Economic and Policy Evaluation of Solar Energy for Indiana Business and Residential Applications

Solar energy is expanding in the US and globally recently in part because of policies encouraging its adoption such as net metering, financing tax benefits, or federal tax credits. Indiana is also expanding solar energy with other renewables to protect its environment because 95% of electricity is generated from coal (U.S. Energy Information Administration (U.S. EIA), 2014). Much of the attention to date on the expansion of solar energy has been on adopting solar PV systems in residential sectors. However, farm businesses offer an important opportunity as energy expenses account for 6% of total farm expenses on nationwide average (Brown and Elliot, 2005). As this analysis will show, the ability of farm and other businesses to depreciate the solar investment makes it much more economically attractive. In this analysis, we examine the economics of solar PV systems in Indiana in farm businesses and residential areas. We also compare these two sectors under different policy combinations so that we can see how they are different from an economic perspective. If adopting solar PV systems is shown to be cost competitive, it may be helpful for farm businesses to reduce energy expenses. We use stochastic benefit-cost analysis to evaluate the economics of solar PV systems under operating conditions in Indiana. A key indicator of economic viability is a comparison between the annualized cost of installing a solar PV system in each sector, a residence and a farm business, and the expected annualized electricity price from grids per kWh. We use the stochastic analysis to capture uncertainties in some key uncertain variables, and this makes the annualized costs probability distributions, not just a single deterministic value, so that our analysis can be more realistic. Through the distributions of the annualized costs, we also can calculate the probability that solar can be cheaper than grid electricity under different policy combinations in each sector. The analysis is done using Excel spreadsheets with the @Risk add-in to handle uncertainty. The uncertain variables were future grid electricity price, solar panel output rate of reduction over time, and solar panel failure rate. In addition, we conduct sensitivity analysis on several variables to see how changes in variables may affect the robustness of our results. The output is distributions of annualized costs of grid electricity, solar electricity, and the difference between the two. With the difference distribution, we are able to calculate the probability that solar electricity will be less expensive than grid electricity. Thus we can also evaluate how the economics of the solar PV system differs between a residence and a farm business. We do the analysis under three different combinations of policies: 1) Current policy set – federal tax credit, net metering, interest deduction for initial investment, and for the farm business depreciation of the solar investment 2) Level playing field policy set – carbon tax on grid electricity, no federal tax credit, net metering, interest deduction, and depreciation for both business and residential cases 3) No net metering – here we remove net metering from cases 1 and 2 We find that there is a 92% probability that a solar system in farm businesses is less expensive than grid electricity under current policy. Residential solar has a 50% chance of being less expensive than the grid under current policy. Under the level playing field case, residential and farm solar both show an 84% chance of being less expensive than the grid. Should net metering be removed, residential solar becomes un-economic while farm solar is still attractive even if it is not as much as with net metering in place. We did the analysis for two system sizes, and as would be expected, removing net metering causes more loss for the larger installation. The solar PV system may become a good option for farm businesses due largely to the added depreciation deduction. Another important result is that the level playing field case with carbon tax and depreciation allowed for all provides greater benefits than the current federal solar tax credit. From the sensitivity analysis, panel lifetime and discount rate are shown to be quite important in driving solar economics as would be expected. O&M costs are much less important. This analysis shows that the economics of solar energy are driven by policy considerations, which comes as no surprise. However, the difference in results under current policy between business and residential installations will be of interest to many. The fact that under current policy, solar is quite attractive to farm businesses will generate discussion. We will provide some case examples in the discussion. Also, the level the playing field case will be of significant interest. For profit electric companies can depreciate their capital investment, but homeowners cannot depreciate their solar investment. Also grid electricity imposes a carbon cost on society that solar does not. The federal tax credit is available for renewable energy but not fossil. Once we correct for these differences, we find that solar is more attractive than grid electricity, and this result will be of considerable interest.