We’re fortunate to have many subject matter experts from diverse fields in our business neighborhood at Hone Coworks. In this ongoing series, Perfecting Our Craft, members of Hone take time to share practical knowledge for businesses. And who knows, maybe we’ll make a few connections!
Aries Power designs and deploys renewable energy solutions that help clients to reduce operating costs and their carbon footprint. Aries joined the Hone Coworks community at our Great Oaks Office Park location in August 2020 as a founding member; you can watch their member profile here. In this edition of POC, Jason Allen, principal of Aries Power, walks us through the deceptively simple business case for solar at your home or business, as well as what he sees next for renewable energy technology.
How does solar work?
A solar project converts energy from the sun to kilowatts (kW) of electrical energy which flows out of the system over time and is measured as kilowatt-hours (kWh). This energy is delivered to customer loads (usage) “behind the meter,” which allows you to lower utility costs, or exported to the grid to earn credits on a utility power bill.
Who is an ideal customer for a solar project?
If you have space on your roof or on your property, and an electric bill, you are ideal. The cost of a solar system can often be offset with available Federal and State incentives which are often based on tax credits. If you don’t have the budget or tax credit appetite, we can explore ways to structure the project.
What are the different types of credits from the kWhs exported to the grid?
Residential projects earn “kWh” credits. If you produce an excess of energy at 2PM, exporting and earning kWh credits, you can offset a kWh you pull from the grid at 9PM when the sun isn’t shining. This is called volumetric net-metering. Whether a kWh is worth $0.12, $12 or 12 bitcoin, you are exporting electricity earning kWh credits to offset kWhs you consume when the project is producing less than you are consuming. Per the utility electric tariff approved by the New York State Public Service Commission (PSC), residential projects in NYS fall into the volumetric net-metering scheme but the utility has the right to convert you to a residential VDER monetary credit scheme once the State figures it out and approves. See below for an explanation of VDER.
Non-residential projects earn monetary credits when they export excess energy to the grid. Typically, in the Albany area, an exported commercial kWh is worth $0.09. The monetary credit is called the “value of distributed energy resources” (VDER) and consists of a stack of renewable energy credit (REC), grid demand reduction and NYISO supply and capacity rates. This is a great program and was a game-changer when NYS introduced it a few years ago. The VDER program is particularly beneficial to commercial accounts that are demand-billed ($/kW) as it allows export at a higher rate per kWh relative to the value of a behind-the-meter installation.
How are projects priced?
Projects are typically priced on a $/Wp basis, where Wp or “watt peak” is the maximum amount of electrical capacity a system can generate before the inverters convert the production to AC current. That means, we take the capacity of the system, sometimes referred to as the “DC nameplate,” and multiply it by a price rate. For example, if we price a 100kWp project at $2.00/Wp, the total price would be $2 times 100,000 watts, or $200,000. Price is influenced by our material and labor costs as well as services such as engineering, permitting. Residential projects tend to have higher $/Wp price due to their smaller size and higher fixed costs. We also make educated assumptions on utility interconnection costs based on our look at the utility’s infrastructure and confirm it prior to full notice to proceed. Building infrastructure and the tie-in are also taken into account as they can affect the overall installation cost.
How should one look at the business case of a solar project?
We just talked about project price; let’s talk about the incentives which offset this:
First, there is a NYSERDA cash rebate which comes to the developer of the project at completion. It is less cash the client has to pay Aries. For example, given the $200k project we just discussed, the NYSERDA rebate could be $35,000 reducing the client cash-out to $165,000.
Second, there is the current Federal Investment Tax Credit (ITC) of 26% in effect. The $200,000 project could reduce your total tax bill by $52,000. If you receive the credit, you have to own the project for at least five years. If you don’t pay enough tax to appreciate this credit, you can roll it forward twenty years and possibly pull it back one-year.
Third, if you are a commercial client, the project is eligible for bonus depreciation. Some customers appreciate this, others don’t, so for all tax incentives, please consult with your accountant on how to best optimize.
Residential customers may also be eligible for a NYS tax credit of 25% up to $5,000.
Back to the $200,000 commercial project, you could offset the project price by $35,000 (NYSERDA) and $52,000 (ITC) before depreciation netting $113k between years zero and one.
What is the annual production value of a solar project?
It’s important your solar developer runs a good production model and that you understand it. There are so many apples-oranges between sites driven by latitude, tilt angles, azimuth, shading, equipment selected, and DC:AC ratios that there is no “standard plant” anyone should back into. Rooftop projects provide fewer options for adjustments, while ground-mount project can be designed with greater flexibility to optimize sun exposure on panels. If we assume the 100kW project we discussed has a 14% capacity factor (full production 14% of the 8760 hours in a year), it will produce 122,640kWhs. If each kWh averages $0.09/kWh, then the project earns a little over $11k per year.
Back to the 100kW project example, we’re looking at a total price of $200k-35k-52k=$113k earning $11k per year. Bonus depreciation and low interest leverage can really improve this with improved benefits and less cash-out.
What are some of the economic challenges you see and some of the pitfalls one should look for when considering a solar project?
The assumptions can really make or break a project. On the residential side, we’ve seen friends who were oversold on project performance as well as the value of those kWhs. For example, the residential rate in the Capital District is approximately 12 to 13 cents, not $0.17. Residential capacity factors – a measure of system’s ability for kWh production in the area – for roof-mount systems could range between 12% and 14%. Anything higher should be viewed with caution. Also look at the escalation rate of that value. Given current market assumptions anything over 3% could be considered high and distort economic performance unreasonably.
Be very aware of the $/Wp price and it can get you most of the way there towards comparing developers, however, don’t lose sight of the production model differences. Some developers oversell incremental technology; we feel it has to buy its way on to the project with incremental performance outpacing incremental cost.
Be careful with the tax incentives as well and speak with your accountant. Tax incentives are meant for solar related equipment and cannot be extended to permanent building components, except in very few rare cases and with limited scope.
What differentiates Aries Power as a solar developer?
We are trying to solve a few problems in the solar space:
We don’t carry inventory, conduct marketing nor have a large HQ staff so our overheads are as low as NYS insurance rates allow us. This puts us in a great position to optimize pricing to client return. For example, having our office at Hone is such a great fit for us; it serves our needs while keeping our costs low.
We value the relationships we have with clients and we stay with the projects. As a result, we always add to our experiences and confirm actual economic and electrical performance with our clients.
The owners of Aries have deep commercial, technical, and financial expertise. We bring all these together to create systems for our clients that are technologically, and financially sound investments. In our past lives include designed and developed of energy and financial models and projects for pharmaceutical factories as well as commercialized wind turbines .
How do you size a project?
Depending on the client and site, we have a lot to consider which dictates the project scope:
- Available space
- Customer budget appetite
- Customer tax appetite (If the customer has $0 federal tax bill, they won’t be able to appreciate a $52k ITC or if it’s over ten years, its ITC is diminished)
- Customer electric bill (we don’t want to over produce credits the customer can appreciate)
- Utility infrastructure (if the client needs 200kW and the utility can host only 100kW, the project will be 100kW)
What is happening with batteries?
Batteries have standby power value for residential or kWh customers and standby plus demand (kW) charge reduction for commercial customers who are demand-billed. They are more expensive than a standby generator and sometimes may not improve the return on a solar-only project. They work where clients value the resilience of the technology (they don’t require fuel supply), can reduce demand charges, or where the grid values the export of dispatchable (non-intermittent) electricity. We are happy to run through this with customers.
What is your view on microgrids?
We have performed detailed design and economic analysis on a 5MW microgrid covering multiple end-users. Community microgrids are tough to perform because they require getting multiple parties aligned on deploying CAPEX that benefits all parties across property lines; they are easier to deploy for single-owner sites. They can be an excellent way to serve complicated sites that value standby power and want to mitigate inflation risk. There is currently a trend for a hybrid approach to microgrids, where less physical equipment can be considered while increasing the use of virtual power and energy management across sites included in the microgrid.
What technologies interest you?
We are keeping an eye on electrolysis. Extracting hydrogen from water is very proven technology; I recently made an electrolyzer for my son’s science fair. The issue is cost; will it compete with batteries? Transport and storage are also significant problems to solve for. What many people don’t realize is that combusting hydrogen can have some nasty by-products like NOx. I don’t think it will be feasible unless an electrolyzer plus fuel cell beats batteries in cost and performance.
We’re also interested in seeing how the commercial and technical challenges of EV bi-directional charging are solved. Many people don’t have their cars parked at home during daytime peak periods so how does sending kWhs from cars parked at work through a third- party charger work? It is interesting to see Ford tout its Lightning as being bi-directional.