October 16, 2007
by Paul Gipe
The Toronto Renewable Energy Co-operative (TREC) has conducted an extensive analysis of a co-operative investment in a solar photovoltaic (PV) project within Toronto’s urban core. The analysis was performed under a grant from the Toronto Atmospheric Fund. The co-operative project has been dubbed SolarShare.
TREC and SolarShare has assembled a portfolio of potential projects totalling nearly 4 MW.
As part of this analysis, the SolarShare project team created both an economic model and a financial model to evaluate hypothetical projects. The economic model is a simple tool for examing the influence of various parameters. This model is also useful for determing the tariffs necesary to make solar projects profitable under varying conditons.
SolarShare also created a detailed financial model that examines each individual element of a co-operative solar PV project. Screen shots from the model, an Excel spreadsheet, are presented below as are some of the key assumptions used in the example and the results produced by the model.
For the purpose of this analysis, SolarShare considered a large (1 MW) rooftop installation based on detailed cost estimates from vendors serving the Ontario market.
For more information on the Toronto Renewable Energy Co-operative, see www.trec.on.ca
Disclaimer: This spreadsheet was developed under a grant from the Toronto Atmospheric Fund (TAF). This spreadsheet represents the views of TREC and are not necessarily the views of TAF or the City of Toronto.
The key assumptions used in the model analysis are
- Installed costs: $7,500/kW,
- Yield: 1,140 kWh/kW/year,
- Annual Reoccurring Costs: 1.5%,
- Desired Rate of Return: 7% (This is used in the NPV calculation only.),
- SOC solar PV tariff: $0.42/kWh, and
- Project Life: 20 years (SOC contract term).
Below are some of the abbreviations and terms used on the opening page or tab.
- IRR = Internal Rate of Return
- NPV = Net Present Value (discounted cash flows)
- Profitability Index = NPV/I where I is the total installed cost
- PAYBACK= number of years to recoup original investment
- CUMULATIVE CASH FLOW = net cash flow generated by the project in 20 years net of original cost
- SOP = Ontario Standard Offer Program
- LTD = Long Term Debt
- kWp = peak kilowatt
- P = Pessimistic
- ML = Most likely
- O = Optimistic
- RET = Renewable energy tariff
Using the above assumptions, the model yields a negative NPV, a very low IRR, and a payback beyond the 20-year project life. Such a project is not economic without a radical drop in the installed cost (to $4,380/kW), a substantial increase in the SOC solar PV tariff (to $0.75/kWh), or a substantial up-front subsidy (46% of total costs).
Cash Flow & Payback
Returns from the SolarShare project remain negative until the 26th year when the project finally fully pays for itself. Though solar PV plants are long lived, possibly 25, 30, or more years, SolarShare exmined profitability only for the 20-year period of Ontario’s Standard Offer Contract. The assumptions used here are conservative, but revenues beyond 20 years are extremely uncertain.
There any number of possible combinations of lower installed costs, higher SOC solar PV tariffs, and direct subsidies that would make a SolarShare project profitable. This table summarizes a few combinations.
There are a number of individual tabs or tables in the combined worksheet. One is the income statement. Below is a screen shot of the first two years of the project.
Capital Cost Allowance (Depreciation)
Businesses, such as a co-operative, can deduct from taxes owed certain expenses for depreciation. The “financial engineering” used in many projects is in part built around the depreciation deducion, known in Canada as the Capital Cost Allowance (CCA). The value of the CCA to a business or investor is a function of the tax rate. The tax rate for a co-operative in this example is 17%.
This tax rate is not the maximum in Canada, but is the rate appropriate for SolarShare, according to TREC’s tax advisers. Other business structures may find advantage in using the CCA with a higher tax rate. However, the tax benefits can not be “passed through” to the individual investor. This could change, but at this time SolarShare’s advisers argue that the CCA can only be used against the tax liability of the business.
Residual (Salvage) Value
Solar PV plants are long lived. Some solar PV systems have been in continuous operation for more than 20 years. These plants can be expected to continue generating electricity and revenues 5, 10, or possibly 15 years beyond the project life used in the SolarShare anaylsis. Thus, solar plants will have some residual or salvage value at the end of their 20-year life. However, determining what that value will be remains difficult.
SolarShare estimated what each component might be worth in the 21st year. It’s clear that a solar PV system will have substantial value. How to value that in today’s dollars is less clear. Nevertheless, project partners may be able to place some internal value on what the project could be worth to them in the future.
SolarShare Analysis Tables
The following worksheet calculates the revenue, expenses, and cash flow for a projected investment in a solar PV project located in Toronto, Ontario. The tables that comprise the worksheet also calculate various investment parameters used in such a project. There is also a table that examines the residual or salvage value of the project in the 21st year.
Please note that use of this spreadsheet requires finance and accounting knowledge, as well as experience with Microsoft Excel tools and features. No warranty is expressed or implied. Please see TREC’s full SolarShare project report for background on the project and the assumptions used. The SolarShare project report will be posted when it is completed.
Note: This spreadsheet has been removed from the public domain. For information, contact TREC directly