How Much Is Apple Really Paying For Power In Its $850M Solar Deal?

Does it make sense for Apple to lock in electricity prices at twice the going rate? 

You heard the news already: Apple Computer is teaming up with First Solar to invest $850 million on a 2,900-acre, 280 megawatt solar farm in Monterey County, Calif. Everyone other than the owls, lizards and San Joaquin kit foxes that live on the land seem to think this is a really great deal, an example of the world's biggest company stepping up and doing something constructive about climate change or whatever.

I'm more curious about how good or bad a deal this is for Apple shareholders.

Let's start though by correcting some early misconceptions. First, Apple will not be owning a piece of the solar installation, rather it is just buying the electricity output of the plant. Second, Apple will not be investing its $850 million upfront, rather it will be buying the power as it's generated over 25 years. Third, Apple will be getting the electricity generated by 130 mw of installed photovoltaic capacity (out of 280 mw total), but the actual amount of power it receives won't be anywhere close to 130 mw.

With that out of the way, let's look at what Apple gets. The deal terms pencil out to about $6.50 per watt of solar capacity. This looks pretty crummy considering that the average price of utility-scale, thin-film solar capacity installed in 2013 was less than $3 per watt, according to the Lawrence Berkeley National Lab.

Although that looks expensive, remember that Apple is not putting up the capital to build this project, First Solar and its financial backers are, and it's safe to assume that the construction costs will be considerably lower than that $6.50 per watt (especially when you consider the 30% Federal investment tax credit the developers will enjoy).

More importantly, how much electricity will Apple end up getting from this solar farm, and how much will it end up paying for kWh? Those figures haven't been disclosed, but we can make some good estimates.

The deal calls for Apple to get the electricity output from 130 mw of installed photovoltaic panels. But that doesn't mean it will be getting 130 mw around the clock. Solar panels only make power when the sun shines. The U.S. Energy Information Administration regularly looks at the "capacity factors" of various modes of power generation -- that is what percentage of the time does a power plant actually operate at its full capacity. Or said another way: how much power a generator truly produces relative to its maximum possible output under perfect conditions. Power plants that burn coal tend to run at greater than 65% of capacity. Plants that split atoms do better than 90% of installed capacity. Plants that burn landfill gas work at around 68%. Solar photovoltaic systems, on the other hand, do a mere 33% or less.

That means that out of Apple's 130mw share of installed PV capacity, Apple will only be getting the equivalent of a 43 mw flow of around-the-clock power. 

Is that a lot? Well consider that the average American home uses 10,800 kWh per year, or 903 kWh per month, according to EIA data. That equates to a steady demand of about 1.2 kw. Thus, 1 mw of constant power generation is enough to supply the electricity needs of 830 homes.

Apple then, will be getting enough juice to run the equivalent of about 36,000 homes. 

And how many total kilowatt-hours does that add up to over 25 years? This calculation is akin to converting the flowrate of a river into buckets full of water. It goes like this:

1 megawatt continuous flow = 24 megawatt hours per day.

24 mWh per day x 365 days = 8,760 mWh hours per year.

8,760 mWh per year x 25 years = 219,000 mWh.

Multiplying that out by Apple's 43 mw and we get 9.4 million mWh. That equates to 9.4 billion kWh over 25 years. 

Divide that out by the $850 million, and we come up with an average electricity cost of 9 cents per kWh.

And that's on the conservative side. We didn't factor into the calculations the impact of system degradation. According to research from the National Renewable Energy Laboratory, the performance of the average PV system degrades by at least .5% per year. That means after 20 years Apple would be getting more like 39 mW, making its electricity cost closer to 10 cents per kWh.

This might seem an OK price if you're paying your residential electric bill. But consider that the average wholesale electricity price in California in 2013 was 4.5 cents per kWh. So Apple is locking in a power price that is roughly twice the going market rate for wholesale power.

Does that make sense? Yes it does, if you believe that over the next 25 years the prices of other fuel sources are heading up. Sure you can get cheaper electricity from coal or natural gas today, but you'd have a hard time locking in today's cheap natgas prices because NYMEX futures imply significantly more expensive gas in the future. Furthermore, there's the carbon question to contend with -- if federal carbon taxes are ever imposed, it would dramatically drive up the cost of electricity to the end user.

For Apple, this 25-year power purchase agreement is an excellent hedge against all these uncertainties. It smooths out operating costs and enables Apple to further bolster its image as a responsible corporate citizen.

And even if it doesn't work out, so what? With $30 billion in cash and short-term investments and $145 billion in marketable securities, Apple can afford to take the risk of overpaying for electricity.

With assistance from Forbes contributor William Pentland.