Page 54 - North American Clean Energy November December 2015

investing in clean energy

An Energy Gamble:

Solar as a hedge

By Chris Otness

are typically analyzed through a variety of inancial metrics enough relative to what they are currently paying. However, the current price is much less
COMMERCIAL SOLAR PROJECTS
including NPV, IRR, and payback period. But like any inancial metric, the analysis is only important than how that price will compare to future electricity prices down the road.
as good as the assumptions that drive it. After years of growth in the solar industry, it is For the length of the PPA, the customer will have stable and predictable energy prices.
now known, with near certainty, what a solar system will produce over its lifetime.
In comparison, it is diicult to predict future retail electricity prices and there is ample
What isn’t known, and is the key driver for most customer returns, is the future price of evidence to suggest that those prices are headed for substantial growth.

retail electricity. A solar system will ofer a set price for electricity relative to the current Some customers in response to this are saying they want to wait for the price of solar to
cost. Future “cash lows” from the system are simply the diference between what the solar come down low enough to signiicantly beat their current rates. hey value the system as a
system provides on a $/kilowatt hour basis and what a traditional utility service would hedge, but doesn’t it make sense to wait until prices drop even further? he problem with
charge.
this logic is that time is running out. With the 2017 expiration of the Federal ITC, which

With this in mind, a commercial customer should consider valuing a solar system, not provides a tax credit of 30% of total project costs, the economics of solar will never be
just as an investment, but also as a hedge against future retail electricity prices. As a hedge, better.
there is additional value a solar system provides that may not be evident in traditional
metrics. he value is inherent in the protection from future electricity price volatility. he Future Electricity Prices

higher traditional retail electricity prices go in the future, the more valuable that hedge So what will future retail electricity prices do? he reality is nobody knows.
becomes.
Since 2000, the cost of electricity has grown at an annualized rate of 2.5% however,
his perspective is particularly useful in today’s power purchase agreement (PPA) this is taking into account the natural gas boom seen over the last 5-10 years. While there
landscape. Many customers are turning down PPAs because the price is not yet low
is a range of projections for future electricity prices, developers typically predict a 4%

annualized increase. How do developers justify a break from past trends? here are quite a
few reasons to believe electricity prices are set to spike here in the U.S.
he basis of this belief falls on the future price of natural gas. Demand for natural gas

is set to explode in the United States. As the grid becomes more reliant on it for base load
power. Due to the EPA’s latest ruling on coal, almost 17% of U.S. coal power plants over the
next few years will be phased out.
In addition, following Japan’s Fukushima nuclear disaster, there is little support here

Expert Tax Advisory, Accounting, and in the United States to renew and rebuild our aging nuclear infrastructure. With a smaller
portion of our energy mix coming from coal and nuclear, the only place to turn for a
Business Strategy for Clean Energy Companies
major source of base load power will be natural gas. States, such as New York, have also
begun to pursue moratoriums on hydraulic fracking due to health concerns and the recent

Put OUR Green Team on YOUR Green Team
earthquake link discovered by the USGA in Oklahoma.
With a reduction in places to drill for natural gas, coupled with a growing distrust of the
industry, there is a strong possibility that supply could be strained in several key areas.
In addition, 70% of electric transmission and distribution infrastructure will need

to be replaced over the next few decades. Transmission and distribution costs account
for roughly half of all retail electricity prices. Utilities are poised to invest huge capital
resources in the coming years which will surely only be inanced through rate increases the
Public Utility Commissions will have no choice but to approve.

he beauty of a solar system is that it allows a commercial business to protect itself
against future increases in retail electricity prices and provide a level of certainty that a
commercial customer cannot get anywhere else. he question for commercial customers
is how much do they value that certainty and how much will their

competition?

Chris Otness is a project developer at Borrego Solar Systems
PV AMERICA
BOOTH
205
Borrego Solar Systems | www.borregosolar.com
www.rodmancpa.com

54 nacleanenergy.com
NOVEMBER/DECEMBER 2015