Case Study #9: Solar Water Heating (modified from the RETScreen Policy Toolkit)
In order to inform government policy, you would like to determine the level of capital cost incentive that would be necessary to stimulate interest in solar hot water systems in the State of Virginia.
Charlottesville can be considered representative of climatic conditions around the state for the purposes of this exercise. An apartment building is the subject of this case study. It has 15 units and an occupancy rate of 95%. The roof is flat, with an area of 130 ft by 100 ft available for the collector. All of the solar equipment can be housed in the mechanical room of the building. The water is presently heated to 140°F by two heating oil (#6) water heaters.
An evacuated tube collector will be used. The installed cost for systems of this size is approximately $70 per ft2 of collector. It will be sized to satisfy roughly 50% of the annual hot water requirement of the building; oil-fired heaters will provide the remaining hot water when there is insufficient sunshine. Storage capacity of 1.85 gallons per ft2 of solar collector and an 80% efficient heat exchanger can be assumed. The circulation pump can be assumed to require 0.5 W of electricity per ft2 of collector. Miscellaneous losses of 2% in the collector and 5% in the balance of system are estimated.
The solar water heating system is assumed to last 20 years. Operations & maintenance costs are limited to an annual inspection (requiring about one hour) and replacement of the water/glycol mixture every 7 to 10 years. In total, average maintenance costs are estimated at $300 per year.
Typical financial figures for the analysis are assumed to be inflation (on maintenance and fuel costs) of 3%; debt ratio of 70%; debt interest rate of 7%; and a debt term of 15 years.
The owners of the apartment building currently pay about $0.10/kWh for electricity and $3.50 per gallon for heating oil (#6); these prices are expected to escalate at a rate of approximately 3% annually.
1) Assume it is determined that a pre-tax IRR on equity of 20% is required to stimulate significant interest in this technology. What would the capital cost incentive have to be to achieve this IRR?
2) Is a 20% IRR attractive? Would you say that the simple payback period for this project is attractive?
3) Can you use goal seek to find the capital cost incentive that would be required to achieve a, say, 16% pre-tax IRR? (Hint: in Excel, make sure that the maximum change for iterative calculation—found under File-Options-Formulas in Excel 2010—is set to very small number, e.g., 0.001)