Month: August 2015

Key Considerations to Help Evaluate an On-Farm Solar Energy Proposal

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On-Farm Solar 2015-08-27Agricultural producers are constantly looking for ways to reduce their input cost as a means to stabilize production cost. As energy prices fluctuate and the price of PV (photovoltaic) solar energy continues to fall, more and more farmers are investigating the economics of a PV solar system to generate electricity for their farm. Investing in an on-farm solar system can reduce the amount of electricity a consumer purchases from their electric utility provider, minimizing the impact of future price fluctuations. However, each project is different due to variables such as: energy consumption, energy cost, utility provider, rate schedule and tariffs, system design, components, warranties, and contracts.

Extension educators have a long history of identifying critical issues facing our clientele and providing factual-based information to guide informed decisions. A growing question among many Ohio farmers is, “What is the payback period for a Photovoltaic (PV) solar system on my farm?” Investing in on-farm PV solar typically requires a significant upfront investment that will involve numerous contracts, spanning decades. It is important that anyone considering a PV solar proposal conducts a detailed assessment before signing any paperwork and not fall victim to making a hasty decision.

Below are four tips that will help Extension clientele evaluate a PV solar proposal and the associated impacts of the project to their farm.

Tip # 1 – Understand the details of a proposal:

Proposals for PV solar systems frequently involve numerous contracts and are often difficult to understand. If necessary, ask the developer to put the information in a format that you can understand. The cost of the system (equipment and labor) should be easy to identify and not masked by various tax credits, grants and subsidies to the point it is unclear exactly the project cost. Many PV solar system proposals make it appear as if after all of the financial benefits are assumed, a system can be installed for $5,000 to $10,000 to provide all of the energy for a facility. It is important to remember that although there are financial incentives for renewable energy projects, many of them are in the form of tax credits, depreciation, and energy savings not recognized until after the project is operational. In other words, if the project cost is $100,000, then the owner of the project will need to pay the renewable energy developer $100,000 to install the system.

When reviewing a proposal, make sure to clearly identify the assumptions and/or projection details. Some common assumptions and/or projection details to look for include:

  • What is the factor used to calculate the electricity price escalation?
  • Are competitive grants included in the payback calculation (i.e., a grant that is not guaranteed to be funded)?
  • What inflation rate and discount rate is used?
  • Does the cash flow analysis look at all items on an after-tax basis (e.g., annual electric expense)?
  • Does the analysis include additional cost for insurance?
  • Does the analysis include additional cost operation and maintenance?
  • Does the analysis account for degradation of the panels over time?

Similar to other large capital investments, it is a good idea to secure multiple quotes to identify a company that demonstrates experience in PV solar installations and the local electric utility interconnection process. Green Energy Ohio, a non-profit corporation, has lists of Ohio installers.

Tip #2 – Talk with the utility provider:

Net metering is a billing arrangement allowing customers that produce their own electricity to receive a credit on their electric utility bills for any extra electricity produced by their system that flows back onto the electric utility’s distribution system, and the credit can be used to offset charges in future months. Interconnecting a PV solar system to the distribution grid may present a number of technical issues and challenges that a system owner should discuss with the utility provider before agreeing to install a system.

In addition to the technical challenges, electric bills can be difficult to understand making it hard to evaluate the true impact of a PV solar system on a farmer’s electric bill. In Ohio, a net metering credit is limited to kilowatt-hour (kWh) charges only and will not reimburse system owners for distribution services, transmission services or demand meter charges. In other words, even if a PV solar system generates all of the electricity for a farm, there may still be additional monthly charges that will remain on the system owner’s electric bill. When estimating the electricity savings in a PV solar proposal, it is important to make sure to identify any charges that will remain on the bill and remove them from the equation. It is a good idea to personally contact the local electric utility provider (not communicate through a third party) to review the PV system proposal with them and understand the impact on the electric bill. A list of utility contacts can be found on the Public Utilities Commission of Ohio (PUCO) website.

Tip #3 – Research Solar Renewable Energy Credits:

In 2008 Ohio established alternative portfolio standards that require Ohio’s electric distribution utilities or electric services companies to diversify their electricity generation to include 12½% renewable energy by 2027. Utilities that do not meet the annual benchmarks for renewable generation are subject to compliance payments. However, to comply with the requirement electric distribution utilities or electric services companies can purchase renewable energy credits from other renewable energy producers. Every time a certified renewable energy facility system generates one-megawatt hour of electricity, it also generates one renewable energy credit. A renewable energy credit that is created by solar energy is known as a Solar Renewable Energy Credit (SREC). An electronic database tracks the amount of electricity generated by a solar energy system and the corresponding creation of renewable energy credits. The most common database used to track renewable energy credits in Ohio is the Generation Attribute Tracking System (GATS). There is no assigned value to an SREC, as the prices are influenced by renewable energy policy, supply and demand. For example, in Ohio the GATS solar weighted average price per certificate reached a high price of $471 in 2010 and a low price of $85 in 2015.

The sale of SRECs can generate significant income for system owners, which can help offset the high upfront installation cost. There are a number of different ways a system owner can sell their SRECs. For example, the owner of a system may choose to personally manage the sale of their SRECs as they are generated via a web-based exchange program, enter into an agreement to sell their SRECs to an aggregator or broker, or sell their SRECs directly to the system developer who built their system.

Some PV solar proposals will try to oversimplify the transaction of SRECs by calling it a discount, rebate, payment, allowance or refund. Regardless of what you call an SREC agreement, the value of these agreements is significant, and the terms can extend for 20 years or more. In addition, the sale of an SREC is a taxable transaction and the sale proceeds will be taxed as ordinary income. If a system owner agrees to receive money upfront for the rights to their SRECs, there will typically be a contract associated with the agreement. The complexity of the agreements can vary significantly and it is essential that you receive a copy of the contract before signing any paperwork. Additional information on renewable energy credits is available here.

Tip #4 – Conduct a detailed financial analysis:

It requires a significant capital investment to develop a PV Solar system that should undergo a detailed financial analysis. In many cases, project developers will present a farmer with a summary sheet that shows a simple payback calculation for the project. However, using a simple payback calculation to assess the economic feasibility of a PV solar project has major limitations. The simple payback calculation ignores critical investment factors such as the time value of money, variations in energy prices and alternative investment options. In addition, many of the small details and various assumptions discussed in Tip # 1 above should also be included in a detailed financial analysis.

On-farm PV solar proposals are wide-ranging, complex, and challenging to evaluate in terms of performance and probability. A good practice is to review the proposal with an accountant or financial advisor who can assist in utilizing multiple financial analysis tools (e.g., net present value, Discounted Cash Flow, Internal Rate of Return) to help accurately forecast the future financial performance of a project. In addition, the National Renewable Energy Laboratory of the U.S. Department of Energy has developed cash flow models to help calculate the levelized cost of energy, net present value, payback period, and other financial metrics related to a renewable energy project.

For additional farm-energy resources, please visit go.osu.edu/farmenergy and extension.org/ag_energy.

(Submitted by Eric Romich, Assistant Professor and Extension Field Specialist for Energy Development)

Could America become like Greece?

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Since the financial crisis of 2008, the national debts of many nations throughout the world have skyrocketed. Even though the crisis started in the private sector, the balance sheets of national governments quickly turned negative because of reduced tax revenues and a tendency for governments to “bail out” troubled private sector institutions (mainly banks) that were deemed “too big to fail.” Of all the countries in the world, the one that has received the most scrutiny for a rapid increase in its national debt has been Greece. Most Americans are at least somewhat aware that Greece itself has been “bailed out” by the European Union several times since 2010 because it faced insolvency – a situation where it literally could not service its debt or even pay its operating expenses. These bailouts have come with a lot of tight strings attached that have caused the unemployment rate to rise to 27% and nearly half of all Greek households to fall into poverty. Other countries that have had serious national debt/solvency issues include Ireland, Spain and Portugal.

American Dollar 2015-08-20In the United States, both the Bush and the Obama administrations took actions to fight the crisis in 2008 and 2009. These actions resulted in large increases in America’s national debt also. In early 2008, the Bush administration succeeded in getting tax rebates to households and then a few months later agreed with Congress on the Troubled Asset Relief Program (TARP). Together, these initiatives added nearly $1 trillion to the national debt. Soon after he took office, President Obama signed the stimulus package (American Recovery and Reinvestment Act) that was nearly $800 billion added to the debt on top of that.

These actions, which were necessary to prevent the American economy from falling from recession into depression, came under criticism from certain elements in the American political economy. Moreover, annual budget deficits since 2010 have pushed the national debt up to $18 trillion. The critics argued that the influx of all these moneys into the economy would cause hyperinflation and that the resulting national debt would create an insolvency problem in the United States like the one in Greece.

These critics have been wrong on both accounts. First, the inflation rate since 2008 has been the lowest for any seven year period in the post-World War II era. Obviously, the critics who warned of inflation could not possibly have been more wrong about the results. Second, the comparisons with Greece about debt and insolvency are completely inappropriate because Greece is a member of a monetary union and does not issue its own currency. Greece’s debt is denominated in a currency over which it has no control (the Euro). US debt on the other hand is denominated in a currency that only it can issue (the dollar). The difference between these two positions cannot be overstated. What is ironic is that many of the critics who have been sounding the alarm about the US national debt also prescribe “solutions” which would tie the hands of federal policy makers, and lead to a situation where the US indeed could face the problems Greece does. These two “solutions” are: a balanced budget amendment to the Constitution and a return to the gold standard.

Related to the balanced budget amendment is the “debt ceiling.” Another constraint on what the federal government can do to help when the economy slows down, the debt ceiling was once seen as a relatively harmless rule. But in recent years, the Congress of the United States has come very close to allowing this ad hoc rule to push the American economy to the edge of a default crisis. In other words, the United States nearly defaulted on its debt, not because it could not service it, but because the Congress for a time threatened to refuse to service it. Every dollar the US government owes has been a result of spending and tax laws that the Congress itself has approved. The results of the spending and tax laws have led to an increase in the national debt. Simply choosing a number and arguing that we cannot surpass that even when the legislation for taxation and spending rates has been approved serves no useful economic function. This is because the US government can easily create the money to service the debt it owes. The same holds true for why there is no need for a balanced budget amendment at the federal level. Note that this is not the same for the states, because states do not issue their own currency. Like Greece, they must somehow get their money from taxpayers (or get bailed out by the central government) to make ends meet.

The gold standard is another inappropriate suggestion that we currently hear about today. Essentially, the gold standard robs the federal government of its ability to create money when needed to face a potential crisis. To that extent, it is essentially the equivalent of joining a monetary union like the Eurozone. The Bush tax rebates, the TARP, the stimulus program – none of these could have been adopted without the monetary authority in the US (the Federal Reserve) having the flexibility to finance them by printing money “out of thin air.” And it is because of this flexible monetary policy that the current recovery from the “Great Recession” of 2007-2009 is now in its seventh year. Saying that the United States government might run out of dollars to pay its debt is a bit like saying the scorekeeper at a basketball game might run out of points to award the teams if they keep making more baskets.

And the $18 trillion national debt? There is no need to “pay it off.” The government services the debt by paying bond holders interest. Bond holders can sell their bonds to investors, roll them over, or even sell them back to the government, which can always issue the money to pay for them. Won’t that cause inflation? Not when the economy is operating well below capacity – see paragraph 4 above. So no, the US government cannot face insolvency – unless it chooses to place upon itself counter-productive constraints that serve no useful economic purpose, or like Greece, joins a monetary union that essentially has the same effect.

(Submitted by Thomas W. Blaine, PhD, Associate Professor, Ohio State University Extension)

The Lake Erie Resource

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Lake Erie Resource #1 2015-08-06

In most years there are more fish caught out of Lake Erie for human consumption than all of the other Great Lakes combined! (Photo: Ohio Sea Grant)

Lake Erie is arguably one of the most important lakes in the world. It’s the southernmost, shallowest, and warmest of all the Great Lakes, which makes it the most productive. While power generation is a major use of Lake Erie water, the most important may be that it serves as drinking water for 11 million people. It’s also an unmatched recreational resource for Ohioans as over 30 million people live within a day’s drive.

While fishing is king in the “Walleye Capital of the World,” people come from all over to enjoy boating, beaches, sailing, diving, birding and a variety of other outdoor activities. This amounts to around $11.5 billion and 117,000 jobs annually from the eight Ohio counties bordering Lake Erie. This is more than a quarter of the tourism revenue for the entire state.

In order to keep reaping the benefits of the resource, we need to keep taking care of the resource. With that in mind, Ohio Sea Grant has identified six critical issues that we’re working on to make sure we sustain a healthy Lake Erie.

  1. Sedimentation and dredging: When we get big rain events, we get a lot of dirt flowing into Lake Erie. Shipping lanes get full and need dredged, which comes at a big cost and can stir up toxins that have settled to the bottom.
  2. Phosphorus and nutrient loading: With the sediment comes the phosphorus and other nutrients. It can come from agriculture, urban runoff, combined sewer overflows, over fertilized lawns and a handful of other sources. It’s basically fertilizer for algae.
  3. Harmful algal blooms (HABs): When there’s too much phosphorus and the water gets warm in mid to late summer, we see major blooms of blue green algae, aka cyanobacteria, that can produce very powerful toxins. You shouldn’t swim in the blooms, and definitely don’t ingest it or let your pets drink it. If it gets in drinking water supplies it can be difficult to treat, which was the cause of Toledo’s issues last summer.
  4. Dead zones: As the algae and other living things die and break down at the bottom of the lake, vital oxygen gets used up. Sometimes this can cause pockets of no oxygen where fish and other aquatic life cannot survive.
  5. Aquatic Invasive Species: There are dozens of plants and animals that have been introduced to Lake Erie. They often out-compete our native species. This can cause irreparable damage to the ecosystem and cost millions of dollars to try to combat.
  6. Climate Change: We’ve seen more intense storms more frequently, and warmer temperatures more often. This can make the other issues even worse.
Lake Erie Resource #2 2015-08-06

Put-in-Bay on South Bass Island. (Photo: Ohio Sea Grant)

Despite all of these issues, Lake Erie is still Ohio’s greatest natural resource and a great place to visit no matter how you prefer to enjoy the water. So how can you help keep the critical issues in check?

  • Use phosphate-free lawn care products.
  • Regularly check your septic system. Damaged septic systems can contaminate nearby waters.
  • Reduce the amount of water you send to the water treatment plant. Install low-flow toilets and rain barrels.
  • Plant native plants along shorelines and ditches. These plants can filter out fertilizers and are essentially maintenance-free.

Check out ohioseagrant.osu.edu for more information, or contact me if you have questions. Enjoy the rest of your summer, and I hope to see you up here on Lake Erie!

(Submitted by Tory Gabriel, Fisheries Outreach Coordinator, Ohio Sea Grant College Program)