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“What’s the Most Efficient?” Geo VS Solar Thermal VS Solar PV
I’m doing some sales consulting work in NYC, and there’s one question I’m getting a lot from property owners: “What is the most efficient renewable energy technology?”
In the city, they are mainly speaking of solar PV vs solar thermal, because generally there’s not enough room for geothermal in the city. However, for fun, I’ll expand it and include geothermal.
The answer is, of course, it depends on how you’re defining efficient.
Which technology produces the most energy in the least amount of area
Which technology produces the most valuable energy
Which technology has the best financial return. Again, however you’re defining return.
There are two ways that I’m going to frame the discussion to search for an answer, or a methodology for finding an answer:
Efficiency of the technology (is this a good design for this specific application)
Efficiency of cash, which takes into consideration the site characteristics and policy (is this a good investment?)
As always, it’s easiest to see this when we look at a few examples, being clear to highlight when and where the examples might be different in the real world and how said sensitivity might impact our results.
1. Technology Efficiency. Right now, let’s just look at GROSS INSTALLED Costs and raw energy production.
Here’s what I’m going to calculate: Gross Installed cost / Net energy produced in year 1 (energy produced / energy used)
Again, I’ll keep it in residential for simplicity. And I’ll focus on Boston because I’m most familiar with the solar resource available and the average heating degree days needed when understanding geothermal production.
Our example home will be:
1500 square feet
Average home shell construction.
South Facing roof, no shading, 10 pitch, that is 60 feet by 12 feet.
Solar PV: $25,000 / 6,843 kWH produced per year = 3.65, which means that you must invest 3.65 dollars in year 1 to get 1 kWh of production
5kw DC Installed @ $5.00/watt = $25,000
Avg Insolution = 5 hours of full sunlight per day.
We’ll derate from DC to AC is .75, which is extremely conservative.
AC Production = 3.75 AC output
3.75 X 5 hours per day = 18.75 kWh production per day on average.
18.75 X 365 = 6,843 kWH produced per year
$25,000 / 6,843 kWH produced per year = 3.65, which means that you must invest 3.65 dollars in year 1 to get 1 kWh of production
Solar Thermal: $8,000 / 4,982kWh = 1.6. For every $1.6 dollars invested you get 1kWh of production.
3 to 4 family home
Gross Installed Costs for a simple drawback system by a well trained crew is ~$8k
Each Module will likely produce around 85 therms per year, totally 170 therms per year
170 therms is 17,000,000 BTUs / 3,412 = 4,982 kWH equivalent.
$8,000 / 4,982kWh = 1.6
For every $1.6 dollars invested you get 1kWh of production.
Note: For solar thermal, unlike solar PV, production of solar energy and usage of that energy doesn’t necessarily match. For this example, I’ll assume it does.
Geothermal: $27,000 / 13,478 kWh equivalent = 2. You must invest $2 in year 1 to get 1kWh of energy production.
We’ll assume the heat pump is only heating, to make the calculation more simple and keeping in mind that our ratio of dollars invested to energy produced will be a little larger, if we considered cooling.
63 MBTU average heating load
Avg COP of 3.75 (this is important, because lower efficiency will increase the tonnage needed for the same btu’s delivered, all else equal)
3 Ton system
9k ton X 3 tons = 27k
Energy Produced = 63 M BTU –> Let’s convert BTU to kWh equivalant
63 M BTU = 18,463 kWH (Remember that 1kWh = 3,412 BTUs. Thus long calc is 63MBTU = 630 Therms (10 therms = 1MMBTU) 630 therms = 63,000,000 BTUS divide by 3,412 = 18,464)
Many will point out that geothermal uses energy (in pumps and fans) to produce more energy, which is true. However, we want to find out what EXTRA energy that was created by the system, this is the renewable part. With an average COP of 3.75 it means that 3.75 units of energy was created for every equivalivent energy put into the system.
3.75 means we need to reduce the energy produced by 26.66% (1 / 3.75) to find the amount that was produced by the system.
18,464 X 73% = 13,478 kWh equivalent produced
27k installed costs gross / 13,478 kWh = 2 in equivalent energy produced. Which means, that for you must invest $2 in year 1 to get 1kWh of energy
Here is our conclusion about gross installed costs and energy produced:
Solar PV: $25,000 / 6,843 kWH
Solar Thermal: 8,000k / 4,982 kWh
Geothermal: 27k installed costs gross / 13,478 kWh
A few things to note about the sample examples
PV: $5 a watt is average and there are much higher installed costs.
Thermal – Production of modules and usage don’t necessarily match. Also, assumptions around water usage are not accurate. ~8k is also for a great site and a well trained crew. It’s common to see $10k+ projects.
Geothermal – Only assumed it was heating. Assuming 72 set point and 62MMBTU needed to heat the home. 3.75 COP also impact the energy produced from that invested cash. Higher COP = greater output, all else equal, per dollar invested.
As we’ll discuss in section 3, site characteristics can change the analysis of any one of these by making some technologies, cheaper or non-available in certain areas.
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Finance 101 for Renewable Energy Professionals
Understanding finance is required to sell renewable energy projects. It’s needed to communicate the value of both residential and commercial projects, and for all types of technologies: solar PV, solar hot water, and geothermal heat pumps.
The reason financial metrics are important is that all of these technologies are financial investments. Thus, you must be able to communicate the financial value of the system to the client and ‘payback period’ does not do this. I repeat, don’t use ‘payback period’, and we’ll talk about why later.
The key to understanding financial analysis is a small contradiction. The actual financial calculations are not difficult once you have all the numbers. The challenging aspect of financial analysis is that many of the numbers the model depends on are assumptions and projections — things you can’t always nail down. Thus, it’s important to perform sensitivity analysis to see how a few critical variables will impact a project’s returns.
Another challenge is communicating exactly what these numbers mean to a consumer, so they understand it. In order to do this, you need to understand what each term represents and how to explain it in plain language.
I’ve noticed that the information and educational resources on basic financial analysis for the renewable energy industry is lacking. While many PV installers can derate conductors easily, they may not know what the NPV of an array is. Most geothermal contractors can size of a heat pump, but few know that the typical IRR of a system is when it’s replacing an oil boiler. We need to change this.
Let’s Start With the Basic Terms
Below are the basic financial terms you will need to understand to perform financial analysis on any renewable energy project. I’m simply going to discuss what each variable is and how to calculate it, with an example from excel. At the bottom of the article you’ll be able to download the excel file, so you can play with it yourself.
It’s critical to remember that the variables that impact these metrics will change based upon technology and incentives, but the underlying cash flows that create the financial returns will remain the same. NPV is NPV.
Here are the terms will will discuss
Net Present Value (NPV)
Present Value
Future Value
Discount Rate
Internal Rate of Return (IRR)
Sensitivity Analysis
Net Present Value (NPV)
NPV is the most recognized metric used to analyze capital projects. NPV takes every known cash flow in a period, negative and positive, and discounts back to today to see if the project is profitable or not. If a profit has a negative NPV, it should not be completed. If it’s zero, it doesn’t matter if a project is completed or not, from a pure financial perspective. If it’s positive, all else equal, it means the project should be completed.
Unlike ‘payback period’, NPV provides a specific dollar amount that you can use to determine if a project is profitable or not. HOWEVER, NPV analysis can vary widely because it is extremely dependent on the discount rate used. On residential sales in particular, an acceptable discount rate can change greatly depending on the customer.
The analysis can also vary widely due to the confidence one has in the financial assumptions used to create the model. It is key to perform a sensitivity analysis when performing NPV analysis because most times the cash values being used are projections and it cannot be said with 100% confidence the numbers will be exact.
The equation to calculate NPV is to add together the present values of each cash flow for each period for a project. Here is the formula to calculate present value for a single period.
Present Value = Net Cash Flow / (1 + i)^t
i = discount rate
t = time period.
**Note, I’m using “^” meaning to the power of X, or in replacement of a supercript because our publishing software does not allow superscript. This is also the same script that excel will use if you want to raise a integer to a power of X**
If we had 5 periods, we could calculate the present value for each period, then add those numbers together.
What is the net present value of $500 investment, with 5 unequal cash flows, 50, 200, 200, 300, and 300 at a 5% discount rate?
Figure 1: Adding together the present values of 5 future cash flows to determine NPV
A few notes: The cell in C13 is simply summing the values of C6:C11. Each of the values in C6:C11 is calculating the present value of a single cash flow. Notice how $200 in 2 years, is worth more then $200 in year 3? This is because it’s getting discounted by 5% every year.
Present Value (PV):
Present value is the present value, today, of a future cash amount discounted back to today. Net present value is thus, a series of cash flows all discounted back to today’s terms. For example, what is $50 worth today? It’s worth $50. However, if you wanted to find out what $100 in 5 years would be worth today at a 5% interest rate, you’d need to calculate the present value. Here is the equation.
The equation to find present value of a future cash flow is:
PV = FV / (1 + i) ^ n
i = interest rate
n = number of period.
So, what is the present value of $100 payment in 5 years at a discount rate of 5%
PV = $100 / (1 + .05) ^ 5
PV = $100 / 1.28
PV = $78.15
This means that is someone gave you $100 in 5 years, and you have a bank account with a yield of 5%, it would have been the same value of money if they would have given you $78.15 today and you put the money into the bank for 5 years.
Future Value: (FV)
The future value is asking what the future value is of a present day cash amount, given it is accumulating at a specific interest rate. The best way of describing future value is a typical savings accounts.
If you put $50 dollars into a savings account with a 5% interest rate and take it out in 10 years, how much will it be worth?
The equation to calculate future value is
FV = PV (1+i)^n.
FV = the value of a future cash flow today, given x % interest rate.
PV = the present value of the investment
i = the interest rate of the investment
n = number of periods of the investment
FV = $50 (1+.05) ^ 10
(1.05)^10 = 1.63
$50 * 1.63 = $81.44
In other words, $50 today at 5% interest is EQUAL TO be given $81.44 in 10 years
How about a 10% interest rate?
FV = $50 (1 + .10) ^10
FV = $129.69
As you can see, the interest rate used over the term has a huge impact on the value of the investment.
Discount Rate / Interest Rate:
In the calculations of NPV, PV, and FV, you’ve noticed that we’ve been using an interest rate to calculate the value of money in different parts of time. This value is called the discount rate. Sometimes, it’s referred to as the interest rate (for future value), or minimal attractive rate of return (MARR), which we’ll discuss below.
The discount rate can be somewhat confusing to some. There are critical pieces to understand about the discount rate. First, what it does. Second, how you determine it.
In the above examples of calculating PV and FV you noticed I used an interest rate to calculate the value of cash between a certain period in time and another period in time. So, to define it very simply the discount rate is an interest rate that is the difference between a present value and future value of the same dollar amount. The difference between $100 today and in five years is the discount rate.
How one should select the discount rate is a little more difficult. Many times the discount rate is selected based on a few characteristics. None of these is wrong, it simply depends on the circumstances.
A comparable investment or savings rate. If a homeowner could invest the same money in a CD at risk free interest rate of 5.6%, they will likely use 5.6% as a discount rate for other investments. Also, keep in mind that many times a homeowner might add a few percentage points to a different investment that is not risk free to cover the additional risk.
The inflation rate. If I had $100 in cash and stuffed it in a safe (a place that is not getting interest), and took it out in 5 years, it would have lower purchasing power. To understand how the purchasing power changes, we would calculate the FV of $100 in 5 years with the discount rate being the expected rate of inflation.
Risk tolerance. The more risky the investment, the higher discount rate you’d need to satisfy the level or risk. Having a higher discount rate will decrease the time it takes for you re-coup your investment, given the NPV is still positive. When risk tolerance is being used to determine need returns, it’s sometimes referred to as “Minimum Attractive Rate of Return” (MARR), or the “hurdle rate”.
The thing to remember about discount rate is that while it’s use in the financial analysis is extremely clear, determining what exactly to use as a discount rate is extremely subjective or will vary widely between homeowners.
The impact of a different discount rate can be huge when talking about renewable energy projects because an acceptable discount rate between different homeowners can vary widely. Let’s walk through some examples to demonstrate.
CASE STUDY: A Sample Solar Hot Water Customer in Greenfield, MA.
Net Installed Cost After Incentives: $4,000
Displaced Oil : 130 Gallons with 3 Full Time Occupants
Value of Displaced Oil @ 3.00 Gallon = $390
The life of the system will be 20 years.
Maintenance costs are $200 at year 10.
All other equipment failures will be paid by the manufacturer
Here’s the T*Sol estimation for the system production and load.
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Certified GeoExchange Desiger Certification – The CGD – What is it? Who needs it? How to get it?
Certified GeoExchange Designer Certification is the most prestigious credential that exists within the geothermal heat pump industry because few people have it. It’s hard to get because you can’t sit for the exam without some combination of education and experience (these requirements are explained in detail below). It’s also really hard to understand the process […]
“If you can’t install solar at $3.45/watt, you’re going out of business.” Straight Talk on Solar with Jigar Shah at NESEA 2012
Jigar Shah was my favorite presenter at this year’s Building Energy Conference. Mr. Shah founded SunEdison in 2003 and sold it five years later for $200 million. Here are some quotes he offered up in the “Energy Subsidies and the Future of Solar: Where Do We Go From Here?” session:
He outlined a 25kw project in […]
Geothermal Loop Design: Series vs Parallel Flow Path Analysis
When designing geothermal ground loops, this is an issue that a lot of people get hung up on. Because of the advantages of, we use parallel circuits in ground loops almost exclusively in our industry. Read more to hear why.
When loops are tied in series with one another, they will all see the full system flow rate (because there is only one flow path) and the pressure drop through the loops add together. Because there is only one flow path, the pump must overcome the pressure drop through each consecutive loop as the fluid travels through the system from the supply to the return line. The pump will be required to produce the combined pressure drop from the series loops at a shared flow rate.
In a parallel system, the flow through each loop will be the same. We add individual loop flows together to get the combined total system flow rate on the supply-return line back to the heat pump. The amount of pressure required to overcome friction losses through each loop (because they equally share the total system flow) will all be the same. The pump will be required to produce the combined flow rate from the parallel loops at a shared pressure.
To Summarize:
In a series system, the total length of the well pipes would have to be figured in calculating head loss while in a parallel system only one loop needs to be calculated.
Parallel flow: Individual loop flow rate adds at a common pressure drop
Series flow: Individual loop pressure drop adds at a common flow rate
Series system
Advantages include: Single flow path and pipe size, higher thermal performance per foot of pipe, since a larger diameter pipe is required.
Disadvantages include: Larger water or antifreeze volume of larger pipe, higher price per foot of piping material, increased installed labor cost, limited length due to fluid pressure drop and pumping costs.
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