7.5 Yellowdig Discussion

Domestic Solar Hot Water Financial Analysis

We have covered methods to account for the costs and savings for a generic SECS in the previous pages. In those readings, we introduced the time value of money. So, let's think about the "time value of money" using a spreadsheet. The questions below are to be leading topics that will dig into the coupled meanings of Life Cycle Savings, Solar Savings, Fuel Savings, time value of money, systems payback, and paying back a loan. Some of the questions may be easier than others, but there are not necessarily clear answers to all of them. Also some people in class may have more experience with this type of analysis than others, so it would be beneficial to work together as a group through this discussion.

An example spreadsheet for solar hot water systems in a residential home (Domestic Solar Hot Water, or DSHW) is published as a shared Google spreadsheet. The direct link to access the file is in the middle of this page. This spreadsheet is set up in many columns: each column is representing a separate sequence of years for discrete financial analysis. There are accompanying graphs to link with the data, presenting loan payments and annualized Solar Savings increasing each year. Because the spreadsheet is dynamic, it would be better if you download a copy of the file and try changing things like the discount rate, fuel cost, loan size, and systems size (solar fraction) and see what the response will be.

There are two example systems analyzed in the spreadsheet. The first system has a solar fraction F = 0.65, costing \$16k with a 20% Down Payment and the remainder paid through a back loan at 7% interest. The second system has a solar fraction F = 0.85, costing \$26k with a 20% Down Payment, and the remainder paid through a back loan. Both systems have a potential resale value of 30% of initial investment ($16k), framed in Present Value (a different kind of "PV"). This is a detailed spreadsheet presenting you with an example of discrete financial analysis where we consider the time value of money over 20-year span. Half the battle in developing a useful spreadsheet is figuring out where everything is. Later, we will also dig into the financial output in SAM simulations.

NOTE: You must be logged into Google in order to view this spreadsheet.

Link to Google spreadsheet

Study the spreadsheet and then discuss the following questions in the Yellowdig community.

1. Why is there Time "Zero?" What years do the two systems "pay back?" Why is there an additional financial increase for Year 20 at the end?
2. Look at columns $B$ through $I$ and identify the role that each of the columns serves leading up to Solar Savings and the Cumulative Solar Savings (framed in present worth).
3. Where does one find the market discount rates to estimate present values (seen in Column $Q$ and $R$ of the first sheet), and why is it that we need to consider future values in present worth when we are accounting for the project finance of SECS? What would the special meaning of the rate be if we raised that value from 8% in Column $R$, to a value high enough to drive the LCS to \$0?
4. In the red colored "loan" columns, do you see the connection to the reading regarding the rate of the loan and the annual loan payments? Why is the interest rate listed as a "discount rate"?
5. Which system would seem to be a reasonable investment for a middle-class family of 4 (two incomes, <\$100k annual gross income) living in Michigan, USA? Why?

• A comment: Columns $N$ , $O$ , and $P$ are tied to the use of fuel to heat water (annual loads: $L$ ), the annual Solar Fraction for the installed system (annual solar fraction: $F$ ), and the annual cost of the fuel ($C_F$ as electricity in \$/MWh, or \$0.8/kWh). We are initially guessing a system size, and that 65% of the annual energy will be covered by this array. In mid-continental USA, each person consumes ~8 MWh of energy to heat water per year. Here, we are estimating for a residential family of four.

Deadline

There is no hard deadline for this discussion activity, but it would be good to have some initial relfections posted in the middle of the study week (Sunday), and comments and replies will be due by the end of the point-earning period.