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A Renewable with Improving Prospects Alberta and Saskatchewan Prime Locations for Solar PV
November, 2007
By David Oxtoby
South of the border, a revolution is beginning to take place. Commercial and industrial property owners are warming to solar power systems, seeing them as an iconic statement of how environmentally friendly a building can be.
From Pasadena to Poughkeepsie, photovoltaic (PV) panels are popping up everywhere. Whether they also start appearing on rooftops in Peterborough and Penticton will depend on a number of factors, including equipment prices, Canadian tax policy and provincial incentives.
The total capacity of grid-connected photovoltaic systems in the U.S. climbed from 50 megawatts (MW) in 2001 to more than 350 MW last year, enough to supply electricity to about 35,000 homes. Property owners are installing solar power systems on rooftops, on walls, on vacant land and even on canopies over parking spaces.
New financing models are emerging, with a number of companies offering to pay the full upfront cost of the systems and then sell the output to building owners or tenants under long-term power purchase agreements (PPAs). In some states, property owners can also sell any excess power back to the local utility under net metering arrangements.
The use of solar power in Canada is growing quickly, with the total installed capacity at the end of 2006 standing at 20.1 MW, up by 31% during the year. However, 93% of this total capacity was still for stand-alone systems, providing power for remote locations or off-grid residences such as cottages, according to a recent report from the International Energy Agency.
Whether solar power starts to be used on Canadian factories, warehouses and big box retailers has relatively little to do with how sunny it is here. It does, instead, have a lot to do with the tax treatment of solar equipment and the level of government incentives available. Simply put, these latter two factors are currently insufficient compared to the tax treatment and incentives available in many U.S. states and European countries.
PRICE POINT MOVEMENT ANTICIPATED
When Canadian property managers pull out their calculators or open their spreadsheets, they face a tricky problem: how to account for a solar power investment in a way that makes economic sense. In most cases, the conclusion today is that paybacks are too long, or internal rates of return too low.
This is true even if they take into account the few incentives that do exist. However, forward-thinking financing structures may be emerging to help get over this hurdle.
Because most solar power equipment is imported, the rising Canadian dollar has been improving project economics. The feeling among some project developers is that equipment prices will need to fall another 30% in Canadian dollar terms before rooftop systems are attractive to commercial and industrial customers from a strictly financial perspective.
Global production of the silicon used to make PV cells, and of the completed panels themselves, is increasing quickly, so a price decline of this magnitude may take place as early as 2009. At the same time, new technologies are coming to market. Among the most promising are solar concentrators that use reflective materials or lenses to focus the sun's rays onto a smaller amount of PV cells, reducing the overall cost per Watt of a new system. Planning a project and securing the necessary permits takes time, so starting now in anticipation of 2009 equipment prices may be a wise strategy.
To date, urban installations in Canada have been few and far between. Most have been built with the help of site-specific subsidies and are viewed as demonstration sites. Examples of these include a 33.5-kilowatt (kW), NRCan-backed installation at a federal office building in Yellowknife, Northwest Territories, and a 20-kW utility-sponsored installation on the roof of a Home Depot store in Woodbridge, Ontario.
A few companies have recently begun to install grid-connected systems to meet corporate sustainability or marketing objectives, or to pick up a potential three points toward LEED (Leadership in Energy and Environmental Design) building certification. Other companies are beginning to take a leadership role in terms of social responsibility, not waiting for an optimal ROI from solar projects but rather opting for this environmentally friendly technology even if the payback is long term.
METEROLOGICAL ASSUMPTIONS
Demonstration sites and early adopters are valuable in validating meteorological assumptions about the amount of sunshine in specific locations, and by demonstrating the performance of equipment in a colder climate.
Projecting energy output for a solar power system is a function of the average amount of sunshine (called "insolation") at the site's location. The Meteorological Service of Canada has measured insolation at 74 different locations since 1950, for various periods ranging from three consecutive years to the full 47. For other locations, the data has been combined with weather data such as temperature records to try to estimate how much sunshine there is in these places.
Today you have to cross your fingers that the algorithms are correct and the sunshine will be as predicted. As more solar power systems are installed and monitored, the risk related to output forecasts will decline.
While most solar power systems are solid state, and require very little maintenance compared to other power generation equipment, Canada's climate does present a few issues of concern for system performance. One of the most basic is how often the system will be covered with snow, and by what amount the snow will reduce annual energy output.
Some installations are not solid state, but rather use tracking systems to keep panels facing the sun. For these, there can be questions about how the trackers will perform in cold weather. Increased experience will help reduce such performance risks.
On the plus side, solar cells actually work more efficiently when they are cold. The output of solar panels is rated at a benchmark 25 degrees Centigrade, and average output increases by 0.4% for each degree below this temperature. For this reason, solar panels in sunny, cold places such as southeast Alberta and southwest Saskatchewan may outperform the same panels located in the Arizona desert.
INCENTIVES UNDERLIE INTERNATIONAL SUCCESS STORIES
Although crystalline silicon PV cells have been in use and have remained fundamentally unchanged for more than 30 years, solar power systems in Canada are still viewed as something of a leading-edge technology. Commercial and industrial solar power systems, unless aggregated, also do not have the scale of utility wind farms. For this reason the cost of capital offered by most financial intermediaries is higher.
A lack of experience in bringing together the government incentives and the project finance, while creating the most efficient corporate structure, can add to a project's overall cost. Experience in Europe and the United States indicates that, over the next few years, familiarity with the technology, increased project aggregation and standardized transactions should help reduce the cost of project finance and put solar power on a more competitive footing with other forms of power generation.
Germany and Japan together account for 85% of global installed capacity. Neither of these countries is particularly sunny, with the number of hours of direct sunshine per year ranging from 900 to 1,200 in most locations. In contrast, Toronto receives an average 1,250 hours of direct sunshine per year, and some places in Western Canada receive up to 1,400 hours.
What makes solar power successful in Germany and Japan - and increasingly in the U.S. - is the range and value of government incentives available. The four most common types of incentives are Investment Tax Credits, Production Tax Credits, Renewable Energy Certificates and Feed-In Tariffs. These are used in varying combinations in many U.S. states and European countries, but hardly at all in Canada.
Ontario is the one Canadian province to implement a significant incentive. It offers a 20-year feed-in tariff for PV electricity at 42 cents per kilowatt-hour (kWh). This rate appears sufficient to spur the construction of large-scale solar parks in rural areas.
For the type of rooftop solar installations that actually offset building loads and reduce the need for new transmission lines, the 42-cent rate presents a challenge. With innovative financing structures, however, successful projects are now possible on certain types of buildings in certain locations.
David Oxtoby is CEO of CarbonFree Technology Inc., a solar power project development company based in Toronto. More information is available at www.carbonfreetechnology.com.
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