Renewable energy projects need to be carefully researched and analyzed in order to interest any potential investors. Investors need to know how much energy the renewable source has the potential to generate and how the calculations were derived. Solar energy is infinite, so the risk of running out of this resource is essentially nil. The maintenance of a solar energy system is less than that of other renewables, and considerably less than that of fossil fuel energy. The lifespan of solar panels are on average 30-40 years, and most warranties of solar panels cover an average of 25 years. Investing in solar energy is also very beneficial to the environment. The investment in solar will expand any investor’s portfolio to show environmental awareness, and reduction in their carbon footprint. The solar energy system will also qualify for Solar Renewable Energy Credits (SREC), which earn income through their sale to electrical suppliers in the grid. A federal tax credit of 30% for the system is another important deduction in capital cost. Solar’s extensive lifetime of producing energy make it an attractive investment option for any investor, considering demand for energy and government energy policy.
The potential for financial success is present for investing in solar energy. The federal tax credit reduces the upfront investment by 30% and the IRS allows for accelerated depreciation over a 6 year span. Of course, the most important financial concern to an investor is return on investment (ROI). The US T-Bill has a yield of 2.98% for a 30 year investment. The S&P 500 has an average return of approximately 10%. There are many risks involved with any investment, but the risk analysis for energy demand has a low beta. The internal rate of return (IRR) is a good metric to determine the rate of growth a project is expected to generate. The weighted average cost of capital (WACC) is another analysis to show how capital structure is used, which will help make the decision to invest. The net present value (NPV) is possibly the best financial analysis to determine the value and profitability of an investment. NPV gives results based on cash flows discounted at WACC and proves whether a project is financially worthwhile.
According to the National Renewable Energy Laboratory (NREL), the long-term decline in installed PV system prices is clearly the result of reductions in both module and non-module costs, and module costs have declined at a faster pace, especially over the past several years. In addition, the NREL states that analysts project that PV price trends will remain in their downward trajectory in the near term (NREL, 2012). Technology is reducing the cost of capital for solar investment and the government has incentives in place to reduce upfront costs. The investment in a solar renewable energy system is a good, sound investment decision.
National Renewable Energy Laboratory (NREL). (2012). Photovoltaic (PV) Pricing Trends: Historical, Recent, and Near-Term Projections. Retrieved October 13, 2014,
from http://nrel.gov/docs/fyosti/56776.pdf.
There are a few differences between selling to an investor and selling to a homeowner. I don’t think you want to overwhelm consumers with too much technical jargon. I have tried this before with roofing and lost a few people in the process. It is needed in solar to a larger degree because of the complexities of financial obligations etc… but people get scared if you have to repeat things too many times and believe me with solar, the more questions they ask, its like opening a can of worms. At the end of the day all they seem to really care about, especially with roof top mount, is how long its going to take, how much its going to cost and how much they are going to save……I feel that capital budgeting was more valuable that NPV. NPV is a good start but seemed to have to many holes or maybe variables that are not initially considered. I read about capital budgeting and that made a lot of sense. It reminded me of all the tools and fixed assets, maintenance etc…..check out my post if you have time….
http://sites.psu.edu/engr312/2014/10/20/david-westsmith-lesson-8-blog/
Hi Mark. Christine here. I found your post very informative; and like Marielle, thought you must be working within the industry or had experience with the financing component of renewable energy projects because of the in-depth discussion. You’ve obviously done your homework. I think you are correct that solar PV projects may be harder to sell to investors because of the uncertainty with regard to tax credits and SRECs. Are there also considerations regarding geography? It seems to me an investor would want to be sure the project was sited in an area receiving adequate “fuel” (or at least an adequate back-up through batteries or traditional means) to ensure its long-term success. Great post. Very thoughtful. If you are interested, you may view mine at http://engr312.dutton.psu.edu/2014/10/14/stallard-the-cost-of-capital-not-just-money/. I also mention the need to consider changing government incentives or regulations.
Hi Christine,
Thank you for reading my post and commenting. You work in the energy industry so any comments are a learning lesson for me and especially reading your blog post.
I think the geography is a factor, but with use of the Homer and PV Watts software, the energy or fuel potential is made available. Granted it is not exact, but it gives the investor a good idea of how many kW could be produced. I do believe that it is much easier to get investor financing in Arizona or Southern California than in PA though.
The SREC debacle and AEPS policy is more of an issue to get financing in PA. Hopefully, the state legislatures will develop better policy.
Mark,
You must have experience with accounting/economics and the solar industry. Your post certainly makes it seem that way. One thing I’m curious about is the difference between continued revenue over time for renewables vs. non-renewables. Once a solar array, for example, is sold, the business that sold it doesn’t continue to gain from the sale. An oil company is able to keep charging for the purchase of energy over time though. Do you think that the independence created by selling distributed energy sources is a harder sell to investors in any way?
– Marielle
Hi Marielle,
I wish I knew a lot about the economics of the solar sector. I have been reading up on it a lot since beginning the ESP program. I feel like like I’m so far behind everyone else in this course because I do not work in the energy industry yet. I plan on changing that this summer. I lived in NYC for a long time and had many opportunities there, but when I got married we moved to PA. Not so many opportunities in the Scranton area, so I will be moving back to the NYC area.
The difference between solar and oil, for example, is the fact that oil will run out, as you already know. The capital costs are much greater for oil as well, but the revenue is not comparable right now. Hopefully, through policy the government will level the playing field and make renewables a stronger investment.
The companies that sell the solar panels do have financial plans where they install solar panels for free, but get the 30% tax credit and any energy sold back to the grid is the installers. The site owners only get free electricity out of the deal, not that thats a bad deal. Solar City, for instance, are becoming vertically integrated and they will manufacture, install, and finance solar panels for a site. Businesses like Solar City will find ways to make money.
I think it is a harder sell to investors because of the volatility of the SREC’s and the fact that tax incentives may expire. Those are two of the biggest issues facing investment in renewable energy, I believe.