits Renewable energy portfolio standards and third party investor

1. Introduction Abundant research on economic analysis of photovoltaic (PV) solar system is available in several studies. Aste et al. [1] and Beyer et al. [2] have presented the performance of PV. Turhan [3] has performed a feasibility study of PV projects focusing on college campuses. Another economic prefeasibility study of a grid-connected PV system identified 1800 MWh annual energy production potential by a 1 MW PV system in Bangladesh [4]. Recently, Li et al. [5] published an economic analysis for a domestic PV system installation in Ireland and concluded that climatic condition is the limiting factor for the economic viability of PV projects in Ireland. Dust accumulation and snow covering are some of the environmental factors that hinder the energy yield and the economic performance of a PV panel. Kaldellis and Kokala have shown significant energy losses due to dust deposition as a result of urban air pollution [6]. The project location is in the Southwest desert of the

* Corresponding author. Tel.: þ1 7195492848. E-mail addresses: [email protected] [email protected] (H. Sarper). 0360-5442/$ e see front matter Published by Elsevier Ltd. http://dx.doi.org/10.1016/j.energy.2013.01.052

(A.M.

Paudel),

United States and experiences frequent sand dust blown by wind gusts [7]. The hot and arid climate not only has high brightness supplying more photons to be converted into electricity in a PV system but also has higher temperature, which degrades the efficiency of the PV cells. Impact of temperature on PV performance is investigated by using an energy balance model and presented in Ref. [8]. Another experimental findings reported in Ref. [9] support the fact and suggest that the performance of PV panels decreased with increasing PV panel surface temperature. Life cycle economic analysis of a project might portray a better economic picture of an emerging technology. Life cycle assessment (LCA) of the electricity generation by means of photovoltaic panels is presented in Refs. [10,11]. The studies concluded that Energy Pay Back Time (EPBT) was shorter than the panel operation life. Not only the life cycle cost of PV system but also various market conditions and competing energy sources play a role in PV deployment. Government subsidies, excess inflation and price hikes are some of the market factors, and their economic impact in the solar PV system in Bangladesh is presented in Ref. [12]. Another way of utilizing a PV system is as a supplemental energy source to complement the existing grid supply. A PV system is presented as an alternative to diesel power to supplement grid-supply hydro power

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in Uganda [13]. Economic feasibility of photovoltaic technology to supply energy in an off-grid irrigated-farming-based communities in the arid regions similar to the region under investigation in this paper is presented in Ref. [14], and suggested that PV system was cheaper than using a diesel generator. Dusonchet and Telaretti performed an economical analysis of solar photovoltaic in eastern European Union countries and investigated the impact of renewable energy policy and programs such as feed-in tariffs (FIT), quota system regulation and Tradable Green Certificate (TGC) [15]. Most of the PV systems they studied were smaller size off-grid connections. Performance and economical analysis of grid-connected photovoltaic systems are presented in Ref. [16] and point out the scope of economic analysis of a large-scale PV plant. Southeastern Colorado is highly suitable for electricity generation using solar energy due to its arid climate and more than three hundred days of sunshine annually. This opportunity is well received by the public and government authorities deploying various solar initiatives. Colorado state government has provided financial incentives for solar power generation and utilization in addition to federal tax credits. Multiple commercial and residential PV projects are currently operational throughout Colorado, and the number is rising. This is one of the first large PV projects in the state. Excel Energy e a regional utility company e has recently installed an 8 MW PV plant in Alamosa, and a 5.2 MW PV system in Fort Collins [17]. Almost all projects are commissioned under significant governmental financial subsidies, and their economical viability is still under investigation. In this paper, performance of a commercial scale PV project is investigated. Different scenarios of PV implementation are considered in the economic analysis. Constraints in effective solar energy harness such as cloud covering and its hindrances to energy production are explored. The relationship between the potential energy supply from PV system and energy demand trends of the customer are also investigated. 2. PV system installation cost and performance As per National Renewable Energy Laboratory (NREL) data, Southeastern Colorado has solar insolation in the range of 5e 6.5 kWh/m2/day, and is considered a favorable location for PV applications [18]. A PV system converts solar energy into electrical energy and only a fraction of energy could effectively be transferred from solar to electricity. The amount of conversion depends upon cell efficiencies of the PV and other operating and environmental conditions. Non-residential commercial PV projects development activity is growing due to the lower module prices of solar panels and is stimulated by the Renewable Portfolio Standard target of the various states in the U.S. Reduced module prices are now starting to impact utility project prices; one-fifth of the installed system prices above one MW are now $3.75/W STC DC (Standard Test Conditions, Direct Current) or below. In 2012 the solar module price is targeted below $2/W [19] which is half of the $4/W cost of 2008 and significantly lower than the price of $27/W of 30 years ago. PV system installed cost in Southeastern Colorado is below $3/W [20]. Further reduction in PV cost is projected over the years. 2.1. Incentives, rebates and Renewable Portfolio Standard (RPS) Although renewable energy is competitive in the long run, it requires a significant amount of initial investment. The total cost for PV system installation in typical households is around $30,000 (using $3/W installation cost). Tax credits, rebates and incentives may reduce the investment amount to almost half (under $15,000), and make it more affordable. Financing is also available in many cases at relatively low interest rates. Due to the Renewable Portfolio Standard (RPS), public utility companies are required by law to

produce a certain portion of their power using renewable energy sources. For example, Colorado has an RPS target of 30% by 2020, which means 30% of the total energy generated should come from renewable energy sources. Four percent out of 30% have to be from solar energy-PV and solar thermal. One-half of the solar energy must be derived from customer-sited installations [21]. The Investment Tax Credit (ITC) is governmental assistance for PV investors, which can be captured upfront in the investment and has been extended until 2016. This longer-term extension should make planning and budgeting around PV projects simpler, and should mean greater cost certainty, as the various suppliers of PVrelated equipment also will be better able to plan. PV equipment warranties are usually long: A PV panel has 25 years of warranty. PV operations and maintenance costs are minimal. With this technological advantage and governmental provisions, many public utilities are providing various incentives such as rebates, energy credits and buy-back options to their customers. A standard rebate is set at $2/W, which applies up to 100 kW. From the provision of net metering e (netting consumption against generation), the utility will reimburse the generating customer for any excess over their consumption at the utility’s average hourly incremental costs over the prior twelve-month period [22]. Economic and financial analysis of the federal and state governmental solar-targeted policies in the Northeastern states of the US that have Solar Renewable Energy Credits (SREC) is reported in Ref. [23]. 2.2. Commercial PV array project description The utility company selected the project to meet the state requirements of customer site PV installation. The university campus was selected as the best location because of the university’s interest in PV and the fact that the university is one of the largest customers of the utility company in the region. Before the implementation of the PV project, a separate feasibility study was done regarding the PV potential on the Colorado State University e Pueblo Campus, which concluded a significant amount of (75%) rebate is essential to implement the PV Project [3]. The PV market has changed from the time that study was done in 2007. The project was developed as a build-own-operate business model. In accordance with this model, a third party invests, owns and operates PV arrays on the customer’s property, and the customer will receive energy at a lower rate. A solar array of 6820 (BP3170) solar modules (system size 1,193,360 W DC/1 MW AC) was installed in a far northeast corner of the university campus. Construction began in August and the system was operational in the same year (December of 2008). This project is capable of generating approximately 1800 MWh (about 10% of the institution’s electric usage per year) and estimated to eliminate 1281 metric tons of CO2 per year. Custom UniRac “Solar Mount” module structure was used with a fixed tilt of 20 south facing. The array was installed on a hillside sloping 12% from west to east covering 1.74 ha of land. The system consists of four inverters (Xantrex GT 250 kW), an energy recommerse data acquisition system, web based monitoring and a transformer. The project uses the high efficiency photovoltaic module manufactured using silicon nitride multi-crystalline silicon. The product specification of solar panels along with the inverters and features, make and model of the various electrical components are listed in Table 1 below. The PV facility is used as a supplemental power source and is coupled with the conventional utility grid power supply. The externally fed utility supply rating to the university is 13 kV AC. To tie with the grid, electricity produced from the PV, which is a 600 V DC, needs to be converted and matched with the utility grid rating. The 600 V DC is converted into 600 V AC with a DCeAC inverter, and subsequently into 13 kV AC with a step up transformer. Data was collected in 15 min intervals. Irradiance, ambient temperature,

A.M. Paudel, H. Sarper / Energy 52 (2013) 289e296 Table 1 Solar array information. Panel size: length ¼ 1.593 m, width ¼ 0.79 m Number of panels: larger array ¼ 6820, smaller array ¼ 36 Performance and electrical characteristics Rated power (Pmax) ¼ 170 W  3%, nominal voltage ¼ 24 V NOCT (air 20  C, 0.8 kW/m2; wind 1 m/s) ¼ 47  2  C Panel array (volt rating) ¼ 600 V, limited warranty ¼ 25 yr Power system components Inverter (DCeAC): Xantrex GT 250 kW Transformer (600 V ACe13 kV AC) Energy meter, outside utility feed ¼ 13 kV A

relative humidity and power output of the system are recorded automatically. In this project the initial investment was $9.05 million with a project life of 20 years. The third party investor received state (30%) and federal (30%) tax credits on the investment. The customer (university) pays the starting rate of $0.036/kWh with 4.25% annual increases. The regional utility company will pay $0.22/kWh to the investor for being environmentally friendly. With all this combined effort, the utility company is in compliance with the state law by producing 5% of its renewable energy as per the statute. The investor will recoup its investment using the annual payments from the utility, the customer and the upfront government incentives. The customer will get cheaper energy and an option to own the facility after 20 years. 2.3. Factors affecting the performance of a PV system The solar panels are rated under laboratory conditions. In reality, there are cloudy and rainy days which reduce the solar insolation in the field and lower the efficiency. The project’s net capacity factor (NCF) is commonly taken as 20% of the rated PV capacity. Factors contributing to the lessening of effective sunshine hours will lower the total output of the PV system. Using 20% NCF, a PV project with 1.2 MW capacities can produce 2102 MWh of energy in a year. Actual reading of the energy meter for a year (JanuaryeDecember 2011) is 1856 MWh (approx 17%). The average energy reading for years 2008e2010 was 1735 MWh. Solar energy production (kWh) in a typical day is displayed in Fig. 1. The horizontal axis represents the time of the day and the vertical axis represents energy produced in kWh. As shown in Fig. 1, duration of power generation by the PV on a typical day in March is 10 h but power generation will vary depending upon the time of the year. Continuous electricity was generated with a minor fluctuation around noon. 2.3.1. Local energy demand analysis Temperature is normally considered one of the main factors related to PV performance. Temperature (minimum and

Energy Generation from PV (March 01, 2011)

1000

maximum) and energy generated in each month of a year is presented in Fig. 2. The customer is an academic business entity with office spaces, class rooms, residential buildings, sports complex, etc. The highest energy requirement is for maintaining indoor comfort level during winter and summer. Winter needs heating, summer needs cooling. As shown in Fig. 2, the average monthly maximum temperature is always higher than the freezing temperature. The average minimum temperature is at or below the freezing point during the winter months from October to March. The temperature difference between the maximum and minimum is around 25  C. Due to lower than ambient temperatures from December to February, heating is needed (max < 22  C and min < 0  C), whereas much higher temperatures (>22  C) need cooling from May to September in this geographical region. As Electromagnetic waves from the Sun provide both heat and light energy, both temperature and energy output of PV is higher during the summer months due higher solar insolation. The PV system could produce electricity throughout the year, highest in June and lowest in December. The lowest average electricity generation is almost half of the highest. 2.3.2. Electricity generation and solar insolation Solar insolation is a prime factor for electricity generation using a PV system. The amount of electricity generation for a given insolation needs to be accounted for in performance measurement. The relationship between the electricity generation and solar insolation for the large array is shown in Fig. 3 below. As shown in Fig. 3, electric energy of the PV closely followed the solar insolation. When the insolation is decreased on the eighteenth day of the month, energy output of the PV is also reduced as shown in the middle part of the graph above. The dip might be caused by a cloudy day. Average solar insolation and electricity for the given months are 62.5 MWh per day and 6.7 MWh per day. This suggests a conversion of approximately 10.7% of solar insolation into actual AC electricity on average. The electricity contribution of the PV system over the months and resulting effects are presented next. The purpose of the PV installation is to supply the electrical power to the customer by partially replacing grid supply. Energy usage of the customer and the contribution of the PV array are shown in Fig. 4. PV electricity (kWh) is used to supplement the grid feed supply and is shown on the top of the utility (kWh) supply amount. As shown in Fig. 4, the customer has higher electric usage during the summer and early fall months. Energy demand increases from May with a peak in August followed by a slow decline. Although the PV supplies electricity throughout the year, its contribution is relatively higher in summer months. The average monthly and annual electricity productions are 145 MWh and 1741 MWh. The energy produced by the PV system is completely consumed by the customer although the system is connected to grid and has a net metering system. The methodology for economic analysis of the PV system is explained in the next section. 3. Economic analysis methodology

800 kWh

291

3.1. Background

600 400 200 0 6

7

8

9

10

11 12 13 14 Time of the Day

15

16

Fig. 1. Electric energy generation in a typical day by PV.

17

18

The project is implemented as collaboration between the utility company, the customer and the third party investor. As explained in Section 2.1, RPS forces the utility company to produce a portion of its power generation from solar energy. Tax credits motivated the third party investor to be involved in the project. A schematic diagram of the parties involved in the project and their relationship is presented below in Fig. 5.

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Fig. 2. PV monthly electricity generation patterns, and minimum and maximum temperature.

The governments (State and Federal) are involved at a highest level for setting up the RPS for the utility companies and provide tax credits for the PV investor. To fulfill RPS requirements the utility company provided an initial as well as a recurring rebate to the investor. The customer has agreed to provide the land space and buy all the power generated by the system at a much lower price than the retail grid price. The investor and utility company selected the customer’s property for the project location, which might be motivated by potential land rental and operating cost savings. With all this an economic model is presented to evaluate the investor’s return on the investment. The cost stream consists of two components: first is investment e covering all costs associated with PV system purchase, installation and commission along with insurances and warranties and second is the recurring maintenance cost. The revenue stream consists of tax credits, revenue from electricity paid by the customer and rebates from the utility company. The model for Life Cycle Economic Analysis (LCEA) is presented as:

Cash Flow ¼ ðTax Credits þ Rebate þ Revenue from Energy Sales þ Salvage ValueÞ  ðInitial Investment þ Operating Cost

might be different. The university has 12 MW power requirements out of which 10% is expected to be supplied by the PV system. The pricing of a regional utility company is shown in Table 2. The utility’s price increases due to the increase in cost of gas fired power plants. Rates of 7.5 cents and 4.2 cents listed in Table 2 are for 2011. The customer is a traditional university, which is fully operational during fall and spring semesters and partially open during summer. From the university consumption data, air conditioning appears as a major electrical load from August to September creating peak demand. PV generated electricity reduces not only the usage but also the peak demand of some months from the grid. Because the utility company gives rebates to the investor, the solar usage price for the customer is lower than the regular grid price. Demand saving, on the other hand, can reduce the maximum power rating and may occur when the supply from the solar offsets or reduces the peak energy demand from the grid. Practically speaking, it is better to manage energy usage rather than try to offset peak demand because the electric supply of the solar panel is not consistent. The output may vary with the variation in weather conditions (such as clouds, wind, storms, etc.) and will hinder production. If this happens during the peak demand time, then the power needed to be supplied from the conventional source will increase and ultimately raise the demand charge.

þ Maintenance Cost þ Disposal CostÞ 3.2. PV project cash flow analysis Before performing the economic analysis of the PV system, it is important to understand the energy market and pricing model of utility companies. An energy bill consists of two main price components: usage charge and demand charge. Usage charge depends upon the number of units of actual energy consumption in kWh, whereas demand charge depends upon the maximum capacity connected. The pricing model of an individual utility company

The total initial capital cost was $9.05 million which covered the cost of PV module parts including invertors, wiring, and installation costs. After state and federal tax credits, $3.6 million is the net investment amount. No additional manpower or other resources for operation are allocated in the project since the project is installed in the customers’ property and uses the existing maintenance

Fig. 3. Relationship between solar insolation and electricity generation in PV array.

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293

Monthly Engery Uses of the Customer 2000000 Solar (kWh) Utility (kWh)

kWh

1500000

1000000

500000 Jan.

Feb.

Mar.

Apr.

May

Jun.

Jul.

Aug.

Sept.

Oct.

Nov.

Dec.

January-December 2011 Fig. 4. Monthly energy usage and PV contribution.

manpower and equipment. Non-recurring costs for major equipment replacement is covered under warranty and does not incur any cost to the investor. From the last four year’s data, maintenance costs are estimated to be $1000 per year. A twice yearly on-site preventive maintenance and repair program is in place. Up to now two panels have been broken due to construction activities in the adjacent site, and one panel was blown away by wind. The utility company agreed to pay the rebate at the rate of 22 cents per kWh, and the customer agreed to buy the entire electricity produced and pay based on the usage (kWh) and demand charge. Savings e the amount saved in the demand charge due to solar installation e are handed over to the investor. A 4.25% increase in tariff per year was agreed upon. The conventional Internal Rate of Return (IRR) method is used to perform the economic analysis. IRR (i%) of the project using present worth (PW) is expressed as:

PWði%Þ ¼ I þ

  20 X P R ; i%; n F n¼1

(1)

where I is net investment and n is project period. Net investment (I) is given by:

I ¼ cp  tcr  r

(2)

where, cp is cost of project, tcr is tax credits and r is upfront rebates provided by the utility. Revenue (R) is given as:

R ¼ ra þ re  cm

(3)

where ra is the rebate from the utility per unit of electricity generated by PV, re is the revenue from the sales of the electricity and cm is maintenance cost. Operation cost is not included as the existing manpower and resources of the customer are used for the operation. Costs associated with the disposal phase of the project is

Government RPS

Tax Credits

Utility Rebate Investor Invest and Maintain PV

PV

Customer Operate PV Buy Energy

Fig. 5. Major stake holders of the PV installation.

estimated to be equivalent with the salvage value at the end of the project life since the project life (20 years) is less than the warranty period of the panels (25 years). Assuming July to June fiscal year, annual cash flow of the project is presented in Table 3 below. As shown in Table 3, after deducting tax credits (30% State and 30% Federal) and the instant rebate of $200,000 from the utility company, the total project investment was reduced to $3.42 million. Solar panels have 25 years of warranty, which is higher than the project life (20 years). Product warranties cover equipment replacements and eliminate the major maintenance spending to the investor. Supervision and cleaning of the panels is performed twice a year, and the cost to clean the entire array is allocated to be $1000 per year with a 5% escalation rate. Maintenance cost and effort in this system appears very low in comparison with the estimates available in literature (approx 0.5% of investment). A separate study could be done to find the relationship between the maintenance cost and system performance improvement. Depending upon a new revenue stream one can decide whether the higher maintenance expense will be economically justified or not. The average annual electrical energy output of the PV is listed in the third column in Table 3. As per the manufacturer’s specifications, performance of the PV will degrade 12% in 20 years. By considering this fact a derating factor of 0.6% is used starting in the fifth year. The first four years’ data (2008e2011) is actual annual average whereas the remaining (5e20 years) is a projection based on the first four years’ average with the derating factor. In year one, the amount of electric energy (kWh) is less than subsequent years because the project was commissioned in December and that fiscal year consisted only eight months (DecembereJuly). A fixed annual rebate e at the rate of $0.22/kWh of energy produced e is paid by the utility company as listed in column five, and electric bill payment of the customer is listed in column six. The usage rate is $0.042/kWh as of 2011; an annual increment of 4.25% was agreed upon for this rate. The customer’s payment is a combination of both the average annual usage and demand charges. Using this information, Before Tax Cash Flow (BTCF) for each year is calculated and displayed in the last column. The IRR of the project is calculated to be 10.7%, and the discounted payback period with 5% discounted rate is 8 years. In addition to the economical benefits, replacing grid power by solar power reduces 1281 metric tons of CO2 per year, helping to reduce global warming. RETScreen-energy model analysis software [24] showed 11% IRR and 7.8 years payback period of the project, which validated the results. In the following sections some of the important what-if scenarios are presented. Table 2 Energy requirement of the university and pricing. Supply

Power (MW)

Utility rate (cents/kWh)

External grid power Solar

10.8 1.2 (10% of Total uses)

7.5 4.2

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Table 3 Cash flow of the project. End of year

Initial investment (USD)

Maintenance cost (USD)

Energy out (kWh)

Rebate payment (USD)

Customer’s payment (USD)

BTCF

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

3,420,000

e 1000 1050 1103 1158 1216 1276 1340 1407 1477 1551 1629 1710 1796 1886 1980 2079 2183 2292 2407 2527

e 1,015,928 1,741,590 1,741,590 1,741,590 1,741,590 1,731,140 1,720,754 1,710,429 1,700,167 1,689,966 1,679,826 1,669,747 1,659,728 1,649,770 1,639,871 1,630,032 1,620,252 1,610,530 1,600,867 1,591,262

e 223,504 383,150 383,150 383,150 383,150 380,851 378,566 376,294 374,037 371,792 369,562 367,344 365,140 362,949 360,772 358,607 356,455 354,317 352,191 350,078

e 39,621 70,809 70,809 70,809 70,809 70,384 69,962 69,542 69,125 68,710 68,298 67,888 67,480 67,076 66,673 66,273 65,875 65,480 65,087 64,697 IRR¼

3,420,000 262,125 452,908 452,856 452,801 452,743 449,958 447,187 444,429 441,684 438,951 436,230 433,522 430,825 428,139 425,465 422,801 420,148 417,505 414,871 412,247 10.7%

3.3. Cash flow scenario analysis 3.3.1. Case 1: energy price of PV system if no tax credits and rebates are available The government incentives (tax credits and rebates) policy is a short-term program, which might not be financially possible to offer indefinitely. If the investor does not receive such assistance, they might need to increase the energy price to compensate for the loss. The energy market price is based on various competitive factors and is commonly determined by the state government. In such a situation, PV system could not remain competitive with other sources of energy and may not survive, leading to a complete collapse of the PV industry in its infancy. An understanding of the price rate in the absence of the incentives is necessary, and thus analyzed. Using the same assumptions of the base model the project’s overall cost is still $9.05 million; if there are no tax credits or instant rebate, the net project investment will remain $9.05 million. Since the annual rebate from the utility company is also not available, the annual revenue will depend entirely on the customer’s payment. If 11% is the rate of return expected over the 20 years of the project’s life, using Microsoft Excel’s Goal Seek, the energy price rises to $0.673/kWh, which is almost six times the current energy price paid by the customer. The solar panels come with 25 years of warranty; if the project life is considered to be 25 years, the price rate for 2011 would be $0.64/kWh. This helps a little to reduce the energy price but not significantly. This scenario clarified that a PV system cannot be sustained without governmental assistance, but the level of financial assistance it might require to be able to maintain a certain level of IRR might be a question, which is considered in Section 3.3.2.

IRR (%)

Impact of Tax Credits on Project IRR 15 10 5 0 -5

0

5

10 15 20 25 30 35 40 45 50 55 60 65 Tax Credits(%) Fig. 6. Impact of tax credits on project IRR.

3.3.2. Case 2: impact of tax credits on IRR The quantitative impact of tax credits on the project IRR and its viability is investigated and displayed in Fig. 6. The IRR is plotted in the vertical axis against the tax credits in horizontal axis. Both IRR and tax credits are calculated and displayed as percentages. The amount of tax credits is shown as a percentage of the total investment budget. As shown in Fig. 6, the IRR is increased considerably with an increase in tax credits. IRR is negative below 4% tax credits. This suggests that the project will operate at a loss without at least 4% tax credits, which supports the results explained in Section 3.3.1. Investors, who are working as a non-profit business firm, still need at least 5% of tax credits to install and maintain a PV project. The trend of the curve suggests that the increment in IRR is smaller than the increments in tax credits. To this point the paper has analyzed the existing project investment. This offers a good understanding about the various factors and their influences, and provides a baseline to start the economic analysis of the PV projects. For future investment endeavors, existing market situations and future trends need to be considered and analyzed. 3.3.3. Case 3: if the project is installed now In the present situation, when all the tax credits and rebates are still available, and PV panel cost is much lower, the economical viability of a PV project might be better than before as mentioned in Section 2. Currently, the U.S. market price of PV is $3 per installed watt, and for a given 1.2 MW capacity PV plant, the total project cost would be $3.6 million. After tax credits and rebate collection, the investment amount would be $1.24 million. After all financial

Table 4 Percentage of tax credits required for PV in the current energy market. Installed capacity (W)¼ Project budget (1.2 MW @$3/W)¼ Avg. annual electricity generation (kWh)¼ O & M cost ($)¼ Required state and federal tax credits[

1,200,000 $3,600,000

Derating (0.6%/year)¼ Base rate ($)¼

0.60% 0.1/kWh

1,741,590

Escalation rate¼

4.25%

1000 60%

Project life (yr)¼ IRR[

20 10%

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Fig. 7. PV installation cost, energy price and project IRR.

assistance available, the resulting IRR would be 32.43%. This is a good rate of return on investment and suggests that the future prospect of PV system would be economical. Power capacity rating of the panels is also increased from 170 to 230 W, which might reduce the number of panels and reduce the required land space for the project. From the above cases, it is clear that the economical viability of PV projects depends upon the financial incentives available and the reduction of the PV panel price. The optimum level of the financial assistance required for a given market condition (cost of PV per W installed ¼ $3) is investigated and displayed in Table 4. As shown in Table 4, the average energy price is $0.1/kWh, which is the market price charged by the utilities for a commercial customer in Southeastern Colorado. For a given power capacity (1.2 MW) with the $3/W installation cost of PV, 60% financial assistance (tax credits) is required to have a 10% IRR of the project. It should be noted that there are no rebates offered by the utility company in this scenario. Continuation of the existing governmental financial assistance (60% combined state and federal tax credits) appears to be enough without rebates to sustain the PV projects. Offering this level of tax credits might not be possible in the current economic situation, and usage price increase may be an alternative way to cope with the situation. The relationship between the PV installation cost ($/W) and IRR with different levels of the energy price was investigated and displayed in Fig. 7 below. PV cost ($/W) is in the vertical axis and IRR is in the horizontal axis. There different lines are plotted for different energy price rates. The IRR as shown in Fig. 7 is calculated without including the tax credits. The line represents the three different scenarios of the electric price produced from the PV. Location of the curves is according to the price rate, with the higher rate (0.2/kWh) at the top followed by lower rates. All three lines have similar trends with higher IRR for lower PV installation costs. For example, as shown by the arrows, when the PV cost is $3/W, the IRR of the investment would be around 4% for a selling price of $0.15 per kWh. In the same curve, if the PV installation cost fell to $2/W, IRR will increase to 10%. It is also clear that for $4/W PV cost, the IRR is negative for $0.1/kWh price rate. But fortunately, in the current market, the PV installation cost is much lower and continues to be lowered below $3/W. For $3/W, all the price rates produce positive IRR even though it is in the lower end range (0e7%). If PV cost fell below $2/W, the price rate of $0.15/kWh and $0.2/kWh would generate 10% and 14% IRR. If the cost of PV fell to $1 per W, the IRR of the project would be higher than 15%. In the current energy market with the existing utility electricity prices of $0.1/kWh, and PV costs of $3/W, investment in PV barely produces a positive IRR.

4. Conclusion In the semi-desert region of Colorado, a larger-scale PV project has more than 10% of solar energy-to-electricity conversion efficiency. The system has performed at 17% of rated capacity which is close to the 20% Net Capacity Rating (NCR) standard performance rating. The trend of energy supply from the PV matched closely with the energy demand of the location. Sunny days in summer are the most energy-consuming time of the year with high energy demand for indoor cooling. During the same period, PV system also operates in its peak rating and generates more electricity. A PV system with a potential to match the monthly energy demand distribution makes it a more attractive in this region. Efficiency is determined with the actual data and later used in the model in conjunction with derating factor to predict the future electricity generation and resulting cash flow, which preciously assessed the technical as well as economical performance of the PV. It is evident that revenue generation of a power plant directly depends upon the units of energy (kWh) produced by the plant. The higher the kWh, the larger will be the revenue collection. Therefore electrical energy outputs from PV decide the affordability and sustainability of the project. As a conclusion, the PV project is economical with less than eight years of payback period and more than 10% of Internal Rate of Return (IRR). Due to the lower cost of installation and the higher energy price, with the current tax credits and rebate, the PV project if implemented now could produce up to 34% of IRR in the Southeastern Colorado, which is significantly higher than the 10% IRR of the investigated project. The actual maintenance cost of the project is significantly lower than the estimates presented in the literature. As a separate note the authors have observed that the demand charge is a significant amount in an energy bill, which could be reduced by supplementing the energy from the PV in conjunction with sequencing the loads if possible (equipment or household appliances). Finally, this research emphasizes the fact that PV system is a viable energy option, practically, and it will continue to be more economical as its costs come down. Results of this research might be helpful to develop a model to forecast the daily solar energy generation capacity of a specific location and resulting cash flow generation. With this the paper concludes that a well designed PV system is now affordable not only to environmentally conscious customers but also to ordinary citizens with some incentives to supplement the utility supply. 5. Limitations and further study This paper also explored the practical issues pertaining to generation and use of solar power, recognized the limitations of PV,

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and laid out critical steps in considering PV deployment. The limitations of this economic model are as follows: The tax credits are provided in the income tax of the investor, which will be only applicable if the investor has taxable income in his/her portfolio. It might be difficult to find an investor who has another business in his portfolio and makes enough taxable income for the application of these credits. In this model economical analysis was done for the investor only. Economical benefits to the customer and the environmental benefits for the community are not included. The work has a direct application in managing the facility. The model could be used to analyze the economics of solar power in other regions with some modifications of location-specific information in the US and beyond. In US Arizona, California (southern California, specifically), New Mexico, and Nevada are generally regarded as having better solar resources than Colorado with similar environmental conditions. If the solar resources in these states are better, then the returns from projects located in these states will be higher. Energy export potential and transmission issues might be considered as a further study. In addition to the traditional economic model looking at cost and benefits only in the monetary term, energy returns on energy investment and transferring equivalent financial savings from reducing CO2 might be a further consideration. References [1] Aste N, Del Pero C, Adhikari RS. Performance analysis of ground-mounted PV plants. In: 2009 International conference on clean electrical power; 2009. p. 165e70. [2] Beyer HG, Yordanov GH, Midtgard OM, Saetre TO, Imenes AG. Contributions to the knowledge base on PV performance: evaluation of the operation of PV systems using different technologies installed in southern Norway. In: 2011 37th IEEE photovoltaic specialists conference (PVSC); 2011. p. 003103e8. [3] Turhan AM. A pre-feasibility study methodology for solar electricity generation on college campuses. MS thesis, Colorado State University-Pueblo, Pueblo, USA; 2007. [4] Alam Hossain Mondal M, Sadrul Islam AKM. Potential and viability of grid-connected solar PV system in Bangladesh. Renewable Energy;36: 1869e74. [5] Li Z, Boyle F, Reynolds A. Domestic application of solar PV systems in Ireland: the reality of their economic viability. Energy 2011;36: 5865e76.

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