'Questionable Solar Math' Revisited

After I posted a blog piece on what I called "questionable math" on the payback period for installing solar photovoltaic panels, I received an email from Jeff Ressler, President of Software Services at Clean Power Research, the company that provided data to the Wall Street Journal. Jeff describes himself as a regular reader of American Thinker and writes:

As an entrepreneurial capitalist, I personally look forward to the day when incentives are unnecessary and the market can reach its full potential.  Will incentives going away impact our business?  Sure.  Does it scare us?  No.  We existed before the incentives and we intend to exist and thrive after them.

I couldn't agree more. If conservatives believe in an "all of the above" energy policy, there's no reason to oppose entrepreneurs who can make a profit selling solar panels -- assuming that these profits can be achieved without the heavy hand of government leaning on the scales.

Mr. Ressler provided a spreadsheet with additional information that explained the figures I was trying to make sense of.  The main error I made was in my interpretation of the numbers described as "cumulative savings over 25 years." The Journal article explains that "the purchase cost [of the system] is also subtracted." Leaving out this significant factor led to unintelligible figures, and I should have stopped to question my own thinking rather than posting a blog questioning their numbers. My apologies to Mr. Ressler and Clean Power Research for my thickheadedness.

In the bigger picture, however, my view of solar power has not changed. Clean Power Research is in business to be a source of accurate information, but the green power industry as a whole is guilty of wildly optimistic exaggerations. The goal of eliminating all carbon fuels by 2050, proposed by Al Gore and others, is a complete fantasy, but unfortunately uncritical politicians translate this nonsense into government policy, and consumers pay the price in higher energy costs.

Despite decades of subsidies, the solar industry cannot compete with traditional energy sources like natural gas, and entrepreneurs would not make profit without these subsidies and Renewable Portfolio Standards mandating that electric utilities purchase expensive "clean" energy. (The natural gas industry does receive some government subsidy, mostly in the form of tax write-offs for business expenses, but it is a fraction of what the solar industry receives.)

These subsidies often encourage institutions to proceed with wasteful solar projects. An example among many: The Dallas Morning News reported, "UT Southwestern Medical Center finishe[d] its $2.4 million solar energy project early next year - largely funded with federal economic stimulus dollars...[A]t an annual savings of $27,500, it will take 88 years to realize a reduction in electricity costs." And there's plenty of sun in Texas.

Large solar plants and the transmission lines necessary to get the power to market are land intensive; according to a chart in Robert Bryce's Power Hungry, using Energy Information Administration data, large solar PV arrays have an energy density of 6.7 watts/square meter, compared to 53 watts/sq. meter for natural gas.

Using the roofs of existing structures for PV solar might be smart if costs come down to the point where they don't need to be subsidized. A rooftop does not use any new land, and no transmission lines are needed. Libertarian-leaning Cypress Semiconductor CEO T.J. Rodgers has been betting that roofing material incorporating solar panels will be a standard feature of housing of the future. If Mr. Rodgers's vision is realized, kudos to him and other entrepreneurs. But the intermittency of solar power means that a backup source of electricity will always be needed-unless by some miracle the obstacle of energy storage is overcome. Furthermore, adding an intermittent power source means that natural gas plants have to cycle on and off, leading to inefficiencies that can result in a net power loss greater than the added power from solar.

A final issue bears examination. The Wall Street Journal payback figures are based on a cash purchase of the systems, which cost around $20,000 after rebates and tax credits. Clean Power Tech then calculates an Internal Rate of Return on this investment. For example, if you save $1,000 a year on your electric bill, your IRR is 5%, which compares favorably with other investments like a 30-year 2.9% Treasury Bond. In the five cities studied in the Journal, the IRR ranged from 5% in Portland to 22% in New York (where electricity prices are very high.)

The Department of Energy typically takes a different starting point, assuming that the homeowner would have to take out a loan to purchase a $20,000 system. According to the December 2009 National Renewable Energy Laboratory report, Break-Even Cost for Residential Photovoltaics in the United States:

The net present cost in our base scenario assumes a system financed with a home-equity type loan (with tax-deductible interest and a 28% marginal federal tax rate), a 20% down payment, a real interest rate and discount rate of 5%, and a loan term of 30 years....Our assumption of a 5% real interest rate is based on the 2008-2009 average home equity loan rate of about 8% and the average inflation rate of about 3% during this period.

Taking out a 5% mortgage to purchase a solar system therefore wipes out the favorable 5% Internal Rate of Return. This doesn't mean that Clean Power's assumptions are wrong or deceiving; they clearly state that their data assumes a single person with "an annual income of $140,000." In other words, at current prices, residential solar has reasonable payback for individuals looking for a place to invest excess cash. Homeowners who increase their mortgage to finance a photovoltaic system might have a harder time recouping their investment-especially if the house is sold before the payback period--depending on local market conditions.

A Berkeley Lab study from September 2011 summarizes the current state of the photovoltaic industry:

Preliminary cost data for the first half of 2011, as well as current cost benchmarks published by a variety of other entities, indicate that installed costs have continued to decline. Notwithstanding this success, further cost reductions will be necessary if the U.S. PV industry is to continue its expansion [...] It is also evident, however, that market size alone is insufficient to fully capture potential near-term cost reductions, as suggested by the fact that the lowest-cost state markets in the United States are relatively small PV markets.

In short, getting cheaper but not there yet.

After I posted a blog piece on what I called "questionable math" on the payback period for installing solar photovoltaic panels, I received an email from Jeff Ressler, President of Software Services at Clean Power Research, the company that provided data to the Wall Street Journal. Jeff describes himself as a regular reader of American Thinker and writes:

As an entrepreneurial capitalist, I personally look forward to the day when incentives are unnecessary and the market can reach its full potential.  Will incentives going away impact our business?  Sure.  Does it scare us?  No.  We existed before the incentives and we intend to exist and thrive after them.

I couldn't agree more. If conservatives believe in an "all of the above" energy policy, there's no reason to oppose entrepreneurs who can make a profit selling solar panels -- assuming that these profits can be achieved without the heavy hand of government leaning on the scales.

Mr. Ressler provided a spreadsheet with additional information that explained the figures I was trying to make sense of.  The main error I made was in my interpretation of the numbers described as "cumulative savings over 25 years." The Journal article explains that "the purchase cost [of the system] is also subtracted." Leaving out this significant factor led to unintelligible figures, and I should have stopped to question my own thinking rather than posting a blog questioning their numbers. My apologies to Mr. Ressler and Clean Power Research for my thickheadedness.

In the bigger picture, however, my view of solar power has not changed. Clean Power Research is in business to be a source of accurate information, but the green power industry as a whole is guilty of wildly optimistic exaggerations. The goal of eliminating all carbon fuels by 2050, proposed by Al Gore and others, is a complete fantasy, but unfortunately uncritical politicians translate this nonsense into government policy, and consumers pay the price in higher energy costs.

Despite decades of subsidies, the solar industry cannot compete with traditional energy sources like natural gas, and entrepreneurs would not make profit without these subsidies and Renewable Portfolio Standards mandating that electric utilities purchase expensive "clean" energy. (The natural gas industry does receive some government subsidy, mostly in the form of tax write-offs for business expenses, but it is a fraction of what the solar industry receives.)

These subsidies often encourage institutions to proceed with wasteful solar projects. An example among many: The Dallas Morning News reported, "UT Southwestern Medical Center finishe[d] its $2.4 million solar energy project early next year - largely funded with federal economic stimulus dollars...[A]t an annual savings of $27,500, it will take 88 years to realize a reduction in electricity costs." And there's plenty of sun in Texas.

Large solar plants and the transmission lines necessary to get the power to market are land intensive; according to a chart in Robert Bryce's Power Hungry, using Energy Information Administration data, large solar PV arrays have an energy density of 6.7 watts/square meter, compared to 53 watts/sq. meter for natural gas.

Using the roofs of existing structures for PV solar might be smart if costs come down to the point where they don't need to be subsidized. A rooftop does not use any new land, and no transmission lines are needed. Libertarian-leaning Cypress Semiconductor CEO T.J. Rodgers has been betting that roofing material incorporating solar panels will be a standard feature of housing of the future. If Mr. Rodgers's vision is realized, kudos to him and other entrepreneurs. But the intermittency of solar power means that a backup source of electricity will always be needed-unless by some miracle the obstacle of energy storage is overcome. Furthermore, adding an intermittent power source means that natural gas plants have to cycle on and off, leading to inefficiencies that can result in a net power loss greater than the added power from solar.

A final issue bears examination. The Wall Street Journal payback figures are based on a cash purchase of the systems, which cost around $20,000 after rebates and tax credits. Clean Power Tech then calculates an Internal Rate of Return on this investment. For example, if you save $1,000 a year on your electric bill, your IRR is 5%, which compares favorably with other investments like a 30-year 2.9% Treasury Bond. In the five cities studied in the Journal, the IRR ranged from 5% in Portland to 22% in New York (where electricity prices are very high.)

The Department of Energy typically takes a different starting point, assuming that the homeowner would have to take out a loan to purchase a $20,000 system. According to the December 2009 National Renewable Energy Laboratory report, Break-Even Cost for Residential Photovoltaics in the United States:

The net present cost in our base scenario assumes a system financed with a home-equity type loan (with tax-deductible interest and a 28% marginal federal tax rate), a 20% down payment, a real interest rate and discount rate of 5%, and a loan term of 30 years....Our assumption of a 5% real interest rate is based on the 2008-2009 average home equity loan rate of about 8% and the average inflation rate of about 3% during this period.

Taking out a 5% mortgage to purchase a solar system therefore wipes out the favorable 5% Internal Rate of Return. This doesn't mean that Clean Power's assumptions are wrong or deceiving; they clearly state that their data assumes a single person with "an annual income of $140,000." In other words, at current prices, residential solar has reasonable payback for individuals looking for a place to invest excess cash. Homeowners who increase their mortgage to finance a photovoltaic system might have a harder time recouping their investment-especially if the house is sold before the payback period--depending on local market conditions.

A Berkeley Lab study from September 2011 summarizes the current state of the photovoltaic industry:

Preliminary cost data for the first half of 2011, as well as current cost benchmarks published by a variety of other entities, indicate that installed costs have continued to decline. Notwithstanding this success, further cost reductions will be necessary if the U.S. PV industry is to continue its expansion [...] It is also evident, however, that market size alone is insufficient to fully capture potential near-term cost reductions, as suggested by the fact that the lowest-cost state markets in the United States are relatively small PV markets.

In short, getting cheaper but not there yet.

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