The first time I ran this analysis was 10 years ago in 2014, then again in 2018. Now let’s look at the picture for 2024 and beyond; although the conclusion might be obvious.
(Note that I will call a solar-energy electric system a “PV” System, from “photovoltaic”, and solar panels are actually PV “modules”.)
The short answer, for several reasons, is to “go solar” sooner than later. This is whether it is grid-tied PV on the roof of your warehouse, your home, or a PV Microgrid that includes an Energy Storage System (ESS) on your island. The financial performance will never be as good as it is today!
There is no amount of price reduction in PV Modules that will result in a better investment decision by waiting. Some costs will go up and some will go down. But grabbing those benefits now will pay off for years. Even if the cost of the PV Modules was zero, it is still smarter to do it today. How’s that for a call to action?
This article is about the Bahamas and Caribbean market, or any community that makes electricity by burning petroleum. But the same sound logic applies to the United States.
Building that PV or Microgrid now means …
- Higher investment value because of the time value, or “Present Value”, of money. This is the same advice you tell your kids about saving early.
- Reducing carbon emissions today is more valuable than tomorrow – the “Present Value of Carbon Reduction”.
- Less diesel electricity means lower risk of fuel spills, less smokey exhaust, less noise, less maintenance, less motor oil to dispose.
- Good-paying, permanent Jobs for local families.
- Money stays in the country instead of paying it offshore for diesel fuel, helping the national balance of currency.
Online forums are full of this question: “is solar worth it?” Really the only way to answer this question is to crunch some numbers and decide for yourself what “worth it” means to you. After you decide to Seize the Day, you then have to figure out how exactly to do it. What size and system configuration makes sense for you and how to implement it. More on that later.
SOME COSTS GOING DOWN
Since solar energy is technology driven, the price will continue to come down as technology gets better and economies of scale improve the value proposition. It is a good assumption that solar panel prices will drop a few percent a year. Over time, this has averaged 3-5% a year. Sometimes they go up, like with tariffs in the US, but generally a little down every year.
The efficiency of the PV modules also goes up, maybe about 2-3% a year. This would reduce the cost for other parts and tasks that share in the total project cost, which translates to another 1% annual cost reduction. A little less wire, racking, and roof or land space.
SOME COSTS GOING UP
Offsetting those savings; the cost of fossil-fuel electricity will always go up over time. This is because of inflation and higher cost of pulling more scarce fossil fuels out of the ground. Look at a graph of the price of West Texas Intermediate Crude on the commodities market and you will see that it reflects diesel fuel and utility electricity prices. Typically, utility or fuel costs go up by 3% to 5% a year just for inflation alone; sometimes it can be as high as 5-10% when a utility hedge expires, for instance. Let’s assume 2% annual increase for this analysis, along with the same 2% increase in insurance and the cost of everything else including the installation labor. We will call that the inflation rate that affects everything except PV Modules.
The rest of the system includes electronics and racking systems. These aren’t as costly as the PV modules and haven’t been experiencing the same sort of falling prices. In fact, racking systems increase in cost every year because of the price of steel. Nothing is exempt from inflation and costs going up over time.
Will these increases offset the decrease in cost of PV Modules? That is a question for an industry economist, so later on I will assume it is a zero-sum game.
The cost for battery plants, or Energy Storage Systems (“ESS”) also trend down over time. The ESS enables the owner to use even less diesel or utility electricity, so the calculations are the same. But I am not going to cover Microgrids with ESS specifically in this article. That gets into more elaborate energy modeling using HOMER Energy (from UL) and is more than I want to write about now.
TIME VALUE OF MONEY
Recall that a dollar today is worth more than that same dollar in a year. For everyone that was asleep during that part of math class, which is the “time value of money”. Most of our clients like to evaluate investments with a discount rate of 8%, so we will use this rate for our analysis. That means $100 today has a value to our investor of $92 in a year, $85 the year after that, and so on.
TAXES & INCENTIVES
This analysis assumes no taxes or other financial incentives. But doing this analysis for the OECS countries or in the United States will have similar results.
AND WHAT ARE THOSE RESULTS?
The financial performance is much better the sooner the project is put into service rather than waiting! Waiting to build the PV or Microgrid drops the returns by about 75% even when considering that the cost to build the project in two years is the same as building it today.
The next three tables show the results for a six-year period to keep the font from getting too small. We could extend it out further, but the results only get better.
Lots of PV system owners make their decision based on straight-line payback. The downside of making decisions
based on straight-line payback is that it ignores everything that happens after the payback year. Costs will continue to accelerate over time and straight-line payback doesn’t capture those benefits.
This analysis includes Internal Rate of Return (IRR) and Net Present Value (NPV), because both IRR and NPV consider all future cashflows in the project lifecycle. Like equipment replacements, since we assume the PV power electronics (Inverters) will fail on the first day of the year after their warranty expires. Straight-line payback doesn’t capture that future cost.
IRR is the effective interest rate you are earning over the life of the project. NPV is the value of the project when future cashflows are discounted at the 8% rate. Your accountant will tell you that if a project has a positive NPV then you should do it, and if the NPV is negative then you should not do it.
WAIT TWO YEARS
MAKE IT WORTH IT TO WAIT TWO YEARS (NOT COUNTING PRESENT VALUE OF CARBON REDUCTION)
Consider this: even if PV Module prices went to zero in two years – manufacturers giving them away and delivering them to you for free – it is still a better investment to start today! The cost of our example project above would have to drop 68% from $616k to $200k to deliver the same IRR today. That means ALL of the equipment would have to be free and not just the PV Modules!
The same thing for the straight-line payback point. That is where the Net Cashflow (line 5, 12, or 19) changes from a negative to positive number. Waiting causes the payback to increase from 4 years to 7 years from today.
Yes, there are assumptions in this analysis. Costs and prices might vary more or less than these assumptions.
This is assuming a smallish commercial or island project of 300 kW of DC power capacity. That is roughly a full shipping container of PV modules and a practical cutoff point for economies of scale. This assumes electricity is $0.30 US per kWh, which is typical for the Caribbean. The Bahamas and OECS are higher than that so we will keep it conservative.
Sorry, but I gotta put some solar pups in here.
DO IT FOR YOUR CHILDREN BECAUSE YOU ARE THEIR BIG-BRAINED ANCESTOR
Finally, let’s touch on the non-financial reasons to act now. This project delivers environmental benefits on top of excellent financial performance. Reducing fossil fuel consumption and carbon emissions starting today is more valuable to the planet than starting in the future. We call it the “time value of carbon reduction”! (Or the “present value of carbon reduction”.)
At least enough to think some more about it?
Before you invest in a PV System or PV Microgrid, make sure you get competent expertise on your side of the table.
You wouldn’t buy a dishwasher or vacuum cleaner without learning a little about them, would you?
Either gain that education yourself or hire an expert to help you. Invest your time before you invest your money. Remember that low cost is usually not the best answer. Benjamin Franklin said, “The bitterness of poor quality remains long after the sweetness of low price is forgotten.” And my other favorite expression … the sad buyer didn’t have enough money to do it right the first time but did have enough to do it right the second time!
No matter how you slice it, the smart money is going into renewable energy today – for your bottom line … and the bottom line of the planet.