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Photovoltaics: A Dispatchable Peak-Shaving Option

Fortnightly Magazine - September 1 1995

(PCS), and array structure (installed), plus $200/Kwh for battery storage. O&M costs include $500 every five years for overhauling the PCS, and $150/Kwh every seven years for battery replacement. Utility carrying charges equal the sum of annual requirements for allowable return, taxes, depreciation, and other overhead costs.

Customer ownership and financing of the PV-DSM system produces a higher benefit-cost ratio. Under this option, the customer would retain all bill savings resulting from operation of the PV-DSM unit. Tax benefits include an accelerated depreciation deduction and a 10-percent renewable energy tax credit (established by the Energy Policy Act of 1992), neither of which is available to utilities. Customer NPV costs

include the capital and O&M costs described above in the utility ownership option. The NPV of O&M costs differs because the customer is assumed to employ a higher discount rate (12 percent) than the utility (7.99 percent). It is also assumed that the customer would not attach carrying charges to this investment. The combined benefits to customers ($84,730) were found to be 76 percent of system costs ($111,040). This result suggests that the economics of system costs ($111,040). This result suggests that the economics of PV-DSM are more favorable for customer-owners, mostly due to the special tax benefits.

Utility-Customer Partnership

To speed penetration of PV into the DSM market, a utility-customer partnership may be needed. In such an arrangement, a utility, or its unregulated subsidiary, would act as the financing agent because most large commercial customers would be unwilling to devote a large amount of upfront cash to purchase a

PV-DSM system. Furthermore, a utility's cost of capital is likely to be significantly lower than that of its commercial customers. Thus, commercial customers investing in a PV-DSM system would have access to the necessary funds, at a lower interest rate.

Commercial customers would then use their bill savings and tax benefits to repay the utility's loan. This arrangement is similar to the shared-savings programs currently used by utilities to fund investments to improve end-use efficiency. Under these programs, the customer contracts with the utility, or energy service company (ESCo), and forfeits a portion of

its bill savings to pay for the

investment.

Table 2 illustrates three economic scenarios based on the proposed partnership arrangement. In the first, we assumed that the utility would make funds available to the customer to invest in the PV-DSM system. The customer would be charged an interest rate equal to the utility's after-tax weighted cost of capital. In addition, the utility would be paid 3 percent of the loan to cover any administrative expenses that the utility might incur in making the loan. The customer would use its electric bill savings and tax benefits to repay the loan. In this partnership case, the benefits of the system cover 85 percent of its costs (em 9 percentage points higher than the

customer-owned and operated system. This first calculation was based solely on traditional benefits.

If a system is sited in an area with a particularly high cost of service, the utility may receive nontraditional benefits, as the second scenario