April 17, 2007 (Revised August 28, 2007)
by Paul Gipe
When announcing the Standard Offer Program, the Ontario Power Authority provided a simple RetScreen spreadsheet to calculate simple payback on solar PV. OPA worried, unnecessarily as it turned out, that the solar PV tariff of $0.42/kWh would result in a rush of il-considered small PV installations. OPA argued that they didn’t want to “oversell” the program.
However, in trying to protect Ontarians from excess enthusiasm, OPA made a stronger case for solar PV than is justified by the Standard Offer Program.
For example, OPA’s sample case used a specific installed cost for a a 10 kW system of $9,000 CAD/kW. This is unrealistic in the Ontario market. With connection fees, small solar PV installations in Toronto have averaged about $10,000/kW. Further, OPA assumed that the operating costs for a 10 kW system was only $224 CAD/yr or about 0.24% of installed cost. This too is unrealistic. The Bundesverband Solarwirtschaft (German Solar Industry Association) estimates that 1.5% of installed costs is needed to pay for land leases, operations and maintenance, and other expenses. Of course, no one has more experience operating solar PV systems than the Germans. They should know.
The Ontario Sustainable Energy Association has consistently argued that the solar PV tariff, while the highest in North America, is too low for any rapid uptake of solar energy except by the very earliest of the “early adopters. We did not publicly object to the OPA’s spreadsheet at the time because an 18-year payback is so long that by our definition the investment is not economic. What difference does a few years make.
Over the intervening months, we have noticed a worrisome trend that solar developers and consumers are arguing that solar PV is “economic” under the Standard Offer Program because the system will pay for itself in less than its lifetime. This is erroneous for two reasons. First because even if a system pays for itself in less than its lifetime, it can still be a poor investment, and second because the assumptions used by the OPA are too favorable.
Using an installed cost of $10,000 CAD/kW and operating costs of 1.5% of installed costs annually, OSEA estimates that a 10 kW solar PV system in Ontario will require 27 years to pay for itself and earns a negative rate of return. This is hardly economic.
Below are the original OPA RetScreen spreadsheet and a modified version incorporating OPA’s assumptions as well as those of OSEA.
Note also that by classical definitions, the OPA assumptions result in a project that is not profitable. Where simple payback time is used (SPBT), simple payback must be less than 1/CRF where CRF is the Capital Recovery Factor. The CRF is a function of the discount rate and the life of the project. Assuming a discount rate of 5% and a life of 20 years, 1/CRF = 12.5. SPBT of 18 years in OPA’s example is significantly greater than 12.5 and therefore the project is not profitable. By this definition, the project does not become profitable unless the term is extended to 40 years.
