The first and key qualifier for the vast majority of behind-the-meter renewable energy projects is: how much is the current utility $/kWh cost (avoided cost), and what will be the“installed cost of energy’ (equivalent $/kWh)?
Asking for a PPA without knowing the avoided cost is like trying to sell somebody shoes without asking their foot size.
No matter the scale of your solar project, but especially if it is small-to-mid C&I, “avoided cost vs installed cost” ratio is the very first thing investors will want to know.
A rule of thumb to keep in mind:
The smaller the project, the higher the avoided cost needs to be, and the wider the margin between your installed cost and the avoided cost.
Why? Because the investor has fixed costs to get into the deal (underwriting, legal, insurance etc), generally has a higher cost of capital, a high maintenance cost per kW, a more volatile tariff risk, and a small margin for the risk. So the investor will need to mark-up the power more to make sense of the investment.
Example: if we have a current avoided cost of 26 cents (per kWh), and we have a proposed install cost of 18cents, we have a 1.44 Avoided Cost/Installed Cost ratio.
Our observation at CleanFi is that for most sub-200kW PPA’s, as a rule of thumb you’ll want to present a 1.4 ratio or better. As the size of the system goes up, PPA investors are more comfortable with a ratio that reaches progressively closer to 1.25.
Calculating the avoided cost:
Once you have the 1st year annual production for the system, and you have the annual savings from the system, divide savings by production, and there’s your avoided $/kWh.
Calculating the “installed cost of energy”:
For PPA purposes, a quick and dirty way to figure this out at “present value” (or cash basis) is to take the fully installed cost of your system, and divide that by the total anticipated number of kWh’s the system will produce over 20 years, inclusive of your system de-rate. We’ve made it easy for your with this instant calculator:
>>>> Download your Installed Cost of Energy Calculator Here
Can I deduct ITC+Adders and Grants in the “installed cost of energy”
Yes! But you need to be able to back up what you are claiming. If you are claiming a Low Income Adder to the ITC, you should have an IRS confirmation letter. If you say a project is eligible for a grant but have not yet written that grant, then just allude to the eligibility and don’t deduct it from the cost.
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