by Chris Hall, Managing Director, Global Banking Division,
Deutsche Bank Securities, Inc.

As a financial professional who is interested in PV, I have followed PV technology, pricing trends, government incentives and electricity prices to determine if a grid-connected PV system is a good investment for the typical homeowner (i.e. me). With the advance in the grid connected
market (utility approved inverters and net metering) the mix of incentives and the increasing price of electricity, I think the time has come - at least in my home of Chappaqua, New York.

A PV system is not typically considered to be an investment that produces an attractive financial return. There are many good reasons to install PV, but the return available as an investment isn't typically one of them.

However, for a long-term income oriented investor, a grid-tied PV system can be considered an alternative to investing in the financial markets (e.g., a money market fund, a mutual fund, the stock or bond market). This is because the PV system produces electricity that has a quantifiable cash value. Just as you would „buy and hold‰ a dividend paying stock, you can buy and hold a dividend paying PV system. The money spent on the system is recouped when the house is sold.

I've "put my money where my mouth is" and have had a 1.6 kW system installed on my house in New York State where I buy my electricity from Con Edison. On my most recent bill, I paid US$0.1629 per kWh for electricity (including tax). New York State has net metering so for each kWh produced by my system, I am credited this US$0.1629.

Additionally, there are significant incentives available in New York State for the installation of residential PV. There is a "buy-down" of US$3 per watt from the New York State Energy Research and Development Authority and an additional US$1.50 per watt New York State tax credit. (With any luck a Federal energy bill will be passed this year with an additional 15 percent Federal tax credit but I‚m not counting on that.)
The PV System and Installation

The system I installed is the Astropower SunLine-16 which uses 16, 100W AP-100 modules and two Advanced Energy GC-1000‚s connected to the grid. It was installed by Ed Witkin of SolarWorks while Ken Olsen of SolEnergy taught his PV250 PV installation course to 10 students over a 3-day period. I paid the "retail" price for the system - a price I negotiated with SolarWorks.

I had participated as a student in a PV 250 course during July of 2001 in New Hampshire and thought it would be a good idea to "host" a course during the installation of my system.

I participated in the course at my house while also being the typical homeowner, i.e., hoping everything would go just right and that nobody would fall off the roof. The system, installed during the 3-day course, has been in place for about a month.

The system was challenged during its first month due to the unusual heat in the region. There were 12 days of over ninety degree heat in August (a new record for the area) and the grid suffered through a number of brownouts as power use surged. As expected, the GC-1000 inverters took the system offline when the line voltage was low and then reconnected as soon as the line voltage returned to normal. Thus far, September has cooled down and everything has worked as planned.

Calculating the investment return
Keeping the analysis simple, the value of the electricity produced expressed as a percentage of the initial cost of the system is the dividend. The initial cost of the system is my investment. Total system cost after US$3 per watt buy down: US$14,484 Tax Credit US$1.50 per watt for 1600 watts - $2,400. My net cost = my investment $12,084.

What is an appropriate return? The 10 year US government treasury bond yields about 4 percent right now. A money market fund is returning somewhere below 2 percent and the stock market is anybody's guess. For the sake of picking a number, let‚s just target a pre-tax return for a low risk investment of five percent. Five percent of my investment is US$604. At the current 42.7 percent combined (Federal and N.Y. State) marginal tax rate, after taxes, a five percent return turns into US$346. So, if the PV system produces US$346 of electricity, it is equivalent to putting money into a taxable investment (like a stock that pays a dividend) paying five percent.

Is it reasonable for me to expect that the PV system can produce this amount of electricity? $346 per year / 365 days per year equals electricity production of US$0.95 per day. At US$0.1629 per kWh, 5.82 kWh per day from the PV system has to be produced.

Is this possible? Looking at this roughly: 1600 watts X .90 efficiency X 4 hours average sun per day = 5.76 kWh per day.

As another data point, the Astropower literature has me living in Zone 2 of their Solar Resource Map and notes that I should expect to produce 155 kWh per month or 5.12 kWh per day.

So, the PV system looks like it could produce a dividend return of between four and five percent. Of course, this depends on all the factors that influence the output of the PV system (amount of sun, temperature, shade, etc.)

The risk to the dividend is if electricity prices decrease. If this happens, the dollar value of the electricity produced will be less and the dividend will decrease. But, I am willing to take this risk. Historically, electricity prices have risen (A NYSERDA report - Patterns and Trends New York State Energy Profiles 1986 - 2000 states that residential electricity prices increased 7 percent from 1999 to 2000 and since 1986 have increased 39 percent). Additionally, there are local energy issues to consider - I live 13 miles from the Indian Point nuclear plant and post September 11, 2001, its closure is a real possibility. If this happens, it is reasonable to assume that electricity prices will rise.

Calculating the total return requires estimating a value of the PV system in the future when it is "sold" for its value. I am assuming that at any point in the future, the value of the PV system will be equal to what I paid for it.

Since I am not planning on selling the PV system as a unit separate from my house, this is an assumption that I am never going to test. Now, I could make a case that the system will appreciate with the rest of the house as long as the housing market continues to appreciate (after all the PV system is now a part of the house) or I could make a case that the system will depreciate. The point at which this assumption breaks down is at the end of the life of the modules, but who knows the life of a module? (At this point, the modules have no value if not covered under the 20 year warranty). My assumption makes the point that with an electricity dividend of five percent, the return on the PV investment is five percent.

What other investment attributes have I gotten with this investment?

1. A hedge against rising oil, natural gas, and electricity prices. When oil and natural gas prices rise, so does my electricity bill (I have paid as much as $0.19 per kWh in the past two years). In this case, when electricity prices rise, my return increases.
2. As energy prices are a key component of inflation indexes, I have acquired a hedge against inflation.
3. I have diversified away from exposure to the financial markets.
4. Low risk. There is not going to be a lot of variability to this return. It‚s not likely to be 10 percent, but it also won‚t be negative.
As an additional side benefit, installing the PV system has reinforced the economic value of conservation. Each dollar I save on electricity has the same economic benefit as producing electricity via the PV system.

The investment return of the PV system is limited to the amount of energy I consume as net metering only allows for reducing my electricity bill to zero. Consequently, I can't get cash from my utility company if I produce more than I consume. Right now however, there is no threat of this happening as the system is only projected to produce less than half of my electricity consumption.

Looking into the not so distant future, as the PV manufacturing cost curve continues to result in reductions in manufacturing and end user costs, this investment return for newer systems will increase. And, if additional incentives are added by federal, state and local governments, the return will also increase.

Conclusion
PV is often dismissed or not considered by individuals because it is "too expensive." However, if PV makes sense as an investment, individuals can no longer conclude that it is "too expensive." I think that this framework allows the individual homeowner to consider the investment value of a grid connected PV system to determine if it could be economic. In many places around the country, the combination of incentives, electricity prices and available sunshine make grid connected PV attractive as an investment so that the „too expensive‰ argument can be disregarded.

I'll be watching my electricity production for years to come to evaluate the actual return of my grid tied PV system. Unlike many investment in the stock market I have made, I am not subject to accounting shenanigans, corporate malfeasance, or outright fraud. I will receive a dividend each month and I am not subject to the current mood of the market. With a projected annual dividend of four to five percent (and a bias toward increasing over time), this is an investment that I am very happy I made.

About the Author
Chris Hall is a Managing Director in the Global
Banking Division of Deutsche Bank Securities, Inc.