I seem to be on a pessimistic/downward path. It must be because of the weather – panels are not doing anything for a couple of days now. It’s been raining most of the day yesterday, and 3.75 kW installation managed to produce just over 1 kWh/day. Yay, I am up $0.80 for the day. Today looks to be only marginally better.
Yesterday I mused about solar panel production warranty (or rather, lack thereof).
In that post, I discussed SolarWorld’s assertion that panels are guaranteed to degrade no more than 0.7% per year, linearly. In a perfect world, that does not mean degradation will actually occur at that fast a pace, or even at all; but in the physical universe we occupy, degradation seems to be inevitable.
In this post, let me focus on the financial effect of this degradation and throw some numbers at it, to show what it actually means in lost microFIT revenue.
Then, we’ll add inflation into the mix. Oh yes, that “invisible” government hand that steals our wealth while we sleep. It’s often conveniently forgotten in microFIT marketing brochures. Problem is, unlike SolarWorld panel output degradation, inflation is not linear – it is compounding. And if our central bank has its way, inflation should be 3 to 4 times worse then panel output degradation nominally.
Calculate losses from panel output degradation
In this example we consider a hypothetical 16-panel solar array with projected annual income of $3,500. For the sake of example, let’s say that advertised return on investment is 13% per year. Total expected revenue is $70,000 ($3,500 x 20 years). Again, for the sake of example let’s say this system costs $27,000 to install.
Just to highlight panel degradation loss, we are going to forget about AC/DC conversion losses, panel efficiency losses due to less then ideal sun exposure, high temperatures, resistance of the wires, and so on. Let’s assume that there are no other losses.
MicroFIT losses due to panel output degradation
In this table, year 0 is “reference” year, and we don’t count it as profit. This is what 16 panels that just left the factory are supposed to produce (in this example). As per SunWorld, first year can see a 3% initial drop. You can see that year 1 is calculated at 97% (for the sake of simplicity we assume the worst case scenario where output drops by 3% the day you install the panel).
After year 1, we start subtracting 0.7% on a linear scale, dropping to 83.7% by year 20.
You can see that output degradation costs this microFIT owner approximately 10% of total microFIT income. So roughly $6,755.00 is going to take total microFIT income down to $63,245. So this you won’t read in brochures, that 13% return will be more like 0% for two years, only due to inevitable panel output deterioration. Admittedly, the actual drop in output may be less – but we use the numbers that the manufacturer “guarantees”.
But wait! … It gets worse. 
Calculate effect of inflation on your microFIT profits
So degradation deals with the nominal and linear losses – that 10% we likely won’t have in hand.
While inflation does not reduce the nominal amount of money we get from OPA, it erodes its purchasing power over time. Enough has been written about inflation so let’s stop there. I’ll just say that since Bank of Canada’s inflation target is somewhere between 2% and 3% per year, i’ll use the average, 2.5%, and assume that every microFIT year will be inflationary.
I’ll use formulas from Invstopedia to calculate present value of future payments. We multiply nominal future amount by (1 – inflation rate) ^ number of years from now. But, since we are dealing with output degradation, I am going to factor that in as well, by subtracting degradation amount from expected microFIT payment (before calculating present value). Long story short:
Calculating present value of microFIT payments
So in this table we have PV income 1, showing income with panel degradation. In PV income 2 column, we are calculating present value of future microFIT payments. Keep in mind that we invested present value dollars to put this system on our roofs, so it’s only fair to compare apples to apples. These calculations assume, once again, inflation rate of 2.5%. The higher the actual rate becomes in future, the worse off microFIT owners are going to be.
With panel degradation, we lose 10% of microFIT income.
Add inflation, and losses add up to 30%. Now that’s a big chunk of change.
In the next post, we will continue this train of thought to factor in income taxes, talk about how these things affect break-even points, and wrap up with a more realistic look at the actual microFIT return numbers.