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Rooftop solar system anyone?

Posted by Jon @ MaRS, March 18th, 2009

Tags: cleantech, Environmental Policy, Green Energy Act, Job Creation

A new day dawns for solar energy

Last week, Ontario’s Minister of Energy and Infrastructure, Rt Hon George Smitherman, announced the proposed feed-in tariffs for producers of renewable energy under Ontario’s new Green Energy Act. The proposed tariffs were developed by the Ontario Power Authority on Minister Smitherman’s request.

Best for Solar and Biomass
While both the Act and the feed-in tariffs may still be changed before implementation, the current Act and accompanying incentive scheme appear very positive in terms of creating a marketplace for renewable energy in Ontario – especially for solar power and biogas. Wind power advocates will be a little less enthusiastic according to Paul Gipe, an expert on international renewable energy tariffs who offered detailed commentary about the proposed feed-in tariffs on his blog (“Ontario Proposes Precedent-Setting Renewable Tariffs”).

How the feed-in tariff works:
If you are a homeowner with suitable roof space, feed-in tariffs mean that you can install a photovoltaic system on your roof, connect it to the grid and get paid $ 0.802 per kWh that your system delivers to the grid (for systems up to 10 KW). The rate is guaranteed for 20 years, a guarantee that allows you to get financing for the required investment and that, in most cases, will generate greater returns than your RRSP portfolio.

The New Jobs
In addition to property/land owners and the renewable energy industry, the Green Energy Act and the proposed tariffs would benefit candidates for the 50,000 jobs the politicians are hoping the Green Energy Act and the incentive scheme will create. Both Minister Smitherman and Premier Dalton McGuinty have clearly stated that job creation is the primary objective of the new legislation (read my blog from January 27th for more details).

But Ontario isn’t Germany
However, to achieve the job creation target the Ontario Government still has a formidable task at hand: demand generation. Minister Smitherman deserves credit for his willingness to adopt a legislative scheme that has been successful elsewhere (mainly Germany), but it is important in the adoption process that he recognizes that Ontario is different than Germany in terms of latent demand for renewable energy. The primary difference lies in the simple fact that Germans strongly dislike depending on external sources for their energy (i.e. Russia). So when the German state offers households and businesses an incentive to invest in renewable energy, they are happy to oblige and earn a healthy return at the same time. Energy rich countries like Canada don’t have energy demands that are driven by energy insecurity, nor does reducing greenhouse gases appear to be a big motivator for many Ontarians.

The feed-in tariffs proposed for Ontario will be enough to offer owners of a roof-top solar system a decent return on investment with a high degree of security. The problem is that when it comes to asking people to invest in solar (or biogas or wind power for that matter), the investment required is fundamentally different from that involved in investing in mutual funds. People might have a degree of comfort when investing in mutual funds, or at least a trusted someone they can turn to for advice. However, a lack of similar knowledge and understanding about renewable energy technology will make the process of demand creation for renewable energies in Ontario very slow. Sure, the industry itself will invest in marketing, but corporate marketing is one of the least trusted sources of information out there. As a result, the task of informing and educating the public about the value of solar energy largely falls on Minister Smitherman, not only to ensure widespread public interest and investment in solar energy but to ensure that Ontario gets the new jobs it needs.

Discussion

Randall Howard

Jon,
Interesting to see this, especially the solar tariffs and especially in such a northern country. Do you know if anyone has computed the ROI/payback periods for residential scale solar??

Randall

Jon E Worren

Thanks for your comments Randall.

Nicolas Morgan at Morgan Solar has provided an example for a 3 KW solar system in his blog here: http://www.morgansolar.com/blog/ showing a payback of 12 years. With a 20 year FIT deal, it gives you another 8 years of premium rates on top of that and then 5-10 years of revenue based on normal market rates - assuming a normal life span of system of 25-30 years - so it is possible to make money on the investment.

I believe the math would be even more favorable if you could fit a 10KW system on your roof-top; there are certain one off expenses (design, inverter, meter etc.) that favor scale.

/Jon

Patrick McMahon

Jon, great work, amazing to think that Ontario will be the most profitable solar market in the world.

Here's a thought, banks should create eco-action funds that can accept investments through the TFSA rendering them tax free. Loan homeowners capital from fellow citizens at a decent rate, say 5% (leaving a healthy margin for the 'struggling' banks). Local capital, local energy, and everyone can participate even if their roofs aren't accommodating.

Check out my eBook 'Small Scale Solar Power in Ontario' through www.greensunsolutions.com and, catch my on Twitter: patrickmcmahon4!

SO EXCITED!

Jon E Worren

Thanks for your comments Patrick - it is exciting times indeed! Canadian banks have not been pro-active in developing products for renewable energy investments so far. The few projects that were built under the previous SOP regime got their financing from foreign banks. However, just yesterday I spoke to representatives from a large Canadian bank who said they were in the process of developing products. I sensed it was still early in their process, so when the Green Energy Act hopefully is implemented in early May, there will be very little in the form of products to help home- and business owners to invest in renewable energy, but I believe that should change quickly.

Brian

"NowSolar" is a Toronto based Solar panel installation company that recently launched the 'Summer of Solar' campaign.
This program encourages the Greater Toronto Area to take advantage of Ontario's new Green Energy Act and install a home solar system. The aim is to install 500 home solar installations by the end of the summer and reduce the cost of installation by 20% for everyone who signs up for the program.
Check out http://www.summerofsolar.com or http://www.nowsolar.ca for more information.

Tim Tang

At the fundamental level, adoption comes down to costs and benefits. According to Waterloo-based, solar panel manufacturer ARISE Technologies, "a typical turnkey residential system can range from $12,000 to $32,000 dollars, depending on the size of the system." However, the market will develop different programs and business models like leasing, guarantees, and financing to reduce the initial capital requirement. Also, today's electricity rates generally run from 5 cents to 10 cents per kWh, so that 80 cents per kWh FIT price for rooftop solar panel is on the right side of the business case.

From the product marketing standpoint, should one pitch it as a revenue-generating or a cost-saving solution? Should the end-to-end solution be sold as a "product" or a "service"?

The strongest argument, of course, will emerge and present itself in terms of numbers from an Excel spreadsheet.

Here are some FAQs on solar panels:

http://www.gepower.com/prod_serv/products/solar...
http://www.arisetech.com/content/view/54/100/
http://www.thesolarguide.com/solar-power-uses/c...
http://www.sunshinesolar.co.uk/khxc/gbu0-displa...

jworren

Tim,

Thanks for your comments! You are asking two questions; the first is essetially whether this is about making or saving money; the other whether this is a product or a service - I will address both in turn:

Is Solar about Making or Saving Money?
Feed-in-Tariffs are normally designed to provide investors with a "reasonable rate of return". In Ontario's case, that return was supposed to be 11% for project financed with 30% equity and 70% debt. Even though this rate of return is based a number of assumptions that at the very least are subject to fluctuations and change (such as interest rates, equipment prices and currency rates), the point is that the purpose of feed-in-tariffs is to create an incentive for the public to invest in energy generating capacity by offering an ROI. In other words, it is not about saving money. In most US states however, solar is about saving. The main difference is that utilities apply net metering rules, which basically means that you spend any electricity generated by your system for your own needs and only sells any surplus electricity to the utility company. Under most net metering rules, your electricity meeter is allowed to roll backwards and may theoretically end up showing negative numbers, meaning that the utility company owes you money. Normally the savings on your electricity bill under a net metering regime is not enough to pay for the financing of a solar system so the investment in solar should not be made with the expectations of an ROI, the way you can with an FIT.

Is Solar a Product or Service?
I am going to respond with a question: Does it really matter whether it is a product or a service? At the moment, solar is mostly sold as a product for the simple reason that it is early days in Ontario. However, I fully expect that solar in the near future will be offered at the very least as a leasing object, which you could characterize as a service (Leasing gives you right to use a product and the benefits of use are yours - all against a regular fee paid to the owner of the product, which is usually a financial services entity).

I agree with your conclusion that the success of the FIT program will depend on the economic benefits it can create for the investors, but it is important to understand that many dynamic factors are at play here, including creating economies of scale for the solar industry on a global basis which will allow for costs to continue to come down (solar panels dropped 50% in prices from 2008 to 2009) and help attractive ROIs become attainable even for places that aren't considered sunny.

carter37

Solar manufacturing costs have recently been dropping sharply due to new photovoltaic thin-film chemistry and manufacturing techniques. Some solar companies are reporting PV panels for under $2 a watt which is a four-fold cost reduction from the $8 it was only a few years ago. At these reduced levels, the $0.82 per kwh feed-in tariffs should be a very attractive financial incentive in stimulating solar development. More on the declining cost of solar can be seen at http://www.solarpower-house.net/