Friday, October 01, 2010

Choosing Green Projects Wisely

One aspect of blogging I never anticipated was the degree to which it would put me on the radar screen of public relations agencies. Not a day goes by that I don't receive at least a half dozen emails from various PR firms seeking publicity for a new product, project, initiative or campaign. Their clients include companies, government agencies, and non-governmental organizations. Of course these emails aren't all equally interesting or informative, but now and again they catch my attention, as was the case with two I received today. The first was promoting "Ohio's Largest Rooftop Solar Array", to be installed on a transit bus garage in Akron. The second touted UPS's acquisition of another 130 hybrid-electric delivery vehicles. Both press releases framed these efforts in terms of their benefits for reducing fuel consumption and CO2 emissions. However, from the data provided, the costs of those reductions look quite different.

Start with the Akron Metro Regional Transit Authority's solar rooftop array. The project installed 488 kW of photovoltaic panels, with an expected annual generation of 486,760 kWh of electricity. RTA claims this will save the equivalent of 39,322 gallons of gasoline--an odd comparison, since roughly 86% of Ohio's power is generated from coal and less than 1% from oil--while reducing emissions by 350 tons of CO2 per year, all for a cost of $2.5 million. I give RTA and their solar installation contractor full credit for providing enough data to assess the effectiveness of this investment. Doing that properly would require a discounted cash flow analysis and a detailed knowledge of what RTA pays for power from the grid. However, interest rates are currently very low, reducing the impact of discounting on the calculations, and for a back-of-the-envelope estimate the EIA's national figures for commercial electricity rates should be close enough.

$2.5 million for 488 kW of panels works out to just over $5/Watt, which is right in the ballpark for installed PV at this scale. Estimating the effectiveness of this investment requires allocating that cost among the resulting benefits. From my perspective, aside from the intangible benefits of being greener plus the health benefits associated with reduced coal use, this boils down to two simple categories: power savings and CO2 reduction, with the latter being the real measure of how wise a green investment this was. Over the 20 years this installation could last, it should generate roughly 9.7 million kWh. At an average electricity price of 10.2¢/kWh, the value of that power is just under $1 million. (I've ignored future inflation in electricity prices, but I've also ignored the typical 1% per year accumulating loss of PV output over the life of the panels.) That leaves the other $1.5 million of cost to apply to the 7,000 tons of CO2 savings over 20 years, for an effective cost of $214/ton. Considering that you can buy emissions credits in the EU all the way out to 2020 for less than about $32/ton, the environmental benefits of this project look pretty expensive.

What accounts for that huge gap? Well, among other factors it's because these solar panels are in Ohio, not one of the most reliably sunny spots in America. Based on the information in the press release, they will be exposed to an average of just 2.7 hours of peak sun each day. The same array located in Los Angeles would generate more than twice as much power, halving the premium over commercial power costs in the calculation above. And even with California's cleaner average grid emissions, the effective cost per ton of CO2 avoided would be much lower, perhaps less than half the cost in Akron.

Contrast all this with the UPS purchase of 130 hybrid vehicles for their delivery fleet in New York, New Jersey and California. The estimated fuel and emissions savings are nearly double those of the Akron solar array, although the press release was missing the associated cost, citing only the $25 million that UPS has invested in its total fleet of over 2,000 alternative fuel vehicles (AFVs) including hybrids, plug-in hybrids, CNG and propane. The folks at Edelman were kind enough to put me in touch with a representative at UPS, from whom I learned that the figure I was seeking wasn't public, because of competitive issues involved in how UPS bids its fleet purchases. However, I also learned that UPS has a payout hurdle of 5 years for its AFVs, other than new models undergoing testing. That means that the 35% fuel savings these vehicles provide recoup the cost premium over conventional vehicles within 5 years, after taking into account any federal, state or local incentives involved. So the emissions benefits are essentially free to UPS--and at worst cost the equivalent of the incentives.

I hate to be second-guessed, and I don't enjoy second-guessing others. I don't know everything the Akron RTA management considered when they chose to spend $2.5 M on a solar roof array, so I can't say it was a bad decision. However, if I do know that if I were a stakeholder in Akron RTA, I would be asking some very pointed questions about the goals and criteria that drove them to make this decision, instead of investing in another green alternative that would either cost less or deliver more emissions savings bang for the buck. Did they look at buying more hybrid or natural gas buses, along the lines of what UPS is doing, or consider other efficiency investments in their facilities? A solar roof is a very visible symbol of "going green", but unless it's in the right location, it might not be the greenest choice, if the goal is the economical reduction of greenhouse gas emissions.

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