Cost of Waiting

It increases over time, not the other way around.

Take the case of a mid-sized California business in the Bay area, with revenues of $55MM, paying PG&E $550,000 a year in electricity, 1 percent of sales, for 3MW of power, or 18.3 cents a kWh in 2017.  Not unusual for this size customer in PGE territory. And let’s assume the business makes 5% in net profits.

Historically, PG&E’s rates have gone up 6% a year during the last four decades.  It is facing daunting “inverse condemnation” lawsuits from the 2017 Santa Clara fires which created over $4B in claims and killed 44 people.  If the lawsuits succeed, the insurance companies will not be liable for the damages, PGE will. And it will file for bankruptcy again.

Taking 5% as the future average rate increase, and assuming the customer’s usage remains constant, it is easy to graph the cost of waiting.

At roughly $160,000 year one, the cumulative savings equal $1 Million by year 6,  $2 Million by year 10, $3.2 Million by year 15 and over $9 Million

by year 30.  This is money the customer does not have to pay to the utility company any longer and can redirect to the bottom line.

How much would sales revenues have to increase to equal $1 million in profits? $20,000,000!  The business would have to grow 36% in revenues in the next 5 years to generate profit increases equal to the financial benefit of conversion.

The cost of modules keeps going down, true enough, but have reached such lows that the calculus of waiting for better economies of scale no longer pays out. The cost of solar after incentives is so low that the net present value of current savings is greater than the NPV of postponed savings.  

Wholesale module prices have tracked Swanson’s law and dropped 20% every time global volume of shipments doubled. They are now roughly 50 cents per W.  Assume they drop to 40 cents next year. Modules were about 30% of the cost of an installed system in 2017; as their price reaches new lows, the proportion will decrease accordingly as Balance of System costs cannot fall as fast (labor).

The differential for a completely installed system, same size, same components, will be about 2-3% less (barring any political aberrations like tariffs, or temporary Chinese gluts), or 5-7 cents/watt (utility scale). Meaning, the difference in purchase price is less than the savings realized year one.

First year savings cannot be made up by postponing the conversion.We have reached the point where the cost of waiting increases every year.

Which is why so many of the F100’s are converting and pledging to reach 100% renewables by 2030.

The financial costs are the locomotive, they pull along the externalities which do not show in the P&L, but which can be quantified and attributed. They grow darker with time….

In California, every kWh produced and transmitted to a customer via the grid by utility companies creates 0.52 lbs of CO2.  So the commercial customer above not only leaves money on the table by waiting, but also adds 1.5 million pounds of carbon dioxide to the atmosphere every year….

Source: US EIA, “Annual Electric Power Industry Report”  2016 Summary