December 16, 2011 edits: Corrected date. Added the expression “indicative” to describe the proposed tariffs. Added further paragraphs to explain the different assumptions between microFIT and FIT calculations and to explain how we arrived at the tariff for ground-mounted microFIT.
For 2012 the Green Energy Act Alliance and Shine Ontario recommend a dramatic cut in the solar PV tariffs in response to the falling prices of modules during the past two years.
Using a simple economic model, we have calculated indicative tariffs needed for a reasonable profit. The key assumptions used in the model are
- Installed cost
- Yield of the solar panels under typical Ontario conditions
- Term of the contract
- Annual reoccurring costs
- Desired return on equity
- Cost of debt
- Ratio of equity to debt
- Profitability index desired
These are the same parameters used by the GEAA in its submission to OPA during the development of the original FIT program in 2009.
Resulting recommended tariffs are shown in the table below.
The installed costs and yields are based on extensive conversations with the industry.
With the exception of hydro, the term of all contracts under Ontario’s FIT program is 20 years. Longer contract terms cut the initial price that must be paid for the same profitability by spreading revenue over a longer period. For instance, Spain offers fixed-price contracts with 25-year terms.
Solar PV systems have very long operating lives. There are modules that are still producing electricity after more than 30 years. Contract terms could be extended to 25 years and possibly up to 30 years for solar projects to reduce near-term costs to ratepayers. Longer-term contracts also help lock-in the fossil-fuel price hedging of solar PV for a longer duration, thus helping promote long-term electricity price stability in the province.
The highest tariff of Ontario’s solar PV tariffs is the rooftop microFIT tranche. Even with today’s cost of modules, the tariff necessary for a reasonable profit is still $0.59/kWh. However, extending the contract term to 25 years cuts the tariff needed by 7%, bringing the tariff down to $0.55/kWh.
We recommend extending the term of rooftop microFIT to 25 years.
We also recommend extending the definition of microFIT to all rooftop projects less than 30 kW in size. This will enable farmers to use more of their barn roofs than under the present program.
Because microFIT projects are smaller and, therefore, simpler, we’ve assumed that their annual operating costs are lower than those of commercial projects. This is largely due to the high lease fees for commercial rooftop projects in Ontario.
We’ve assumed that microFITs are on the owners roof and we’ve also assumed that the owners of microFIT projects will do some of the work to maintain the systems themselves.
We’ve assumed that microFIT projects will require a 9% return while commercial projects will require an 11% return as in 2009. We’ve assumed that homeowners and farmers will take less profit to find the investment attractive than commercial developers.
To maintain a vigorous pace of industrial development of the solar PV industry in the province, we assumed a profitability index of 0.3 for commercial projects, which is typical for a rapidly expanding industry. However, we’ve assumed a Profitability Index of 0.1 for the microFIT tranche. As with the lower return on equity for microFIT, we’ve assumed that the residential and farm market for small solar systems doesn’t require as much profit to drive the industry as for commercial projects.
Thus, the assumptions used to calculate the indicative tariffs differ markedly between microFIT and FIT.
- The installed cost of microFITs are much higher than commercial projects in the FIT program.
- Term is 25 years rather than 20 years.
- Annual costs are assumed to be 1.5% in microFIT compared to 3.5% for the FIT.
- Return on equity for microFIT is assumed to be 9% rather than the 11% for FIT projects.
- Profitability Index is 0.1 rather than 0.3 for the commercial FIT projects.
Note that the tariff for ground-mounted microFIT has not been calculated. The indicative tariff is simply derived from the relationship between rooftop microFIT and ground-mounted microFIT in the current program. This may or may not be true.
Two principle parameters in calculating solar PV tariffs are the installed cost and the yield of the projects. The following table presents the sensitivity of the tariffs to variations in these two parameters.
Because of the importance of these two factors in determining the price of solar-generated electricity, OPA should be collecting this data on a regular basis from participants in the FIT program.
We also recommend that the OPA begin collecting industry data on annual reccurring costs, sometimes known as total running costs. Annual costs for commercial rooftop systems in Ontario are higher than those in Europe. These costs can also have a significant effect on the tariffs.
Adopting our recommended tariffs would cut solar PV tariffs from 14% for large ground mounted projects to as much as 32% for rooftop microFIT installations.
With rapid degression of -9% per year, the tariffs for large groundmounted systems in 2018 would be about one-half what they were when the program was launched, and the tariffs for rooftop microFIT would be nearly one-third less.
This web site contains extensive citations on the Chabot Profitability Index Method used to calculate these tariffs.
The model we used can be downloaded at the links below.
Proposed Revised Ontario Feed-in Tariffs and Key Assumptions-4.xls
Proposed Revised Ontario Feed-in Tariffs and Key Assumptions-4.qpw