Compared to most of the continental United States, Germany doesn’t get a lot of sun—about 3 average daily peak sun-hours, while the U.S. averages about 4.5 to 5—but they still have a lot of PV systems. Despite having a solar resource that’s similar to Alaska, by the end of 2012 Germany had installed more than 32 gigawatts of solar capacity. The United States was only at about 7.7 gigawatts. In 1991, the German government enacted the Electricity Feed Law, a renewable energy feed-in tariff that was established to reduce Germany’s dependence on imported energy and fuel. While wind power expanded during this period in the mid-1990s, it wasn’t until 1998—when the feed-in tariff for PV was raised—that solar electricity saw a boom. Now, more than 1 million German rooftops have PV modules, with about 4% of the country’s electricity coming from the sun.
When Helmut Metzler and his wife Suzy moved to a small town in the Colorado mountains, they wanted to use PV modules to meet their electricity needs. Helmut was familiar with solar electricity—most of his family in Germany have PV arrays on their homes. Not using the abundant Colorado sunshine would have felt wasteful to him. But in the early 2000s, when the couple first investigated the cost of installing a PV system to offset 100% of their household’s electricity, the resulting payback numbers were too low. As much as the Metzlers wanted to produce their own clean energy, Helmut felt he had to be able to justify the investment financially.
Then, in 2010, Helmut learned of the solar federal tax credit and Recharge Colorado’s rebate program, as well as the lower cost of PV modules. This new information made the financial analysis favorable. Although the incentives were far below what his German relatives received for their systems, the return on investment was more than 5%—enough, he thought, to justify the project.
To calculate even a simple rate of return on a PV system investment, some assumptions need to be made. Perhaps the most difficult, and most important, is predicting increases in retail electricity rates, which directly affect how quickly a grid-tied PV system can pay for itself. The best data available is historical averages.
Helmut used his home’s previous billing data and averaged the electricity rates over 10 years. He found that the rates increased about 6% annually, which is below the state’s 9% average increase over the past 10 years, but close to the 5.5% annual increase that is projected for the next 20 years.
To determine a simple internal rate of return (IRR), he examined the cash flow for a 10 kW PV system, which would produce about 13,780 kWh per year and come close to covering the home’s electricity usage. He accounted for inverter replacement after 10 years and initial upgrades to the AC service panel.
At the time, Recharge Colorado’s rebate program paid $1.50 per DC watt for systems that met certain solar access criteria, with a cap at 3 kW, or $4,500. The Metzler system qualified for the full rebate. They were also able to take advantage of the 30% federal tax credit on the remaining cost.
Using the 6% average annual electric rate increase, Helmut figured an IRR of 5.4%— much better than the 1% to 2% IRR he had calculated for the past PV system investigation. Even a smaller electricity rate increase (4%) resulted in an IRR of 3.8%.
While these numbers weren’t spectacular from an investment portfolio perspective, they were good enough to justify the PV project. Helmut also says that he feels that the PV system is a good bet against future inflation. If the United States suffers increased inflation sometime in the next 20 years, which some analysts say is likely, the IRR numbers will look even better. While utility rates would rise along with the price of all other goods and services, the Metzlers’ electricity would be covered by their PV system, which was already paid for in pre-inflation dollars. The utility rates might increase dramatically, but their home’s net usage will stay close to zero, with only the monthly access charges to pay.
This analysis makes a good case for a PV system even where local incentives are small or only the federal tax credit is available, since only about one-third of the Metzlers’ system qualified for and received a rebate. As electricity prices rise, and if PV equipment costs continue to fall, the financial case will continue to improve.