Distributed Generation Adoption Decision Making Under Uncertainty Mark Sanford Michael Leifman

Agenda Assumed buyer behavior & resulting model Forecasting uncertainties Product adoption & grid parity Incentive induced dynamics

Underlying business question Will residential and small commercial demand for distributed generation justify the investment required to serve these consumers?

Predicting adoption Deployment = Opportunities x Penetration x Adoption Consumers don’t do sophisticated financial analysis … simple payback more closely represents decisions Source: Adapted from Navigant Consulting, NREL/SR-581-42306/ February 2008

Simplified adoption model Candidate locations Financing cost Capital cost Res/Comm deployment Incentives Grid parity Simple payback Operating cost & output Expected penetration Electricity price Time since introduction But … capital cost is declining while retail electricity and fuel prices may go up or down

Geographical variance is significant Retail electric prices, natural gas prices, and renewable annual output vary widely among states Source: US Energy Information Agency

Capital costs are coming down But … opinions differ considerably as to how far and how fast, particularly for residential applications Source: One of several Illustrative example from GE Energy

Rapid adoption in mid-point case GW Solar, with no operating cost, is most attractive alternative for deployment

Uncertainty cannot be ignored NY GA Cumulative Probability IL Probability of “grid parity” Grid parity: cost of production = retail electric price, assuming net metering Even with fixed customer behavior assumptions, amount of adoption remains highly uncertain Source: GE Energy, Energy Strategic Marketing

Incentives dynamics GW Tax credit incentives accelerate market, but create potential for severe trough when removed Source: GE Energy, Energy Strategic Marketing

Conclusions Mid-point case shows significant growth in distributed solar generation Uncertainty analysis shows a wide range of outcomes to be possible Incentive programs have desired effect of accelerating adoption, but introduce risk of suspending demand when removed Uncertainty analyses illustrates risks in entering a new business that might otherwise be ignored