Performance-Based Incentives: The New Face of Residential Solar

Note: This article was first published in the Winter 2012 edition of CRES News and then in Smart Energy Living, January 2012. Please visit these organizations and consider joining them or subscribing to them. You may also download a PDF of this post.

In March 2011, Xcel Energy’s began shifting Solar*Rewards from up-front incentives (UFIs)—rebates based on the size of the installed system—to performance-based incentives (PBIs), which pay system owners for electricity generated. This shift impacts the return over the life of PV systems as well as their installation costs. While the 30% federal tax credit on PV systems runs through the end of 2016 (U.S. Department of Energy 2011), the Solar*Rewards incentives available to Colorado’s Xcel customers will continue to change (Table 1).

Table 1. Xcel Energy’s Current Solar*Rewards Program Incentives

Step
(Phased-in Program)
UFI
Rebate $/W
PBI
Price per kWh
MW Reviewed
in Step
MW Remaining
in Step

1

$1.75 $0.04 4.000 0

2

$1.00 $0.09 1.071 3.929

3

$0.50 $0.11 5

4

$0.00 $0.14 6

How the new PBIs impact system owner costs

Using the pre-incentive price estimate of $5.25 per Watt (W) installed for small (< 10 kW) residential systems that we calculated in September 2011 (Scott 2011, Yechout, Residential Sales Director, Namasté Solar 2011), Table 2 illustrates Xcel’s current “Step 2” for a homeowner owned 5kW system in Denver.

Table 2. A 5kW System Under Step 2

Average Monthly Residential Usage 602 kWh
Monthly Output of 5 kW PV System 660 kWh
Percentage of Usage Covered 110%
Net Upfront System Cost ($2.98/W) $14,875
10-Year Electricity Savings ($0.11/kWh[1]) $7,946
10-Year PBI ($0.09/kWh) $7,128

While the system will cost $5,250 more than under the pre-March 2011 UFI-only program, it will generate $7,128 in PBIs (also called renewable energy credits or RECs) over 10 years. In addition, assuming a grid-tied net-metering setup, it will provide $7,946 in electricity savings over 10 years at today’s rates.

An Investment with Risk and Reward

Residential solar PV is an investment and carries the potential for risk and reward—which depend upon future factors about which we can only hypothesize, as illustrated in Table 3. The economic viability of a system depends largely upon which Solar*Rewards Step a participant purchases under and how much Xcel Energy’s electricity prices change.

Table 3. Payback and 10-year ROI
Steps 2–4 Based on Different Electricity Price Increases (5 kW System)
Step 2
Annual Rate of Price Increase 0% 3.4% 5% 7% 10%
10-Year Net Return ($) $199 $1,532 $2,248 $3,232 $4,917
10-Year Net Return (%) 1.3% 10.3% 15.1% 21.7% 33.1%
Years to Payback 9.9 9.1 8.8 8.5 8.1
 
Step 3
Annual Rate of Price Increase 0% 3.4% 5% 7% 10%
10-Year Net Return ($) $33 $1,366 $2,082 $3,066 $4,751
10-Year Net Return (%) 0.2% 8.2% 12.5% 18.4% 28.6%
Years to Payback 10.0 9.3 9.0 8.7 8.3
 
Step 4
Annual Rate of Price Increase 0% 3.4% 5% 7% 10%
10-Year Net Return ($) $659 $1,992 $2,708 $3,692 $5,377
10-Year Net Return (%) 3.6% 10.8% 14.7% 20.1% 29.3%
Years to Payback 9.6 9.1 8.8 8.6 8.2

These calculations assume that the program will remain as described, assume fixed PV installation costs over the three Steps and do not factor in the time value of money.

Why the Shift to PBIs?

Steps 2 and 4 do offer consumers a slight advantage over the UFI only program, which would have yielded a 0% return at 10 years with a 10-year payback on the 5 kW system. However, as Dan Yechout of Namasté Solar points out, the time value of money makes the new structure less desirable for consumers: it is best to get money sooner rather than later.

Xcel Energy has clear motivations for the changes. Solar*Rewards was running a deficit; by paying incentives over time, Xcel evens out the program’s cash flow (Yechout, Residential Sales Director, Namasté Solar 2011). Further, as Jaclyn Webb of Xcel Energy explained, the program now incentivizes systems that generate. Because ratepayers fund these incentives through a 2% electricity charge, Xcel must bring online the program’s required number of MW of solar generating capacity and ensure that capacity is generating.

PBIs motivate installers and owners to produce high-quality installations and maintain them, Mr. Yechout. Such systems are more likely to meet their production estimates, ensuring that the system owner is seeing the desired revenue stream (Webb 2011).

Because PBIs provide a contracted revenue stream, some industry observers believe more financing will be available: a reliable income can be used to pay down loans. In practice, commercial firms leasing systems to homeowners may be seeing the availability of such capital, but installers are not yet seeing this opportunity for homeowners (Yechout, Residential Sales Director, Namasté Solar 2011).

The Consumer’s Best Bet

For some homeowners, buying a system makes sense. The 3.4% increase in electricity prices—approximately Xcel’s 10-year estimate—is a conservative assumption. Therefore, homeowners looking to make a $15,000 investment and no need to receive more than the 10.3% 10-year rate of return (about a 1% annual return), self-ownership is a reasonable choice and offers a hedge against even higher electricity costs.

However, a loan may not make sense: the fees and interest rate reduce the rate of return. A leased system may be more economical: the leasing company finances the system and receives the REC. Homeowner typically see a modest reduction in utility bills. With little or no obligation to monitor or maintain the system, leasing allows those without cash to access the benefits of PV.

Finally, consider other technologies. Energy efficiency, solar thermal, geoexchange or other technologies may offer a more sensible investment today, and might make your home more “PV ready” tomorrow.

Bibliography

U.S. Department of Energy. “Direct Cash Incentives.” DSIRE: Database of State Incentives for Renewables & Efficiency. 2011. http://www.dsireusa.org/solar/solarpolicyguide/?id=10 (accessed Dec 13, 2011).

—. “Federal Incentives/Policies for Renewables & Efficiencey: Residential Renewable Energy Tax Credit.” DSIRE: Database of State Incentives for Renewables & Efficiency. 2011. http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US37F (accessed Dec 13, 2011).

Webb, Jaclyn, interview by MA Leslie Martel Baer MS. Xcel Energy (Dec 22, 2011).

Xcel Energy. “Solar*Rewards: Get incentives, reimbursed for solar energy in Colorado.” Xcel Energy. 2011. http://www.xcelenergy.com/Save_Money_&_Energy/Find_a_Rebate/Solar*Rewards_-_CO (accessed Jul 25, 2011).

Yechout, Dan, interview by Leslie Martel Baer. Residential Sales Director, Namasté Solar (Aug 04, 2011).

Yechout, Dan, interview by MA Leslie Martel Baer MS. Residential Sales Director, Namasté Solar (Dec 19, 2011).

Scott, Jeff, interview by Leslie Martel Baer. President, SolSource, Inc. (Jul 14, 2011).



[1] Price cited by Dan Yechout, Residential Sales Director, Namasté Solar.

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