Solar Power Plant Valuation

A manufacturing factory consulted Inspecro on electricity cost savings. So, we recommended a 77.5 kW solar power plant / PLTS. Then, the Managing Director asked, “Is this project profitable?”

To answer that, we can calculate the present value of future savings:

This might look confusing. But I promise you it will get easy very shortly.

Electricity cost savings. Our engineering study found that the PLTS will produce 123,100 kWh of electricity, every year. Meanwhile, the 2019 PLN Tariff is Rp 1,035 per kWh. By multiplying the two numbers, we knew the factory will save Rp 127 millions, before any increase in PLN tariff.

Savings growth rate. PLN tariff will not stay the same forever, right? Therefore, isn’t it safe to say the PLN tariff will rise? Let us forecast that PLN tariff increases by 5% per year. However, honest installers will also tell you that solar panels degrade by 0.7% per year. Therefore, the “ethical” savings growth rate is 4.3%.

Opportunity cost of capital. What is the return of your next best investment with similar risk? With a 25 years warranty on solar panels, isn’t the risk extremely low? So, the only investment with the same level of safety is 25 years Indonesian Government Bond, right? (It’s hard for a government to go bankrupt.) At the time of this writing, its yield is 8.5% per year. Therefore, your opportunity cost of capital is 8.5%.

Lifetime years. This one is easy. With a 25 years warranty on solar panels, isn’t the lifetime 25 years as well?

Now the fun part, putting the numbers:

We found that the present value of future savings is Rp 1.9 billion. Meanwhile, the investment is Rp 1 billion. This means, literally just by saying yes to the PLTS, wouldn’t the Managing Director be contributing Rp 900 millions of present value profit to his company?

End of Capitalism by Solar Energy and Decentralized Economy

Is capitalism the prevailing economy today? Yes. Will it continue to be that way? Probably not. Put simply, capitalism is an accumulation of capital to derive profits. This is done by matching supply-demand. However, the irony is that by successfully doing this in a long term, capitalism is nearing its own death. How is this so?

Capitalism Paradox

In his New York Times bestseller The Zero Marginal Cost Society, Jeremy Rifkin pointed that our technological advances have allowed extremely efficient industrial productions. Supply is increasing, opening larger demand as a result. Consequently, marginal cost is pushed to near-zero, making goods and products abundant, to the point of almost free or near-zero prices. When this happens, profit plummets. Therefore, capitalism final destiny is its own end.

Advent of the New Economy

Rifkin added that Collaborative Commons is a logical successor to capitalism. It is an economy which sharing goods or services is prioritized over ownership, and decentralized production over the centralized. Some of the technologies assisting these movements include Internet of Things and 3D printing. However, for these technologies to contribute, they need an important component: energy to drive them in decentralized regions.

Decentralized Energy Source

Not just any energy, though. It has to be a form of energy which can be installed in a smaller scale, therefore allowing it to supply electricity to the decentralized Internet of Things and 3D printing.

  • Coal-fired, nuclear, geothermal and hydro energy sources require large scale installations, therefore inappropriate for the decentralized applications.
  • Wind energy sources can be installed in a somewhat smaller scale, but some regions have inadequate wind resources.
  • Solar energy on the other hand, do not possess those difficulties.

Furthermore, solar energy costs have dropped 73% since 2010 to 2017, making solar energy an increasingly attractive option for our upcoming decentralized economy.

References

The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism by Jeremy Rifkin

Renewable Power Generation Costs 2017 by International Renewable Energy Agency (IRENA)

3 Types of Solar Energy Installation

There are three types of solar energy installations:

  1. On-Grid
  2. Off-Grid
  3. Hybrid

How are they different? Let us examine each one.

1. On-Grid System

  • Can be used in parallel with the grid
  • Imagine the grid as a form of battery in this case – surplus of solar energy can be “stored” in the grid,
  • In cloudy days you can withdraw that “stored” energy from the grid.

2. Off-Grid System

  • Used in areas without the grid. Therefore, it requires a (physical) battery as an energy storage.
  • Similar to On-Grid system, surplus of solar energy is stored, but this time in a real battery.
  • The most expensive type of solar installation because of the requirement to get batteries.
  • Battery lifetimes stay only for 8 to 10 years while solar project is usually expected to last for 20 years. This means that the batteries will need to be replaced at least once during the project lifetime.

3. Hybrid System

  • Using diesel generator as backup power.
  • Similar to Off-Grid system, Hybrid system is installed in areas without the grid, therefore it requires batteries as energy storage.
  • However, because there is now a backup diesel generator, the batteries need not be as large as Off-Grid system, meaning lower costs can be achieved. This economics advantage is the reason why Hybrid system is popular in remote areas which are not yet exposed to the grid.