Grid Tied Photovoltaics Economics

The cost of a typical grid-tied PV system is about $5/watt installed (for a large system). Such a system located in sunny southern Arizona will actually generate power for about 1650 net sun-hours a year. A 1kW system will produce about 1,650 kWhr/year. This system will cost about $5,000 to install. So what is the value of the electricity it produces?

If 100% of the power could be used real-time by the end user, then one might say it’s worth the real time retail rate (See post titled “The town of Coalville” to appreciate the pitfalls of such an assumption). In my town I pay about 11 cents/kWhr. So making 1650 kWhr * $0.11 = $182. This has a simple payback of 27 years. But what if I can't use the power during the day when it is being produced and I have to sell it back to the utility?

In Arizona and in many states there are 'Net Metering' laws which require the utility to buy power back from the end user at full retail rates. This is unfair to the utility and is a subsidy for the PV user (which we all pay in the form of higher utility rates and fees). It is extremely important to have a firm grasp on the concept of "no free lunch." It is very easy to confuse real economic returns with artificial returns in a heavily subsidized environment.

Forcing the utility to buy back power at retail rates is unfair because they are required to provide power 24/7, install and maintain generation equipment and transmission lines and provide service and billing. The actual value to the utility of this intermittent power (PV) is much closer to the fuel avoidance cost.
For reasons explained in the Coalville post I think the value of homeowner produced PV is close to the fuel avoidance cost which is about 2.7 cents/kWh in my area. So the real payback of PV is about 111 years.

But what if PV costs fell substantially? Well it has, especially in the last 18 months. The $5/watt figure is based on the new current lower prices (Mar 2010). But what if they fall more? How cheap do they need to be to make systems break even without subsidies. If PV panels were available free, the cost to install the panels, including the inverter, wire, breakers, enclosures, conduit, and panel mounting structure would be about $2.50/watt. So the free 1 kW panels would cost $2500 to install and connect to the grid, and will produce about $45 worth of power a year, for a 56 year simple payback.