Costing a Green Future

Wind turbines can produce power cheaply after their installation. The question is whether it is cost effective to install them in the first place. Tax credits and other government subsidies reduce the cost of wind power. The larger scale the wind turbine is, the more efficient it is. According to Iowa State University, smaller scale systems can cost up to $3000 per kilowatt, while mid scale systems range from around $1500 to $2500, and the largest scale utility wind farms cost $1000 to $2000 a kilowatt.

As with all payback periods, borrowing money increases the payback period. Loans at a higher interest rate over longer periods of times greatly increase the payback period, although the calculation also includes the tax benefits of deducting interest expense paid on the loan to build the wind turbine. The wind turbine owner may also depreciate the cost of the wind turbine for federal and state tax purposes, including using accelerated depreciation methods such as MACRS. Penn State University provides an example of a turbine owner using a 5 year MACRS depreciation scheme. Wind turbines usually last longer than five years, although the IRS does allow machines to be depreciated for tax purposes over a shorter period than their actual lifespan. The government can also allow accelerated depreciation as a method of providing a subsidy. Wind turbines may be eligible for other federal benefits such as the REPI Credit and the Federal Production Tax Credit.

Battery storage greatly increases the cost per kilowatt hour for wind power, as it does with solar power and other intermittent sources of renewable energy. According to Iowa State, using battery storage can increase cost to $5000 a kilowatt, since a large battery can cost thousands of dollars. Grid redesign for utility power systems reduces these costs for large projects. A utility also uses several sources of power, likely including nonrenewable energy sources, so it may be able to use all of the wind power without purchasing extra storage equipment at the time of generation. If other factors are not considered the cost directly corresponds to the cost per kilowatt of the system. A system that costs twice as much per kilowatt will take twice as long to pay off.

Some projects that use wind power are not as time sensitive as other projects. Powering appliances in the home usually requires electricity at all times. A project such as using wind power to pump water for cattle does not need constant power, as long as the wind provides enough energy to fill up a tank that holds enough water for several days. Charging a battery can be performed over night, so the wind may vary in strength over night and still provide sufficient power.

Other expenses should be considered when calculating the payback period. According to Iowa State, an annual insurance premium is an important expense to include, since the turbines are valuable enough to require expenses. 2 or 3 percent of the purchase cost in maintenance expenses should also be part of the budget.

Since wind power is intermittent, some users may purchase turbines with a greater capacity than they can use at one time. Having twice or even three times as much maximum power for the same cost may be favorable to purchasing batteries. This setup requires a connection with the utility power grid for two reasons. The turbine owner will have the option of purchasing backup power when there is no wind. Some utilities also allow the turbine owner to sell power back to the utility. Not all utilities allow this and the turbine owner will have to purchase an inverter to use this method. Selling power back to the utility does generate income, so it should be considered when calculating the payback period.

Payback periods for hybrid cars are a popular topic because hybrid cars are well known to have a higher purchase price than cars with standard engines. Typical calculations use the sales price of the hybrid, as well as the cost of gasoline, and possibly state and federal rebates. Hybrids don’t always come out ahead this way. With the addition of some other factors, hybrids provide a much greater cost savings than many consumers think.

Drivers typically purchase a hybrid car for a work commute. One of the perks of owning a hybrid is that some states, such as California, allow the driver to use the carpool lane when driving a hybrid to work. This can save significant amounts of money. Traffic often stalls for long periods of time on freeways, especially in Los Angeles and other large cities. A hybrid car does not burn fuel idling in the other traffic lanes. The driver can also get to work and leave work faster, and more work time often means the driver earns more money.

Hybrid cars are usually higher end than other competitors. Even when a hybrid is the same model as the non hybrid version, it has more expensive parts. This can reduce maintenance and provide other quality improvements, since the manufacturer is not as concerned with buying the cheapest items possible. A hybrid car is often the top of the line version of a car model and includes navigation, fuel monitoring, and communication systems which would cost additional money to add to another car.

Some employers and government agencies provide benefits to hybrid car owners. Like the carpool lane, these perks can save the driver time. For example, the hybrid car owner may get the parking spots close to the building. Cities may reduce or even eliminate parking fees and tolls for drivers of hybrid vehicles.

Hybrid car owners may receive reductions in their car insurance. Hybrid Travelers claims a ten percent discount for drivers who insure a hybrid vehicle, under certain conditions. Travelers also provides a discount for hybrid boats, so be sure to check for discounts for hybrid vehicles other than cars.

Hybrid car owners receive tax credits for driving a hybrid. Drivers should know that the tax credits are meant as a manufacturer incentive to produce hybrids, and gradually phase out as a specific manufacturer gets more hybrid vehicles on the road. This means that a car buyer will receive a larger tax break for purchasing a hybrid made by a manufacturer who has not produced hybrids in the past.

The State of California, along with the other US states, offers rebates on the purchase of energy efficient household appliances, including refrigerators. The payback period for these green refrigerators is the amount of time it takes before a homeowner covers the expenses of their new refrigerator and starts gaining money.

A green refrigerator is sold at a retail store, such as Best Buy or Sears. The customer receives a rebate that the merchant turns in to the state government agency in charge of the environmental rebate program, so there is a deduction included in the purchase price. The customer also pays money to transport the new refrigerator home and have it installed.

So you add up the initial costs:
Refrigerator $1000
State Rebate ($200)
Installation $50
So the total purchase and installation cost is $850.

Next, add the operations expenses and energy savings each year. An Energy Star qualified refrigerator reduces energy consumption by at least twenty percent. Because of the additional cost for powering other appliances in the house, the savings from purchasing an Energy Star refrigerator may be a lot higher. Using the Energy Star Calculator and California’s average power rate, the site shows a cost reduction from $183 a year to $58 a year for a typical California refrigerator, an average annual savings of $125. Refrigerators don’t last forever, so the payback period includes the refrigerator’s depreciation cost. This requires estimating the refrigerator’s normal lifetime. Since we are buying a new 2010 refrigerator for $1000 sticker price, it’s a quality product, so we’ll use 20 years as the lifetime. Dividing $850 by 20 we get a straight line depreciation of $42.50.

Operation costs and savings:
Energy Savings $125
Depreciation ($42.50)
So the total savings each year is $82.50.

Dividing the initial refrigerator cost, $850, by the savings in energy bills, $82.50, provides the payback period, 10.3 years. The homeowner breaks even after 10.3 years, but the refrigerator usually lasts for 20 years. Multiplying the savings of $82.50 by the remaining lifespan, 9.7 years, gives the homeowner a total power bill reduction of $800.25 when buying a refrigerator through the California program. This calculation assumes energy costs remain the same, so if they increase each year, the refrigerator buyer will save more over time.

I see ads all over the place for solar panels. Many people have mentioned that you can install them on your house and significantly reduce or even eliminate your electricity bill. Even better, it’s possible in some areas to get payback from the electricity company and receive money each month instead of losing it. Receiving a payment from the power company does depend on two things, you need an inverter so that you can send the energy you harvest back into the grid, and you have to have a contract with a power company that accepts this setup. Is it cost effective? Of course it will cost a lot of money up front, so it is definitely an investment that will take years to pay off. Worthwhile? Possibly. Homeowners are familiar with purchases that can cost a lot of money upfront, especially if they end up reducing costs in the long run. What the solar panel buyer wants to ask is what is the payback period? Another way to explain a payback period is the amount of time until the breakeven point is reached. After that, the solar panel owner will make a profit each month with each check from the electric company.

So what do we need to know here? We’re going to separate the initial costs out from the overhead, so let’s figure out the bills we need to pay to get the system up and running. It is a lot easier for me to visualize with some sample numbers, although to shorten the calculations I’d use algebra variables like a, b, c, to make the formulas. Besides, the real numbers will depend on many other factors that are specific to each household, so keep in mind these are just placeholders and don’t represent your real costs.

You record the initial costs first:
Solar Equipment $30,000
Installment Costs $2,000
Permits $2,000
Government Rebates ($10,000)

Total: $24,000

Then you record the cost savings:
For example, let’s say your power bill was $100 a month, and you installed the panels so now you
are receiving $250 a month back from the electric company. Calculate this as an average, as your power usage and the amount of solar power you collect will vary with the seasons.

$250 – ($100) = $350 a month revenue

You’ll also add the depreciation and repair costs here. Repair costs, like the power bill, is an average amount you budget each year. Straight line depreciation is the cost of the equipment divided by how many years it usually lasts if well maintained.

Let’s say the panels last 20 years, and cost $24,000, so depreciation is $1200 a year, or $100 a month.

$50 a month for repairs
$100 a month for depreciation
Total: $150 a month expenses

So a simple payback period would be $24,000 / $200, which would give a result of 120 months, or ten years. It can also be added to the house value for buyers or lenders at cost minus depreciation, as the solar panels do add value to the house. This can be estimated by another straight line depreciation that includes your installment and permit costs in the value of the asset: The total cost is $24,000 and the panels last 20 years, so subtract $1,200 from the value each year until the panels are depreciated to zero.

This analysis doesn’t account for other factors that might show up. It is a nominal calculation, not a real one; if inflation occurs it’s possible that energy prices will rise sharply. Oil resources are limited, so you might be expecting this factor to limit supply and raise costs in the future, I know I am. You’ll also have to consider interest charges, for borrowing the setup costs to be able to get the system up in the first place. It can be a complex calculation with other factors, although these are the most important costs and revenues to consider.