EME 810
Solar Resource Assessment and Economics

7.3 Solar Savings and Avoided Fuel Costs


Reading Assignment

  • SECS, Chapter 10 (focus on Solar Savings)
Now, let's dig into the specifics of Life Cycle Costing Analysis (LCCA) and this topic of solar savings and avoided fuel costs. The Solar Savings is referring to the work in 1977 by Beckman, Klein, and Duffie from the University of Wisconsin--Madison.

Solar Savings

When I think about a SECS and the potential solar utility for a client in a given locale, I am familiar with the variable costs (VC) of fuel in a home or a commercial building. I am also familiar that SECSs have a relatively high fixed cost (FC) of the system's initial investment. So, I need a metric that can show me the annualized and cumulative flow of cash as costs and savings (in today's dollars) over the period of analysis.

We see in our reading that earlier solar engineers had developed strategic ways to apply the concepts of Life Cycle Costing Analysis (LCCA) for SECSs. Because solar technologies like PV (photovoltaics) and SHW (solar hot water) tend to substitute for fuels that need to be purchased, the authors recognized a value in specifying SECS financial potential in terms of avoided fuel costs (another FC), otherwise termed fuel savings (FS). The opposite of a "cost" is a "savings" in marginal analysis, right? But saving fuel is only one of at least seven parameters affecting the flows of cash for a system. Annualized cash flows are the sum of costs and savings in a year.

  • The Solar Savings (SS) are the sum of avoided fuel costs (fuel savings) and incremental costs of operation for the SECS that we calculate for a system, typically on an annual basis, then put in today's dollars, and finally summed for a cumulative solar savings. Notice that (in the best scenarios) there are three savings parameters (+) and four cost parameters (-) assessed. Can you describe what each of these parameters is, and how they each function?

SS = FS - incremental mortgage/loan payment

- incremental maintenance/insurance

- incremental parasitic energy costs

- incremental property taxes

+ tax credit incentives

+ production credit incentives

  • The Life Cycle Savings (LCS) are the cumulative solar savings for the period of analysis, framed in today's dollars.

Self-check questions:

1. What are avoided fuel costs?

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ANSWER: Avoided fuel costs are the same thing as fuel savings. They are a marginal change in the use of fuel on site due to a change in local demand (could be from energy efficiency, or could be from a SECS).

2. Are fuel costs considered fixed or variable costs in a project?

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ANSWER: Fuels costs are VC (variable costs).

3. What is the annualized flow of money called in solar analysis?

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ANSWER: Solar savings: the sum of avoided fuel costs (fuel savings) and incremental costs of operation for the SECS.

4. What are the cumulative flows of money called for all the years in the period of analysis?

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ANSWER: The cumulative solar savings for the period of analysis is called the Life Cycle Savings. As the time horizon is long for most solar projects, we must frame the analysis in present worth.

5. What is the difference between an annual avoided fuel cost and an annual solar savings?

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ANSWER: Annualized solar savings are the sum of costs and savings in a year. Avoided fuel costs are also called fuel savings, and are only one parameter of seven in accounting for solar savings.

6. What is an Energy Investment Tax Credit?

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ANSWER: Also called an ITC, the Investment Tax Credit in the USA is one of the most important federal policy mechanisms to support the deployment of solar energy.

7. What are the seven parameters that make up solar savings?

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  • Fuel Savings
  • Incremental Loan Costs
  • Incremental Maintenance and Insurance Costs
  • Incremental Parasitic Energy Costs
  • Incremental Property Taxes (Costs)
  • Tax Incentive (Savings)
  • Production Credit Incentives (Savings)