UPS just announced on February 19th that it is “building on its commitment to increase the use of renewable energy resources” by investing in “two solar power projects at its distribution facilities in Parsippany and Secaucus, New Jersey”. (I’m not making this up folks! Here’s the link to the article – http://www.csrwire.com/press_releases/35224-UPS-Expands-Renewable-Energy-Output-at-New-Jersey-Facilities) This is good for UPS; this is good for New Jersey; and it’s good for the U.S. overall! Good job UPS!
And then it donned on me that it may not be clear to most how exactly this is good for UPS, good for New Jersey, and good for the U.S. overall. And, I don’t mean from sense of UPS doing good things for the environment and us all feeling warm and fuzzy about it. (I do feel warm and fuzzy about it, but that’s not what has me excited.) I’m talking from a dollars and cents point of view, and from it being a good business decision from UPS’s point of view.
(A little background about me might be in order at this point. I’ve been installing commercial scale solar PV systems for the last 5 years. In that time, I’ve installed a number of large commercial PV systems on roof-tops in New Jersey, including a few that are very similar in spec to two that UPS are installing (roughly the same size, and also on large flat roof-tops).)
Good for UPS
How is this good for UPS? On the one side, you have the cost of the PV system, which is significant but not outrageous. On the other side, you have the benefit of the electricity. Adding to the complexity of the math problem are the incentives that are applicable to a PV system in New Jersey. There is a federal incentive that provides a tax credit representing 30% of the PV system’s cost, and there is an incentive in the state of New Jersey where the sale of the RECs provides benefits in addition to the value of the electricity.
Confused yet? Let’s break down the individual pieces of the formula, and hopefully clear up some of the confusion.
First is the cost of the PV system. This is broken down into two large chunks – the up-front cost of installing a working PV system, and the on-going costs of maintaining the PV system. The up-front cost includes the equipment, labor, and design and engineering of the PV system. Many PV systems have already been installed in New Jersey, so the labor costs, design and engineering costs, and permitting costs have come down as New Jersey has come up the learning curve. Currently, it costs about $2.30/W to install a large commercial PV system in New Jersey. And, the on-going maintenance (O&M) costs of the PV system will be about $0.01/W/year.
The amount of electricity produced by a PV system in New Jersey is typically 1,150 kWh / kW, or 1.15 kWh/W. This value changes slightly based on the specifics of the PV system, but it’s a good ballpark number to use. Now comes the tricky part, the value of electricity in New Jersey. New Jersey has some of the most expensive electricity rates in the country and has migrated to a Time-Of-Use pricing structure for industrial and large commercial electricity customer. This means that the price of electricity changes throughout the course of the day, with it being more expensive in the middle of the afternoon when electricity is in high demand, and less expensive in the middle of the night when electricity is in low demand. This Time-Of-Use pricing makes the math much more difficult, but it does increase the value of the electricity from a PV system since the production of electricity from a PV system peaks along with the highest cost of electricity. To make the match easier, we’re going to use the average price of commercial electricity of $0.125/kWh (https://power2switch.com/NJ/electric_rates/). (Just remember that you’re actually getting a slightly larger benefit that we’ll calculate.)
The Federal incentive, known as the Investment Tax Credit, or ITC, provides for 30% of the values of the PV system to be used as a tax credit over the next 5 years. The subtleties of the tax credit aspect make it a little difficult to model, so let’s just assume that 30% of the cost is reimbursed by the Federal government.
The New Jersey state incentive is in the form of RECs or Renewable Energy Certificates. For every 1,000 kWh generated by a renewable energy source, 1,000 kWh of electricity are generated and a REC representing the “greenness” of that electricity is also generated. In New Jersey, these RECs can be bought by the utilities and retail electric supplier to comply with the state’s Renewable Portfolio Standard (https://power2switch.com/NJ/generation_mix/renewable_energy/). New Jersey has a carve-out specifically for solar PV electricity, which leads to a higher price for SRECs or Solar Renewable Energy Certificates. The current value for SRECs in New Jersey is $110 per SREC, or an additional $0.11 / kWh.
So, now let’s look at the math:
(Installation cost) – (Federal Incentive (ITC)) = Net cost
($2.30 / W) – (30% * $2.30 / W) = $1.61 / W
(Value of electricity) + (Value of SREC) – (O&M) = Yearly benefit
(1.15 kWh * $0.125) + (1.15 kWh * $0.11) – ($0.01) = Yearly benefit
($0.144) + ($0.127) – ($0.01) = $0.261
(Initial Cost) / (Ongoing Benefit) = Years to Payback
($1.61 / W) / ($0.261 / W / Year) = 6.2 years
UPS will pay off this investment in about 6.2 years. This seems like a long time until you realize that the solar panels have a warrantee of 25 years (and are expected to last at least 40 years), and the inverters (the other major component of a PV system) have at least a 10 year warranty, though some are starting to carry a 25 year warranty. In addition, you can start to see where additional benefits could come in from the additional value of Time-Of-Use pricing for electricity, and the fact that the PV system is a hedge against rising electricity prices in the future. Most people agree that electricity prices will increase in the next 5 years.
So, good for UPS!
Good for New Jersey
The state of New Jersey is offering an incentive that makes the installation of solar PV system more valuable. If you’re a New Jersey tax payer (or, in this case, an electricity user in New Jersey), you would hope that the benefit of the incentive outweighs the cost for the state of New Jersey. The good news is that in the long term it does.
But, let’s take a quick step back to understand a little more about the electricity market in New Jersey as a whole. New Jersey only produces about 40% of the electricity it consumers within the borders of New Jersey. 60% of the electricity that is consumed in New Jersey comes through four high voltage transmission lines that connect New Jersey to Pennsylvania and New York (https://power2switch.com/NJ/generation_mix/). (A fifth high voltage transmission line has been awaiting Federal approval for right of way through a National Forest for over three years. It does not appear that approval will arrive any time soon.)
When electricity is in high demand, during the afternoons and especially on hot summer days, these four high voltage transmission lines must carry a great deal of electricity. These four high voltage transmission lines can only carry a certain amount of electricity, and as demand increases on these transmission lines, so does the cost to push electricity through them, and ultimately the cost of electricity to the end customer. A big reason why New Jersey’s electricity rates are so high is because of the supply constraint imposed by these four transmission lines, and the resulting high mid-afternoon electricity costs.
By supporting the development of solar PV systems, the state of New Jersey is effectively reducing the demand placed on these four high voltage transmission lines during afternoons and during hot summer days (times when solar PV systems are putting out their most electricity). The state of New Jersey, and all its electricity customers benefit from lower overall electricity costs due to this reduction in demand on these four transmission lines in the long run. (Some of this value may already be showing up in electricity rates as New Jersey’s electricity rates have been trending down for the last two years. This is a little bit of speculation at this time since demand for electricity has also been depressed over the last two years due to the on-going recession.)
Good for the Federal Government
The other incentive, the Investment Tax Credit, is coming from the Federal Government. As a taxpayer, you should be concerned about whether or not there is a net benefit from this incentive that exceeds its cost. The good news to taxpayers everywhere is that there is a net benefit.
The Investment Tax Credit increases the demand for the installation of solar PV systems by effectively reducing the cost of installing a solar PV system. By increasing the demand for solar PV systems, the Federal government is attempting to reduce the overall costs of installing a solar PV system to the point where these systems will be installed without Federal incentives. Along the way, the Federal government is spurring job growth and innovation in new technology and a new industry.
The results are not fully in since this is a long term incentive, and the incentive is not scheduled to sunset until 2017. But, from my short 5 years in the PV industry, it has been successful in reaching at least some of its goals. When I first began installing PV systems in the spring of 2008, a commercial solar PV system cost in excess of $5.00 / W to install. Of this cost, solar panels accounted for $3.75 / W of that cost. I can currently install a commercial solar PV system for $2.30 / W, and the solar panels account for less than $1.00 / W. This is an impressive drop in the cost of solar panels in just a few short years.
Good for All
These projects are win-win-win-win! UPS wins, New Jersey wins, the Federal government wins – but, who’s the last “win” for? Well, at the end of the day, we all win. We get less expensive electricity because of the deployment of solar PV systems. We get new jobs and new technology thanks to the Federal government. And, let’s not forget the cleaner air we’ll be breathing because of more renewable electricity and fewer fossil fuels being burned.
So, give UPS an “atta-boy” for their solar projects, so that they make more of these correct business decisions in the future. (It doesn’t hurt to make them feel warm and fuzzy for doing the right thing.)
Twitter: https://twitter.com/UPS & @UPS