Power Prices Going Up...Again!

According to the Connecticut Post (www.connpost.com), November 16, 2006, Connecticut Light & Power has applied for another rate increase. This one will be 8.3% for residents and will amount to about $.015 more per kilowatt hour. According to the article, the request was made because the generation costs have increased. In CT, generation is just a pass-through charge, and CL&P enters into contracts annually to secure these costs. These are usually approved without much discussion.

Interestingly, the increase is actually lower than expected, because the federally mandated congestion charges will be going down, due I believe in part to a new underground power line in the area. However, according to the article, all of the 2007 power contracts are apparently not fixed as yet, and another proposal for an additional rate increase is to be expected for the 2nd half of 2007.

This 8.3% rate increase further improves the economics of the solar panels. Assuming no further increases come, the new rate cuts the payoff time by 4 years. Assuming 8.3% is the new inflation rate for power, and we get this rate increase every year, we can expect to get our money back by 10.5 years. Power then will be a whopping 41 cents/kwh. That power rate would be hard to believe, but given the corner we have painted ourselves into as a nation, that scenario cannot presently be ruled out.

A decision by the Dept. of Public Utility Control (DPUC) is expected by December 8, 2006. I'm not holding my breath.

Going Green: What Next?

The solar panels were an okay deal, and the environment is better off as a result, but they didn't directly help with the oil security issues, although they were some help with the natural gas supply issue. We are out about $11K, and so far, we don't as yet have back-up power. We have alternative power that is grid-tied, but it doesn't help us in the event of another power outage. So what do we do next?

It is the oil situation that has me the most concerned, so it makes sense to concentrate on that area. We have two issues here. First, we, like virtually everyone else in America, use automobiles for the bulk of our transportation. Second, living on the East Coast, we use heating oil to heat our house. Heating oil wasn't our choice, for it was in the house when we bought it, and (fortunately, I now believe) natural gas is not available on our street, probably due to the rocky soil. It seems like we have to work on both gasoline and heating oil (and we have improved both--I just need to post it).

The first question to ask is how much do we use? With 2 cars getting between 22 and 25 mpg and with roughly 8000 miles driven annually on each, we use about 700 gallons of gasoline annually. That's just a guess. Funny thing that we don't know what it is exactly. Nonetheless, our usage is on the lower side for most people in America, but can we improve upon it without a loss in lifestyle?

On the issue of heating, we probably use 1000 to 1500 gallons of heating oil each year for space and water heat. Again, I can't give the exact amount, but now that I think about it, I think I'll try to find the old bills and actually see if we can reconstruct how much we have used in the past.

Both these components come from oil, and not just our lifestyle depends upon it, our actual existence does, for if the heating oil supply was disrupted somehow, the one fireplace in our house would not be enough to heat the house. Yes, if worse came to worse and we did suffer a major heating oil disruption, we could reduce our space to only the living room and live there, but I'd prefer to not even go there unless we have to.

Again, the question is can we move off oil (and fossil fuels in general) and still maintain our lifestyle without a significant cost impact? To date, we've done two things so far: bought hybrids, and put in a geothermal heat pump. We'll look at those in turn to see how well they've helped.

Solar Panels: Financial Analysis

Were the solar panels a good deal? To answer that question, we need to do a cost-benefit analysis. We can compare the cash flows assuming we did and didn't purchase the panels. There are many assumptions about presently unknown variables, such as the cost of power in 15 years.

The bottome line is that putting in the panels as an investment isn't necessarily a slam-dunk, but it does help tremendously from a risk management perspective, and if one is taking a view of the future of tight energy supplies, then the analysis is pretty good. Whether or not it was a good decision from an investment point of view will only be determined by what happens with energy prices in the future. Let's explore.

The cost for the array was $10,878.20. This was after the CT Clean Energy Fund rebate (which was handled by the installer) but before the $2000 federal tax credit. We used this tax credit to offset the cost of cutting down some trees. These trees were probably going to be cut down anyway, so should we include that amount or not? The difference is rather large (16% cost difference). I suppose one can show both scenarios to see the difference if we include the credit or not. As one of the trees we cut down was our neighbor's tree, to be honest about it, we need to keep the federal credit out of our calculation, because we wouldn't have cut that one down if we hadn't needed to. In the meantime, let me just say "Thank you very much" to our neighbor, for without that one tree gone, we wouldn't have met the requirements for the rebate at all.

A simple way to look at the financials is to ask how long will it take for the array to pay for itself. With a cost of 17.0 cents/kwh and 2422 kwh generated per year, we save $411.74 per year thereby requiring 26.4 years to pay for itself [1]. Is it really that bad? The answer is "no" for a couple of reasons. The first one is that we get clean energy credits for each kilowatt-hour (kwh) we generate, and the second is that the cost of power can change, and at this point, it looks like it will be going up. Let's look at the credits first.

Many municipalities have voted to require a minimum amount of their power to come from renewable sources. Also, most if not all utilities give consumers the option of selecting a green source for their power. Practically, all electrons get mixed together on the power grid, so it isn't possible to select exactly which power source you are getting your power from, but from a mix of sources, you can allocate your load to greener suppliers. For instance, our power provider, Connecticut Light & Power, allows the consumer to pay a little extra for supplies from a green source through their "CTCleanEnergyOptions" program (http://www.cl-p.com/community/environment/clean.asp). By selecting a clean source, you pay about 1.1 cents more per kwh, but you can feel good by knowing you are helping support renewable energy projects.

We have sold our renewable energy certificates to Massachusetts Energy Consumers Alliance at a fixed rate of 6 cents per kwh (http://www.massenergy.com/Solar.REC.Sale.html) for the next 3 years. Somehow they can afford to pay us this amazingly good rate just for being green. It is a big difference to us, for that gives us an extra $145.32 annually in income that can be applied to our capital costs. That reduces the payback time to 19.5 years and makes the present annual rate of return on investment just over 5%.

This "renewable energy certificates" may leave some people scratching their heads. It certainly does me. Frankly, it seems to make more sense to generate the clean power and sell the credits than it does to fork out more money for somebody else to collect. But, that may not be possible for some people, either because they rent their residence and/or because of the high capital costs to install the array, and, if the decision has been made on the municipal level, it may not be possible to meet the demands of the citizens without a renewable credit market from which to buy green power.

So, present value gives us a return comparable to investing in treasuries. An added benefit is that the savings we get from the panels in electricity cost is not taxable (although the renewable credits presumably are), but treasury interest is taxable, thus improving the economics from an after-tax perspective.

What about the power cost? For starters, power costs in CT are one of the highest in the USA at the moment. The economics would be different in the Midwest where cheap coal rules even with the generous CT rebate. But what about the future? Over the past 10 years, we've risen from about 10 cents per kwh to the present 17 cents, but most of that rise has been in the last 2-3 years. Could it go back down? Certainly. Will it? I'm suggesting not.

What could make the power costs go down? One of the issues in CT is the fact that we don't have enough transmission lines for the present load. This is known as congestion, and it can be a serious problem, especially in high demand times in the middle of the summer. There is a federally mandated congestion charge that is part of the transmission cost. This charge should be reduced once a new underground transmission line goes into our area. However, the biggest contribution to the power cost is the cost of the marginal fuel, and that is presently natural gas, and for the foreseeable future, this will be the prime driver of price increases in the future, and thus the economics are tied to the price of fossil fuels.

Power prices hit a low in CT in 2003 at 10.5 cents/kwh, and it was as low at 10 cents/kwh back in 1990. Let's use this as our risk scenario for possible bad outcome on our $11,000 investment (Frankly, as we still get most of our power from our grid, we'd be happy if this happened). Also, let's also assume the renewable energy credits go away, and then our savings is only $254 annually. In this case, we are only receiving a return of 2.3% annually, and it will take 42 years to get our money back. On the flip side, power prices rose 22% annually for the last 3 years! Assuming that rate continues (also highly unlikely--substitution would come in a big way if this were to happen), the panels pay for themselves in 7 years and earn a tremendous return thereafter.

So here is the bottom line. If I am wrong and power prices go down, we are out maybe $4-5000 after 20 years. If prices stay where they are, we break even from an investment standpoint relative to treasuries, and if power costs continue to rise, we do better. The only argument that can now be made is that you shouldn't compare the solar panels to treasuries but to a better investment class such as equities that give you a better return. I have to argue that I'm doing one better, because, I have fixed my future expenses--known expenses-- and have insured for a consistent and stable power source, and so now I have more certainty. I know I'm going to use the power, and I am now in control of it as opposed to the power company or the state.

There is also the risk of the alternative investment class to consider. My own equity investments have not been particularly stellar in performance, and the cost of the array is definitely less than what I lost in the the stock market crash of 2000. For me, installing the panels was a no-brainer, and I'd do more if it weren't for the remaining issues of shading from other trees on our neighbor's lot.

Notes:
[1] In the original analysis, the annual savings was 17.7 cents which made the economics a little better.

How Much Oil Did the Solar Panels Save?

How much oil did the new solar panels save? Short answer is not very much.

To get an estimate, I went to the website of the Energy Information Administration (EIA) which is part of the Department of Energy (DOE). If ever there is a government agency that is worth their salt, it is the EIA. (I'd also put NOAA into that category, but that is a topic for another blog). If one has any interest whatsoever in understanding energy issues in the USA and the world, then a visit to the EIA website (http://www.eia.doe.gov/) is a necessary stop. I wouldn't put a lot of trust in their forecasts, but their compilation of historical data is outstanding.

In their section on electricity, one can find the generation data for all states and for the USA as a whole.

The first pie chart shows the generation portfolio for Connecticut. The primary fuel source is nuclear followed by natural gas, cola, renewable, oil, hydro, and lastly other types. For the USA, the generation mix is a little different as seen in the second pie chart. Compared to the rest of the nation, CT uses substantially more nuclear power and substantially less coal.





The striking feature of both charts is how little oil is used (listed at Petro in the bar graphs). Nationally, only 3% of the electricity is generated using petroleum or products. In CT, the fraction is 5%. These values were obtained from the October Monthly data and are the actual fuel mix for the year 2004. One has to go back to before the oil crises in the 1970s to get a higher fraction of oil use in electricity generation.

So how much oil was supplanted? It is tempting to just say that only 5% of the solar power generated by our tiny array was used to supplant the oil, but that isn't exactly correct. The thing that is missed is that with respect to power generation, the different fuel types are used at different times of the day and in different seasons. Power usage peaks in the late afternoon and in the summer.

Generally, the cheapest power to make is generated first, followed by the next cheapest, etc. The base power is nuclear, and this gets generated whenever the power plants are not down for maintenance. Next come hydro (if available) and coal followed by natural gas. Petroleum is usually the last one to be called, and it doesn't happen too often unless the petro plant is a "must run" station that is needed for the stability of the power grid.

The power supplanted, then, is the fuel with the marginal cost at the time that it is generated. Most of the time when the solar power is being generated (mainly summer months and midday), this will be natural gas, but it could also be the other components. I haven't calculated the exact amount, for that would have to be done with hourly data. These hourly data are possible to get, but it would take a bit of time and effort to work out. I may try it in the future, but I haven't done it as yet. But it is safe to say that hardly any coal and nuclear have been eliminated by the solar panels, the bulk of the solar power is substituting for natural gas, and some of the petro is also being substituted out.

The bottom line is that the solar array hasn't as yet made an appreciable dent in my oil consumption, but it has reduced the natural gas usage. This is important if one is concerned about greenhouse gases (and it isn't clear at the moment that I am), but it isn't optimal if that is your primary concern either, for more greenhouse gases are generated by coal and oil than by natural gas.

To eliminate the coal by solar, one has to generate enough for the day usage and also generate and store enough of the solar (or wind) power to last you through the night time as well. It is difficult to see how one could eliminate coal entirely, unless the entire roof of the house was covered with solar panels (not practical today but potentially possible someday), and a large battery or other backup system (which I presently do not have) is installed.

So why did I put in the solar panels then? That is a very good question.

The first answer is that if I had thought about the generation data beforehand, I may not have done the array first. If someone is on a limited budget and looking for methods to reduce dependence on foreign oil or reduce greenhouse gases, the money is best put towards better gas mileage or other forms of heating the home if fuel oil is used. Eventually though, I would have gotten around to it.

The second answer is that natural gas has its own problems (notice the price of natural gas lately?), and I'm trying to stay away from natural gas as well. Further, the use of the sun for power generation fits into the vision of how I think things will go if the peak oil and the peak natural gas people are even half right. That needs elaboration (in a future post).

There is also the fact that any net reduction in natural gas, especially permanent ones like solar panels, will probably end up reducing the use of oil, because the markets tend to used the cheaper sources, and presently that is usually natural gas, so if users of solar power are no longer using as much natural gas for power generation, the price will be lower, making it an even better alternative to oil and products, insuring more natural gas gets used in other areas such as petroleum refining, etc. This substitution, though very real, is a second level effect.

Finally, the primary reason is that it made sense from a financial (as well as a power) risk management perspective. The financial aspect is the subject of the next post.

Solar Panels: What We Got

Great dreams can be dashed quickly by a dose of reality. When the sales representative from Sunlight Solar (John Sych) came to do an analysis of the house, he quickly pointed out the pros and cons. A great pro was that the roof was sloped at a good 45 degrees, so it was well positioned for sunlight in both the winter and summer. One con is that the roof was oriented some to the East Southeast, as opposed to directly South, so the exposure to the Sun's path wasn't ideal, but that was a minor thing. The biggest con was definitely the trees on our property and our neighbor's property.

I had been eyeing our offending trees for some time and was looking for an excuse to take them down. The solar panel was definitely going to be the excuse, but our neighbor's trees were another matter. It was pointed out that the neighbor's trees were the bigger offenders, and they would cut the afternoon sun rather significantly. Not thinking it that big of a deal, I told him that wouldn't affect my decision, but then John informed me that the rebate is contingent upon a system that doesn't have too much shade.

To get the rebate at the time that I got it (the rules have since changed slightly), the solar panel system needs to produce 75% or more of the theoretical amount for a system oriented south at the best angle and with no shading. John's guess that a system on our roof would be close to failing the test, but he'd have to take the measurements and get back to me, and sure enough, the initial design failed.

After speaking with the neighbors, they agreed to let me take one of the shading trees down, but not the worst one (it is a nice tree, I have to admit) provided I paid for the removal. Putting the federal tax credit towards that, getting the array still made sense. So, we cut the tree down along with some in my yard. John came back out and said he could get an array to pass, but it would have to be smaller in size than originally intended to get the system to pass the efficiency requirement. Done! The picture below shows the front roof in the late afternoon in early November, the shadow of the neighbor's tree is clearly present.


The original plan of covering the front and some of the back roof to max out the rebate was thereby reduced to about a third of the original desired size. Of course I could still put more up, but it would mean foregoing the rebate, and without the rebate, the economics aren't as clear cut. In the meantime, I keep eyeing that neighbor's tree. If we had thought about it before we did the renovation, I'm guessing we would have tried to put a roof up in the back that wouldn't have had the shading issues and built our expansion around a good solar roof, but that is definitely hindsight.

We ended up with a 2.58 kilowatt peak array consisting of 12 of the 215 watt Sunpower panels (www.sunpowercorp.com), and a 2 kilowatt inverter (www.pvpowered.com) that converts the DC power from the panels into AC power that is on the electric grid.

The installation was done by Sunlight Solar by early May, 2006, and it went off pretty much without a hitch. All I did was write 3 checks, namely an initial deposit, a midpoint payment, and a final one upon state inspection. They took care of the rebate, and it all went exceedingly well. Since then, the panel has worked as advertised, producing the power at the rate that they estimated it would.

In the summer, the 2.5KW array should cover 30% of the power needs (based upon the usage we had prior to our renovation), but it only gives 10-15% of our historical power usage in the winter. The smallness of these numbers speaks to the difficulty of replacing all fossil fuel plants with solar panels--it just isn't so easy. A need exists to become more efficient with the generated power to make it work autonomously, or a serious reduction in living standards would be required. One area of work in the future is to deal with this issue. A combination of more panels and better use may do it, but we'll have to see.

I'll post more on the performance of the solar panels and how much it is relative to our electricity use. Part of the problem is that we are still having work done on the house, so we haven't reached our normal usage patterns yet. This doesn't affect the amount generated, but it speaks to the expected coverage of our needs from solar alone.

An interesting question to ask is how much did our array help in reducing our dependence on oil, and specifically foreign oil. The answer is a surprisingly small. That is the subject of the next post.