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Economics of Renewables

Everyone wants to know if they can save money with renewable energy systems. The answer is not easy, and the variables are many, but the discussion below should shed some more light on the question. You might be pleasantly surprised.

Economics of Renewables

A lot goes into putting the economics of renewable energy into exact dollars and cents.  There are many variables to take into consideration regarding the cost of an installation, the projected output of the installation, and the revenue, avoided costs and tax benefits of the installation. Every site and owner is unique and injects distinct qualities into the financial equation. There is no such thing as an average installation, and no one knows with certainty what the cost of electricity and/or fuel will be ten years from now.  It is equally difficult to predict what rebates, tax credits or net metering rates will be in the future. However, the financial balance of renewable energy is obviously an important concern for investors, so we will share some numbers, some guesses and, hopefully, enough information for you to form a realistic opinion.

When asked if solar PV systems make economic sense, we can reply with confidence: Yes!  and No!

Yes: if you live on top of Farmer’s Loop ridge here in Fairbanks (for example), and qualify for the current (2012) appropriate agency rebates and tax credits, and GVEA current kWh consumer rate and net metering rates.

No: if you live a mile or so away, at the bottom of the north face of the ridge, and don’t qualify for rebates or tax credits. At the near-ideal end of the spectrum, a system will pay for itself in 6 years (sometimes less) and then provide “free” electricity for at least the next 24 years. At the other end of the spectrum, a system cannot compete with the current utility rates. Most of us are in a situation somewhere in between, and need to look more closely at the details of each part of the economic equation.

There are several financial incentive programs available to help offset the initial cost of installing renewable energy systems. The government has long been in the business of supporting the fossil fuel industry by constructing roads for access, subsidizing distribution systems and providing incentives for exploration and development, among other things. Rebates and tax credits for renewables are the government’s way of leveling the energy playing field a little, so don’t feel guilty accepting their support.

Most states have agencies that offer various forms of rebate programs to help defray the cost of installing renewables and/or improving the efficiency of buildings. The US Department of Energy maintains a database which contains links to the majority of these programs. The Database of State Incentives for Renewables & Efficiency (DSIRE) website is very user friendly.  On their home page, simply click on your state and you’ll get a list of programs and links to additional information.

Possibly the most widely utilized program is the federal Residential Renewable Energy Tax Credit and its commercial cousin, the Investment Tax Credit (ITC.) Any US taxpayer may claim a tax credit equal to 30% of the cost of installing a renewable energy system at a location they use as a residence. This applies to solar PV, solar thermal, wind turbines and geothermal heat pumps. If a taxpayer’s liability is not sufficient to apply the entire credit in one year, the balance of the credit can be rolled to subsequent years until used in its entirety. Businesses can take advantage of the 30% credit in addition to benefits through accelerated depreciation schedules. Both programs are authorized currently to remain in effect until at least December 2016.

Financial Incentives in Alaska

In Alaska there are several incentive programs to consider. Since January 2010, all electric utility companies subject to economic regulation are required to provide a net metering program, applying to renewable energy systems up to 25kW capacity. This is not to say a utility couldn't voluntarily net-meter a larger system, but they are only required to allow system up to 25kW. Each utility is obligated to compensate the producer for excess generation at the “non-firm power rate.” This is not the full retail rate that the utility charges its customers, but is the estimated average avoided energy cost as approved by the Regulatory Commission of Alaska. This rate varies from one utility to another, and each utility updates its non-firm power rate on a quarterly basis. The latest rate in Fairbanks (GVEA) can be checked on line at the GVEA website under SNAP Purchase Rate. The fall 2011 rate was $0.12263 per kWh. 

GVEA also offers the Sustainable Natural Alternative Power (SNAP) program. This program distributes additional monies from a voluntary fund to renewable energy cogenerators, proportional to the amount of energy they produced. The rate of compensation from this source varies annually with the amount of money contributed to the fund, but 100% of the contributions go directly to the producers as GVEA currently has zero administrative costs associated with the SNAP fund disbursement. The first few years the SNAP program existed, the SNAP producers were paid at the maximum rate the program allowed, which is $1.50 per kWh. This was fantastic for providing an excellent financial return on renewable energy systems. Since that time, however, the number of SNAP producers has increased, which reduces the funds available for each producer. This trend will probably continue, and it makes it more challenging to predict exactly what future returns will be. A guess is that the 2012 payout will be in the neighborhood of $0.23 per kWh.

It is important to understand that one can both take part in GVEA's SNAP program and net-metering at the same time. GVEA calls this setup SNAP-Plus and it is easily one of the most attractive financial incentives for renewable energy currently in the state of Alaska

So what does all this mean for the grid-tied renewable energy investor in round estimated numbers? All on-site electrical production and consumption is metered, balanced and billed on a monthly schedule. This is the primary benefit of net-metering, as it means you don't have to be at home using energy when the sun is shining or the wind is blowing to take advantage of the full retail value of the electricity you produce. For each kWh of electricity produced and consumed on-site over the course of a billing month, your electrical bill would be lowered by the (current) retail rate of $0.22/kWh. If in a given month you produced more total energy than you consumed, the excess would be credited at $0.12/kWh on the next month's bill. Depending on your usage and the size of your renewable energy system, this may be a rare occurrence and for many people it is likely that 100% of the energy you produce will be worth the full retail value. In addition, as a SNAP producer you would receive a payment each April for every kWh you produced, regardless of who ultimately consumed the energy produced.

The State of Alaska offers additional programs that are geared to meet the various needs and diverse regions of the state.  For additional information, you can chat with Arctic Sun staff, visit the DSIRE website mentioned above, or browse the Alaska Housing Energy Program site.

In addition, as of July 2013, Arctic Sun now offers our clients financing options! To learn more about how Arctic Sun makes renewable enrgy more affordable, visit our  Financing web page or call us today at (907) 457-1297.

A Holistic Look at the Economics of Renewables

The true value of a renewable energy system goes beyond the immediate short-term financial equation or simple payback. Many financial investors look primarily to the “Return on Investment” (ROI) to evaluate the merit of a venture. ROI is the amount of money made or returned to the investor annually, generally expressed as a percentage of the initial investment. If you invested $100 and made $10 per year from that investment, you would have a 10% ROI.  If a renewable energy system has a 10-year payback, it may sound like a long time, but it has a 10% ROI, all tax-free! What other investment pays 10% these days?  And, a 6-year payback has a ROI of 16.7 %! Obviously, not all renewable systems perform at this level, but if you think your site may have potential, it is certainly worth investigating.

It is also important to realize that savings on a utility bill is a post-tax savings. In order to pay a $100 utility bill you likely had to actually earn much more than $100. You likely had to pay taxes, put gas in your car to get to work, pay union dues or professional licensing fees, etc. Through careful calculation of your particular circumstances, the staff at Arctic Sun can help you work through these considerations.

A renewable system is a long-term investment, and a homeowner would be remiss to not consider the value or equity it adds to their home from the day it is installed. Some communities in Alaska have a property tax exemption for the value of your renewable system, so you are not taxed for the extra equity the system provides.

While it is not part of the hard dollar financial equations, it is nice to remember renewables are friendly to the environment, increase national and local energy independence, are carbon-neutral, do not emit pollutants, create local jobs, boost the economy and enhance national security. Ultimately, these benefits may outweigh the dollars and cents.

Worldwide, investors are increasingly realizing the power of renewables and the call of the future. Fossil fuels provided civilization a lift from the medieval ages, but they are rapidly becoming a part of history. Alternative sources of energy are necessary to carry us forward to economic and healthful prosperity. The graph below illustrates how this evolutionary trend has been functioning, with ever increasing monies dedicated to research, development and investment. All predictions are this trend will not just continue, but will expand into the foreseeable future.

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Investment dollars have produced the desired results and returns. The graph below illustrates the on-the-ground increases in capacity or power production from various forms of renewable energy in the recent past.

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Relying on renewable energy sources can be a wise investment in many locations. If you think there may be potential for you, the staff at Arctic Sun can help you evaluate your site and guide you through the many financial incentive programs available.