19th Ave New York, NY 95822, USA

Avoided Cost Analysis in C&I’s Demand Heavy Environment

The C&I solar sector is maturing and with it, third-party ownership is on the rise. A critical component to design and diligence of a third party owned commercial solar system is the avoided cost analysis (ACA).  In order to discern a fair and beneficial PPA rate for the off-taker and estimate customer savings, the ACA must be accurate and dependable.

It would to be easy if customers were charged a flat fee per kilowatt-hour for their electricity usage. As long as the PPA rate was lower than the utility rate, the customer would save money. Demand charges add a new set of variables to the calculation, and the solar industry has been working quickly to jump the new hurdle imposed by the Utilities’ new rate plans. Effectively, the base kilowatt-hour rate has been reduced to the point where it is not often feasible to install solar based on kilowatt-hour charges alone.

Today, many solar companies use an outdated method for their ACA. They take the entire bill and divide by the usage, giving them a calculated avoided cost well above what the customer will be saving. This neglects daily, connection, and demand charges that are not billed at a kWh rate. Often, customers, installers and originators use an incorrect method and derive an inaccurate avoided cost.

The crux of the issue is calculating demand charges. Demand charges are inherently statistical. There is a probability that each electricity usage peak will be offset by solar production and a probability that it will not. Because of that, demand charges are notoriously difficult to model financially. Due to that uncertainty, the capital markets loathe to include any demand charge reduction in their avoided cost models.

But there is additional avoided cost – and understanding where it comes from will set some companies apart from the rest. Energy Toolbase and Aurora are the industry leaders, and they juxtapose Green Button and weather data to calculate the anticipated avoided cost due to solar. If you’re looking to integrate storage into your solar solution, my colleague Dan Holloway has some additional insight to share with you in his recent blog post. If you have access to that data – great; if not, it can be difficult to discern the total energy savings a solar system will create. Most avoided cost analyses simply guess, if they include it at all. The solar integrators who understand how to model these variables will quickly edge-out the competition, and have happier customers to boot.