OPA NEWS ANNOUCEMENT (text copied from OPA web site)

Released July 23rd, 2010

The OPA has received a significant response to the request for stakeholder feedback on the proposed new price category for ground-mounted solar PV projects under the microFIT program.

The OPA has also received a number of questions asking for more detail on the calculations and the assumptions made in deriving the new proposed price, as well as the methodology for calculating the return on equity for the typical project. The rationale for the proposed price was posted on the microFIT website on July 14, including the assumptions used. The OPA is now providing further detail for the proposal.

Background

Project cost information was developed from a range of sources using best available information. The OPA's financial model was developed with the assistance of Power Advisory LLC and the initial cost assumptions were developed with the assistance of Navigant Consulting Inc. Cost and performance data were updated on the basis of more recent Ontario market information and reflected a range of cost and performance data. All costs and other specific assumptions are derived from a range of possible numbers, and represent a typical project. Of course, not all projects will match the typical project assumptions, and some project-specific data would either result in a higher or lower FIT price. The microFIT Program is a standard offer program, intended to provide a straightforward way to contract for renewable energy generation. As such, it provides standardized program rules, prices and contracts, and will not match every project's specific circumstances.

This is a simplified explanation and example, for the purpose of illustrating how the FIT and microFIT prices are derived.

For all technologies, the OPA makes the following financial assumptions for a typical renewable energy project.

Financial assumptions for a typical renewable energy project

- Percentage of project cost as equity investment - 30%
- Percentage of project cost as debt, borrowed from bank - 70%
- After tax return on equity from investment - 11%
- Cost of debt, repaid to bank - 7%
- Income tax rate on profit from equity investment - 30.5%
- Inflation rate - 2.25%

The following is a detailed example of a ground-mounted, dual-axis, tracker-based solar PV project. These projects typically cost more than fixed ground-mounted systems, however the electricity production from these projects generates more electricity and money. Fixed ground-mounted solar PV systems are less expensive than tracker based systems, and typically more cost effective than rooftop projects. Rooftop projects are typically smaller, between three and five kilowatts, than fixed ground-mounted projects and ground-mounted projects can benefit from this increase in economy of scale. As well, fixed ground-mounted solar PV projects have the advantage of being able to be located facing south, to optimize electricity production.

The capital cost for a 10 kilowatt solar PV ground-mounted, dual-axis, tracker-based project is assumed to be $90,000. Therefore, for a 10-kilowatt ground-mounted solar PV project under microFIT:

$90,000 x 70% = $63,000 (debt, borrowed from bank)

$90,000 x 30% = $27,000 (equity invested from savings)

Payments on borrowed amount are repaid to the bank at 7% interest. Assuming annuity payments (i.e., constant) over a 20-year period, the cost of debt would be approximately $370 per month.

- e.g., $63,000 @ 7% = $370 per month or $4,440 per year

Return on the equity investment is paid monthly at 11% to the contract holder, the supplier. Assuming annuity payments (i.e., constant) over a 20-year period, the payments to the equity investor would be approximately $245 per month.

- e.g., $27,000 @ 11% = $245 per month or $2,940 per year

On the basis of this simplified example, this would represent an annual profit of $2,940 per year on an initial $27,000 equity investment.

- e.g., $2,940 / $27,000 = 11% return on equity

Please note that the return on equity calculation is much more complicated than described above, because it includes factors such as inflation, compounding interest, taxes and O&M costs. However, the example above is for illustrative purposes to explain the basic approach taken by the OPA. Again, these financial assumptions are used for all FIT and microFIT program technologies.

Additional detail on the OPA's assumptions for the proposed ground-mounted price of 58.8 c/kWh.

- Tracking (10 kW)
- Cost to install $90,000
- Annual O&M costs $100
- Capacity factor 19%
- Annual production 16,600 kWh
- Annual revenue $9,800
- Simple payback nine years

The proposed rate is derived to ensure that the total payments made are based on the expected output from the renewable energy project. The expected output of a facility is based on the efficiency of the renewable energy technology and the amount of time that it is producing electricity - known as the capacity factor.

In Ontario, the capacity factor of solar PV projects will vary regionally and depends on solar irradiation. For example, the capacity factor of a solar PV project with a two-axis tracking system in Toronto may be approximately 17%, while the capacity factor of the same system may be approximately 21% in Thunder Bay. The OPA assumed a capacity factor that is consistent with a range of capacity factors that are typical for Ontario. The capacity factors chosen are an average of the expected capacity factor of the system over its expected 20-year life, and take into account expected module performance degradation.

For the purpose of deriving the proposed microFIT rate, the capacity factor of a 10-kW solar PV ground-mounted, dual-axis, tracker system is assumed to be 19%. Over the course of one year, the project would produce approximately 16,600 kWh.

- e.g., 10 kW x 8,760 hours per year x 19% = 16,600 kWh per year

The proposed rate reflects the revenue requirements and the expected output of typical projects.

A fulsome explanation of the model used by the OPA was provided to stakeholders during the FIT Program consultation on April 7, 2009. The FIT and microFIT program prices are developed using a discounted cash flow model, which are commonly used in project finance. This model calculates the prices required to:

- cover the cost of investment
- cover ongoing operating expenses
- earn a reasonable rate of return over a 20-year contact term

The discounted cash flow model uses a seven-step process to calculate prices:

1. annual generation output is estimated for a given project based on the project capacity and assumed capacity factor

2. operating expenses estimated and include variable operation and maintenance cost, fixed operation and maintenance cost, and property tax

3. annual depreciation calculated using an appropriate capital cost allowance rate

4. operating expenses, depreciation, interests, and income taxes deducted from revenue to arrive at net income

5. depreciation added back to net income to estimate actual cash flow

6. capital investment, debt borrowing, and debt repayment added to calculate free cash flow for each year

7. free cash flows are then discounted using the target return on equity.

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