Solar Panel Economics

Situation: You are a homeowner and your electric bills are high. You are deciding whether or not to convert your house to solar panel by installing a 5 KW solar power system. For your climate zone, the PG&E baseline monthly power usage is 378 kilowatt-hours (kW-h). Your average monthly usage is 1126 kW-h. (Note: Use annualized cost for analysis)

PG&E rates are as follows:

Tier 1 0-70% of baseline $0.16 per kilowatt-hour

Tier 2 71-100% baseline $0.18 per kilowatt-hour

Tier 3 100%-200% baseline $0.27 per kilowatt-hour

Tier 4 200%+ of baseline $0.33 per kilowatt-hour

Cost of Solar Panel Systems:

A reasonable equation for small solar panel system is Initial Cost = $20,000 + (x-3)/5* $20,000 where x is the size of the solar panel system in kW.

Converting Solar Panel System Size to Electricity Produced

Average monthly output of a 5 KW system would equate to 650 kW-h per month

Options consider the following options:

Option #1: Do nothing. Continue to allow PG&E to supply all of the electrical power to your home based on your current electrical usage. It is expected that the cost of electricity will keep up with inflation of 3.5% per year.

Option #2: Lease solar panels. There is no cost to install the panels and you enter into a 20 year lease for a 5 KW solar electrical system designed to provide 650 kW-h per month. Your rent on the panels is to pay the installer $0.15 per kW-h for the first year of the lease. That amount will go up 2.9% per year over the term of the lease. You pay PG&E for electricity used above that produced by the solar system. No salvage is assigned to the leased panels

Option #3: Purchase the 5kW solar electrical system. You pay PG&E for any additional electricity used that is not produced by the solar system at the rates listed above. If the system produces more electricity than is consumed, it is sold back to PG&E and the power company pays you at a rate of $0.04 per kW-h.

Assignment

1) Doing a present value analysis over a 20 year period, and determine which option makes the most sense using a MARR of 4%

2) What is the rate of return for investing in the 5 KV system?

3) What is the payback at MARR of 4% if you were to invest in a new solar power?