The Tribune

By NEIL HARTNELL

TRIBUNE Business Editor

nhartnell@tribunemedia.net

BAHAMIAN regulators have disclosed that solar photovoltaic (PV) renewable energy systems must cost $3 per watt or less to install if they are to generate returns that match “or exceed” alternative investments.

The Utilities Regulation and Competition Authority (URCA), unveiling the results of a study on investment returns associated with small residential solar PV systems, revealed that the findings show even a $4 per watt installation cost may not be sufficiently competitive or attractive when compared to returns generated by rival investments such as corporate bonds and preference shares.

And installation costs of $5 per watt or greater are likely to make solar and other renewable investments uncompetitive and unattractive, the URCA report added, revealing that the data obtained showed such expense delivered an internal rate of return of just 1 percent compared to 7 percent for $3 per watt.

The net present value (NPV) of such systems also declined significantly, according to the study, falling from $11,995 at $3 per watt to just $1,995 at an installation cost that was $2 per watt higher.

“The installed cost of a PV system is a significant factor influencing the economic viability of the investment. Based on the analysis, systems installed at costs exceeding approximately $5 per watt are unlikely to generate returns that are competitive with alternative investment opportunities, while systems installed at approximately $4 per watt may provide returns that exceed lower-risk alternatives such as inflation or bank deposit rates,” URCA said.

“Systems installed at approximately $3 per watt or below demonstrate stronger economic performance and may provide returns comparable to or exceeding other investment options, such as bonds or equities… There was significant variation in how much people reported paying for their systems. It ranged from $1 per watt to $10 per watt and was the deciding factor on a system’s return.”

Yet URCA acknowledged: “It should be noted that customers do not necessarily have full control over the installed cost per watt of a PV system, as pricing is influenced by several factors, including equipment costs, installer pricing, system size, import costs, market competition and financing arrangements.

“However, customers may be able to improve the economic attractiveness of their investment by comparing multiple supplier quotations, selecting appropriately-sized systems, and considering the total lifecycle cost and performance of the system rather than focusing solely on upfront cost.”

URCA conceded that its study only assessed 11 solar PV systems, which imposed limitations on the findings. However, of the 11, seven were shown as generating positive internal rates of return (IRR) of between 2 percent to as high as 38 percent, with net present value pegged at between $16,724 and $857,803.

“Residential system sizes ranged from 5 to 15 kW (kilowatts) with the average size being 7.8kW, which was consistent with the BPL’s [residential renewable] framework,” URCA added.

“Applying the framework to the annual use before the PV system was installed yields an expected system size of 8 kW. This means systems are being sized in accordance with the framework, which is designed for self-use, [and] to avoid excessive units sent back to the grid.

“Over half of the systems studied are projected to be a good investment for the individuals. These systems are likely to beat inflation. Eight out of 11 systems also had a positive net present value over their expected useful life of 20 years, applying a discount factor of 5 percent,” the Bahamian energy regulator added.

“This compares favourably with the available return on a Bahamas Government bond over a similar period. Hence, if a government bond is the next best alternative, installing a PV system can be an attractive option. On average, people can expect to make their money back within ten years after installation.”

Bahamas Power & Light’s (BPL) average fuel charge worked out to 17 cents per KWh (kilowatt hour), URCA said, which is the rate at which solar PV system owners are compensated for selling the excess energy they generate back to the grid.

“On average, the units billed after the PV system was installed were 34 percent lower than before. Hence, survey respondents were saving about a third on their electricity bill compared with before,” URCA said. However, the amount of energy sent back to the grid by the solar PV systems studied was 40 percent lower than anticipated.

“This result is not necessarily surprising because most systems are not installed under ideal conditions, [such as] south facing at the right angle with no shading. It does show that persons should pay attention to how the system is installed to maximise its output and their financial return,” URCA said.

“Electricity generated by a PV system and consumed directly by the customer provides a higher economic benefit to the customer, as it offsets electricity that would otherwise have been purchased at the applicable retail tariff [of] approximately 31 cents per kWh.

“Conversely, electricity exported to the grid is compensated based on the applicable avoided cost value [of] approximately 17 cents per kWh), which reflects the value of the avoided fuel-related costs,” URCA added.

“Therefore, from the individual customer’s perspective, maximising self-consumption generally results in a higher direct financial return. However, exporting excess generation remains economically beneficial as it contributes to reducing the need for conventional generation and provides value to the electricity system.

“Customers can improve the economic return on their PV investment by ensuring their system is appropriately designed and installed to maximise energy production. Key considerations include optimal panel orientation - south-facing where feasible - an appropriate tilt angle approximately 15 degrees to the horizontal based on the conditions in The Bahamas, and minimising shading from trees, buildings or other structures,” the regulator continued.

“Proper system design and installation practices help maximise electricity generation, increase self-consumption and improve the overall financial performance of the PV investment.”