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The economics of solar generation

Benefits and costs of capturing the sun on a small scale

by : Nov 1, 2015

Economics is the study of decision making in the presence of scarcity. The scarce factors, or those viewed as scarce, will depend on whose viewpoint is taken. There might be a number of stakeholders, each with a different set of ideas, where a MicroFIT system is concerned: Ontario Hydro, the taxpayer, the neighbour and the system owner. Ontario Hydro has a stated goal of increasing the amount of energy produced from renewable sources. From the viewpoint of a taxpayer, the scarce things might be clean air to breathe, good farmland, and taxpayer contributed funds. From the perspective of a neighbour the scarce things might be a pleasant view obstructed or spoiled by solar panels, or good well water disturbed by deep installation activities setting up the solar farm. And from the angle seen by the solar system owner, it is a matter of time, financial resources, the opportunity cost of maintaining and protecting the productivity of the solar system, the risk involved in being connected to the grid, and the lack of internal economies of scale.

As a producer of solar PV electric power sold to the grid, I suppose I could fall into any or all of these last three categories. As a taxpayer I might prefer that my tax dollars go towards more scientific research. As a neighbour I might prefer that I not have to drive by row after row of shiny aluminum rectangles on my way to a local park. And as a system owner I might prefer not to have the worry of many thousands of dollars invested in a solar array, and instead use the money to travel.

In the second and third cases, where involvement is indirect, we have representatives called politicians or the court system who make this kind of decision on our behalf. We trust them to analyze the overall situation and come up with a policy which, when all factors have been taken into account, leads to an "efficient" outcome where the benefits to taxpayers in general outweigh the costs placed on those who suffer with a spoiled view, or high electricity bills to be paid each month. Every taxpayer will have their own opinion on whether solar panels should appear in a particular location, but that opinion has to yield to the greater interest of the community as a whole. In many cases the downside to particular individual interests can be mitigated by sight diversion measures such as construction of berms or planting of trees to hide shiny panels from view. Whether the policy formulated by our representatives is truly efficient we can never know, but we proceed on the basis that they have done their best given the circumstances.

The fourth case, that of the private system owner and producer, is a business decision. A potential owner takes the contract as offered in all its details and makes a yes or no decision whether to invest in a MicroFIT project. Presumably the owner has analyzed all the costs and benefits including an assessment of the risks and has accepted them or the contract would not have been signed. Only the probability (with its associated mean and variance) of achieving a profitable outcome for the owner is known; but that is the nature of business - a calculated risk in exchange for payment for power produced.

Benefits and risks

The taxpayer, neighbours and the grid benefit from renewable sources of power. Solar generation is quiet, can be made unobtrusive, and if located correctly can make good use of marginal land. Solar power is also produced at a time when demand is great for cooling purposes.

In addition, locally produced power has a subtle benefit. Part of a Hydro bill is a charge for delivery. It takes a certain amount of power to push the alternating current over the distance from a central generating facility via high tension wires to the final consumer. The final user is charged a delivery amount based on the fact that all power comes from that distance; however locally produced power means that the transmission distance is very small, where much less energy is lost in delivery to the end user. The grid still has to be built on the assumption that the full capacity is required from time to time, however particularly during summer, Hydro is receiving a monetary benefit for a service it did not have to provide.

You could say that the taxpayer and neighbour have no risk; if suddenly the solar array next door disappears into a sink hole and never produces again they lose nothing since no further power is produced and zero power produced means zero dollars paid out. There is a matter of replacing the power suddenly lost by other means, of course, but there is no obligation to the system owner suddenly out of business. Even the planning and policy development work is something that has to be done anyway, so for a taxpayer and neighbour there is very little to no loss.

Ontario Hydro has a small risk, that of an array destabilizing a part of the grid. With the MicroFIT programme in effect for over five years now (in 2015), the fact that we have not seen any evidence of such events in the news signals that the efforts made by manufacturers through the quality of their product, installers through the quality of the installation and the grid through its checks and monitoring indicate that this is less of a risk than even power outages.

Risk and uncertainty for the owner

The owner faces certain costs; some of these will be risks and others uncertainties. Risks are those probabilities of events for which there is some history of observations where we can calculate the likelihood of recurrence. Uncertainties are those for which we have poor or inadequate data to get an idea of the probabilities. Given the fact that solar generation is a new and exploratory technology it will be a more "risky" venture since we have little historical data for some of the risky events. Early-adopter system owners are in fact providing data points, building the history of the technology. Part of the premium on compensation for power produced is in recognition of this role. Later adopters will benefit from these early experiences.

For the system owner, here are some of the costs and risks, each of which needs detailed discussion on a separate page:

So the final calculation comes down to the difference between the expected income and the expected costs. If the difference is better than a dollar, then we have a positive outcome.

Balanced against these costs we can count some benefit to the small-scale producer. Apart from the immediate monetary benefit over the initial 20 years of the contract, there is also a potential benefit, that of conversion to off-grid status. At the cost of replacing the alternating current grid inverters with a DC charging system and installing battery storage, a 10 kW system is quite sufficient to power a small house. The battery storage would have to be quite substantial for the winter months, unless a backup system such as a generator is used. But still the possibility of conversion stands as an alternative use for the capital equipment.