ecoENERGY

ecoENERGY for Renewable Heat
Basis of Payment and Level of Incentives for ecoEnergy for Renewable Heat Program

Final Report
Prepared by: Marbek Resource Consultants
March 31, 2008

Table of Contents

• 1. Introduction
  • 1.1 Background
  • 1.2 Objectives and Scope of the Study
  • 1.3 Contents
• 2. Consultations
  • 2.1 Consultation Plan
  • 2.2 Participation
  • 2.3 General Stakeholder Comments
• 3. Basis of Payment Options
  • 3.1 Experience in other Jurisdictions
  • 3.2 Evaluation Criteria
  • 3.3 Options
  • 3.4 Assessment of Options
  • 3.5 Stakeholder Views
  • 3.6 Recommendations
• 4. Incentive Level
  • 4.1 Trends in Use of the NRCan Solar Thermal Incentive
  • 4.2 Cost-Competitiveness
  • 4.3 Incentive Level Options
  • 4.4 Stakeholder Views
  • 4.5 Recommendations
• Appendix
  • Appendix A Cost-Competitiveness Modelling Approach

1. INTRODUCTION

1.1 BACKGROUND

ecoENERGY for Renewable Heat provides incentives to the industrial, commercial and institutional sector to support the purchase and installation of solar water and air heating systems for their facilities. The amount of funding is 25% (40% in remote communities) of eligible costs associated with the system to a maximum of $80,000 per system, and $2 million per corporate entity for multiple installations. With the exception of the corporate maximum which was $250,000, the same approach and levels used for the previous program, the Renewable Energy Deployment Initiative (REDI), are being continued for the ecoENERGY for Renewable Heat program.

Natural Resources Canada (NRCan) has engaged Marbek Resource Consultants to assess the cost competitiveness of solar thermal technologies available in the market, evaluate the basis of payments and funding level of incentives under the program, suggest options to meet objectives as defined below in Section 1.2, and to consult with stakeholders prior to finalizing the review of the options.

1.2 OBJECTIVES AND SCOPE OF THE STUDY

The objectives of the study are to:

• Assess the cost competitiveness of solar thermal technologies currently available in the Canadian market;
• Suggest options for the basis of payment and levels of incentive that will
  • Maximize the number of installations for the fixed level of available program funding (i.e. provide support to help the most projects and minimize free riders).
  • Provide an incentive to improve technology efficiency and cost-effectiveness
  • Make the administrative process more efficient for all parties
  • Be fair and equitable
• Solicit input from stakeholders and determine the implications for the various parties

The work has included modelling of the cost-competitiveness of the various technologies for different applications, a review of the experience of other jurisdictions, and a compilation of the potential options for the basis and levels of incentives. The results of this analysis were presented to stakeholders in a Discussion Paper, which also provided the basis for consultation workshops.

Five different solar thermal technologies are considered (see box):

• Solar air-perforated plate
• Solar air-backpass
• Solar water-unglazed collectors.
• Solar water-glazed flat plate collectors
• Solar water-glazed Evacuated Tube Collectors (ETC).

1.3 CONTENTS

In addition to this Introduction, the report contains three sections:

• Section 2 presents an overview of the consultations, and some general comments provided by stakeholders.
• Section 3 presents the results of the review of jurisdictional approaches, assesses the options for basis of payment, discusses stakeholder views and presents our recommendations.
• Section 4 presents some trends on the recent history of the NRCan incentive program, the results of the cost-competitiveness study, assesses the options for level of incentive, discusses stakeholder views and presents our recommendations.

2. CONSULTATIONS

2.1 CONSULTATION PLAN

The consultation plan for this work incorporated four elements:

• A pre-consultation web meeting with members of the Canadian Solar Industry Association - Solar Thermal Advisory Committee (CanSIA - STAC), held on December 19, 2007. During this meeting, the participants made recommendations concerning the approach and endorsed the consultation plan.
• Publication of a Discussion Paper documenting the results of the analysis and listing a series of focus questions for discussion. The Discussion Paper was also posted on NRCan's website.
• A series of three one-day workshops to which were invited all known industry stakeholders. The workshops consisted of presentations (on the background, methodology, analysis and options), and discussion of the implications and preferences with respect to basis of payment and level of incentive.
• An invitation to submit written comments to Marbek's solar thermal consultation email address by March 7, 2008.

2.2 PARTICIPATION

Not counting NRCan and Marbek staff, a total of 45 people participated in the Workshops (including one person who attended in both Montreal and Toronto). In addition, 7 written submissions were received.

The breakdown by location was as follows:

Toronto - February 26, 2008

• 4 Government (Government of Ontario, Ontario Power Authority, City of Toronto)
• 1 Association (CanSIA)
• 2 Solar Air Industry (1 company)
• 11 Solar Water Industry (5 companies)
• Total: 18

Vancouver - February 28, 2008

• 1 Government (Government of Saskatchewan)
• 1 NGO (BC Solar Energy Association)
• 2 Solar Air Industry (1 company)
• 7 Solar Water Industry (5 companies)
• Total: 11

Montreal - March 7, 2008

• 3 Government (Government of Québec, Agence de l'éfficacité énergétique)
• 2 Utility (Gaz Metro)
• 1 Association (Énergie Solaire Québec)
• 5 Solar Air Industry (4 companies)
• 6 Solar Water Industry (4 companies)
• Total: 17

2.3 GENERAL STAKEHOLDER COMMENTS

Stakeholder comments on the analysis and the proposals for basis of payment and level of incentive are discussed in sections 3 and 4, respectively. More general comments are listed here:

• Stakeholders noted a need for greater clarity on Program goals. For many, it was a surprise to learn that the program's goals do not focus on energy savings or GHG reductions and that the main goal is to develop capacity in the industry.
• Stakeholders noted that financial considerations were not the sole factors driving decisions. They urged consideration of other barriers (and opportunities), including: lack of awareness and familiarity, risk aversion, and the positive marketing and social responsibility message associated with solar energy.
• Stakeholders noted that the message regarding challenges to cost-competitiveness needed to be put into the right context, i.e. that it is a challenge for solar to compete at current low prices for traditional energy sources.
• The industry is very concerned to avoid a sudden or early reduction in the incentive - e.g. due to exhaustion of approved funding.
• The industry is keen to see NRCan continue to provide additional "flanking" support - e.g. through marketing, assistance in metering and reporting, and ultimately by leading and facilitating the adoption of standards and codes and the appropriate pricing of all forms of energy to incorporate their full costs - e.g. by using taxes or tax credits.
• There are some additional new technologies (e.g. glazed backpass) beyond the five in the Study that NRCan should consider.

Stakeholders also had comments and suggestions on various aspects of the analysis and the report. These have been taken into account in preparing this final report.

3. BASIS OF PAYMENT OPTIONS

This section looks at options for the basis of payment. Section 4 will examine options for the level of incentives.

3.1 EXPERIENCE IN OTHER JURISDICTIONS

There are four main bases of payment options in use in jurisdictions around the world for the payment of incentives for solar thermal in industrial, commercial and institutional applications. These are:

• Set amount per installation. This simple approach is self-explanatory.
• Percentage of eligible costs. This is the current approach under the ecoEnergy for Renewable Heat program. It involves specifying which costs (e.g. equipment, installation) are eligible and the percentage to be applied.
• Payment per area of collector. This approach provides an incentive that is based on either the gross area or the aperture area of the solar collector.
• Payment per solar energy production. This provides an amount proportional to the desired result (either anticipated or achieved - see below). A variation on this is to pay on the basis of the amount of energy that coincides with peak energy demand.

There are also additional associated program design options:

• Calculation Approach. Some jurisdictions pay the incentive on the basis of plans or estimated performance (ex-ante) whereas others pay on the basis of actual installations and/or demonstrated results (ex-post).
• Minimum Standards. Some jurisdictions require that technologies meet minimum standards (e.g. performance standards) to be eligible for the payment.
• Variation by Circumstances. Some jurisdictions vary the amount of the incentive depending on the technology, the nature of the back-up fuel, or the application.

In Canada, both Ontario and Saskatchewan currently offer incentives that match the 25% of costs provided by the federal government. Saskatchewan's incentive applies to solar water installations only. Nova Scotia recently introduced a 15% incentive.

The majority of jurisdictions pay incentives as a percentage of cost. In most cases, this approach tends to be associated with extensive requirements for performance and cost verification. In recent years, however, there has been a growing trend for payments to be based on area of collector or energy displaced. When payment is based on energy displaced, it is almost always a one time payment, paid on the basis of estimated energy production or metered results for one year (this increases the technical burden but helps to minimize the administrative burden and ensures that the incentive is available as early as possible to offset the installation costs).

The success of incentives in promoting increased sales has not been extensively evaluated. Where it has, it has tended to deal with the number or penetration of residential systems or the installed capacity of those systems. Furthermore there is no evidence that indicates that one type of approach is more successful than any other. Having said that, the European Solar Thermal Industry Federation (ESTIF) did conclude that incentives should reward energy yield as much as possible¹. What has been noted is that the programs that work best are those whose designs (e.g. level and applicability) are well tailored to the market conditions of the specific technologies to which they are targeted. Other key factors are:

• Simplicity of the program
• Government support to help overcome non-financial barriers
• Easy and streamlined application and payment procedures.

Together with the objectives identified in Section 1.2, these success factors suggest additional criteria for evaluating the options, some of which would apply to the selection of basis of payment and some of which would apply to the choice of level.

3.2 EVALUATION CRITERIA

The criteria for evaluation of the options include the objectives outlined in the Introduction and the success factors discussed above. Those that apply to the selection of basis of payment are listed here. Other criteria apply mainly to the choice of level of incentive.

• Simplicity. The relative ease of understanding by both project proponents and solar equipment suppliers.
• Incentive for Improving Cost-Effectiveness. The relative reward for reducing the installed costs of systems.
• Incentive for Improving Efficiency. The relative reward for improving solar thermal system performance.
• Administration. The relative burden and cost of preparing submissions by project proponents and reviewing them by program officers.

3.3 OPTIONS

Based on the incentive options being used currently in jurisdictions around the world, five specific options are proposed for evaluation and discussion:

• Option 1 - Status Quo. The incentive would continue as a percentage of eligible costs.
• Option 2 - Collector Area Installed Basis - Minimum Collector Performance Standard. The incentive would be changed to a payment per square metre of collector area. In the case of solar water collectors, the payment would vary by technology (to account for different typical efficiencies) and a minimum collector performance standard would apply. The minimum collector performance standard would specify a minimum threshold collectors must meet in order to qualify for funding. Calculation of the threshold would be based on the performance factor for each accepted collector, calculated by NRCan using measured collector performance characteristics under accepted standard conditions. The minimum acceptable performance factor would be chosen to accommodate most of the systems currently available, but disqualify those whose performance is significantly below the norm (i.e. outliers).
• Option 3 - Collector Area Installed Basis - with Collector Performance Factor. The incentive would be changed to a payment per square metre of collector area multiplied by a collector performance factor. The performance factor would be calculated by NRCan using measured collector performance characteristics under accepted standard conditions and would be normalized to the most efficient collectors currently available for solar air and solar water respectively.
• Option 4 - Estimated Solar Energy Produced. The incentive would be changed to a one-time payment per kWh of solar energy produced. The amounts would be calculated in advance using standard assumptions and models and would be paid upon commissioning of the system.
• Option 5 - Metered Solar Energy Produced. The incentive would be changed to a one-time incentive per kWh of solar energy produced. The amounts would be confirmed after one year of metered operation; however 50% of the estimated incentive would be paid upon commissioning of the system.

3.4 ASSESSMENT OF OPTIONS

Table 3.1 summarizes the assessment. Options are rated as Very Good, Good, Neutral, Poor or Very Poor in relation to the criteria.

As shown, options 1, 4 and 5 rate poorly or very poorly in several areas. Although they have some advantages, they have too many disadvantages to be considered. Option 2 is better but it still provides a disincentive to improve system efficiency. Overall, Option 3 appears to offer the best compromise and no significant disadvantages.

Table 3.1
Assessment of Basis of Payment Options

Options	Simplicity	Cost-Effectiveness	Efficiency	Administration
Option 1 - Status Quo. Based on a percentage of costs	Very Good. Easy to understand.	Poor. Can encourage higher costs.	Neutral. Provides no incentive to improve efficiency but does not discourage it.	Poor. Requires extensive effort to review submissions and validate costs.
Option 2 - Collector Area Installed Basis - Minimum Efficiency Standard	Good. Relatively easy to understand, however, incorporation of a minimum efficiency factor adds some complexity.	Neutral. Incentive neither encourages nor discourages higher costs.	Poor. Provides little incentive to improve efficiency beyond the minimum. Encourages larger systems even if not needed.	Good. Will only require verification of area and efficiency rating.
Option 3 - Collector Area Installed Basis - with Efficiency Factor	Good. Relatively easy to understand, however, incorporation of an efficiency factor adds some complexity.	Neutral. Incentive neither encourages nor discourages higher costs.	Good. Will encourage higher technology efficiency.	Good. Will only require verification of area and efficiency rating.
Option 4 - Estimated Solar Energy Produced.	Very Poor. Most complex, involving the use of models and a variety of assumptions	Neutral. Incentive neither encourages nor discourages higher costs.	Good. Will encourage higher technology efficiency.	Poor. Will require review of assumptions and modelling.
Option 5 - Metered Solar Energy Produced	Poor. Somewhat simpler than estimating but it will still involve the complexity of measurement and reconciliation of the advance.	Neutral. Incentive neither encourages nor discourages higher costs.	Very Good. Will encourage both technology and operational efficiency.	Very Poor. Will require system to review and validate reports and follow-up on initial payments.

3.5 STAKEHOLDER VIEWS

Stakeholders had views on the options as well as the calculation of a performance factor.

Views on the Options

• A few stakeholders questioned whether the current approach really did cause an administrative burden but most were convinced by NRCan's argument that it delayed payment.
• Many stakeholders supported Option 5 (metering) in theory but agreed that it was not practical due to the challenges of monitoring, the administrative burden, and the cashflow impact of having to wait for a portion of the payment. Some also opposed Option 5 because it might be a disincentive for investing in energy efficiency.
• Although some companies already conduct metering of their projects, many stakeholders indicated support for a proposed NRCan initiative to support better measurement and facilitate the process to improve metering practices - e.g. hire a single organization to do metering of many projects.
• A few stakeholders supported Option 4 but most were convinced that the burden associated with modeling and/or the limitations of modelling made this option less attractive.
• The vast majority of stakeholders supported Option 3 (payment per area of collector with performance factor).
• A few stakeholders were concerned about the effect of the change on provincial and/or utility incentive programs. Ontario, Saskatchewan and Gaz Métropolitain indicated that they would need to re-assess their approach (it should be noted that the Gaz Métropolitain program already uses a different basis of payment and there is no arrangement with the ecoEnergy program).
• One stakeholder was concerned that changing the basis of payment could provide a disincentive to spend on pre-feasibility, engineering and quality.

Views on the Approach for Calculation of Performance Factor

NRCan presented its preliminary views on a methodology for calculating and using a performance factor. Stakeholder views included the following:

• There was general support for the concept and approach.
• Some stakeholders would like to see the Factor reflect overall system performance but most recognize this is not possible
• Stakeholders are concerned that the calculation be based on sound data and allow a fair comparison between technologies. In particular, the data used must originate from testing under standard conditions by an approved facility. At the same time, some stakeholders are concerned that current lab testing is not always reflective of true performance.
• Stakeholders questioned the use of European data to calculate the performance factor. Some felt that the adjustment being proposed by NRCan might not be sufficient to take into account differences in measurement.
• Stakeholders are concerned that flat plate and ETC technologies be treated fairly. If they are to use the same incentive rate, it will need to take into account the different performance levels calculated using absorber area versus gross area.
• Stakeholders are concerned that normalizing to the current best performing technology will lock-in a standard that will eventually become outdated. It was suggested that a more neutral scale be developed (e.g. based on best possible theoretical performance)
• Stakeholders expressed the view that the base level incentive (translated from current cost-based approach) should be based on the average performance of technologies. Thus, technologies with better performance would receive a higher incentive and those with lesser performance would receive a lower incentive.
• Many stakeholders indicated a desire to review the proposed performance factors before they are finalized.

3.6 RECOMMENDATIONS

Marbek recommends that NRCan adopt Option 3 - payment on the basis of collector area with a performance factor. At the same time, work should proceed to refine the proposed approach for calculation of the performance factor, taking into account the concerns expressed by stakeholders. These factors should be released in draft form for review by stakeholders prior to being finalized.

NRCan should also proceed with its planned initiative to support standardized measurement of solar energy production.

4. INCENTIVE LEVEL

This section looks at recent trends in use of the NRCan incentive and examines the cost-competitiveness of the different technologies in order to inform a review of the options for incentive level.

4.1 TRENDS IN USE OF THE NRCAN SOLAR THERMAL INCENTIVE

Figure 4.1 shows the trends over the past nine years. The bars (left-hand scale) show the growth in the number of projects and the lines (right-hand scale) show the average value of the grant². Although there are some discontinuities, the Figure generally shows a steady increase in both the number of projects and the size of the grants³. As shown, solar-air grants tend to be twice as numerous as solar-water grants and they are approximately 50% larger in cost. NRCan data also indicates that for solar air, a majority of grants deal with farm applications, replacing propane, and all of them are perforated plate applications (i.e. to date no grants have been provided for back-pass applications). Applications replacing natural gas in warehouses, and other similar buildings are also common. In the case of solar water, there are a number of applications, typically replacing natural gas.

If nothing is changed, the fear is that the increasing numbers and size of projects will consume all of the available funding before the scheduled end of the program.

Figure 4.1
Trends in Numbers of Projects and Grants

4.2 COST-COMPETITIVENESS

The first task in assessing options for the level of the incentive is to assess how cost-competitive the various technologies are in comparison to alternative energy sources in the absence of an incentive.

Approach

The five technologies were considered in the context of the applications listed in Table 4.1.

Table 4.1
Solar Technology Applications

Application	Solar Air Perforated Plate	Solar Air Backpass	Solar Water Unglazed	Solar Water Flat Plate	Solar Water ETC
Dairy Farms
Hotels
Health and Extended Care Facilities
Laundromats
Outdoor Pools
Multiple-Unit Residential Buildings (MURBs)
Recreation Facilities
Manufacturing Facilities		4
Schools
Warehouses
Farms

Energy saved was modelled using the RETScreen® decision support software and, along with the costs, was used to calculate a cost per kWh for comparison with other energy sources⁵. In each case, a typical project was defined (informed by the database of previous projects and information on the energy characteristics of buildings) and representative climactic conditions were applied. In addition, sensitivity analysis was conducted for a range of cost assumptions, climactic conditions, orientation, and prices for alternative fuels. The approach for calculating cost-competitiveness is described in Appendix A.

Results

Figure 4.2 shows the cost of energy delivered for solar air technologies in selected applications in comparison with natural gas, electricity, propane and oil. Figure 4.3 does the same for solar water technologies. For comparison purposes, the costs of the competing energy sources incorporate a penalty for the inefficiency of conversion to useful heat (see Appendix A). These figures illustrate the cost-competitiveness of technologies in selected applications under "typical" conditions as defined in Appendix A. They use typical costs and performance levels for each type technology. Some technologies may fare better and others may do worse.

Figure 4.2
Cost-Competitiveness of Solar Air Technologies

Figure 4.3
Cost-Competitiveness of Solar Water Technologies

As seen in Figure 4.2, most solar air applications using perforated plates appear cost competitive relative to conventional/other sources of energy (the exception are farms that have access to natural gas - though, as noted previously, most farm applications to date have involved propane). Backpass systems appear less cost-competitive, particularly in the case of MURBs⁶.

Unfortunately investment decisions are not always based on an analysis of the lifetime cost savings, but sometimes on shorter term payback considerations. In this respect, the typical payback periods for solar air perforated plate applications where electricity is the alternative is about 6 years (4.5 years for manufacturing). Where natural gas is the alternative, the payback period is 8-10 years. In farm applications where propane is the alternative, the payback is about 8 years. This contrasts with typical payback expectations that range from 2-3 years (in the case of business) to 4-5 years (for institutions), and 6+ years (for farms)⁷.

In contrast, Figure 4.3 indicates that it is a challenge for solar water to compete with alternative energy sources in most applications, at current low prices for these alternatives. The exception is unglazed applications in pools, in comparison to electricity, propane or oil.

Sensitivity Analysis

The situation for solar water applications obviously improves if higher alternative fuel rates or lower technology costs are assumed. In the case of electricity, propane and oil, competing prices would need to be 50% higher or technology costs would need to be 50% lower for solar water applications to be cost competitive. In locations with higher solar radiation and colder climate (e.g. Regina), the cost would improve by about 25% but this would not be sufficient to make the applications cost-competitive (conversely, in locations with lower solar radiation and milder climate, the cost-competitiveness would be even worse than indicated in the Figures). Technology lifespan has only a small effect on cost-competitiveness.

A combination of favourable solar and climactic conditions and significantly reduced technology costs could make applications cost-competitive, even in comparison with natural gas. If the cost of the alternative fuels were to rise, the situation would improve further.

In the case of solar air, most applications are cost-competitive under typical conditions; however, the payback periods are not necessarily in line with decision-maker expectations. Payback periods would improve if higher alternative fuel rates were used (e.g. in comparison with 50% higher electricity costs, the payback would be reduced from 5-6 years to 3-4 years).

Findings and Implications

The key findings of this analysis are:

• Under representative conditions, perforated plate solar air systems are cost-competitive in most applications. In farm applications, they are particularly cost-competitive compared to propane but less so compared to natural gas.
• At current energy prices, back-pass systems are generally not cost-competitive under typical conditions.
• With the exception of unglazed technology application in outdoor pools, solar water technologies have difficulty competing with traditional energy sources in all other applications, at current prices. This is true in comparison with all fuels, but particularly natural gas. They begin to be cost competitive in comparison with electricity at higher prices but it takes a combination of several factors (technology costs, alternative fuel prices, climactic conditions) to make them truly cost-competitive⁸.
• Generally there are few differences in cost-competitiveness between different applications of the same technology. The exceptions are, in the case of solar air, applications in manufacturing facilities which tend to be more cost-competitive and farm applications which tend to be less so; and, in the case of solar water, the application of unglazed technology in outdoor pools which is significantly more cost-competitive than other applications.

The implications are:

• There is less need for incentive support for solar-air applications and for unglazed technology used in outdoor pools.
• Solar water applications would need more support to be cost-competitive versus electricity, oil and propane and significantly more support to be cost-competitive versus natural gas.

4.3 INCENTIVE LEVEL OPTIONS

Section 3 examined options for the basis of payment. This section considers options for the level of the incentive based on the results of the cost-competitiveness analysis. The first step is to list and define assessment criteria. The second step is to identify and define the options and range of incentive levels. Finally, the third step is to use the criteria, along with the assessment of cost-competitiveness above, to identify the most promising options.

4.3.1 Evaluation Criteria

Once again, the criteria for evaluation of the options include the objectives outlined in the Introduction and the best practices discussed above. Those that apply to the selection of level of incentive are listed here.

The options will be assessed against the following criteria:

• Fairness and Equity. The degree to which technologies in similar applications receive an equivalent incentive.
• Maximize the Number of Installations - Provide Needed Support. The extent to which the incentive helps overcome the gap in cost-competitiveness.
• Maximize the Number of Installations - Free ridership⁹. The extent to which the unnecessary payment of incentives for projects that would proceed anyway is reduced, thereby allowing those funds to be redeployed to increase the overall number of installations.
• Help Overcome Non-Financial Barriers - Maintain Government Seal of Approval. The preservation of a degree of government support, to help overcome other market barriers.
• Simplicity. The number of variations and levels of incentives should be kept to a minimum.
• Administration. The relative burden and cost of preparing submissions and reviewing them.

4.3.2 Identification of the Options

The options for level of incentive actually involve two sets of choices: (1) deciding whether to vary the level of incentive in certain cases; and (2) deciding what the level should be in each case.

Options for Varying the Incentive

The first series of options concern the potential to vary the level of incentive according to circumstances, such as:

• By type (solar air or solar water)
• By technology (e.g. flat plate, ETC, unglazed)
• By application (e.g. farms, pools, warehouses, etc.)
• By fuel alternative (e.g. electricity, natural gas, propane, etc.).

Choice of Level

The second set of choices concerns the level of incentive for each applicable circumstance. A useful reference point for the discussion of options for level of incentive is the current basis of payment, i.e. percentage of cost. It is proposed that the range of potential incentives be considered on this basis and that the appropriate level then be translated into the new basis of payment. In determining the level, it is important to note the program policy is that overall government incentives will not exceed 50% of the costs, and recognize the interests of both the federal and provincial governments in supporting the industry¹⁰. Thus the maximum level of federal support will continue to be 25% of costs (except in remote communities). Furthermore, the maximum incentive amount of $80,000 (outlined in approved program conditions from Treasury Board) will also remain. Thus the options for level of incentive will range from zero to 25%.

4.3.3 Assessment of Options for Varying the Incentive

As noted above, there are four potential ways in which the incentive could be varied. Table 4.2 summarizes the assessment of each of the options (which are not mutually exclusive). For this part, the applicable criteria are: fairness and equity, ability to target support and minimize free ridership, simplicity and administration. Options to vary are rated as Very Good, Good, Neutral, Poor or Very Poor in relation to the criteria.

Variation by Type

As seen in Figures 4.2-4.3, there is a significant difference between the cost-competitiveness of solar air applications and solar water applications, implying very different needs. This suggests that the level of incentive should be different to avoid free ridership and to provide needed support to the extent possible.

Variation by Technology

In the case of solar water, as seen in Figure 4.3, the cost competitiveness of the technologies is comparable (except for unglazed technology used in pools) and thus, the same level of support should be able to address needs. In the case of solar air, as seen in Figures 4.2, the same level of support could end up being insufficient for back-pass systems or, if too high, would result in free ridership from perforated plate systems. Nevertheless, the interests of simplicity, fairness and equity, suggest that the same level of support should be provided to all competing technologies in similar applications.

Variation by Application

In the case of solar air, there are some variations in cost-competitiveness, notably for manufacturing applications and for farms. Although manufacturing appears more cost-competitive, the payback period usually demanded by corporate decision-makers is also higher and therefore the effective difference is not significant. In the case of farms, there is a case to be made for a different level, but as noted previously most farm applications involve propane as the alternative, and therefore these applications are already more cost-competitive. In the case of solar water, the only significant variation is for pools, but that difference is significant both in terms of the nature of the applications and its cost-competitiveness. Balancing simplicity with providing the appropriate level of support and avoiding free ridership, suggests an exception for pools only.

Table 4.2
Assessment of Options for Varying the Level of Incentive

Option to vary by …	Fairness and Equity	Ability to Target Support and Minimize Free Riders	Simplicity	Administration	Overall Assessment
Type	Neutral. Solar air and Solar water are different markets.	Very Good. Cost- Competitiveness is very different.	Poor. Would be a minor addition in complexity.	Neutral. There is no effect on administration effort.	Yes. Given the major differences in cost- competitiveness, the ability to target support and minimize free riders overrides other factors.
Technology	Very Poor. Providing different support to technologies in the same market would be unfair.	Good for solar air. As cost- competitiveness of the technologies is very different. Neutral for solar water as cost- competitiveness is comparable.	Poor. Would be a minor addition in complexity.	Poor. There is a minor increase in administrative effort required to process different levels.	No. The interests of fairness, simplicity and administration override the benefit of targeting support.
Application	Neutral. All technologies would be able to benefit.	Good in most cases.The differences are generally minor.  Very Good for outdoor pools as there is a significant difference in this case.	Poor. Would be a minor addition in complexity.	Poor. There is a minor increase in administrative effort required to process different levels.	Yes for pools only. The interests of simplicity and administration outweigh the minor advantage in targeting support except in the case of pools, where the difference is so significant.
Fuel	Neutral. All technologies would be able to benefit.	Good. This would allow incentives to be more accurately targeted to situations where the support is needed.	Very Poor. Would be a major addition in complexity, as fuel prices would vary by location and over time.	Very Poor. Administrative burden of proving and verifying that a  cheaper fuel (e.g. natural gas) is available would be substantial	No. The interests of avoiding a complex and burdensome system outweigh the benefits.

Variation by Fuel Alternative

As seen in all the Figures, the costs of the competing energy sources vary considerably and thus the cost-competitiveness of the solar systems depends on which fuel is available. Providing the required support and avoiding free ridership would suggest that variation by fuel would be appropriate. On the other hand, the administrative burden of proving and verifying that a cheaper fuel (e.g. natural gas) is available would be substantial. Furthermore, the prices and thus the relative cost-competitiveness of the various alternative fuels could change (sometimes rapidly) and this could mean that the incentives would have to be adjusted. Overall, the concerns of simplicity and administration suggest that the incentive should not vary by fuel.

4.3.4 Choice of Level

As noted above, the choice should be expressed in term of a percentage of costs and needs to be in the range of zero to 25%. This level then needs to be converted into the chosen basis of payment. The previous sub-section identified three different circumstances, each of which could have a different level of incentive.

Solar Air

As shown in Figure 4.2, the current 25% of cost incentive appears to be leading to free ridership (i.e. the Figures suggest that most applications are already cost effective and therefore perhaps no incentive is needed). On the other hand, the desire to continue to communicate a government "seal of approval" suggests that some level of incentive should be preserved. More importantly, payback periods without incentives are not particularly attractive. As noted earlier, the typical payback in cases where electricity is the alternative is about 6 years, whereas 4 years would be the maximum for many organizations¹¹. Thus an incentive covering approximately 1/3 of costs (e.g. 33%) would be helpful¹².

Although the analysis provides some guidance, deciding what level is appropriate remains a judgment call. Assuming that half of that incentive came from the federal government, an incentive of approximately 15% of costs would be warranted. Or, looking at it another way, assuming that decision-makers give equal weight to the lifecycle cost and the payback analysis, the needed incentive is halfway between zero and 33%, or approximately 15%. 15% could also be justified on the basis that there are many projects whose payback periods will be more attractive than the average and that those projects should be developed first.

Using basis of payment Option 3 and typical costs, 15% would translate to an average of $60/m². The actual payments would depend on performance factors and would be expected to range between $50/m² and $70/m^2 13.

Solar Water (except pools)

As shown in Figure 4.3, the support needed to make solar water applications cost-effective is substantial. As noted earlier, the equivalent of a 50% reduction in costs would be needed to make these applications cost-effective in comparison with electricity, propane and oil. Even then, they would not be cost-effective in comparison with natural gas. Based on this analysis, the maximum available federal incentive of the equivalent of 25% of cost should be continued. Combined with an equivalent provincial incentive, this should allow many applications (particularly in advantageous conditions) to proceed. Furthermore, as technology costs are reduced and efficiencies are improved over time, more and more applications should become cost-effective.

Using basis of payment Option 3 and typical costs, 25% would translate to an average of $300/m². The actual payments would depend on collector performance factors and would be expected to range between $200/m² and $400/m².

Pools

As shown in Figure 4.3, pool applications of unglazed systems are already cost-effective in comparison with fuels other than natural gas. Figure 4.3 also shows that a reduction in costs of approximately 30% would be sufficient to make unglazed systems cost-effective in comparison with natural gas. This amount would also help reduce the payback to levels that would be acceptable to public institutions. Assuming matching grants from provincial governments, the federal incentive could be set at the equivalent of 15% of costs.

Using basis of payment Option 3 and typical costs, 15% would translate to an average of $30/m². The actual payments would depend on performance factors.

4.4 STAKEHOLDER VIEWS

Stakeholders had comments on the cost-competitiveness analysis, on the options for varying the incentive, as well as the levels of incentive.

Views on the Cost-Competitiveness Analysis

• Stakeholders had mixed views on the accuracy and applicability of RETScreen®. Some believe that the software significantly underestimates the solar energy production from some technologies. Others think that it is reasonably accurate. Most stakeholders seemed to accept that it provided enough accuracy for the general policy purposes of this analysis.
• Stakeholders had mixed views on the assumptions concerning the prices of competing energy sources. The majority believe that the assumption of constant energy prices is not realistic and that prices will rise substantially over the years. However, it was also noted that the assumed price for natural gas is substantially higher than the current cost in western Canada.
• Stakeholders had mixed views on the applicability of LUEC and payback period as potential indicators of cost-competitiveness. Many felt that the industry should be promoting the full life-cycle cost comparison inherent in LUEC, but many also pointed out the need to recognize the reality of how business decisions are made.
• Proponents of perforated plate solar air technology noted that, while this technology is cost-competitive in typical applications, the need for support continues to be felt in less advantageous conditions.

Views on the Options for Varying the Incentive

• There was general agreement that the incentive should be varied between solar air and solar water technologies.
• There was also general agreement that the incentive should not be varied according to technology or according to the competing energy source.
• However, some stakeholders disagreed with the proposal to vary the incentive for unglazed solar water application in outdoor pools (see below).

Views on the Proposed Level for Solar Air

• Stakeholders expressed concern that a substantial reduction in the incentive at this time would affect many projects and stall the progress that is just beginning.
• These stakeholders were also concerned that the proposal involved too much of a reduction over too short a time period and that the proposal was not taking into account non-financial barriers.
• There was also concern that the choice of 15% is arbitrary and that it relies, at least in part, on the assumption that provinces provide a matching grant, whereas most provinces do not have a matching grant for solar air.
• Some of the stakeholders representing the solar water industry expressed support for maintaining current levels of support for solar air. However, others were concerned about preserving sufficient funds for the program and suggested that solar air was cost-competitive enough that the incentive should be reduced further or eliminated. Some of these stakeholders also suggested that one way to conserve the funding that would be fair to all, was to reduce the maximum grant (e.g. from $80,000 to $40,000).
• Ultimately, the solar air industry seemed to accept the need for some reduction in the incentive but they suggested either a gradual reduction to 15% in the final year of the program, or a flat reduction to the average level implied by this gradual reduction (i.e. 20%) after a reasonable notice.

Views on the Proposed Level for Solar Water

• There was general agreement with the proposal to maintain the level of support at the equivalent of 25% of costs.
• Some stakeholders indicated that the maximum level of incentive should be raised but most seemed to accept that NRCan was operating under program approval constraints and that the timing was not appropriate to seek changes.

Views on the Proposed Level for Unglazed Collectors in Outdoor Pool Applications

• Some stakeholders noted that, in most cases, the competing energy source is natural gas, which means that the cost-competitiveness challenge remains.
• Some also noted that outdoor pools have the advantage of being a highly visible application of solar technology which helps create awareness and support.
• Overall, the prevailing opinion was that unglazed collectors in outdoor pool applications should continue to receive the current level of support at the equivalent of 25% of costs.

4.5 RECOMMENDATIONS

Solar Air

Marbek recommends that the level of incentive for solar air technology applications be set at the equivalent of 15% of costs for the remainder of the program but that six months notice be provided. This recommendation takes into account the views of stakeholders but is based on the following observations:

• Although payback and other non-financial barriers remain as obstacles, the cost-competitiveness analysis indicates there should be a sufficiently large supply of viable projects, needing relatively little additional incentive.
• A gradual reduction to 15% or a flat reduction to 20% will not generate enough savings to provide sufficient guarantee of the availability of funding in the final year of the program.
• There is value in the certainty, clarity and simplicity of a one-time change as opposed to a schedule of changes.
• It will be important to evaluate the effects of the change on the market for solar air technologies. However, for such an evaluation to be conclusive the change needs to be well defined and the period of observation needs to be long enough. In our view, this is best accomplished by a minimum change of 10% and a minimum period of two years.
• Provision of sufficient notice is important in order to avoid disruption of projects currently under development.

Solar Water

Marbek recommends that the incentive be set at the equivalent of 25% of costs for all solar water technology applications, including unglazed collectors in outdoor pools. This recommendation takes into account the views of stakeholders and the following observations:

• Most outdoor pool applications use natural gas (8 out of 12 in the REDI database).
• The number and scale of outdoor pool projects is relatively small and therefore the potential savings are not large.
• There is some value in the simplicity of maintaining the same level of support (in the equivalent percentage of costs) for all solar water applications. However, it should be noted that this may translate to a different level on the basis of collector area.

Maximum Grant

Marbek recommends that the maximum grant not be reduced from the current level of $80,000 for most applications. Although a reduction could provide more funds and allow more installations to be supported, it would hamper the development of medium-sized projects that are likely to be important in the development and sustainability of the industry. Furthermore, since this idea was only raised at one workshop, it would require more consultation with stakeholders in order to assess the implications.

APPENDIX A
Cost-Competitiveness Modelling Approach

Approach to Cost-Competitiveness Modelling

For each technology, a number of typical applications were identified and a representative archetype was adopted. An archetype is a set of parameters that represent a typical building in each application. The applications were chosen based on the experience with of ecoEnergy for Renewable Heat and REDI projects, and in discussions with NRCan and technology proponents. The parameters that define each archetype were based on Marbek's in-house database (assembled over the years from surveys of typical applications) and the database of successful submissions to REDI. The assumptions are outlined in Exhibits A.2 and A.3.

Energy calculations were done using the RETScreen® decision support software. ¹⁴The main calculations were completed using typical climate data (based on Toronto), a southern exposure and a product life of 20 years. Sensitivity analysis was conducted for a more ideal climate situation (Regina) and a less ideal situation (Vancouver); for a 15 and 25 year life; and for other orientations.

Cost-competitiveness was assessed using Levelized Unit Energy Cost (LUEC), which is defined as the discounted capital and operating costs per unit of discounted energy over the lifetime of the project. A real discount rate of 8% was used.

Prices for the alternative energy sources were assumed to remain constant over the period¹⁵; however sensitivity analysis was completed for higher and lower figures in the case of electricity and natural gas. Energy prices were obtained from Ontario utilities and suppliers and include all charges (e.g. commodity, delivery, debt retirement, etc.). The assumptions are shown in Exhibit A.1. For comparison with solar energy produced, penalties were assigned for inefficient conversion to useful heat, as follows:

• Air - fossil fuels: 20%
• Air - electricity: 0%
• Water - fossil fuels: 25%
• Water - electricity: 9%

Exhibit A.1
Alternative Fuel Cost Assumptions and Sensitivity Analysis

Fuel	Average		Low		High
	Fuel Cost	$/kWh	Fuel Cost	$/kWh	Fuel Cost	$/kWh
Electricity		$0.11/kWh		$0.055/kWh		$0.165/kWh
Natural Gas16	$0.50/m3	$0.048/kWh	$0.35/m3	$0.034/kWh	$0.65/m3	$0.063/kWh
Oil17	$1.006/L	$0.094/kWh	N/A	N/A	N/A	N/A
Propane18	$0.65/L	$0.092/kWh	N/A	N/A	N/A	N/A

Exhibit A.2: Solar Air Assumptions

Solar Air	MURBs	Warehouse	Rec. complex	Schools	Manufac- turing	Farms
Air Flow (CFM)	2,790	1,400	2,000	32,000	2,000	5,000
O.A Require- ments	20 CFM/ person 430 ft2/person 60 000 ft2	40 CFM/ person 1 000 ft2/person 35 000 ft2	20 CFM/ person 100 ft2/person 20 000 ft2	32 CFM/ person 100 ft2/person 100 000 ft2	20 CFM/ person 1 000 ft2/person 100 000 ft2	Chicken farm @ 5L/s/m2, 1000 m2
Indoor Tempera- ture (°C)	21	21	21	21	21	24,5
Max. air Tempera- ture (°C)	35	35	35	35	35	29,4
Wall R-value (m2 - °c/W)	1,6	2,1	2,1	2,1	1,6	2,1
Operating days per week	5	5	5	5	5	5
hours/day - week	24	24	24	24	24	24
Operating days per weekend	2	2	2	2	2	2
hours/day - weekend	24	24	24	24	24	24
Monthly operating schedule (%)
January	100	100	100	100	100	100
February	100	100	100	100	100	100
March	100	100	100	100	100	100
April	100	100	100	100	100	100
May	100	100	100	100	100	100
June	0	0	0	0	0	0
July	0	0	0	0	0	0
August	0	0	0	0	0	0
September	100	100	100	100	100	100
November	100	100	100	100	100	100
December	100	100	100	100	100	100
Base case heating system
Natural gas	Boiler	Boiler	Boiler	Boiler	Boiler	Burner
Oil	Boiler	Boiler	Boiler	Boiler	Boiler	Burner
Propane	N/A	N/A	N/A	N/A	N/A	Burner
Electricity	Resistance	Resistance	Resistance	Resistance	Resistance	Resistance
Annual Efficiency (%)
Natural gas	80	80	80	80	80	80
Oil	80	80	80	80	80	80
Propane	N/A	N/A	N/A	N/A	N/A	N/A
Electricity	100	100	100	100	100	100
Fuel Cost
Natural gas ($/m3)	0.5	0.5	0.5	0.5	0.5	0.5
Oil ($/L)	1.006	1.006	1.006	1.006	1.006	1.006
Propane ($/L)	0.65	0.65	0.65	0.65	0.65	0.65
Electricity ($/kWh)	0.11	0.11	0.11	0.11	0.11	0.11

• The assumption is that the delivery temperature is set to a higher value (i.e. 35c except for farms) so system can offset heating loads rather than just tempering the makeup air so as to not cause an additional heating load.
• For manufacturing applications, the modeling incorporated the effects of de-stratification. De-stratification might also apply to other buildings with high ceilings and large open spaces (e.g. warehouses, rec complexes, etc.), however, the analysis for these applications did not included it. For manufacturing applications, the effect of de-stratification can lead to an increase in annual energy savings of approximately 70% for a typical installation.

In the case of solar air, a black collector with an absorptivity of 94% was assumed; the efficiency is calculated by RETScreen and takes several factors into account including wind and other design parameters. In the case of backpass collectors, a 49% efficiency was assumed

Note: there is some debate regarding the accuracy of the modeling approach to estimate the performance of ETC, however, for our purposes RETScreen has been used with the above coefficients. NRCan will need to consider the validity of alternative approaches and estimates.

Exhibit A.3: Solar Water Assumptions

Solar Water	MURBs	Hotels	Health/EC	Dairy Farms	Laundro- mat	Rec. complex	Outdoor pool*
Water Usage (L/unit/day)	153	68	177	7,75	156	56,8	N/A
Tempera- ture (°C)	55	55	55	55	55	55	27
# of units
Occupancy rate (%)	90	75	100	100	50	75	N/A
Operating days per week	7	7	7	7	7	7	7
Monthly operating schedule (%)
January	100	100	100	100	100	100	0
February	100	100	100	100	100	100	0
March	100	100	100	100	100	100	0
April	100	100	100	100	100	100	0
May	100	100	100	100	100	100	50
June	100	100	100	100	100	100	100
July	100	100	100	100	100	100	100
August	100	100	100	100	100	100	100
September	100	100	100	100	100	100	50
October	100	100	100	100	100	100	0
November	100	100	100	100	100	100	0
December	100	100	100	100	100	100	0
Base case heating system
Natural gas	Bolier	Bolier	Bolier	Tank	Bolier	Bolier	Bolier
Oil	Bolier	Bolier	Bolier	Bolier	Bolier	Bolier	Bolier
Propane	N/A	N/A	N/A	Tank	N/A	N/A	N/A
Electricity	Resistance	Resistance	Resistance	Resistance	Resistance	Resistance	Resistance
Annual Efficiency (%)
Natural gas	75	75	75	75	75	75	75
Oil	70	70	70	70	70	70	70
Propane	N/A	N/A	N/A	75	N/A	N/A	75
Electricity	91	91	91	91	91	91	91
Fuel cost
Natural gas ($/m3)	0.5	0.5	0.5	0.5	0.5	0.5	0.5
Oil ($/L)	1.006	1.006	1.006	1.006	1.006	1.006	1.006
Propane ($/L)	0.65	0.65	0.65	0.65	0.65	0.65	0.65
Electricity ($/kWh)	0.11	0.11	0.11	0.11	0.11	0.11	0.11

^*Additional assumptions for pools:

Pool size (m2)	180
Cover use (h/j)	16
Makeup water (%)	5
Wind sheltering (%)	20
Solar shading (%)	20

The following solar water collector performance coefficients were assumed:

		Solar Water unglazed	Solar Water glazed - flat plate	Soalr Water - glazed vacuum tube
Type		Unglazed	Glazed	Glazed
Gross area per solar collector	m2	4.44	2.98	2.97
Aperture area per solar collector	m2		2.78	2.38
Fr (tau alpha) coefficient		0.84	0.70	0.52
Wind correction for Fr (tau alpha)	s/m		0.00
Fr UL coefficient	(W/m2)/°C	18.47	4.93	1.20
Wind correction for Fr UL	(J/m3)/°C		0.00
Temperature coefficient for Fr UL	(W/m2)/°C2		0.00

Technology costs (see Exhibit A.4) were determined in part from the REDI database and modified by Marbek according to discussions with NRCan and technology suppliers and using judgement. They include the total installed and delivered cost of typical systems. The high and low pricing accounts for the range of possible costs according to several factors including geographical differences, economies of scale, and complexity differences. Note that the costs for ETC and glazed flat plate collectors are based on gross collector area. Also, for all solar water heating technologies, operation and maintenance costs are assumed to be 10% of the initial installed cost over the life of the system, or 0.5% per year.

Exhibit A.4
Technology Cost Assumptions and Sensitivity Analysis

Technology	Application	Average	Low	High
Solar Water
Flat Plate/ETC	All	$1100/m2	$550/m2	$1650/m2
Unglazed	All	$200/m2	$150/m2	$250/m2
Solar Air
Perforated	MURB	$500/m2	$400/m2	$600/m2
	School	$400/m2	$300/m2	$500/m2
	Warehouse	$400/m2	$300/m2	$500/m2
	Rec Complex	$400/m2	$300/m2	$500/m2
	Manufacturing	$300/m2	$240/m2	$360/m2
	Farm	$500/m2	$400/m2	$600/m2
Backpass	MURB	$550/m2	$350/m2	$750/m2
	Manufacturing	$550/m2	$350/m2	$750/m2

For all technologies, except for unglazed solar water collectors, year-round operation was assumed. For unglazed collectors, a seasonal profile was developed. For glazed and ETC solar water technologies, the size of the collector bank was determined using RETScreen based on the assumed hot water load. This typically resulted in a 40-60% solar fraction.