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Net metering programs serve as an important incentive for consumer investment in renewable energy generation. Net metering enables customers to use their own generation to offset their consumption over a billing period by allowing their electric meters to turn backwards when they generate electricity in excess of the their demand. This offset means that customers receive retail prices for the excess electricity they generate. Without net metering, a second meter is usually installed to measure the electricity that flows back to the provider, with the provider purchasing the power at a rate much lower than the retail rate.
Renewable Portfolio Standards (RPS) are state policies mandating a state to generate a percent of its electricity from renewable sources. Each state has a choice of how to fulfill this mandate using a combination of renewable energy sources, including wind, solar, biomass, geothermal, or other renewable sources. Some RPSs will specify the technology mix, while others leave it up to the market. Choices are critical because states don't have the same renewable resources. For example, Arizona has greater solar resources than Oregon, and North Dakota has greater wind resources than Georgia.
Each state has it's own definition, but in general, an SREC is a tradable instrument that is equal to 1 megawatt-hour of retail electricity sales and is generated by solar electricity. It is typically used to track and verify compliance with a state's Renewable Portfolio Standard.
Key Financial Terms
Simple payback is common economic analysis method and is understood by most business owners. Simple payback is the amount of time it will take to recover installation costs based on annual energy cost savings. The equation for simple payback is annual energy cost savings per year divided by the initial installation cost.
The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative.
The internal rate of return (IRR) is a capital budgeting method used by firms to decide whether they should make long-term investments. The IRR is the annualized effective compounded return rate which can be earned on the invested capital, i.e. the yield on the investment. A project is a good investment proposition if its IRR is greater than the rate of return that could be earned by alternative investments (investing in other projects, buying bonds, even putting the money in a bank account). Thus, the IRR should be compared to an alternative cost of capital including an appropriate risk premium.
For an overview of the financial indicators of solar projects and their strengths and weaknesses, visit http://www.clean-power.com/research/customerPV/BasicEconomics.pdf
Units of Measurement
The kilowatt (symbol: kW) is a unit for measuring power, equal to one thousand watts. A kilowatt is roughly equivalent to 1.34 horsepower. The term kW(dc) typically is used to specify the size of a solar electric system. Most solar electric systems are represented in terms of kW(dc) or just kW. A system with 10 modules producing 200 W (name-plate capacity) is a 2 kW(dc) system.
The kilowatt-hour (symbol kWh) is a unit of energy and is most commonly used on household electricity meters. Power companies sell energy in units of kilowatt-hours. Consider a set-up with one 100 W light bulb (0.1 kW) left on for 10 hours per day. This will consume 1 kilowatt-hour per day (0.1 kW x 10 h). If a power company charges $0.10/kW·h, then this light bulb will cost $0.70 to operate over the course of a week (0.1 kW x 10 h x $0.10/kW·h x 7 days in a week).
A megawatt-hour. A unit of retail electricity equal to 1,000 kWh.
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Definitions