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William A. Levinson

Quality Insider

The Henry Ford of Renewable Energy

We must get the price sufficiently low and the performance sufficiently high

Published: Wednesday, March 6, 2013 - 10:46

Automobiles were once high-maintenance luxuries that only the wealthy could afford. Renewable energy, such as that from photovoltaic sources, also is a luxury among whose sole redeeming qualities are its uninterruptable nature—at least during the daytime. Government efforts to compel its use, e.g., through tax incentives or cap-and-trade mandates, are therefore economically dysfunctional as well as socially irresponsible.

Cap and trade is a law that puts a cap on carbon dioxide emissions, and the government issues or sells permits to companies that allow them to emit a certain amount. As implemented in California, cap and trade requires energy users to purchase carbon credits to cover emissions from fossil fuels.

The simplest way for energy-intensive businesses to deal with the problem is to move the jobs out of state, or even offshore to China. The problem with cap and trade, and similar forms of government intervention, is that ideology and legislation cannot create jobs or prosperity. Efforts to do so go against the basic laws of economics and human behavior because supply-chain partners are simply not going to pay for muda (waste) like carbon credits or carbon taxes.

The Henry Ford solution

Horse-drawn vehicles were, unlike modern automobiles with their catalytic converters, a genuine source of hazardous pollution. Equine exhaust is, after all, a fertile breeding ground for bacteria as well as an attractive nuisance for flies. Government mandates, such as a tax on horses or their food, would not have fixed this problem without extensive economic repercussions. It would have added to the cost of all goods that required transportation, without adding any value to them. This would have resulted in higher prices, lower wages, and lower profits throughout every supply chain.

Horses are also inherently wasteful. The owner must feed them regardless if they work, but a motor vehicle consumes fuel only when it is in use. There was indeed a market for affordable motor vehicles, but they were not the result of government incentives, mandates, or anything else. They were the culmination of Henry Ford’s simple and common-sense business principles. Ford explains those in My Life and Work, Chapter 9, “Why Not Always Have Good Business?” (Doubleday, Page & Co., 1922).

If a manufacturer wants to perform his function, he must get his price down to what people will pay. There is always, no matter what the condition, a price that people can and will pay for a necessity; and always, if the will is there, that price can be met.

The application of this principle is why automobiles and horses exchanged roles. The automobile has become an affordable means of everyday transportation, and the horse is now a relative luxury whose primary purpose is recreation. The same principle applies to renewable energy; the instant somebody gets the price sufficiently low and the performance sufficiently high, it will supersede traditional fossil fuels. Narayan Ramesh, associate R&D director at Dow Solar, may have finally achieved this. Dow Solar recently introduced the POWERHOUSE solar shingle. It is incorporated onto a roof in place of traditional shingles and generates electricity as it keeps rain and snow out of the house.

The obvious question is, “What is the bottom line?” Dow has a cost-and-savings estimator that accounts for the location of the home. Solar power will obviously be more effective in the Southwest than in the Northeast, but the figures for the latter are quite encouraging. According to the estimator, the required capital investment (i.e., above and beyond that required for an ordinary roof), along with the energy savings, is returned over a period of 25 years. If we assume that the savings are divided evenly across the 25 years, we can calculate the payback period and the annual rate of return.

Payback is a simple but highly conservative economic-decision tool. It is simply the time necessary to recover the initial investment. Consider a 2,500 sq ft home in New York (which the estimator assumes requires $250 a month in energy costs) and a desired savings of 20 percent. The estimator reports, “For an additional $4,480 (post-incentives) over the cost of a traditional roof, you could receive an estimated $24,560 in energy savings over 25 years.” The savings translate to $982.40 per year, and the payback period is 4.56 years. In other words, the photovoltaic shingles will pay for themselves in fewer than five years.

The next step is to calculate the rate of return. The Dow estimator shows that this investment adds $11,000 to the value of the home, which can presumably be recouped upon sale. Let’s assume that the house is sold after 25 years.

The present value (P) of a uniform series of payments (A) over a period of N years, followed by a salvage or end-of-life return of S is:

Where i is the annual rate of return as a fraction, e.g., 6 percent = 0.06. The goal is then to find i such that:

 

As determined by Microsoft Excel’s Solver tool, i = 0.2215 returns a net present worth of $4,480 for 25 annual payments of $982.40, followed by a final payment of $11,000. In other words, the rate of return is 22.15 percent. This is tax-free income because homeowners pay for electricity with after-tax money.

The benefits for a house in Texas look surprisingly lower, perhaps because the home’s energy costs are assumed to be only $150 per month. The results, again for a 2,500 sq ft home and a desired energy saving of 20 percent, are as follows: “For an additional $8,290 (post-incentives) over the cost of a traditional roof, you could receive an estimated $15,920 in energy savings over 25 years.” This translates into $636.8 per month, and a 13-year payback period. The added home value is $11,000, which yields a rate of return of 0.0812 (8.12%). This is still more than competitive with today’s stock market, especially when we remember that the money is post-tax.

Neither of the above examples constitutes formal engineering economic advice, noting that several other factors require consideration. The results assume optimal roof orientation, and no obstruction of the sun. Also, the Dow estimator’s calculation of up to 80-percent energy savings probably includes an assumption that excess power generated during the day can be sold back to the power company. The sun is not available for, on average, more than 50 percent of a day. It might be more instructive to look at the capacity of the system in kilowatts per day.

It must also be admitted that government incentives reduce the present cost, although the New York example suggests a highly attractive rate of return even in their absence. Nonetheless, when I last looked at a photovoltaic system, the payback period was closer to 25 or 30 years. If the POWERHOUSE product performs as claimed, we may be reaching the point at which renewable energy can economically displace a portion of our fossil fuel consumption.

Disclaimer: The author has no financial interest in Dow.

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About The Author

William A. Levinson’s picture

William A. Levinson

William A. Levinson, P.E., FASQ, CQE, CMQOE, is the principal of Levinson Productivity Systems P.C. and the author of the book The Expanded and Annotated My Life and Work: Henry Ford’s Universal Code for World-Class Success (Productivity Press, 2013).

Comments

price and performance are only part of the issue

The need that is satisfied might be even more important.

Starting with the problem both horses and autos solve: tranportation.  in your example you imply that the rise of the suto was primarily due to price reduction.  i would contend that a key enabler was government enabling the use of autos over horses.  during the early day of the auto, part of the issue with using auto transport over horse was teh roadways.  A horse could travel over many surfaces in many weather conditions (rain, snow, muddy, etc)  As the govenrment created auto friendly roadways, which were less horse friendly, autos became a better source of transportation than horses. which then led to the increase in demand, subsequent increase in competition for the transportation need, lowering the cost(price), and spiraling to where we are today. The auto did not tranform the energy source to be a more efficent means of tranportaion, it used a completely different source.

To relate this to the electrical energy market, the first task would be to relate the consumer needs(desires?): food storage(satisfied today by refrigerators), lighting(today satisfied by electrical lighting), temperture comfort (currently air conditioning and heating), and entertainment (television, internet, etc) to name a few.  Currently, many of these needs or desires are satisfied by electrical power.  The power is distributed primarily over government "freeways" of electricity (e.g. the public electrical grid).  These needs are currently satified by the "electrical fuel source"

To find the parallel to the early days of the automobile, we need to look at the consumer needs first.  As an example, lighting is primarily satified today by electrically powered incandescent/flourescent (some LED) devices.  The technology of which is substanitally over a century old.  To me, this is the "horse".  A true comparision to how the automobile changed transpotation, would be to find a source of lighting that is renewable, less wasteful, cheaper, or whetever other consumer criteria are needed, without focusing on the energy supply.  The power source to drive the revolutionary lighting system may come from electrical energy, may come from steam, may come from chemical luminesescne...only people far smarter than I will determine this. 

To relate the electrical energy back to the horse vs. auto would be like saying we needed to grow the grain for feeding the horse more efficently to get a better mode of transportation.  Short term, growing better grain (e.g. solar, wind, biomass, ... generated electrical power) may be a viable improvement.  the next century, will likely be driven by more substantial innovation of solving peoples needs and desires, rather than just growing better grain...