Solar Array Colorado - Photo by Alexi Brown

A group of solar panels make up a solar array like this one mounted on a flat roof

Solar Lease Considerations in Nebraska 

The technology for production of solar electricity has declined in price dramatically in recent years which has led to installations of small, medium and large solar electrical systems throughout the country. Land leases are a common method of accessing land for solar electric systems. A landowner should carefully consider these agreements prior to signing. Key to a fair agreement are the issues of land use impacts, duration of agreements, obligations of the landowner, compensation, and decommissioning. For more information see the article Solar Lease Considerations in Nebraska

Solar Power in Agriculture 

Solar power is the energy we are able to harness from the sun. Solar power is commonly thought of as a way to produce electricity. This is done with silicon solar panels. It is also used as a form of thermal energy, providing heating and drying abilities. This is also a renewable and non-carbon producing energy source. Solar power became a popular renewable energy source in the 1980s with better understanding of solar panels and government-funded research.  

Economics of Solar Photovoltaic Systems

1. Determine if you have a viable site (facing south with little shade).
2. Determine the total installed cost of a system from your local solar installer.
     Work with the installer to estimate annual production from solar array.
3. Determine your cost of electricity (check your most recent electricity bill).
     Check state net metering laws.
     Check your local utility’s net metering policy (in some cases local utilities have a more generous policy than state law).
4. Calculate simple payback.
5. Determine eligibility for local, state, and federal grants and tax credits.
6. Calculate payback with incentives.
7. Include inflation estimate in your calculations.
8. Calculate internal rate of return and net present value using a spreadsheet or an online calculator.


Economics of a Solar Photovoltaic System 2 (Inflation of energy costs)

Common criteria used to evaluate an investment: (1) The simple payback period (2) The rate of return (often called the ROI) . (3) The present value of the benefit compared to the investment cost, or Net present value. (4) Internal rate of return (IRR).
These criteria are explained in the Economics of Solar Photovoltaic Systems NebGuide. This publication explains how inflation of electricity costs impacts the economics.

There are several reasons why the economics of putting a solar PV system on your home is more beneficial than ever. Firstly, the price of solar panels has been reduced by over half in the past three years. Second, the cost of grid electricity is continuing to increase, driven by inflation and emissions regulation. In Nebraska we get a significant portion of our electricity from burning coal which is facing some of the most pressing emissions regulations. Finally, consumption of electricity is increasing and demand leads to increased price for electricity (2). The U.S. Energy Information Administration recorded a 77% increase in the amount of electricity demanded in the 21-year period of 1985-2006 (2).

Over the period 1990-2011 an average inflation the electric utility in Lincoln Nebraska increased rates at an average rate of 2.85% per year. The rest of the state’s utilities saw similar increases (1). The price of electricity has become more volatile in recent years; when the time frame is shortened to 2001-2011 the average inflation rate per year increases to 4.73% over this eleven year period (1). The price per kWh (kilowatt-hour) sold from the state’s largest utility has increased from 6.43 cents per kWh in 2008 to 8.75 cents in 2012, a 36% increase in the cost of electricity in just four years (3).

Rates vs Inflation

Note that on the graph it shows money inflation as a total and electricity inflation as year by year.

As you can see, the price of electricity has begun to rise faster in recent years. This may be due to increasing energy demand, rising costs of fuel, pollution regulations, or other infrastructure or economic factors. The higher the price of electricity per kWh, the more money you save for each kWh you generate from a solar photovoltaic (PV) system. The price of electricity plays a large role in the time it takes for a solar PV system to pay itself off and thus begin making you money on your investment.

The inflation of money from 1990-2011 (as you can see in the graph above), when compared to electricity, has risen in a linear pattern whereas electricity inflation was relatively stable until increasing faster in the last eleven years. Over this 21-year period the average inflation rate for the U.S. Dollar was at 3.43% per year which is higher than electricity’s inflation over the same period (1). The linear nature of monetary inflation holds true when looking at the same eleven year period from 2001-2011. During those eleven years the inflation of the dollar increased an average of 3.27% per year, slightly lower than the 21-year period due to the recession of 2008 (1). The linear inflation of the dollar shows the significance of the large changes in inflation we are observing in the price of electricity, especially since 2001.

Purchasing a solar PV system for your home must be considered as an investment as the large majority of costs will be upfront. It is important to determine a way to measure the savings per kilowatt-hour produced during the life of the system. Many solar PV systems have about a 30-year lifetime (until capacity drops to 80% of the original amount), but to be safe we will assume it will operate at its best for 25 years. For our example we will assume a house on average uses 12,000 kWh annually. There are many different solar calculators that you may reference but we will use a simple spreadsheet available online to figure payback and return on investment (5). Other assumptions used for the solar calculator are $0.095 or 9.5 cents per kWh generated (4) and a 30% tax credit from the federal government.

The total cost for the solar panels, frame, inverters, and installation is about $22,400 for a 5.6 kilowatt system with an average cost of $4/watt installed.

After the federal tax credit of 30% is applied:
$22,400 * 30% = $6,720 then $22,400 - $6,720 = $15,680

The total cost, as solved for, comes out to $15,680.

Dividing the total cost by the lifetime in number of months
25 years * 12 months = 300 months, then
$15,680 / 300 months = $52.27 per month

as the average fixed cost for the lifetime of the system regardless of electricity generation. Using the following formula to estimate production, where you can substitute the size of your system and calculate the total, we found:

5.6 kW system * 5 hours (sunlight/day on average) * 365 days/year * 0.75 (efficiency of panels) = 7665 kWh/year

At a rate of 9.5 cents per kWh means you are saving $728.18 in your first year on your electricity bill. Over the life of the system it will generate:

25 years * 7665 kWh = 191, 625 kWh

Dividing the total cost after tax credit by the total electricity produced:

$15,680 / 191, 625 kWh = $0.082 / kWh

We see that the price per kWh is about 8.2 cents per kWh produced, which is about the current average price of electricity. There will certainly be inflation in price as demand and other factors contribute to an increasing price for electricity (2).

In the example an average electricity cost inflation rate of 3.79% is assumed, which is the average of the long run 2.85% inflation and the short run 4.73% inflation discussed earlier. If one were to purchase this system in cash it would pay back in a little over 17 years, making a projected profit of $1,142 in year 17 and a total profit on your investment of $13,563 at the end of year 25. The payback time is especially influenced by the inflation in the price of electricity. For this exercise we are using a relatively conservative inflation rate of 3.79% - Nebraska Public Power District’s 2012 annual report showed that from 2008-2012 the inflation in the price of electricity was 7.2% per year on average (from 6.43 cents per kWh in 2008 to 8.75 cents per kWh in 2012) (3). If we apply this 7.2% inflation rate to the Bergey calculator we find that, if paid in cash, payback time would drop to 14 years with a profit of $650 in year 14 and a total profit at the end of year 25 of $30,138 on your investment. That is over double the profit of our conservative 3.79% estimate.

If you are considering taking out a loan for 100% of the cost to purchase your solar PV system (loan at 2.5% interest for 10 years), your results will be drastically different than a cash purchase. With our conservative estimate of 3.79%, it would take 29 years to make a profit on your investment, which is outside of our (conservatively) estimated lifetime. Again, the electricity inflation rate can have a significant effect on this payback period. Changing the electricity inflation rate to 7.2% and still taking out a loan for 100% of the cost, the system would pay back in 22 years with a profit of $385 in year 22 and a total profit of $10,712 on your investment in year 25.

When calculating the economic estimates of your solar array take the inflation of electricity into account. A conservative number to use may be 3.79% while inflation in the near term has been closer to 7%.