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How Does a Photovoltaic System Produce Electricity?

Posted by Christian Brown on Dec 3, 2019 4:30:00 PM

As a solar professional, it’s important to be able to explain the process of how a solar photovoltaic system produces electricity. This process seems mysterious to many and misconceptions abound among those unfamiliar with solar energy. In this article, we get back to basics with an overview of how solar installations provide electricity and how the process works for the customer. 

How Does a Solar Photovoltaic System Work?

Solar panels convert the energy of photons (light particles) into electricity (as we discuss in The Beginner's Guide to Solar Energy). This process is called the photovoltaic effect. When a photon hits a photovoltaic (PV) device, its energy is transferred from the photon to the local electrons in the material. These excited electrons begin to flow, producing an electric current.

Solar cells (within solar panels) produce direct current (DC) electricity, which is typically converted to alternating current (AC) electricity by an inverter. This allows it to be sent back to the electric grid, which operates with AC electricity, as well as used to power appliances in the customer’s home (or commercial building, in the case of commercial solar installations). In summary, the process of how solar panels works involves three primary steps:

  1. Solar cells within solar panels absorb light from the sun, which causes electric current to begin flowing. 
  2. An inverter converts DC electricity to AC electricity. 
  3. This electricity is used to supply current energy demands in the customer’s building and excess electricity beyond what the customer can use is exported to the grid. 

What Happens with the Energy a PV System Produces?

Most solar customers in the U.S. have grid-connected solar installations. Their home is connected to the electric grid, which allows them to use energy supplied by their electric utility when they need more than their solar installation is producing (such as on a rainy day or at night). It also means that whenever their PV system is producing more than they need, that excess energy can be sent to the grid for others to use. 

A policy called net metering, common throughout the U.S., compensates solar customers for this excess energy, so that they can offset the cost of future electricity they use from the grid.

Net metering has played a significant role in making solar energy cost-effective. However, around the country, we are beginning to see some changes in how utility companies implement net metering, many of which reduce the value that solar customers receive from their solar installations. 

Feed-in tariffs are another way of compensating solar customers for the electricity they send to the grid in some areas. 

What are the Parts of a Photovoltaic System?

A simple PV system contains two basic types of components:

  • Solar Modules: Solar modules contain solar cells that convert sunlight into electricity.
  • Inverter(s): An inverter converts DC current to AC current. It can also perform other functions that are beneficial to the electricity grid (see our article on smart inverters, which are now required in California). 

Diagram of a simple PV system from Aurora Solar softwareDiagram of a simple PV system. Source: Aurora Solar.

It is common practice to refer to all components of a PV system besides the modules as balance of system (BOS) components. Examples of BOS components include inverters, disconnects, racking, and wiring.

Of course, this is just a basic overview of the parts of a solar installation and how they fit together. Explore some of our related articles for a deeper dive into the ways that solar panels and inverters can be wired together (stringing) and some alternatives to traditional inverters, known as module-level power electronics (MLPE)

Aurora solar gives companies the tools to design and sell commercial AND  residential solar projects more efficiently and accurately! See what our  customers are saying.

What Factors Affect Solar PV System Efficiency

It is important to note that the process of producing electricity from solar energy is not 100% efficient. Environmental factors—such as temperature, soiling, and shading—as well as losses in the electrical components, can affect the efficiency of a PV system (for a deep dive on these losses see our PV System Losses Series). Typical loss categories include:

  • Temperature: Solar panel efficiency varies with temperature. High temperatures have a negative impact on performance.
  • Soiling: Material that accumulates on the surface of PV panels can block light from reaching the solar cells, thereby reducing the generated power. The power loss due to soiling is highly variable, depending on the type of soiling (such as dust or snow), and how frequently the panel is cleaned.

Soiling, such as dust, on PV modules reduces power outputSoiling, such as dust, on PV modules reduces power output.

  • Shading: Shading is the obstruction of irradiance due to trees, buildings, terrain, and other objects in the environment. The effect of shading on the power output of a solar installation is highly variable. (To learn more about  the causes and consequences of shading, this article and this section of our PV system losses series are great resources.)
  • Wiring and connections: Resistance in the electrical connections of a solar installation typically results in energy losses of a few percent.
  • Mismatch: Due to manufacturing variations, modules of the same type can have slightly different electrical characteristics. This mismatch between modules can lead to a performance loss.
  • Inverter Efficiency: Converting DC into AC current via an inverter is typically around 96-97% efficient. Inverters typically have higher efficiency when the DC input power is high. The conversion efficiency takes a big hit when the input power is much less than the inverter's rated power.
  • Age: Solar panels produce less energy the older they get. Typically the decrease in performance is assumed to be around 0.5% per year.
Term Typical Value
Temperature -0.5%/°C above 25°C
Inverter Efficiency 96.5%
Mismatch 98%
Wiring/Connections 98%
Soiling 95% (highly variable)
Age -0.5%/year
Shading Highly environment-dependent
Typical solar efficiency values for different PV system loss types. 

The above factors are combined in a coefficient called the system derate factor to represent the overall losses of a solar installation. For instance, PVWatts, an NREL supported PV system energy production calculator, uses a default system derate factor of 86%. 

However, depending on the system design or environmental conditions, this value can be higher or lower. Advanced solar design software like Aurora can ensure that you accurately determine PV system losses and how much energy your PV system will produce. 

Sign up for a demo to learn more about these features and see them in action.

Solar panel (module) efficiency denotes what portion of irradiance a module converts into electricity under standard test conditions (STC; irradiance of 1000W/m2, ambient temperature of 25°C). As a general rule of thumb, you can estimate a PV system’s efficiency in converting irradiance into electricity (under STC) using the following formula:

$$\text{Overall System Efficiency} = \text{Module Efficiency} \times \text{Derate Factor}$$


It is important to note that these are merely back-of-the-envelope calculations. To get a comprehensive energy production analysis, you need a software application, such as Aurora, that incorporates all of a PV system’s environmental, mechanical, and electrical characteristics.


About Solar PV Education 101

How a Photovoltaic System Produces Electricity is part of Solar PV Education 101, a six-article series that serves as an introductory primer on the fundamentals of solar PV for beginners.

Article 1: The Beginner's Guide to Solar Energy
Article 2: How a Photovoltaic System Produces Electricity
Article 3: Reading Your Electricity Bill: A Beginner’s Guide
Article 4: How to Size a PV System from an Electricity Bill
Article 5: Shade Losses for PV Systems, and Techniques to Mitigate Them
Article 6: The Basic Principles that Guide PV System Costs

Editor's Note: This article was originally published on October 7, 2016. It was updated in December 2019 for freshness, accuracy, and comprehensiveness.

Topics: Solar PV Education 101, photovoltaic system, Solar Primer, PV system, components, solar cells, modules, arrays, efficiency, derating

The Beginner’s Guide to Solar Energy

Posted by Christian Brown on Oct 7, 2016 8:05:00 AM

Solar Industry Growth and Affordability

Solar is playing an increasingly important role in the transition to a world powered by renewable energy. Over the past decade, the number of solar installations has grown at an accelerating rate and with increasing affordability. In the first quarter of 2016, over 29 GW of solar was installed in the United States.

Figure 1 illustrates the correlation of the increasing number of installations with the decreasing costs. It shows that the price of a solar installation is now less than a third of what it was in 2009, while annual installations have grown more than tenfold during the same period of time.

Annual solar installations in the US are accelerating as price decreasesFigure 1. Annual solar installations in the US are accelerating as price decreases. Source: SEIA

SEIA states that the solar industry is a powerful engine for economic growth. The US solar industry currently employs over 200,000 people, twice as many as in 2010 and now employs more people than the coal, or the oil and gas industries. As installed capacity continues to increase, SEIA predicts that the solar workforce will expand to 420,000 by 2020.

Graph of solar workers vs. gas and coal from 2010 to 2016Figure 3. The solar industry now employs more workers than coal mining and petroleum extraction. Source: SEIA

Solar Energy, Power, and Irradiance

Solar panels convert the energy of photons, or light particles, from the sun into electricity. Photovoltaic devices, such as solar panels, permit the incoming photons to transfer their energy to electrons. These energized electrons begin to flow, creating an electric current. We use the terms irradiance or insolation to refer to the power density of sunlight on a surface.

Basic schematic of a PV arrayFigure 4. Basic schematic of a PV array. Source: clean-energy-ideas.com

We typically measure energy in kilowatt-hours (kWh), and power (the rate at which energy is produced) in kilowatts (kW).

$$\text{Energy} = \text{Power }\cdot \text{Time} = 1\mathrm{kW} \cdot 1 \mathrm{hour} = 1\mathrm{kWh}$$

In solar, we usually define the size of a solar installation in terms of its power (in kW).

Irradiance is typically reported in units of kilowatt-hours per meter squared per day (kWh/m2-d). The amount of irradiance hitting the surface of the earth is often quoted in terms of the number of hours of “full-sun” of solar energy. A "full-sun" is defined as 1 kW/m2.

Quantity Units Definition
Power kW Rate of energy production/output
Energy kWh Capacity to do work
Irradiance kWh/m2-d Hours of full-sun for a square meter each day
Table 1. Important quantities used for solar energy

Solar Resource of a Rooftop

We can estimate the solar potential of a rooftop using its area and the local irradiance. NREL, the National Renewable Energy Laboratory, publishes irradiance data in its report Solar Radiation Data Manual for Flat-Plate and Concentrating Collectors.

Annual irradiance values on a roof plane in Palo AltoFigure 5. Annual irradiance value for a 150m2 roof plane in Palo Alto. Source: Aurora Solar

It is fairly straightforward to calculate rooftop solar potential of a rooftop using this data. For example, a south-facing roof plane of a home in Palo Alto, CA (Figure 5) receives an average irradiance of approximately 1,900 kWh/m2/year. Dividing the annual irradiance value by the number of days in a year yields the average daily irradiance.

$$\text{Average Daily Irradiance} = \frac{\text{Annual Irradiance}}{\text{days/year}} = \frac{1900 \mathrm{kWh/m^2year}}{365 \mathrm{days/year}} = \mathrm{5.2 \mathrm{ kWh/m^2day}} $$

To calculate the amount of solar energy available on a roof face, multiply its area by the average irradiance value.

$$\text{Rooftop Energy}\mathrm{[\frac{kWh}{day}]} = \text{Irradiance}\mathrm{[\frac{kWh}{m^2 \cdot day}]} \times \text{Area}\mathrm{[m^2]}$$

If the rooftop has an area of approximately 150m2, the solar energy available on the rooftop is as follows.

$$\text{Rooftop Energy} = 5.2 \frac{\mathrm{kWh}}{\mathrm{m^2}\cdot\mathrm{day}} \times 150\mathrm{m^2} = 780 \mathrm{\frac{kWh}{day}}$$

Besides the solar irradiance, Figure 5 also displays information on three additional quantities related to the solar resource: Solar Access, TOF, and TSRF:

Solar Access: This is the ratio of the actual solar energy available — taking into account shading cast by objects in the environment — to the solar energy that would be available in the absence of shading. You can learn more about the effects of shading on PV systems here.

$$\text{Solar Access} = \frac{\text{Energy with Shade}}{\text{Energy without shade}}$$

TOF (Tilt and Orientation Factor): This is the ratio of the amount of solar energy a location receives to the amount it would receive if the orientation of the roof were optimal.
$$\text{TOF} = \frac{\text{Energy with actual tilt and orientation}}{\text{Energy with optimal tilt and orientation}}$$

TSRF (Total Solar Resource Factor): This is the percentage of the available solar resource that a location receives as compared to what it would receive with optimal orientation and without shading. TSRF is equivalent to the Solar Access multiplied by the Tilt and Orientation Factor.
$$\text{TSRF} = \text{Solar Access}\times \text{TOF}$$

About Solar PV Education 101

The Beginner's Guide to Solar Energy is part of Solar PV Education 101, a six-article series that serves as an introductory primer on the fundamentals of solar PV for beginners.

Article 1: The Beginner's Guide to Solar Energy
Article 2: How a Photovoltaic System Produces Electricity
Article 3: Reading Your Electricity Bill: A Beginner’s Guide
Article 4: How to Size a PV System from an Electricity Bill
Article 5: Shade Losses for PV Systems, and Techniques to Mitigate Them
Article 6: The Basic Principles that Guide PV System Costs

Topics: Solar PV Education 101, trends, energy, power, solar energy, Solar Primer, pv, irradiance, insolation

How to Size a PV System from an Electricity Bill

Posted by Christian Brown on Oct 7, 2016 8:02:00 AM

Sizing a PV System from an Electricity Bill

An electricity bill typically reveals information about a residential or commercial customer’s total monthly energy consumption (as we discussed in the previous article in this series, Reading Your Electricity Bill: A Beginner’s Guide). From this value alone, it is possible to approximate the required size of a PV system that offsets monthly energy usage.

Take a hypothetical monthly energy consumption of 500 kilowatt-hours, which is on the lower end for a household in California. Assuming there are 30 days in a month, an average daily energy use value can be reached by dividing the monthly use by 30.

$$\text{Daily Energy Use} = \frac{\text{Monthly Energy Use}}{\text{Days in Month}} = \frac{500 \mathrm{kWh/mo}}{30 \mathrm{days/mo}} = 16.7 kWh/day$$

Next, insolation values are needed. As mentioned in The Beginner’s Guide to Solar Energy, insolation values are reported in kWh/m2-day. Since a “full-sun’s” worth of incoming solar energy is approximated as 1 kW/m2, insolation values reported in kWh/m2-day approximate the hours of full-sun equivalent that a location receives over the course of a day.

Representation of full-sun insolation by comparing two daily solar insolation curves Figure1. Visualization of how total solar insolation received over the course of a day (left) can be represented by number of full-sun hours (right). Source: pveducation.org

For a Palo Alto home, the average daily irradiance value is 5.2 kWh/m2-day. By dividing the daily energy usage by hours a day of full sun, the power output required by the PV system is calculated.

$$\text{Power Output} = \frac{\text{Daily Energy Use}}{\text{Daily hours of full sun}} = \frac{16.7 \mathrm{kWh/day}}{5.2 \mathrm{hours/day}} = 3.21 \mathrm{kW}$$

Palo Alto home used for this PV system sizing exercise Figure 2. The Palo Alto home used for this PV system sizing exercise. Source: Aurora Solar

This would be the size of the PV system required, if our system was 100% efficient. However, that is not the case because all PV systems have a corresponding derating factor that takes into account the inefficiencies of the overall system, such as soiling of the panels and imperfect electrical connections.

According to the National Renewable Energy Laboratory’s PVWatts calculator, a typical derate factor is 0.84. For the sake of this calculation, we assume the derate factor be 80%, or 0.8. In order to determine the size of the PV system, divide the required power output by the derate factor.

$$ \text{PV System Size} = \frac{\text{Power Output}}{\text{Derate Factor}} = \frac{3.21 \mathrm{kW}}{0.8} = 4.01\mathrm{kW} $$

From this analysis, the approximate size of a PV system required to completely offset the average monthly energy usage of a 500 kWh/month home in Palo Alto would be about 4 kW.

Comparing the PV Size Estimation to a Simulated Result

Since this is a rough estimate, how does it compare against an actual, comprehensive design for a home with the same characteristics?

Using the same conditions as above, a PV system design software found that the required system size to be 4 kW, which is almost identical to the answer from the estimation conducted above.

Although the answers are very close, it’s important to note that this may not always be the case. For instance, when there is shading on the panels, a significant reduction in power output can occur. Although a shading term is included when calculating a derate factor, it can fail to accurately capture the effect that shading has on a PV system’s power output. Therefore, expect the results to be less close when modeling a location with shading.

About Solar PV Education 101

How to Size a PV System from an Electricity Bill is part of Solar PV Education 101, a six-article series that serves as an introductory primer on the fundamentals of solar PV for beginners.

Article 1: The Beginner's Guide to Solar Energy
Article 2: How a Photovoltaic System Produces Electricity
Article 3: Reading Your Electricity Bill: A Beginner’s Guide
Article 4: How to Size a PV System from an Electricity Bill
Article 5: Shade Losses for PV Systems, and Techniques to Mitigate Them
Article 6: The Basic Principles that Guide PV System Costs

Topics: Solar PV Education 101, Solar Utility Bill, PV System Sizing, offset, Solar Primer, Full-sun, electricity bill

Shade Losses in PV Systems, and Techniques to Mitigate Them

Posted by Christian Brown on Oct 7, 2016 8:01:00 AM

Effects of Shade on PV Output

Since PV systems generate electricity based on the amount of sunlight they receive, it makes sense that when a shadow is cast on a panel, for example by a nearby tree, its power output decreases. However, the decrease in power could be a lot worse than it initially seems.

Solar panels with shadeFigure 1. Solar panels in partial shade. Source: lowcarbonlivingblog.wordpress.com

Intuition suggests that power output of the panel will be reduced proportionally to the area that is shaded. However, this is not the case. In his book Renewable Energy and Efficient Electric Power Systems Stanford University’s Gil Masters demonstrates how shading just one out of 36 cells in a small solar module can reduce power output by over 75%.

Waterflow Analogy

To conceptualize why shading results in such severe losses, it is helpful to use the analogy of water flowing in pipes. The flow rate of water through the pipe is constant, much like the current through a cell string is constant for a given irradiance level.

Current in Panels as Water in PipeFigure 2. Analogy of a water pipe to a string of solar cells.

Shading a solar cell is similar to introducing a clog in a pipe of water. The clog in the pipe restricts the flow of water through the entire pipe. Similarly, when a solar cell is shaded, the current through the entire string is reduced.

Shaded Cell as Clog in PipeFigure 3. A shaded solar cell is similar to a clog in a water pipe.

This is significant because every cell in the cell string has to operate at the current set by the shaded cell. This prevents the unshaded cells from operating at maximum power. Therefore, only a small amount of shading can have a dramatic effect on the power output of a solar panel.

Similar principles apply to PV modules connected together. The current flowing through an entire string of modules can be heavily reduced if even just a single module is shaded, leading to potentially significant loss of power output.

Approaches to Reduce Shading Losses

Fortunately, there are a number of different approaches that can be applied in PV system design to reduce shading losses. These include the use of different stringing arrangements, bypass diodes, and module level power electronics (MLPEs).

Stringing Arrangements

Modules connected in series form strings, and strings can be connected in parallel to an inverter. The current through all the modules of a string has to be the same, and the voltage of parallel strings has to be the same. As we saw in the last section, a shaded module in a string can bring down the power output of the string significantly. However, a shaded module in one string does not reduce the power output of a parallel string. Therefore, by grouping shaded modules into separate strings, the overall power output of the array can be maximized.

For example, in a commercial system with parapet walls, it can be beneficial to group modules that receive shade from the parapets into strings, and keep modules that do not receive shade from the parapets in separate, parallel strings. This way the unshaded strings can maintain a higher current and power output.

Stringing in Series vs. Parallel DiagramFigure 4. PV arrays with modules connected in series (left) and in parallel (right).

Bypass Diodes

Bypass diodes are devices within a module that allow the current to “skip over” shaded regions of the module. By utilizing bypass diodes, the higher current of the unshaded cell strings can flow around the shaded cell string. However, this comes at the expense of losing the output of the cells that are skipped over.
Although it would be theoretically ideal to have a bypass diode for each solar cell, for cost reasons a typical solar module will have three bypass diodes, effectively grouping the cells into three series cell strings (Figure 5). For instance, a 60-cell module will typically have one bypass diode for every 20 cells.

PV module containing three cell strings in series, each with a parallel bypass diode. Figure 5. PV module containing three cell strings in series, each with a parallel bypass diode.

Module Level Power Electronics (MLPEs)

MLPEs are devices that are attached to individual modules in order to increase performance under shaded conditions (though there are other benefits, such as mismatch mitigation and module-level monitoring). This is done by performing maximum power point tracking at the module level. MLPEs include DC optimizers and microinverters.

DC Optimizers:

A DC optimizer adjusts its output voltage and current to maintain maximum power without compromising the performance of other modules.

For instance, when a shaded module produces electricity with a lower current, the DC optimizer will boost the current at its output to match the current flowing through the unshaded modules; to compensate, the optimizer reduces its output voltage by the same amount it boosts the current. This allows the shaded module to produce the same amount of electrical power without impeding the output of other modules. A system utilizing DC optimizers still needs an inverter to convert electricity from DC to AC.

Microinverters:

As opposed to having a single inverter servicing all of the panels, each panel can have a small inverter attached to it to convert its output from direct current (DC) to alternating current (AC). Since each microinverter has an MPPT, and their outputs are connected in parallel, each panel will operate at its maximum power point, without impacting other panels.

Simple schematics of PV systems utilizing MLPEs Figure 6. Simplified schematic of a PV system utilizing microinverters (top) and a PV system utilizing DC optimizers (bottom).

Effects of MLPEs on PV System Performance

Using Aurora’s simulation engine, we compared the performance of three different PV systems subject to significant shading. As shown in Figure 7, we placed a 3.12 kW system near the edge of a roof, which has tall trees next to it. Note that while this design effectively showcases the performance difference of these system topologies in shaded conditions, it is not an optimal—or even a practical — design. Our findings are summarized in Table 1.

The Palo Alto home used for MLPE performance simulations Figure 7. The system analyzed for this case study featured a 3.12 kW system that is partially shaded by trees.

Table 1. Results from performance simulations of PV system on a Palo Alto home utilizing different MLPE components. The difference between the two MLPE outputs is attributed to the differences in their inverters' efficiencies. Source: Aurora Solar.

System Topology Annual Yield Improvement with MLPEs
String Inverter 2,585 kWh/year N/A
Microinverters 3,033 kWh/year +17.3%
DC Optimizers 3,035 kWh/year +17.3%

Our results show that using MLPEs under these conditions increases system output by 17.3% annually, showing the benefit of using these components for shade mitigation. Additionally, the effective yield of a system using a microinverter or a DC optimizer is approximately the same, although there could be small differences (on the order of 1%) in some cases due to differences in efficiency curves.

For the same reason that they can mitigate shade losses by decoupling module output, MLPEs can eliminate module-to-module mismatch losses. These losses are typically caused by manufacturing variations that lead to slight differences in the electrical characteristics of two modules of the same type. Since MLPEs allow the modules to operate independently from one another, these variations will not impact the system’s overall performance.

About Solar PV Education 101

Article 5: Shade Losses for PV Systems, and Techniques to Mitigate Them is part of Solar PV Education 101, a six-article series that serves as an introductory primer on the fundamentals of solar PV for beginners.

Article 1: The Beginner's Guide to Solar Energy
Article 2: How a Photovoltaic System Produces Electricity
Article 3: Reading Your Electricity Bill: A Beginner’s Guide
Article 4: How to Size a PV System from an Electricity Bill
Article 5: Shade Losses for PV Systems, and Techniques to Mitigate Them
Article 6: The Basic Principles that Guide PV System Costs

Topics: Solar PV Education 101, Solar Primer, pv, shading, shading losses, electric current, bypass diodes, MLPEs, microinverters, DC optimizers

The Basic Principles that Guide PV System Costs

Posted by Christian Brown on Oct 7, 2016 8:00:00 AM

Costs Associated with a PV System

In order to determine financial returns, it is important to have a solid understanding of the basic economics that dictate PV system costs. There are two general categories of PV systems costs: capital costs and operation and management (O&M) costs.

Capital Costs

Capital costs refer to the fixed, one-time costs of designing and installing the system. Capital costs are categorized into hard costs and soft costs.

Hard costs are the costs of the equipment, including modules, inverters, and BOS components, as well as installation-related labor.

Soft costs include intangible costs such as permitting, taxes, customer acquisition costs, etc.

Cost breakdown of PV systems Figure 1. Cost breakdown of PV systems. Source: B. Fiedman, et al, "Benchmarking Non-hardware BoS Costs for US PV Systems, Using a Bottoms-Up Approach and Installer Survey," National Renewable Energy Laboratory, Second Edition, December 2013.

Figure 1 illustrates the relationship between soft and hard costs, and breaks down hard costs into its components. According to SEIA, while hard costs have come down dramatically over the last decade, soft costs have remained largely constant.

Operation and Management Costs

O&M costs refer to costs that are associated with running and maintaining the system. These can include fuel, repairs, and operation personnel. PV systems generally have low O&M costs.

Incentives and Policies that Benefit Solar Energy

The high capital costs are one of the biggest factors that discourage people from going solar. To combat this, there are a number of incentives and policies in place to make PV systems financially competitive.

Cost-Based Incentives

Cost based incentives, such as the Solar Investment Tax Credit (ITC), allow those who invest in a solar system to apply a tax credit towards their income tax. The incentive is determined by the cost of the system, and is independent of its performance.

Performance-Based Incentives

Performance based incentives (PBIs) encourage PV system owners to install and maintain efficient systems through payments that are based on the monthly energy production of the system.

Net Energy Metering

In addition to incentives, many states, such as California, implement a net energy metering (NEM) policy that allows consumers who generate excess electricity to be reimbursed at the then-prevailing rate of electricity. For instance, if a residential PV system produces an excess of 100 kWh over the course of the month, the owner will be reimbursed for 100 kWh at the market rate of electricity for that time period. The owner is then free to use that reimbursement credit towards electricity they consume from the grid when solar is not meeting their current energy load. Therefore, households with solar PV and NEM are able to significantly reduce their electricity bill.

Home load profile and PV production over 24 hours Figure 2. Visualized relationship between PV energy production and household electricity use for an average home in New South Wales, Australia. Source: solarchoice.net.au

Figure 2 shows the relationship between PV electricity production and electricity consumption during the day. Note that while the PV system can generate more than enough electricity during the daytime, it can fail to deliver electricity during peak consumption hours.

Basic Financial Calculation for a Residential PV System

In return for a large upfront investment in a solar installation, homeowners that go solar benefit from a reduced monthly electricity bill. Thus, for NEM regimes the benefit of solar comes in the form of avoided costs.

For instance, assume that upon installing a rooftop PV system, a home electricity bill is reduced by $1,500 per year and the cost of the hypothetical PV system is $10,000 after incentives. In order to calculate the simple payback period, which is the approximate time for a PV system to pay for itself, we divide the cost of the PV system by the savings.

$$ \text{Simple Payback Period} = \frac{\text{System Cost}}{\text{Annual Savings}} = \frac{$10,000}{$1,500\mathrm{/year}} = 6.7\mathrm{years} $$

Thus, the payback period for a system that costs $10,000 and reduces the electricity bill by $1,500 per year is 6.7 years.

However, a PV system can last much longer than the duration of its payback period. A typical rooftop PV system has a lifetime of about 25 years. This means that for the last 18 years of its life, after it has paid itself off, the hypothetical PV system described above will generate revenue in the form of additional savings. To calculate this revenue, we multiply the annual savings by the remaining lifetime of the system, after it has paid itself off.

$$ \text{Net Revenue} = \text{Annual Savings} \times \text{Years left in lifetime after system is paid of} $$ $$ \text{Net Revenue} = $1,500\mathrm{/year} \times 18.3\mathrm{year} = $27,450 $$

Based on this simple analysis, the system will generate approximately $27,450 in savings over its lifetime. It is important to note that this is an approximation, and does not take into account factors such as maintenance costs, changes in electricity price and usage, as well as system degradation over time.

The figure below shows another financial analysis for a hypothetical residential PV system. In both graphs, the y-axis is the dollar amount and the x-axis is the year.

Aurora's basic financial analysis for a hypothetical residential PV system Figure 3. The cumulative (top) and annual (bottom) cash flows of a hypothetical PV system. Source: Aurora Solar

The top graph, which shows the cumulative cash flow of the project over time, and indicates that the project has a payback period of approximately four years. Additionally, the dollar amount in the 25th year, which is about $25,000, is the cumulative net revenue that the system generated. The bottom graph is the annual cash flow of the project. The first year is characterized by a large negative cash flow, due to the large upfront cost required to install the system, but after that there is positive annual cash flow with the exception to this is in the 14th year, which is when the inverters are being replaced.

About Solar PV Education 101

The Basic Principles that Guide PV System Costs is part of Solar PV Education 101, a six-article series that serves as an introductory primer on the fundamentals of solar PV for beginners.

Article 1: The Beginner's Guide to Solar Energy
Article 2: How a Photovoltaic System Produces Electricity
Article 3: Reading Your Electricity Bill: A Beginner’s Guide
Article 4: How to Size a PV System from an Electricity Bill
Article 5: Shade Losses for PV Systems, and Techniques to Mitigate Them
Article 6: The Basic Principles that Guide PV System Costs

Topics: Solar PV Education 101, PV System Costs, O&M costs, cost based incentives, net energy metering, Capital Costs, Hard costs, soft costs, performance based incentives, simple payback period, Solar Primer

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