Commercial Solar Economics
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Commercial Solar Economics

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Commercial Solar presentation focusing on the finance of loans and PPAs

Commercial Solar presentation focusing on the finance of loans and PPAs

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Commercial Solar Economics Commercial Solar Economics Document Transcript

  • Andy Black “Commercial Solar Economics & Solar Financial Analyst (408) 428 0808x1 Introduction to Financing with Leases & andy@ongrid.net PPAs”Solar Living Institute: April 20, 2008, Los Angeles, CA, 9am-5pm Contact: Solar Living Institute: www.solarliving.org, 707 744 2017 to register 8:30 Check-in 9:10 Introductions Commercial Tax & Incentive Issues Break, Q & A, Networking TOU & Demand Rate Choices & Case Studies ~12:00 Lunch, Q & A, Networking (~30 minutes if possible) Choosing Rebates vs. PBIs Commercial Financing In General Break, Q & A Financing with Leases Financing with PPAs ~4:30 Formal Conclusion, Break, Q & A Interactive Examples (for those who wish to stay) Using the OnGrid Tool We must be out by 5:00 (add’l questions outside)Diligence: Heights by great men reached and kept were not obtained by sudden flight, but they, while their companions slept, were toiling upward in the night. - Henry Wadsworth Longfellow
  • Andy Black “Commercial Solar Economics & Solar Financial Analyst (408) 428 0808x1 Introduction to Financing with Leases & andy@ongrid.net PPAs”Solar Living Institute: April 20, 2008, Los Angeles, CA, 9am-5pm Contact: Solar Living Institute: www.solarliving.org, 707 744 2017 to registerAbstract:This rigorous workshop is designed to help commercial systems integrators (dealers, installers, andsalespeople) understand and make the financial case for commercial PV systems including specificsfor the local/nearby utilities (depending on location), then understand how to finance them withPPAs and Leases.“Economics of Solar: Making The Financial Case for Residential Solar” or equivalent is a requiredprerequisite.This class includes: Economics of commercial & municipal systems, including the additional incentives (tax credits, RECs, PBIs, depreciation), and utility tariff options (including TOU and demand charge rate choices) PPAs: Understanding the basics, subtleties, complexities, risks, and opportunities Leases: Understanding the major types, how and when they are used A short list of financing, legal, tax, and accounting providers who specialize in solarAll students will receive a copy of the demo version of the OnGrid Tool (licensing agreement will berequired).Biography:Andy Black is a Solar Financial Analyst and the owner of OnGrid Solar. OnGrid Solar providesfinancial analysis and sales education & software to solar installers to help them make a strong salescase for solar electricity to their customers. Andy has more than a dozen years of design, consulting,teaching, sales, and research experience in solar. He specializes in demonstrating the financial paybackof solar electricity systems. He is a former NABCEP certified solar installer.Andy Black is a recent member of the Board of Directors of the American Solar Energy Society andserved as Chapters Representative. He is also a member of the Advisory Board of the NorthernCalifornia Solar Energy Association.Andy’s formal education includes a Bachelor’s in Electrical Engineering from Penn State University, aMaster’s in Electrical Engineering from University of Southern California, and a Marketing Certificateat the University of California. His training in solar electricity includes Solar Energy International’sintensive photovoltaic coursework and more than a dozen specialty courses in solar electric and relatedfields. He presents regularly on the financial analysis of solar electricity to audiences nationwide.Andy is also the groundskeeper and servant for a cat at his home in San Jose, CA.Contact Info: Andy Black, CEO OnGrid Solar 4175 Renaissance Dr #4, San Jose, CA 95134 (408) 428 0808x1 andy@ongrid.net www.ongrid.net
  • COMMERCIAL SOLAR Introductions & Thanks ECONOMICS & FINANCING !  Solar Power International 09 Andy Black !  Solar Electric Power Association Solar Financial Analyst "  Julia Hamm & Emily Brown, & Stuart Raper & Sales Software Creator !  Andy Black, OnGrid Solar "  Solar Financial Analyst & OnGrid Tool Creator Solar Power International 2009 !  You for coming! © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 2 Quick Survey - Quick Survey - Who’s Here? !  Existing integrators / dealer / installers Your Goals for Today? "  Managers & Owners !  Learn about economics for general knowledge !  Salesperson for integrator / dealer / installer !  Want to use economics for selling / grow !  New or hopeful integrators / dealers / installers !  New or hopeful salespeople business !  Government / Utilities !  Want to learn about / have the OnGrid Tool !  Customers / consumers / end users !  Want to increase your knowledge to develop !  Manufacturers your own tool !  Others? !  Who’s taken the Residential/Basic Payback Class?© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 3 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 4 Quick Survey - Instructor Background Area(s) of Interest? !  Came to learn specifically about: !  M.S. Electrical Engineering "  Commercial Financial Analysis: IRR, Tax, etc !  SEI graduate & NABCEP Certified PV Installer "  Commercial Lease Financing !  13 Years involved with Solar "  Commercial PPA Financing !  9 Years studying, writing, & presenting about # Use PPAs in selling Solar Financial Issues # Create new PPA offering to market !  5 Years as Solar Salesperson !  Other interests? !  Now a Solar Financial Analyst & !  Networking list? Creator of the “OnGrid Tool” solar sales software© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 5 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 6
  • Handout Resource List Decorum !  Resources available at www.ongrid.net !  Questions: Please focus on Solar Economics & Payback " Articles & papers on solar “Payback” !  No Side Conversations Please " Upcoming classes & events "  Hard for others to hear # Sales & Marketing !  Cell phones to fun mode # Slides from past classes !  Site Logistics & Breaks "  Free demos of the OnGrid Tool "  Facilities "  Lunch & 2 breaks: Networking© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 7 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 8 Agenda Installed System Costs - Size !  Commercial Solar Financial Analysis !  Typical range $7-$11/ CEC AC watt thru 10/2008 "  Commercial Incentive, Tax, & Tariff Issues !  Commercial, Gov’t & Non-Profit: $7-$9/Watt CEC AC "  Four Financial Analysis Methods & Examples "  $5.50-$7.50/Watt STC DC (1 W DC =~ .83 W AC) !  Choosing Rebates vs. PBIs "  $5.50/W STC is typical for 500kW+ !  Financing with Leasing & PPAs !  Some economies of scale !  Interactive Examples using the OnGrid Tool !  Price Trends 2003-2008 Questions preferred at points marked: "  Germany & Spain Questions? "  Please focus on Economics Questions? !  Price Declines Since 11/2008 and Predictions !  Down $1 by 5/2009; Down $1.50-$2 by 12/2009© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 9 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 10 PBI: Performance CSI EPBB Rebate Based Incentive !  Systems under 50kW (30kW in 2010+) !  Systems over 50kW (30kW in 2010+) !  EPBB: Expected Performance Based Buydown "  Optional for systems <50kW "  Adjusted for Expected Performance: !  Paid for all kWh produced for first 5 years # Tilt, Orientation, Shading, Location, Module "  Actual performance Temperature (due to lack of air flow) # EPBB Calculator: www.csi-epbb.com Questions?© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 11 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 12
  • CSI Trigger Tracker Step Statewide MW in Step EPBB Payments (per Watt) Residential Commercial Government / PBI Payments (per kWh) Residential Commercial Government / Tax Benefit Overview Non-Profit Non-Profit 1 50 n/a n/a n/a n/a n/a n/a 2 70 $2.50 $2.50 $3.25 $0.39 $0.39 $0.50 3 4 5 100 130 160 $2.20 $1.90 $1.55 $2.20 $1.90 $1.55 $2.95 $2.65 $2.30 $0.34 $0.26 $0.22 $0.34 $0.26 $0.22 $0.46 $0.37 $0.32 !  Federal Investment Tax Credit (ITC)/Grant !  Federal & State Accelerated Depreciation 6 190 $1.10 $1.10 $1.85 $0.15 $0.15 $0.26 7 215 $0.65 $0.65 $1.40 $0.09 $0.09 $0.19 8 250 $0.35 $0.35 $1.10 $0.05 $0.05 $0.15 9 285 $0.25 $0.25 $0.90 $0.03 $0.03 $0.12 !  Only apply to taxable entities (not schools, 10 350 $0.20 $0.20 $0.70 $0.03 $0.03 $0.10 non-profits, gov’t, etc) Disclaimer: I’m not a CPA or lawyer, and am not providing tax advice. Seek qualified professional help Trigger Tracker website: http://www.csi-trigger.com As of 10/19/09 Program Data & Statistics: http://csi.powerclerk.com© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 13 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 14 Federal Investment Federal ITC “Grant” Tax Credit - Commercial - Commercial 2009-2010 !  30% Investment Tax Credit - Extended 10/2008 "  Must be “placed in service” in 2006-2016 !  30% ITC becomes (or optionally can be?) a Grant "  10% if installed after 2016 !  Same general features and intended functionality as “There is no feast which does not come to an end.” the ITC, but better: - Chinese proverb ! "  Paid < 60 days of “placed in service” or application !  IRS Form 3468 (Sect 48 of Internal Revenue Code) "  Usable even if no tax appetite (effectively a !  Unused credit can be carried forward 20 years refundable ITC or Federal Rebate) !  Commercial !  Commercial systems only "  Including home businesses > 20% sqf - with caution !  “Placed in service” in 2009-2010 only, or !  Limited by AMT in 2008, No AMT limit 2009-2016 "  Construction Initiated 2009-10, completed by 2017 !  Vests at 20% per year (over 5 years) !  Treasury web application now Commercial Solar Economics & Financing available© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 15 © 2009 OnGrid Solar, All rights reserved. - 16 Federal ITC “Grant” Limitations “Placed In Service” !  Commercial systems only SEIA “Guide to Federal Tax Incentives for Solar Energy” "  Limited to IRC Sec 48 and some Sec 45 Available at: www.seia.org! !  Pass-thru entities (partnerships, LLCs, S-corps) !  Equipment delivered and construction / installation can use grant, as long as none of the recipients is completed! non-taxable (and therefore disqualified) "  Minor tasks like painting need not be finished ! "  I.e. One disqualifies all, regardless of small % !  Taxpayer has taken legal title and control ! !  Allows transfer of ownership !  Pre-operational tests demonstrate the equipment !  Recapture of Grant or ITC on permanent functions as intended ! cessation of production !  Taxpayer has licenses, permits, and PTO (permission !  May be state taxable in certain cases to operate)!© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 17 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 18
  • “Placed In Service” Depreciation - Federal !  Depreciation = tax deduction spread over time POSTT:! !  MACRS 5-Year Accelerated Depreciation (1/2 yr conv.) !  Permits & Permission to Operate signed off! MACRS: Modified Accelerated Cost Recovery System "  !  Operation Commenced! IRS Form 4562 "  !  Equivalent of tax deducting system’s ‘basis’ over 5.5 years !  Synchronization with the Grid! Net Value = Basis * Tax Rate !  Testing Complete! Net Value = (System ITC basis - 1/2 ITC) * Tax Rate Net Value = System ITC basis * 85% * Tax Rate !  Turnover to the Customer! !  Regular Schedule: 20%, 32%, 19.2%, 11.52%, 11.52%, 5.76% !  2008-09 Schedule: 60%, 16%, 9.6%, 5.76%, 5.76%, 2.88% "  2008-09 Gets 50% “Bonus Acceleration of Depreciation” !  Commercial (including home businesses >50% by sqf) !  Up to 20 year carry-forward© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 19 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 20 Depreciation - CA State Financial Hazards & Gotchas !  Corporate: 12 Year Straight Line method !  Federal Tax on Rebate !  Non-Corporate: MACRS 5-Year !  1099 tax forms have been issued to "  (Sole-Proprietors, LLP, etc) recipients !  Section 136 applies only to residential !  State Depr Basis is Top Line Cost minus Rebate & State Tax Credit !  Commercial (including home businesses) Questions?© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 21 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 22 Rebate Tax Interactions Tax Credit & Depr. Example !  If the rebate is non-taxable, the federal ITC Non-Taxed Rebate $150K System Cost is on amount after rebate -$50K Rebate $100K Net Cost After Rebate !  If rebate is taxable, then federal ITC is on -$30K Tax Credit Value (30% of $100K) amount before rebate -$35K Depr Value (85% of $100K * 41%) =$35K Net Cost !  Rebates are not state taxable in CA 41% = combined net federal & state tax rate (35% Federal, 8.84% CA State)© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 23 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 24
  • Tax Credit & Depr. Example Tax Credit & Depr. Example Taxed Rebate Non-Taxed Rebate Taxed Rebate $150K System Cost $150K System Cost $150K System Cost -$50K Rebate -$50K Rebate -$50K Rebate +17.5K Rebate Tax ($50K * 35% Fed Tax) +17.5K Rebate Tax $100K Net Cost After Rebate -$45K Tax Credit Value (30% of $150K) -$30K Tax Credit Value -$45K Tax Credit Value -$52K Depr Value (85% of $150K * 41%) -$35K Depr Value (85K * 41%) -$52K Depr Value (127.5K * 41%) =$20.5K Net Cost =$35K Net Cost =$20.5K Net Cost If commercial, want rebate taxable (no choice) Then tax credit and depreciation are on amount before rebate "  Worth more to pay tax on rebate, then get 30% credit and " © 2009 OnGrid Solar, All rights reserved. depreciation on rebate © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 25 Commercial Solar Economics & Financing - 26 Section 179 Not Available Small Business Carry-Back of NOL !  Can’t use Section 179 Deduction (in lieu !  In 2009(+?), small businesses can carry of depreciation) and also get ITC or back Net Operating Losses up to 5 years Treasury Grant "  $15 Million Gross Receipts limitation "  Normally only 2 year carry-back !  2009 Economic Stimulus© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 27 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 28 Tax Benefits System Variables in More Depth !  ITC & MACRS reduce customer cost, but not !  Demand Charges up-front !  RECs !  Not available to all customers - affected by !  Time-of-Use (TOU) Choices & Issues AMT (before 2009 only) !  Commercial Tax Issues "  Ask about customers “tax appetite” "  More in Lease & PPA section !  Customers beware of optimistic sales claims© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 29 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 30
  • CPUC Loading Order Least GHG, Least Total Cost Electric Rate Structures Overview (including new power plants) 1a. Customer Awareness via Energy Audits and Analysis 1 - Energy Efficiency & Conservation 1b. Efficiency Rebates !  Options for Solar - Net Metering Eg: programmable thermostats and lighting controls, CFLs, etc. 2a. TOU & Super-Peak Rates !  3 Customer Classes (Res, Com, Ag) 2b. Demand Charges 2 - Demand Response & Load Control 2c. Utility Control Systems with large critical !  2 Types of Rate (Flat, TOU) Greater customers System 2d. Advanced Metering 2e. “Flex Your Power” Ads "  TOU: Time of Use 3 - Renewables Reliability 2f. PV 3. California Solar Initiative (PV), !  Demand Charges for Commercial & other RE programs Overall 4 - Clean Cost Fossil Effectiveness© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 31 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 32 Time of Use with Common Electric Rate Schedules Annual Net Metering Net Metering on an annual basis Common Commercial Rate !  Utility Common Ag Rates Schedules Combined with !  Time Of Use metering CA - PG&E A1, A6, A10, E19, E20 AG1, AG4, AG5 CA - SCE GS-1, GS-2, TOU-GS-3, TOU-8 PA-1, PA-2 !  Sell at high rate, Buy at low rate CA - SDG&E A, AL-TOU, A6-TOU, DG-R PA !  2:1 or 3:1 in customer favor !  Can reduce system size 0-30% NJ - JCPL GLP "  Reduction depends on % on-peak usage & rate schedule NJ – PSEG GP #  Commercial is usually small reduction #  Shading and orientation AZ - APS E-32 Questions?© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 33 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 34 Time Of Use Commercial Rates (PG&E) Commercial PG&E A6 & A10 Demand Commercial "A6" & "A10" Time-of-Use Pricing Periods Rate Size Flat Rate TOU Rate Charge Sunday Monday Tuesday Wednesday Thursday Friday Saturday A1 <20kW 13-19¢ Flat None Midnight - 6am Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak 40¢ Peak 6am - 8:30am Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak A6 Any* None 8:30am - Noon Off-Peak Part-Peak Part-Peak Part-Peak Part-Peak Part-Peak Off-Peak 11¢ Off-Peak Noon - 6pm Off-Peak Peak Peak Peak Peak Peak Off-Peak A10 <500kW 10-13¢ Flat High 6pm - 9:30pm Off-Peak Part-Peak Part-Peak Part-Peak Part-Peak Part-Peak Off-Peak 15¢ Peak 9:30pm - Midnight Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak A10 TOU <500kW High 9-11¢ Off-Peak 14¢ Peak !  Use and/or Sell On-Peak @ up to 40¢/kWh on A6 E19**/E20 >500kW High 7-8¢ Off-Peak !  More usage on peak, less benefit from TOU *If not required to be on another rate schedule **Required schedule if measured demand is >500kW Questions?© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 35 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 36
  • SCE Commercial Commercial Rates (SCE) Time Of Use SCE Commercial Time-of-Use Pricing Periods Sunday Monday Tuesday Wednesday Thursday Friday Saturday 11pm - 5am Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak 5am - 8am Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak 8am - Noon Off-Peak Part-Peak Part-Peak Part-Peak Part-Peak Part-Peak Off-Peak Noon - 6pm Off-Peak Peak Peak Peak Peak Peak Off-Peak 6pm - 11pm Off-Peak Part-Peak Part-Peak Part-Peak Part-Peak Part-Peak Off-Peak !  Use and/or Sell On-Peak @ 24-32¢/kWh on Option R "  Part-Peak @ 14-19¢/kWh !  More usage on peak, less benefit from TOU Questions?© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 37 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 38 Electric Rate Structures Overview Demand Charges !  Usually applies only to Large users Commercial and Agricultural !  Options for Solar - Net Metering "  !  On a per kW basis (load, not usage) !  3 Customer Classes (Res, Com, Ag) "  Size of the wire, power plant for peak usage !  2 Types of Rate (Flat, TOU) "  TOU: Time of Use !  Demand Charges for Commercial !  Based on highest 15-30 minute peak load average any time during the last 1-12 billing months Questions?© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 39 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 40 Demand Profile vs. Reducing Demand Charges Solar Production !  Difficult for solar to offset demand TYPICAL "  Clouds, spikes in usage not during solar hours, BUILDING DEMAND inverters tripping offline DEMAND & !  Add control systems ~$30K+ IDEAL PRODUCTION SOLAR !  Some rates have no/low demand charges PRODUCTION "  And sometimes high peak (sell) rates 7am 12noon 5pm "  Benefits depend on Size: Usage ratio and demand & HOUR usage patterns with respect to rate schedule hours© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 41 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 42
  • Reducing Demand Charges RECs, Green Tags, TRCs !  RECs = Renewable Energy Credits !  TRC = Tradable Renewable Certificates !  Green Tags = RECs = TRCs = S-RECs !  What are these? "  The green value part of a solar kWh "  The Legal Rights to Green-ness Electricity (kWh) Generating Plant (kWh) Green Tags (kWh) Questions?© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 43 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 44 REC Value CA REC Value !  RECs have value to other consumers !  REC sale value can be added to other value generated by the system to calculate payback, etc. " Those who can’t get solar directly "  Not included in any examples here " Utilities who need it to get into "  Likely 1¢ to 5¢/kWh in California - same as Wind compliance with emissions "  Must give up “Green Attributes” & claims requirements. !  Challenges in aggregating from small systems !  The best performing systems produce the most !  Value ranges from 1¢ to 68¢/kWh RECs "  Depends on location, type & term !  Double counting in sales Questions? "  Depends on state mandate for S-RECs !  Green-e Certified RECs: www.green-e.org© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 45 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 46 NJ REC Value Commercial Cost / Value Overview - System Cost !  REC sale value can be added to other value + Rebate / PBI generated by the system to calculate payback, etc. - Tax on Rebate / PBI "  15 year producible life + 30% Fed Tax Credit "  Assumption in examples at 48¢ for 1 year, 30¢ for + ~41% Depreciation * 85% 12 more years, and 10¢ for the final 2 years + Savings & Inflation !  Challenges in aggregating from small systems - Lost Electric Bill Tax Deduction "  Estimated/calculated RECs used - Maintenance & Inflation - Inverter Replacement Cost !  The best performing systems produce the most + REC Value, Green Marketing, Morale RECs ------------------------------------------ Questions? = Net Cost Questions?© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 47 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 48
  • Financial Analysis Agenda Methods & Tests Overview !  Commercial Solar Financial Analysis !  Simple Payback: In reasonable time "  Commercial Incentive, Tax, & Tariff Issues !  Total Lifecycle Cash Flow "  Four Financial Analysis Methods & Examples "  Gives back lots more than cost over time !  Choosing Rebates vs. PBIs !  Rate of Return analysis: 6-15+% returns !  Financing with Leasing & PPAs !  Cash Flow when financing: Cash Positive !  Interactive Examples using the OnGrid Tool !  Increase in Appraisal Valuation "  Appraises for more than it cost© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 49 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 50 General Commercial Utility Specific Variables & Assumptions Commercial & !  35% federal tax bracket, corresponding state tax bracket Muni/Non-Profit Assumptions !  Facing south, 14° pitch, simple composition shingle roof by Staring/Ending Rate AC kWh ~2008 Cost per Schedule full service provider, no complications Utility Insolation Production per rated kW per year rated Watt Peak%/ PP% Incentives Demand !  Slightly conservative real system performance, no shade A1 / A6 CA - PG&E San Francisco 1540 / CEC kW $1.10/W Rebate 47%/35% !  Final Net Cost = total installed system costs - Rebate (if any) - GS2B / GS2A 10kW: $8.50 CEC CA - SCE Los Angeles 1590 / CEC kW 48%/43% $1.55/W Rebate 2009 Fed 30% ITC + $800 Permit + $0 Utility Fee 25kW: $8.25 CEC 50kW: $8.00 CEC 2x Min Demand AL-TOU / DG-R !  System maintenance cost is 0.25% of gross system cost per CA - SDG&E San Diego 1700 / CEC kW 39%/51% $1.55/W Rebate 2x Min Demand year, adjusted for inflation SRECs: 48¢/1yr, NJ - JCPL Newark 1100 / STC kW 50kW: $6.50 STC GP 30¢/12yrs, 10¢/12yrs !  5.0% electric inflation (2.2% in CO) $1/W Rebate !  Module degradation: 0.5% per year !  Inverter replacement costing $700/kW occurs in year 15 !  Solar only - no Energy Efficiency included© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 51 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 52 General Gov’t/Non-Profit Variables & Assumptions !  Facing south, 14° pitch, simple composition shingle roof by full service provider, no complications !  Slightly conservative real system performance, no shade Final Net Cost = total installed system costs - Rebate (if Watt’$ the Payback? !  any) + $800 Permit + $0 Utility Fee !  System maintenance cost is 0.25% of gross system cost per year, adjusted for inflation !  5.0% electric inflation (except CO is 2.2%) !  Module degradation: 0.5% per year !  Inverter replacement costing $700/kW occurs in year 15 !  Solar only - no Energy Efficiency included© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 53 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 54
  • General Commercial Variables & Assumptions !  35% federal tax bracket, corresponding state tax bracket !  Facing south, 14° pitch, simple composition shingle roof by full service provider, no complications !  Slightly conservative real system performance, no shade !  Final Net Cost = total installed system costs - Rebate (if any) - 2009 Fed 30% ITC + $800 Permit + $0 Utility Fee !  System maintenance cost is 0.25% of gross system cost per year, adjusted for inflation !  5.0% electric inflation (2.2% in CO) !  Module degradation: 0.5% per year !  Inverter replacement costing $700/kW occurs in year 15 !  Solar only - no Energy Efficiency included© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 51 Utility Specific Commercial & Muni/Non-Profit Assumptions Staring/Ending Rate AC kWh ~2008 Cost per Schedule Utility Insolation Production per Incentives rated Watt Peak%/ PP% rated kW per year Demand A1 / A6 CA - PG&E San Francisco 1540 / CEC kW $1.10/W Rebate 47%/35% GS2B / GS2A 10kW: $8.50 CEC CA - SCE Los Angeles 1590 / CEC kW 48%/43% $1.55/W Rebate 25kW: $8.25 CEC 2x Min Demand 50kW: $8.00 CEC AL-TOU / DG-R CA - SDG&E San Diego 1700 / CEC kW 39%/51% $1.55/W Rebate 2x Min Demand SRECs: 48¢/1yr, NJ - JCPL Newark 1100 / STC kW 50kW: $6.50 STC GP 30¢/12yrs, 10¢/12yrs $1/W Rebate© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 52
  • Commercial Total Total Lifecycle Payback Lifecycle Payback kWh PV System Final Net Cost w/ Cumulative Savings Lifecycle Years Pre-Solar Utility Usage per Size & Tax Benefits & Over First 25 Years Payback To Bill Month Rating Rebate (including inflation) Ratio Payback PG&E $346 2000 10 kW CEC $23K $68K 2.9x 11 PG&E $853 5000 25 kW CEC $56K $172K 3.1x 10.6 PG&E $1,696 10000 50 kW CEC $107K $344K 3.2x 10.3 SCE $333 2000 10 kW CEC $20K $27K 1.3x 21.1 SCE $695 5000 25 kW CEC $48K $75K 1.5x 19.1 SCE $1,297 10000 50 kW CEC $92K $156K 1.7x 18.2 Total Savings SDG&E $371 2000 10 kW CEC $20K $55K 2.7x 11.6 SDG&E $840 5000 25 kW CEC $48K $137K 2.8x 11.2 Initial Cost SDG&E $1,621 10000 50 kW CEC $92K $274K 3.0x 10.9 NJ - JCPL $692 10000 50 kW STC $91K $116K 1.3x 8.1 NC - Progress $800 10000 50 kW STC $47K $88K 1.9x 17.9 CT - UI $2,309 10000 50 kW PTC $133K $310K 2.3x 13.1 AZ - APS $906 10000 50 kW STC $60K $127K 2.1x 16.4 !  Total Savings (whole area) is much larger than Initial Cost HI - HECO $2,144 10000 50 kW STC $47K $368K 7.9x 5.1 CO - Xcel $805 10000 50 kW STC $109K $57K 0.5x 40.2© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 55 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 56 Gov’t/Non-Profit Total Lifecycle Payback Total Lifecycle Payback PV System Final Net Cost w/ Cumulative Savings Lifecycle Gov’t/Non-Profit vs. Commercial Pre-Solar kWh Usage Utility Size & Tax Benefits & Over First 25 Years Payback Bill per Month Rating Rebate (including inflation) Ratio PG&E $346 2000 10 kW CEC $68K $122K 1.8x PG&E $853 5000 25 kW CEC $162K $306K 1.9x PG&E $1,696 10000 50 kW CEC $311K $613K 2.0x !  Differerences between Gov’t/Non-Profit SCE $333 2000 10 kW CEC $63K $48K 0.8x SCE $695 5000 25 kW CEC $150K $134K 0.9x & Commercial? - Taxes! SCE $1,297 10000 50 kW CEC $285K $278K 1.0x SDG&E $371 2000 10 kW CEC $63K $97K 1.6x !  Tax deduction for electricity SDG&E $840 5000 25 kW CEC $150K $244K 1.6x SDG&E $1,621 10000 50 kW CEC $285K $488K 1.7x !  Commercial tax deduction lowers the NJ - JCPL NC - Progress $692 $800 10000 10000 50 kW STC 50 kW STC $301K $351K $318K $150K 1.1x 0.4x value of a kWh saved by solar CT - UI $2,309 10000 50 kW PTC $336K $539K 1.6x !  Commercial gets tax credit & depreciation AZ - APS $906 10000 50 kW STC $276K $218K 0.8x HI - HECO $2,144 10000 50 kW STC $351K $628K 1.8x CO - Xcel $805 10000 50 kW STC $351K $95K 0.3x Questions?© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 57 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 58 IRR Timeline Year X Year: Year 0 Year 1 Year 2 Year 3 … … (12-15-20) System -System Cost Cost +Incentives Rebate PBI 1 PBI 2 PBI 3 … PBI X … +Bill Savings Savings 1 Savings 2 Savings 3 … Savings X … Maint. X -Maintenance Maint. 1 Maint. 2 Maint. 3 … … Watt’$ the Rate %f Return? Inverter +Fed Tax Credit Fed ITC +State Tax Credit State ITC -Fed Cost of Fed Cost State Tax Credit State ITC +Fed Depr. Fed Depr Fed Depr Fed Depr … +State Depr. State Depr State Depr State Depr … - Fed Cost of Fed Cost of Fed Cost of … State Depr State Depr State Depr =Net Net 0 Net 1 Net 2 Net 3 … Net X … !  IRR is function of Net0 : Net25 line !  Inverter replacement: $700/kW in yr 12-20 !  PBI, Savings, Maintenance adjust for inflation and/or module degradation© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 59 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 60
  • Commercial Total Lifecycle Payback kWh PV System Final Net Cost w/ Cumulative Savings Lifecycle Years Pre-Solar Utility Usage per Size & Tax Benefits & Over First 25 Years Payback To Bill Month Rating Rebate (including inflation) Ratio Payback PG&E $346 2000 10 kW CEC $23K $68K 2.9x 11 PG&E $853 5000 25 kW CEC $56K $172K 3.1x 10.6 PG&E $1,696 10000 50 kW CEC $107K $344K 3.2x 10.3 SCE $333 2000 10 kW CEC $20K $27K 1.3x 21.1 SCE $695 5000 25 kW CEC $48K $75K 1.5x 19.1 SCE $1,297 10000 50 kW CEC $92K $156K 1.7x 18.2 SDG&E $371 2000 10 kW CEC $20K $55K 2.7x 11.6 SDG&E $840 5000 25 kW CEC $48K $137K 2.8x 11.2 SDG&E $1,621 10000 50 kW CEC $92K $274K 3.0x 10.9 NJ - JCPL $692 10000 50 kW STC $91K $116K 1.3x 8.1 NC - Progress $800 10000 50 kW STC $47K $88K 1.9x 17.9 CT - UI $2,309 10000 50 kW PTC $133K $310K 2.3x 13.1 AZ - APS $906 10000 50 kW STC $60K $127K 2.1x 16.4 HI - HECO $2,144 10000 50 kW STC $47K $368K 7.9x 5.1 CO - Xcel $805 10000 50 kW STC $109K $57K 0.5x 40.2© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 56 Gov’t/Non-Profit Total Lifecycle Payback PV System Final Net Cost w/ Cumulative Savings Lifecycle Pre-Solar kWh Usage Utility Size & Tax Benefits & Over First 25 Years Payback Bill per Month Rating Rebate (including inflation) Ratio PG&E $346 2000 10 kW CEC $68K $122K 1.8x PG&E $853 5000 25 kW CEC $162K $306K 1.9x PG&E $1,696 10000 50 kW CEC $311K $613K 2.0x SCE $333 2000 10 kW CEC $63K $48K 0.8x SCE $695 5000 25 kW CEC $150K $134K 0.9x SCE $1,297 10000 50 kW CEC $285K $278K 1.0x SDG&E $371 2000 10 kW CEC $63K $97K 1.6x SDG&E $840 5000 25 kW CEC $150K $244K 1.6x SDG&E $1,621 10000 50 kW CEC $285K $488K 1.7x NJ - JCPL $692 10000 50 kW STC $301K $318K 1.1x NC - Progress $800 10000 50 kW STC $351K $150K 0.4x CT - UI $2,309 10000 50 kW PTC $336K $539K 1.6x AZ - APS $906 10000 50 kW STC $276K $218K 0.8x HI - HECO $2,144 10000 50 kW STC $351K $628K 1.8x CO - Xcel $805 10000 50 kW STC $351K $95K 0.3x© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 57
  • Commercial Analysis Commercially Attractive? !  Ideal commercial customers can see after- !  IRR must exceed a hurdle rate tax IRRs in the 3% to 8% range "  > “Risk Free Rate” + ~1-2% = Risk Free Rate + Sum of Risks (more later) "  Comparable to other business investments #  Source: Photon International, Aug 2007, p114 "  Plus has green marketing and morale !  Current “Risk Free” interest rates: benefits "  LIBOR = 1.25% As of October 2009 "  10yr = 3.5%, 30yr = 4.4% As of 10/29/2009 "  Depends heavily on system cost !  ! Commercially Attractive >= 6-7%? !  Must properly factor all benefits and costs !  PPA & Lease investors were getting 6-8% "  More on this later, due to recent financial market© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 61 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 62 Complete Commercial Analysis Commercial Rates of Return PV System After-Tax Pre-Solar kWh Usage System Gross Final Net Cost w/ Tax Utility Size & Annual Bill per Month Cost Benefits & Rebate !  Proper commercial analysis is after-tax PG&E $346 2000 Rating 10 kW CEC $85K $23K Return 7.4% !  A. Extra incentives: PG&E $853 5000 25 kW CEC $206K $56K 7.8% PG&E $1,696 10000 50 kW CEC $399K $107K 8.2% "  Federal Tax Credit & Depreciation SCE $333 2000 10 kW CEC $85K $20K 1.8% !  B. Loss of electric expense tax deduction SCE SCE $695 $1,297 5000 10000 25 kW CEC 50 kW CEC $206K $399K $48K $92K 2.8% 3.4% !  A & B approximately offset each other SDG&E $371 2000 10 kW CEC $85K $20K 6.6% SDG&E $840 5000 25 kW CEC $206K $48K 7.0% "  Net results are comparable to residential, but SDG&E $1,621 10000 50 kW CEC $399K $92K 7.4% are “after tax” values, so sometimes appear NJ - JCPL $692 10000 50 kW STC $350K $91K 6.9% NC - Progress $800 10000 50 kW STC $350K $47K 3.5% smaller. CT - UI $2,309 10000 50 kW PTC $375K $133K 5.9% AZ - APS $906 10000 50 kW STC $350K $60K 4.6% HI - HECO $2,144 10000 50 kW STC $350K $47K 14.4% Questions? CO - Xcel $805 10000 50 kW STC $350K $109K -3.7%© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 63 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 64 Gov’t/Non-Profit Analysis Gov’t/Non-Profit Rates of Return PV System Pre-Tax Pre-Solar kWh Usage System Gross Final Net Cost w/ Tax Utility Size & Annual Bill per Month Cost Benefits & Rebate !  Ideal government & non-profit customers PG&E $346 2000 Rating 10 kW CEC $85K $68K Return 4.2% can see non-tax IRRs in 1% to 5% PG&E $853 5000 25 kW CEC $206K $162K 4.6% PG&E $1,696 10000 50 kW CEC $399K $311K 5.0% "  Comparable to funding costs (muni bonds) SCE $333 2000 10 kW CEC $85K $63K -1.7% SCE $695 5000 25 kW CEC $206K $150K -0.7% "  Long term thinking, modest returns OK SCE $1,297 10000 50 kW CEC $399K $285K -0.2% SDG&E $371 2000 10 kW CEC $85K $63K 3.1% "  Has green societal and moral benefits SDG&E $840 5000 25 kW CEC $206K $150K 3.5% SDG&E $1,621 10000 50 kW CEC $399K $285K 3.8% !  Simpler analysis of benefits and costs NJ - JCPL $692 10000 50 kW STC $350K $301K 0.5% NC - Progress $800 10000 50 kW STC $350K $351K #NUM! CT - UI $2,309 10000 50 kW PTC $375K $336K 3.3% AZ - APS $906 10000 50 kW STC $350K $276K -1.5% HI - HECO $2,144 10000 50 kW STC $350K $351K 4.2% CO - Xcel $805 10000 50 kW STC $350K $351K #NUM!© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 65 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 66
  • Commercial Rates of Return PV System After-Tax Pre-Solar kWh Usage System Gross Final Net Cost w/ Tax Utility Size & Annual Bill per Month Cost Benefits & Rebate Rating Return PG&E $346 2000 10 kW CEC $85K $23K 7.4% PG&E $853 5000 25 kW CEC $206K $56K 7.8% PG&E $1,696 10000 50 kW CEC $399K $107K 8.2% SCE $333 2000 10 kW CEC $85K $20K 1.8% SCE $695 5000 25 kW CEC $206K $48K 2.8% SCE $1,297 10000 50 kW CEC $399K $92K 3.4% SDG&E $371 2000 10 kW CEC $85K $20K 6.6% SDG&E $840 5000 25 kW CEC $206K $48K 7.0% SDG&E $1,621 10000 50 kW CEC $399K $92K 7.4% NJ - JCPL $692 10000 50 kW STC $350K $91K 6.9% NC - Progress $800 10000 50 kW STC $350K $47K 3.5% CT - UI $2,309 10000 50 kW PTC $375K $133K 5.9% AZ - APS $906 10000 50 kW STC $350K $60K 4.6% HI - HECO $2,144 10000 50 kW STC $350K $47K 14.4% CO - Xcel $805 10000 50 kW STC $350K $109K -3.7%© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 64 Gov’t/Non-Profit Rates of Return PV System Pre-Tax Pre-Solar kWh Usage System Gross Final Net Cost w/ Tax Utility Size & Annual Bill per Month Cost Benefits & Rebate Rating Return PG&E $346 2000 10 kW CEC $85K $68K 4.2% PG&E $853 5000 25 kW CEC $206K $162K 4.6% PG&E $1,696 10000 50 kW CEC $399K $311K 5.0% SCE $333 2000 10 kW CEC $85K $63K -1.7% SCE $695 5000 25 kW CEC $206K $150K -0.7% SCE $1,297 10000 50 kW CEC $399K $285K -0.2% SDG&E $371 2000 10 kW CEC $85K $63K 3.1% SDG&E $840 5000 25 kW CEC $206K $150K 3.5% SDG&E $1,621 10000 50 kW CEC $399K $285K 3.8% NJ - JCPL $692 10000 50 kW STC $350K $301K 0.5% NC - Progress $800 10000 50 kW STC $350K $351K #NUM! CT - UI $2,309 10000 50 kW PTC $375K $336K 3.3% AZ - APS $906 10000 50 kW STC $350K $276K -1.5% HI - HECO $2,144 10000 50 kW STC $350K $351K 4.2% CO - Xcel $805 10000 50 kW STC $350K $351K #NUM!© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 66
  • Commercial Cash Flow !  Typical Commercial Watt’$ the Cash Flow? System Loan !  X% Y year loan $25,000 $20,000 Net Annual Savings $15,000 $10,000 Net Annual Savings $5,000 $0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 -$5,000 Year -$10,000 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 67 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 68 Commercial Cash Flow Options “Smart Financing” ! High Cost Loan: !  Efficient pay-down of principal using tax benefits when Starting Principal = Net Costs w/ Solar Utility Costs w/ received (if allowed by bank) “Gross - Rebate” with High Cost Loan o Solar !  Find ‘payment’ amount that pays off evenly over term "  Lower payments than amortizing full “after-rebate amount” ! Optimistic* Loan: "  Higher payments than only amortizing the net “after- Starting Principal = rebate, after-tax-benefits amount” “Gross - Rebate - !  No cash out of pocket waiting for ITC ITC - Depreciation” Utility Costs w/ o Solar "  Doesn’t require ‘bridge loan’ *Customer needs "  Realistic presentation of customer costs bridge loan until tax Net Costs w/ Solar !  No excess interest paid on “un-used” money savings realized with Optimistic Loan "  Doesn’t weaken sales presentation © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 69 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 70 “Smart Financing” Timeline “Smart Financing” Timeline LOAN: Year: LOAN: Year:LOAN: Loan Balance Year: . 0 70,182 1 45,816 2 36,723 3 30,165 4 25,045 5 19,515 6 7 14,996Loan11,594 Balance 7,919 8 9 3,951 10 11 0 70,182 1 45,816 2 36,723 3 30,165 4 25,045 5 19,515 0 1 2 3 4 5 6Loan Balance Payment (monthly) 70,182 45,816 36,723 30,165 25,045 (356) 19,515 (356) 7 14,996 11,594 8 (356) 7,919 9 3,951 10 (356) 11 (356) (356) (356)Payment (monthly)(356) (356) (356) (356) (356) (356) (356) (356) (356)Payment (monthly) Interest (portion of payment) Paid (356) (356) (356) (356) (356) (356) (356) (305) (356) (245) (356) (356) (201) (356) (167) (130) (100)Paid Interest (portion of payment) (77) (53) (26) (356) (305) (245) (201) (167) (130)Paid Interest (portion of payment) (356) (305) (245) (201) (167) (130) (100) (77) (53) (26)Unpaid Interest (added to Interest (added to loan principal) Unpaid loan principal) (112) (112) Unpaid Interest (added to loan principal) (112) Tax Deduction Benefit (monthly)Tax Deduction Benefit (monthly)Net Monthly Loan Cost 205 (150) 134 (222) 107 (248) 88 (267) 73 205 57 (282) (298) 134 44 (312) 34 (322) 10723 (332) 12 (344) 88 73 57 44Tax Deduction Benefit (monthly)12 34 23 205 134 107 88 73 57 Net Monthly Loan CostNet Tax Benefit Received (put towards paying down 25,714 8,493 5,230 3,267 3,267 (150) 1,814 (222) 336 336 (248) 336 336 (267)336 (282) 336 (298) (312)Net Monthly Loan (332) (322) Cost (344) (150) (222) (248) (267) (282) (298)the next years principal) Net Tax Benefit Received (put towards paying down Net Tax Benefit Received (put towards paying downNet Annual Electric Bill before Solar (with tax effects 25,714 8,493 5,230 3,267 3,267 1,814 336 336 336 336 336 336 25,714 8,493 5,230 3,267 3,267 1,814& including Lifestylenext years principal) the changes, but not Energy 2,388 2,507 2,632 2,764 2,902 3,047 3,199 3,359 3,527 3,704 3,889 4,083 the next years principal)Efficiency) Net Annual Electric Bill before Solar (with tax effectsNew Net Annual Energy Cost (with tax effects, Net Annual Electric Bill before Solar (with tax effects & including Lifestyle changes, 755 not Energy butincluding new electric bill, maintenance, inverter800 847 897 9502,388 1,006 2,507 1,065 1,127 2,632 1,193 2,764 1,262 1,336 2,902 1,414 3,047 3,199& including Lifestyle changes, but not Energy 3,359 3,527 3,704 3,889 4,083 2,388 2,507 2,632 2,764 2,902 3,047replacement) Efficiency)Net New Annual Cost (Loan plus New Net Energy Efficiency) 2,560 3,459 3,825 4,105 4,337 4,587 4,805 4,986 5,181 5,391 1,336 1,414Cost) New Net Annual Energy Cost (with tax effects, New Net Annual Energy Cost (with tax effects, including new electric bill, maintenance, inverterCash Flow (annual) (Old less New Net Costs) (172) (952) (1,193) (1,341) (1,435) 755 (1,540) 800 (1,627) (1,605) 847 (1,654) (1,687) 897 2,553 950 2,670 1,006 1,065including new electric bill, maintenance, inverter 1,127 1,193 1,262 1,336 1,414 755 800 847 897 950 1,006 replacement)Cash Flow (monthly) (14) (79) (99) (112) (120) (128) (134) (136) (138) (141) 213 222 replacement)ACCUMULATED LOAN CASH FLOW: (172) (1,124) (2,317) (3,658) (5,094) (6,633) (8,239) (9,865) (11,519) (13,206) (10,653) (7,983) Net New Annual Cost (Loan plus New Net Energy Net New Annual Cost (Loan plus New Net Energy 2,560 3,459 3,825 4,105 4,337 4,587 4,805 4,986 5,181 5,391 1,336 1,414 2,560 3,459 3,825 4,105 4,337 4,587 Cost) Cost) Cash Flow (annual) (Old less New Net Costs) (172) (952) (1,193) (1,341) (1,435) (1,540) (1,605) Cash(1,627) Flow (annual) (Old less New Net Costs) (1,654) (1,687) 2,553 2,670 (172) (952) (1,193) (1,341) (1,435) (1,540) Cash Flow (monthly) (14) (79) (99) (112) (120) (128) (134) Cash Flow (monthly) (136) (138) (141) 213 222 (14) (79) (99) (112) (120) (128) ACCUMULATED LOAN CASH FLOW: . (172) (1,124) (2,317) (3,658) (5,094) (6,633) (8,239) ACCUMULATED LOAN CASH FLOW: (10,653) (9,865) (11,519) (13,206) (7,983) (172) (1,124) (2,317) (3,658) (5,094) (6,633) © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 71 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 72
  • “Smart Financing” Timeline LOAN: Year:LOAN: Loan Balance Year: . 0 70,182 1 45,816 2 36,723 3 30,165 4 25,045 5 19,515 6 14,996 0 1 2 3 4 5 6Loan Balance Payment (monthly) 70,182 45,816 36,723 30,165 25,045 (356) 19,515 (356) 7 14,996 11,594 8 (356) 7,919 9 3,951 10 (356) 11 (356) (356) (356)Payment (monthly) Interest (portion of payment) Paid (356) (356) (356) (356) (356) (356) (356) (305) (356) (245) (356) (356) (201) (356) (167) (130) (100)Paid Interest (portion of payment) (356) (305) (245) (201) (167) (130) (100) (77) (53) (26)Unpaid Interest (added to Interest (added to loan principal) Unpaid loan principal) (112) (112) Tax Deduction Benefit (monthly)Tax Deduction Benefit (monthly)Net Monthly Loan Cost 205 (150) 134 (222) 107 (248) 88 (267) 73 205 57 (282) (298) 134 44 (312) 34 (322) 10723 (332) 12 (344) 88 73 57 44 Net Monthly Loan CostNet Tax Benefit Received (put towards paying down 25,714 8,493 5,230 3,267 3,267 (150) 1,814 (222) 336 336 (248) 336 336 (267)336 (282) 336 (298) (312)the next years principal) Net Tax Benefit Received (put towards paying downNet Annual Electric Bill before Solar (with tax effects 25,714 8,493 5,230 3,267 3,267 1,814 336& including Lifestylenext years principal) the changes, but not Energy 2,388 2,507 2,632 2,764 2,902 3,047 3,199 3,359 3,527 3,704 3,889 4,083Efficiency) Net Annual Electric Bill before Solar (with tax effectsNew Net Annual Energy Cost (with tax effects,including new& including Lifestyle changes, 755 electric bill, maintenance, inverter but not Energy 800 847 897 9502,388 1,006 2,507 1,065 1,127 2,632 1,193 2,764 1,262 1,336 2,902 1,414 3,047 3,199replacement) Efficiency)Net New Annual Cost (Loan plus New Net Energy 2,560 3,459 3,825 4,105 4,337 4,587 4,805 4,986 5,181 5,391 1,336 1,414Cost) New Net Annual Energy Cost (with tax effects,Cash Flow (annual) (Old less new electric bill, maintenance, inverter including New Net Costs) (172) (952) (1,193) (1,341) (1,435) 755 (1,540) 800 (1,627) (1,605) 847 (1,654) (1,687) 897 2,553 950 2,670 1,006 1,065 replacement)Cash Flow (monthly) (14) (79) (99) (112) (120) (128) (134) (136) (138) (141) 213 222ACCUMULATED LOAN CASH FLOW: (172) (1,124) (2,317) (3,658) (5,094) (6,633) (8,239) (9,865) (11,519) (13,206) (10,653) (7,983) Net New Annual Cost (Loan plus New Net Energy 2,560 3,459 3,825 4,105 4,337 4,587 4,805 Cost) Cash Flow (annual) (Old less New Net Costs) (172) (952) (1,193) (1,341) (1,435) (1,540) (1,605) Cash Flow (monthly) (14) (79) (99) (112) (120) (128) (134) ACCUMULATED LOAN CASH FLOW: . (172) (1,124) (2,317) (3,658) (5,094) (6,633) (8,239) © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 71 “Smart Financing” Timeline LOAN: Year: 0 1 2 3 4 5 6 Loan Balance 70,182 45,816 36,723 30,165 25,045 19,515 14,996 Payment (monthly) (356) (356) (356) (356) (356) (356) (356) Paid Interest (portion of payment) (356) (305) (245) (201) (167) (130) (100) Unpaid Interest (added to loan principal) (112) Tax Deduction Benefit (monthly) 205 134 107 88 73 57 44 Net Monthly Loan Cost (150) (222) (248) (267) (282) (298) (312) Net Tax Benefit Received (put towards paying down 25,714 8,493 5,230 3,267 3,267 1,814 336 the next years principal) Net Annual Electric Bill before Solar (with tax effects & including Lifestyle changes, but not Energy 2,388 2,507 2,632 2,764 2,902 3,047 3,199 Efficiency) New Net Annual Energy Cost (with tax effects, including new electric bill, maintenance, inverter 755 800 847 897 950 1,006 1,065 replacement) Net New Annual Cost (Loan plus New Net Energy 2,560 3,459 3,825 4,105 4,337 4,587 4,805 Cost) Cash Flow (annual) (Old less New Net Costs) (172) (952) (1,193) (1,341) (1,435) (1,540) (1,605) Cash Flow (monthly) (14) (79) (99) (112) (120) (128) (134) ACCUMULATED LOAN CASH FLOW: (172) (1,124) (2,317) (3,658) (5,094) (6,633) (8,239) © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 72
  • Smart Loan Commercial Cash Flow Commercial Cash Flow!  “Smart Financed” PV System Net Monthly Cash Flow Loan Timeline New Net Cost: Loan, New Bill, Maintenance, etc. Utility Pre-Solar Bill kWh Usage per Month Size & Amount Financed Compared to 8% 10-yr Cash Flow In Fifth Year Rating Loan in First Year!  No bridge loan PG&E $346 2000 10 kW CEC $23K $-67/mo $-121/mo needed Utility Bill w/o Solar PG&E $853 5000 25 kW CEC $56K $-144/mo $-269/mo PG&E $1,696 10000 50 kW CEC $107K $-244/mo $-477/mo!  Not optimistic - SCE $333 2000 10 kW CEC $20K $-125/mo $-190/mo fair to the SCE $695 5000 25 kW CEC $48K $-273/mo $-424/mo SCE $1,297 10000 50 kW CEC $92K $-493/mo $-775/mo customer SDG&E $371 2000 10 kW CEC $20K $-69/mo $-121/mo!  Assumes customer SDG&E $840 5000 25 kW CEC $48K $-151/mo $-272/mo SDG&E $1,621 10000 50 kW CEC $92K $-260/mo $-485/mo will be efficient w/ NJ - JCPL $692 10000 50 kW STC $91K $598/mo $-255/mo tax benefits NC - Progress $800 10000 50 kW STC $47K $54/mo $-454/mo CT - UI $2,309 10000 50 kW PTC $133K $-495/mo $-815/mo!  Interest Tax AZ - APS $906 10000 50 kW STC $60K $-189/mo $-460/mo Benefit Drops so HI - HECO $2,144 10000 50 kW STC $47K $597/mo $223/mo Net Cost Rises Net Annual Savings / Cost CO - Xcel $805 10000 50 kW STC $109K $-752/mo $-1,092/mo© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 73 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 74 Gov’t/Non-Profit Gov’t/Non-Profit Cash Flow !  29.9 kW Cash Flow Utility Pre-Solar kWh Usage PV System Size & Net Monthly Cash Flow Amount Financed Compared to 5% 30-yr Cash Flow Bill per Month In Fifth Year Gov’t/Non- PG&E $346 2000 Rating 10 kW CEC $68K Loan in First Year $-129/mo $-69/mo Profit PG&E $853 5000 25 kW CEC $162K $-280/mo $-130/mo PG&E $1,696 10000 50 kW CEC $311K $-484/mo $-183/mo system SCE $333 2000 10 kW CEC $63K $-240/mo $-215/mo SCE $695 5000 25 kW CEC $150K $-533/mo $-462/mo SCE $1,297 10000 50 kW CEC $285K $-973/mo $-827/mo SDG&E $371 2000 10 kW CEC $63K $-147/mo $-98/mo !  5% 30 year $15,000 $10,000 Net Annual Savings SDG&E $840 5000 25 kW CEC $150K $-327/mo $-206/mo loan $5,000 Net Annual Savings SDG&E NJ - JCPL $1,621 $692 10000 10000 50 kW CEC 50 kW STC $285K $301K $-580/mo $654/mo $-337/mo $-151/mo $0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 NC - Progress $800 10000 50 kW STC $351K $-1,576/mo $-1,492/mo -$5,000 CT - UI $2,309 10000 50 kW PTC $336K $-762/mo $-497/mo -$10,000 AZ - APS $906 10000 50 kW STC $276K $-1,043/mo $-927/mo -$15,000 HI - HECO $2,144 10000 50 kW STC $351K $-683/mo $-379/mo Questions? Year CO - Xcel $805 10000 50 kW STC $351K $-1,548/mo $-1,524/mo -$20,000© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 75 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 76 *Includes S-REC income Commercial & Gov’t/Non-Profit Resale !  Based on actual savings and cost of borrowing - Cash Flow in disguise !  Also known as “Cap Rate” Watt’$ the Resale Value? "  Cap Rate varies from 4% to 7% Annual Savings Resale Increase = Cap Rate Annual Savings = .06 !  No commercial, government and non-profit data or studies ! are known for solar, but is a standard commercial real estate valuation mechanism© 2009 OnGrid Solar, All rights reserved. © 2009 OnGrid Solar, All rights reserved. ! Commercial Solar Economics & Financing - 77 Commercial Solar Economics & Financing - 78
  • Commercial Cash Flow PV System Net Monthly Cash Flow Pre-Solar kWh Usage Cash Flow Utility Size & Amount Financed Compared to 8% 10-yr Bill per Month In Fifth Year Rating Loan in First Year PG&E $346 2000 10 kW CEC $23K $-67/mo $-121/mo PG&E $853 5000 25 kW CEC $56K $-144/mo $-269/mo PG&E $1,696 10000 50 kW CEC $107K $-244/mo $-477/mo SCE $333 2000 10 kW CEC $20K $-125/mo $-190/mo SCE $695 5000 25 kW CEC $48K $-273/mo $-424/mo SCE $1,297 10000 50 kW CEC $92K $-493/mo $-775/mo SDG&E $371 2000 10 kW CEC $20K $-69/mo $-121/mo SDG&E $840 5000 25 kW CEC $48K $-151/mo $-272/mo SDG&E $1,621 10000 50 kW CEC $92K $-260/mo $-485/mo NJ - JCPL $692 10000 50 kW STC $91K $598/mo $-255/mo NC - Progress $800 10000 50 kW STC $47K $54/mo $-454/mo CT - UI $2,309 10000 50 kW PTC $133K $-495/mo $-815/mo AZ - APS $906 10000 50 kW STC $60K $-189/mo $-460/mo HI - HECO $2,144 10000 50 kW STC $47K $597/mo $223/mo CO - Xcel $805 10000 50 kW STC $109K $-752/mo $-1,092/mo© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 74 Gov’t/Non-Profit Cash Flow PV System Net Monthly Cash Flow Pre-Solar kWh Usage Cash Flow Utility Size & Amount Financed Compared to 5% 30-yr Bill per Month In Fifth Year Rating Loan in First Year PG&E $346 2000 10 kW CEC $68K $-129/mo $-69/mo PG&E $853 5000 25 kW CEC $162K $-280/mo $-130/mo PG&E $1,696 10000 50 kW CEC $311K $-484/mo $-183/mo SCE $333 2000 10 kW CEC $63K $-240/mo $-215/mo SCE $695 5000 25 kW CEC $150K $-533/mo $-462/mo SCE $1,297 10000 50 kW CEC $285K $-973/mo $-827/mo SDG&E $371 2000 10 kW CEC $63K $-147/mo $-98/mo SDG&E $840 5000 25 kW CEC $150K $-327/mo $-206/mo SDG&E $1,621 10000 50 kW CEC $285K $-580/mo $-337/mo NJ - JCPL $692 10000 50 kW STC $301K $654/mo $-151/mo NC - Progress $800 10000 50 kW STC $351K $-1,576/mo $-1,492/mo CT - UI $2,309 10000 50 kW PTC $336K $-762/mo $-497/mo AZ - APS $906 10000 50 kW STC $276K $-1,043/mo $-927/mo HI - HECO $2,144 10000 50 kW STC $351K $-683/mo $-379/mo CO - Xcel $805 10000 50 kW STC $351K $-1,548/mo $-1,524/mo© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 76 *Includes S-REC income
  • Commercial Equity Increase Commercial Sales / Proposal Tools PV System Final Net Cost w/ Appraisal Equity / Pre-Solar kWh Usage Annual Utility Size & Tax Benefits & Resale Increase in Bill per Month Savings Rating Rebate First Year PG&E PG&E $346 $853 2000 5000 10 kW CEC 25 kW CEC $23K $56K $2,858 $7,193 $48K $120K !  Home grown / proprietary company tools PG&E $1,696 10000 50 kW CEC $107K $14,407 $241K SCE SCE $333 $695 2000 5000 10 kW CEC 25 kW CEC $20K $48K $1,196 $3,330 $20K $56K !  QuickQuotes SCE $1,297 10000 50 kW CEC $92K $6,890 $115K SDG&E $371 2000 10 kW CEC $20K $2,315 $39K !  The OnGrid Tool SDG&E $840 5000 25 kW CEC $48K $5,802 $97K SDG&E $1,621 10000 50 kW CEC $92K $11,609 $194K NJ - JCPL $692 10000 50 kW STC $91K $16,870 $26K NC - Progress $800 10000 50 kW STC $47K $3,923 $66K CT - UI $2,309 10000 50 kW PTC $133K $12,722 $212K AZ - APS $906 10000 50 kW STC $60K $5,446 $91K HI - HECO $2,144 10000 50 kW STC $47K $14,637 $244K CO - Xcel $805 10000 50 kW STC $109K $4,265 $71K© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 79 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 80*Appraisal Doesn’t include Resale Value of future stream of S-RECs Home Grown/Proprietary QuickQuotes !  Most companies have something !  Product of Clean Power Research !  Most control & customizable "  Makers of the Clean Power Estimator http:// www.clean-power.com/quickquotes/products.aspx !  Must be maintained !  Designed to produce high quality, credible quotes "  Electric Rates in a simple, easy-to-use, streamlined process "  Rebate, PBI, REC & other incentive info !  Web Based (requires internet connection) "  Tax incentive info "  Has some offline capabilities "  Module & inverter info !  Based on Clean Power Estimator engine !  Accuracy & completeness !  Provides customizable residential & commercial analysis & quotes© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 81 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 82 The OnGrid Tool Calculates Cost & Performance !  Sales Tool !  System Costs & Cost Adders "  Incentives (Rebate, PBI, Tax Credits, etc) "  Quickly Identify & Screen Leads !  Calculates Price, Prepares Quotes "  Organizes Client Info !  System Performance !  Design Tool "  Data from shading devices: 1-touch upload "  Size Systems Optimally "  Site performance variables #  Tilt, Orientation, Dust, Mismatch, Wire !  Proves the Payback #  PTC & Inverter Efficiency !  Automatically Creates Quotes & Proposals !  Choice of Electric Rates & inflation rates !  Prepares Paperwork !  Estimates TOU kWh Performance and $ savings© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 83 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 84
  • Commercial Equity Increase PV System Final Net Cost w/ Appraisal Equity / Pre-Solar kWh Usage Annual Utility Size & Tax Benefits & Resale Increase in Bill per Month Savings Rating Rebate First Year PG&E $346 2000 10 kW CEC $23K $2,858 $48K PG&E $853 5000 25 kW CEC $56K $7,193 $120K PG&E $1,696 10000 50 kW CEC $107K $14,407 $241K SCE $333 2000 10 kW CEC $20K $1,196 $20K SCE $695 5000 25 kW CEC $48K $3,330 $56K SCE $1,297 10000 50 kW CEC $92K $6,890 $115K SDG&E $371 2000 10 kW CEC $20K $2,315 $39K SDG&E $840 5000 25 kW CEC $48K $5,802 $97K SDG&E $1,621 10000 50 kW CEC $92K $11,609 $194K NJ - JCPL $692 10000 50 kW STC $91K $16,870 $26K NC - Progress $800 10000 50 kW STC $47K $3,923 $66K CT - UI $2,309 10000 50 kW PTC $133K $12,722 $212K AZ - APS $906 10000 50 kW STC $60K $5,446 $91K HI - HECO $2,144 10000 50 kW STC $47K $14,637 $244K CO - Xcel $805 10000 50 kW STC $109K $4,265 $71K© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 79*Appraisal Doesn’t include Resale Value of future stream of S-RECs
  • Proves the Payback: Rates & Incentives (West) Financial Analysis Methods $12,000 $10,000 Annual Savings Before and After Payback !  Pre-programmed w/ many electric rates Simple Payback $8,000 & incentive programs: Annual Savings !  $6,000 $4,000 !  Total Lifecycle Payback West: AZ, CO, HI, CA $2,000 $- 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Year Annual Savings Before Payback Payback Year (Occurs at 9.7 Years) "  Annual Savings After Payback !  Rate of Return analysis "  CA: PG&E, SCE, SDG&E "  CA Munis: LADWP, IID, Anaheim, !  Cash Flow when financing Pasadena, Burbank, Riverside, Glendale, !  Increase in Appraisal Valuation $14,000 Turlock, SMUD, Palo Alto, SVP $12,000 $10,000 $8,000 !  Provides spreadsheet of numbers for Annual Savings "  East: PA, NJ, NY, DE, CT, MA, OH $6,000 $4,000 $2,000 proof $(2,000) $(4,000) $- 1 3 5 7 9 11 13 Years 15 17 19 21 23 25 "  Southeast: NC, FL, GA Power Purchase Agreements $(6,000) $250,000 "  “User Defined” for all others $200,000 Resale Value $150,000 Grant Applications $100,000 $50,000 $- Years 1 3 5 7 9 11 13 15 17 19 21 23 25 Effective Resale Value (lesser of 20x annual or remaining 25yr savings) 20 times Annual Savings Remaining savings within 25 years !  Commercial, Residential, Agricultural© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 85 © 2009 OnGrid Solar, All Rights Reserved. Economics of Solar PV - 86 Rates & Incentives (East) Scenario Options !  Pre-programmed w/ many electric rates !  User Customizable to Any Situation: & incentive programs: "  Commercial, Residential, "  East: PA, NJ, NY, DE, CT, MA, OH "  Southeast: NC, FL, GA Government & Non-Profit "  West: CA, AZ, CO, HI "  Any size system: 10W-100MW "  “User Defined” for all others "  Any Rate Structure !  Commercial, Residential, Agricultural "  Any Incentive: Rebate, PBI, REC, Tax Credits & Depreciation "  Any Insolation Location !  Excel-based: Fast, Portable, non-web© 2009 OnGrid Solar, All Rights Reserved. Economics of Solar PV - 87 © 2009 OnGrid Solar, All Rights Reserved. Economics of Solar PV - 88 Agenda !  Commercial Solar Financial Analysis "  Commercial Incentive, Tax, & Tariff Issues "  Four Financial Analysis Methods & Examples Financing Non-Residential !  Choosing Rebates vs. PBIs Solar Projects !  Financing with Leasing & PPAs !  Interactive Examples using the OnGrid Tool© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 89 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 90
  • Ways to Finance Solar Sales Benefits of Financing !  Cash • Reduced Customer Risk !  Offering Financing keeps salesperson in control of • Benefits shared with the sale !  Loan more parties "  If the customer is out looking for financing, you’ve !  Lease lost control of the sale. "  If you offer it, you can continue to control the sale. !  PPA • More Sales Control !  Creates more purchasing options, more chances at a close !  Leases & PPAs keep you in control !  Can use to overcome objections (as much as you can in this market!) !  Gets salesperson closer to decision maker & their real thinking© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 91 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 92 Commercial Selling Realities Sales Tip !  Only 3% of all commercial quotes turn to sale !  Failure to “sign” is not likely due to price "  Most quotes are made to private companies !  Suggest don’t even quote a system price #  Can’t make >5 year commitment "  Only quote a monthly payment "  Salesperson doesn’t know tax & accounting issues #  Talks w/ building manager, facilities, etc !  Ask if they are, or will become subject to AMT if #  Afraid to talk to CFO, Controller, CEO, Outside they go solar Auditor & Banker "  If so, only consider Lease or PPA !  Typically only large public companies can go long "  And only discuss monthly payments (10-12 yrs) - even they hesitate 18-20 years "  Then comparable to current expense !  Gov’t, Schools, some non-profits have long vision© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 93 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 94 Characteristics Financing Options For Solar Common to PPAs & Leases !  Leases - Ways of paying for ownership and/or use over time, having tax and/or cash flow benefits !  Lower interest rate environment helps during term, usually with intention of purchasing or !  Attractive if based on fundamentally renewing at the end attractive scenario - ie. Assuming the project "  Renting system with intent to purchase, while allowing transfer of tax benefits can use tax benefits !  Solve problem of inability to use tax benefits, !  PPAs - Power Purchase Agreements - Paying for just the energy if/when delivered with eg due to AMT possible intent to purchase !  Improve initial customer cash flow Disclaimer: I’m not a CPA or lawyer, and am not providing !  Requires good end-customer credit tax advice. Seek qualified professional help© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 95 "  Stricter credit environment hurts © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 96
  • “Good” or “Strong” Credit Risks in Solar Finance !  Three C’s of Credit: !  Compare to Real Estate "  Credit scores & reports (Dun & Bradstreet) Real Estate Solar "  Collateral System N/A Understood Low "  Capacity or Cash Flow Performance None Warranty Dependen t !  >5 years in business Revenue Customer Credit Stream from Customer Credit Can lock system off & force !  >$50 million revenue “Off-Taker” customer back to utility Market Valuation Low Resale Value !  Positive trends (increasing revenue & profits) Liquidity Saleable Costly to relocate "  Hard to find in 2009 Regulatory Site Permit Issues Permits & Interconnection Low if Understood !  Standard ratios (cash flow, etc)© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 97 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 98 Returns for Lessors CHEC Check Ask f !  Was in ~6%-9% range before financial crisis !  Less money now available, so higher returns Leases for those willing to deal !  Requires: "  Lessees with best credit "  Limited project risk "  Low transaction costs via standard terms and “conforming” projects© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 99 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 100 Leases What is a Lease !  Several Types !  Finance contract between 2 parties "  Finance / Capital Lease "  Lessor & Lessee "  True / Tax / Operating Lease "  Vendor connects the 2 parties "  Tax-Exempt Lease Purchase !  Looks like either a loan or a rental !  Thanks: !  Ability to transfer ownership benefits "  Gene Beck, EnviroTech Financial "  For Tax or Accounting purposes "  Baker Davenport, Davenport Group !  Specified term & payment "  Scott Young, Sentry Financial© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 101 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 102
  • Widely Used Lease “Flow” & Parties Lessor !  Solar Leases similar to other asset leases Lease Payments !  Well established market PV System "  80% of companies and gov’t agencies use leasing, rather than owning, for at least some Purchase of their equipment Payment Use of System "  Some companies only use leasing, rather than purchasing Initial “sales” interaction !  Lessor = Owner of system Info on leasing resources Lessee Vendor !  Lessee = User (“renter”) of system© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 103 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 104 Benefits of a Lease AMT - Alternative Minimum Tax !  Corporate AMT occurs for business with large “tax !  Terms more flexible than a purchase preferenced” items !  Allows for 100% financing "  Depletion, state income tax, real estate tax, non-solar "  Covering freight, maintenance, fees, … Tax Credits, Accelerated Depreciation #  Which might not be allowed in a loan !  Some business are or will become subject to AMT !  Doesn’t tie up capital and/or effectively stretches if they go solar: line of credit "  MACRS Depreciation on solar can cause limitation "  Considered “Off Balance Sheet” "  Solar ITC no longer causes a problem - AMT relief "  Keeps bank line of credit free !  Tax Equity Investors (banks) not usually affected !  Solves AMT problems by AMT, so have a tax “appetite” and can offer !  Can include Energy Efficiency measures investment $ to get tax benefits others can’t use© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 105 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 106 Lease vs. Loan Lease vs Loan Cost: Bank Loan Leasing Interest Floating interest rates, but Fixed rate with Rates effectively lower Fixed payments !  Loan/Cash: 100% Principal Usually 2-3 years, Terms Often year-to-year Up to 10 years "  + Interest (or Time Value of Money if Cash Purchase) Opportunity Reduced Bank None "  - ITC (30% if available) Costs Line of Credit Upfront "  - Depr (~30% if available) Typically 20% to 30% 0% (100% financed) Payment "  = Net cost = 45-50% depending on interest rates Financial Some are off-balance On balance sheet as debt Reporting sheet !  Lease: Total payments ~= 60% of principal Less than Lease unless tax More than Loan Total Cost limitation (More risk to Lessor) (interest cost included), but no ITC or Depreciation, therefore total cost is 60% net *courtesy Conergy Commercial Financing presentation by Baker !  The difference is the Lessor’s profit Davenport & Tim Pedersen, Rockwell Financial Group© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 107 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 108
  • Lease Term Set By: Finance / Capital Lease !  Price of project - larger is better !  Same as bank loan !  Credit of customer !  Fully amortizing or with balloons !  Structure of the deal !  Lessee gets tax credit & depreciation !  Interest is deductible !  Most commonly utilized for energy projects "  Not useful for solar projects needing to transfer tax benefits to Tax Equity Investor© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 109 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 110 Accounting vs. Taxes Capital Lease Typical Terms wrt True & Operating Lease !  5 year, $100-150K !  7 year, $500K !  Two perspectives when reviewing leases !  Over 8yrs will have a longer amortization period, "  Tax vs. Accounting but with a 7 year due date "  Two different sets of books & calculations "  Banks don’t lend over 7 yrs unsecured !  Accounting: must meet FASB 13 rules #  Ie. w/o cash, real estate, or marketable securities "  FASB - Financial Accounting Standards Board !  8 year, $1MM, 5-7 year due date (7 w/ balloon) !  Tax: must meet IRS rules !  10 year typical max, 7 year due date !  Most solar leases are !  Limits: Longer = higher risk "  Operating Leases for accounting purposes !  Easiest lease to create wrt due diligence "  True Lease / Tax Leases for tax purposes "  Typically 2 page agreement plus boilerplate© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 111 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 112 Operating Lease True Lease / Tax Lease (Accounting Perspective) (Tax Perspective) !  Rental contract w/ fixed terms & conditions !  Rental contract w/ fixed terms & conditions !  Lower effective interest rate than capital lease !  Lessee expenses monthly payments !  Available to non-profits & gov’t entities "  Lessor gets depreciation & tax credits "  Can do, but no transfer of tax benefits "  Payments ~40% lower for solar than capital lease "  Use Tax Exempt Lease Purchase !  Lessee expenses monthly payments !  This is the one used for solar projects suffering !  Lease considered “off balance sheet” from AMT tax benefit limits !  This is the typical accounting treatment of an True !  This is how Operating Leases are treated from Tax Tax / Tax Lease perspective© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 113 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 114
  • CHECK W/ Gene & Dave Clamage CHEC True / Operating / Tax Lease Operating Lease Check examples for Typical cases too Docs Check Typical Terms Ask for real examples Ask f !  E.g.: $1MM+, 120kW+ system (as of 5/23/09) More difficult, more due diligence than Capital Lease, !  !  Preferred: $3MM, 500kW+ system Less than PPA lease paperwork and processing costs Get examples of Common Get e "  5-7-10yrs on strong credit for smaller projects To set up !  deal pages basic lease: a 10-15 To se "  ~10-15yrs on very strong credit & larger projects "  5% custom language, 95% boilerplate #  Credit requirements have gone up in 2009 "  Roof lease #  DOE Loan Guarantees will help "  Waivers !  End of lease: "  Terminal Value Schedule & Purchase "  Purchase equipment at FMV "  Master Lease, Equipment Schedule "  Extend lease for add’l 12-60 months at fixed rental rate #  Repeat indefinitely or sell "  + other docs "  Return equipment to Lessor in good condition "  = total of ~15-30 pages© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 115 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 116 Cash Benefits of Loan True & Operating Leases !  Lessor offers lower monthly cost of solar Loan system to end user because of enjoyed tax benefits !  Lessor gets lower taxes Electric Bill !  Lessee gets lower cost PV system (lower payments)© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 117 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 118 Lease Payment Options True & Operating Lease Term Electric Bill Various Leases !  Typically >= 6 years to get all depreciation benefit and vest all of the tax credit !  Asset transferred to Lessee at greater of: "  Fair Market Value (FMV)* "  Predetermined price *Critical to avoid tax violation Hard to be Cash Positive in 2009 w/ Lease© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 119 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 120
  • Typical Lease Terms Tax Exempt Lease Purchase !  Lease can’t exceed 80% of life of asset !  Primarily for State & Local governments "  Must have a residual value "  Includes public schools & universities !  Lessor owns, but takes no operating risk "  Longer terms: 10-20 yrs by project size (>20kW) "  Hell or high water - Lessee must pay for system !  Current debt obligation for lessee regardless of performance "  Incentive on Lessee to maintain system !  Non-profits qualify for larger projects (> $1MM) !  Property tax, insurance, maintenance is "  Must have gov’t sponsor responsibility of lessee !  Special structuring - more “complicated” lease !  May require tax indemnity if tax benefits aren’t !  “Tax Exempt” means the lessor doesn’t pay Fed tax transferable to Lessor on income: Reduces interest ~ 300 basis points© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 121 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 122 Non-Profits w/o Gov’t Sponsors Lease Contract Costs !  Non-Profits not eligible for True / Operating !  Were long & complicated (50-60 pages and Leases $10Ks) "  Can’t pass tax benefits to lessor "  Now have 8-9 page standard lease agreements "  Instead - Capture via a 3rd party ownership structure: PPA !  Need a common set of terms "  Current diversity of lease names & approaches confuses & slows the sale "  Increases sales cost© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 123 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 124 Get Lessor, Lender or Financing Options For Solar Broker Involved Up Front !  They can help present and sell the deal - !  Leases - Ways of paying for ownership and/or include them early on use over time, having tax and/or cash flow !  Helps and increases sales person’s control benefits during term, usually with intention of purchasing or renewing at the end !  Helps get the right questions asked up front "  Speeds the sale !  PPAs - Power Purchase Agreements - Paying for just the energy if/when delivered "  Or determines early that this is a no-go "  Determine which type is best© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 125 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 126
  • Power Purchase Agreement - PPA !  A Type of Offering or Proposal "  Contract for the sale of energy (kWh) PPAs "  Not sale of a PV system !  A financing alternative to leasing !  Recently very popular (75%+ of large) !  Thanks: "  Keith Martin, Chadbourne & Parke, LLP "  Colin Murchie, SunEdison© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 127 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 128 PPA “Flow” Parties to the Transaction PPA Developer Investment Cash PPA Financier / Vendor ROI & Tax Benefits / Investor !  Agreement between "  PPA Provider / Vendor aka “Developer” Monthly Energy PV System "  Off-Taker / End User of Energy Building Payments Access / kWh "  Building Owner (might be End User) Maintenance Purchase Energy Payment "  System Vendor / Installer / Integrator "  3rd Party Investor / Financier (might be Permission installer and/or Developer) Building Occupant / System Owner Off-Taker / Vendor/Installer Energy User© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 129 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 130 Party Responsibilities Financier-Developer Relationships !  Developer (might also be installer) oversees: !  Financier is Tax Equity Investor "  Construction "  Has Tax appetite "  Operation & maintenance of equipment "  Doesn’t want to build or operate projects - "  End User & Investor relationships & payments needs developer/operator "  Execute the 80-100 ‘To Do’ items !  Sale-Leaseback or Partnership-Flip !  End-User "  Receives energy from system "  Makes predetermined payments for energy if/as it is produced© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 131 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 132
  • Sale-Leaseback Partnership-Flip !  Property Sold to Tax Equity Investor & !  Tax Equity Investor & Developer/Operator are Leased back to Developer/Operator partners with unequal ownerships "  Important that this lease is back to the same "  For initial period, Tax Equity Investor owns 99% (max) and receives 99% of benefit (tax and income) party that placed the property in service until “target” return is achieved "  Tax benefits stay w/ Tax Equity Investor #  Must be >5 years for full vesting of ITC "  Entering second phase, ownership “flips” so that Developer/Operator owns up to 95%. "  Developer/Operator can buy remaining share at FMV (or more, FMV decided at that future date)© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 133 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 134 Sale-Leaseback Sale-Leaseback Time Flexibility Benefits & Drawbacks !  Allows “Place-In-Service” date up to 3 months + 3 extra months to close financial of deal before closing Sale-Leaseback + 100% Tax Benefit Capture (vs. 99%) "  More time flexibility in getting financing !  To qualify, delay In-Service as needed: "  Construction completion - No “Limited Use” property (can’t be removable) "  Asset conveyance - 80% of useful life limit on lease term #  Sale to Tax Equity Investor - Repurchase at end of term more expensive #  Use of asset by site user - Tax Indemnity required "  Permits signed off - Developer/Operator can’t be a non-profit "  Testing and customer signoff© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 135 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 136 End-User/Off-Taker Benefits Energy Expense Comparison !  No up-front costs, down payment or deposit Utility Electric Rate required including estimated escalation at 5% !  Lower initial energy costs 15¢ Cost 14¢ PPA Electric Rate including !  Potentially lower long term energy costs Per contracted escalation at 3% kWh !  Future discount purchase of system !  Reduced PV cost even if no tax appetite 2007 2017 2027 Year© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 137 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 138
  • User Energy and Investor/Owner Benefits Capacity Payments !  Guaranteed stream of income from energy !  Most are Energy Payments only: $/kWh sold delivered !  Tax benefits "  Sometimes indexed to electric or gas markets !  Some also include a “Capacity” payment !  No inflation/escalation risk "  Fixed $/kW/month based on average !  Keep or sell Green Tags / RECs “availability” of PV equipment "  Comparable to Demand Charges #  Depends on profile #  Recover some lost hidden value© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 139 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 140 Performance Terms Performance Terms cont’d !  Performance Guarantees !  REC / Green Tag ownership "  Annual & Project life "  Usually retained by system owners "  Actual Energy / Power delivered "  Potentially valuable as AB32 kicks in "  Efficiency & Availability of Equipment !  Metering !  Liquidated Damages for failure to perform / "  Costs & Billing Systems provide power or energy !  Rights to Excess Power "  Use of and Value© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 141 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 142 End User Risks Upside Down Deals? PPA Electric Rate including PPA Electric Rate including 14¢ contracted escalation at 3% Cost contracted escalation at 3% 15¢ Per 13¢ kWh Utility Electric Rates assumed to rise at 5% Cost 14¢ Per and eventually go above PPA Contract Rate Utility Electric Rates may not rise or stay kWh above PPA Contract Rate !  Why take 10 years of guaranteed losses to maybe get 10 2007 2017 2027 Year 2007 2017 2027 future years of savings (consider Time Value of Money)? Year !  Is the hedge worth that much? !  Inverse of Electricity Escalation "  If rates don’t rise, might cost more "  Chances of rates not rising at 5%? "  U.S. Average: Rates Grew 4.1% /yr from 2001-2008 !  Might not get Green Tags/RECs "  Large 2009 U.S. Natural Gas discoveries may limit escalation "  Additional cost if desired© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 143 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 144
  • Investor/Owner Risks Investor Access to Tax Benefits !  Tax Equity investor must have “unfettered” use of !  System Performance valuable asset after deal is over "  Maintenance over 15+ years "  Will panels still be valuable in 15+ years? !  End-User default or vacancy of property "  Value can’t be stated now - must be set at that time "  Good credit end-users required "  Term can’t go over 80% of “useful life” "  Require host supply another site or pay term. Fee !  Must not be “Limited Use” or “Personal” property "  Lots of “due diligence” required - high transaction "  Must be “attached” and not easily moved - non- costs penetrating systems? !  Incentive Receipt Certainty !  Purchase Options: Fair Market Value (FMV) only "  Must have confirmation of qualification/allocation "  Dates can be set, but not value© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 145 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 146 PPA Contract Documents PPA Contract Costs !  Total: 100-200+ pages !  3 Standard Off-taker Contract Segments: !  High (long & complicated) but dropping "  1. The PPA: 20-35p rapidly for “generic” & standard # Sale of Power/Energy "  Basic Standard Agreements: $3K-20K # The right to use the site: Lease & Easement including tailoring w/ desired terms # REC ownership !  Moving to pre-approved deal checklists "  2. Installation Contract: 20-50p w/ exhibits !  SolarTech produced “Standard PPA” #  Equipment Supply & Construction !  Per-Deal (legal) costs are now low(er): "  3. O&M agreement: 10-15p "  Quick review (if standard & good basic #  Site access agreements are used)© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 147 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 148 PPA Developer & Equipment Supply & Investor Contract Documents Construction Agreement !  Additional agreements for Developer & Investors !  Product Supply "  LLC w/ Partnership Flip: 40p + 15p exhibits !  Installation terms, timeline, etc "  Purchase Agreement: 24p + 7p of “definitions” "  In-Service Date not < 3 months before closing Sale- !  Covers the multi-year legal structure to allow Tax Leaseback or not before closing Partnership Flip Equity Investor to reap tax benefits as 99% initial !  Warranty (5-10 yrs, useful terms to satisfy) owner, then “flips” ownership to Developer to reap !  Performance Guarantee or Warranty long term operating benefits. "  Based on independent data & measurable parameters !  Flips occur anywhere from Year 6 to Year 17 !  Can installation be subcontracted? "  Rebates/PBI, Host Payments, Tax Benefits (vesting)© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 149 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 150
  • Complications - Legal & Tax Complications - Terms !  Long contracts - 40-60 pages !  Power Contract Form: !  High initial transaction costs "  Selling kWh? "  Reduced with standardization # At what price? # TOU & Demand saving / costs !  Building access / maintenance costs # Who takes remaining utility bill? !  Repossession / aftermarket value "  Simpler but vague sales presentation !  Termination tax issues? - terminal price? "  May leave lots on table in customer’s "  Must be at FMV or greater for tax benefits benefit© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 151 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 152 Common Mistakes PPA Deal Sizes !  Purchase Options: Fair Market Value (FMV) only !  Tax Equity Investors looking for big deals "  Value can’t be stated now - must be set in future "  $25-$40 million minimum "  No declining schedules of value/purchase price "  Keith Martin’s typical: $75-$150 million !  Rebates are taxable to Host? "  Host signs over rebate, but is stuck w/ tax liability? "  Desirable $100-$200 million !  Usually no “Tax Indemnification” (unlike leases) "  ? 5 to 50MW PV systems ? !  Max length <= 80% of expected life !  Aggregation !  Host can’t share in upside "  Collect $3-$5million+ size projects !  Host can’t be charged for electricity not received© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 153 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 154 Aggregation Tax Equity Investors & Lenders !  Collect 5 to 50 $3-$5million+ size projects !  Recently Active (who knows now!): "  Union Bank of CA !  Master Agreements: “All Deals …” "  US Bank "  In by X date "  Deutsche Bank "  John Hancock "  Meet 10-12 item checklist "  Morgan Stanley !  Standard checklist reduces due diligence & "  Wells Fargo legal costs per deal "  National City Bank (leaving the business?) !  Goldman Sachs invests in PPA companies to buy & flip for profit© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 155 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 156
  • ARRA DOE 1703 & 1705 Investor Returns !  Stimulus Dept. of Energy Loan Guarantees !  Financial Returns for Tax Equity Investors !  1703: For Emerging Technologies !  Was High 6% to Low Teen % after tax !  1705: For Existing Technologies "  Now? – 11-13% Depends on project !  Designed to improve lending options – reduce !  Much less money now available, so bank interest costs (by 1.5-2%) via guarantee demanding higher returns !  Only viable for utility scale, commercial scale !  Leveraged? "  Too much bureaucracy, too time consuming "  Increases risk & complication !  Risk of interest rates rising while waiting "  Too small to bother?© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 157 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 158 Higher Cost of Capital in 2009 PPA Typical Terms !  Much less money now available !  $2.5Million+ (>350kW+) !  Demanding higher returns, more risk averse !  15-20-25 yr commitment !  Some estimate this is reducing project values !  End of term: 10%+ "  Renew PPA !  Who will pay? "  Purchase of system "  Manufacturers (25-40% margins) "  Developers (5-15% margins) #  At greater of FMV or pre-determined price "  Customers - depends on electric rates Pay termination & have system removed "  "  State incentives? !  Significant due diligence on customer req’d© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 159 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 160 PPA vs. Lease Sun Run Generation Residential Pseudo PPA Electric Bill !  Residential Pseudo PPA "  Large “installation fee” required ~ 25-50% of gross Typical PPA "  Reduced per kWh fee w/ performance guarantee !  20 yr term & unknowable? buyout charge at end !  Very small deal size needs low “due diligence cost” Typical Lease "  FICO score / credit check & large deposit #  No risk if Deposit >25% of gross cost "  Risks spread over many customers "  Much higher relative savings on Residential Tiered© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 161 TOU rates compared to commercial rates/PPAs - 162 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing
  • SolarCity “SolarLease” Comments Residential Pseudo Lease !  Residential Pseudo Lease !  PPAs & Leases are only likely to be viable "  $0-$2K down options if the system is attractive on a stand- "  Escalating monthly payment w/ perf. guarantee alone basis assuming full commercial tax !  Otherwise could be ~ same as SunRun: appetite "  15 yr term & unknowable buyout charge at end "  Very small deal size needs low “due diligence cost” "  Allow creative finance where tax status or #  FICO score / credit check customer preferences otherwise block a sale #  Risks spread over many customers "  They don’t save “lost causes” #  Much higher relative savings on Residential Tiered TOU rates compared to commercial rates/leases© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 163 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 164 PPA Developers were Money on the Table Ideal Customers !  PPAs were selling fast; now? !  Effectively are “Repeat” customers !  Appears the customers were getting "  Just need to find “Host” sites excellent deals - medium+ savings !  Have $, ready to move "  Now: money grab & offering hedge !  Understand installer’s business & cash needs !  Not clear how investors will make out "  That’s good & bad "  Lots of risk (Circuit City!) "  They know your strengths and weaknesses "  Who bears it over the long term? "  Will it work? !  Attitude shifted?© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 165 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 166 Lease vs. PPA Dealing with PPA Developers PPA Leasing Ease for Operation, Maintenance, Return Almost No Effort !  Seem less interested in having deals brought Customer Operating Inspection PPA Vendor End User !  Greed has set in: Risk Long Term May Be Higher, to May Be Lower, Except Upon "  No longer looking to “partner” with installers Costs Compensate for Risks Return of Equipment Costs on Removal of Equipment, Functional "  No longer trying to save customers money Usually None Termination Verification, Return Shipment Opportunity "  Working each as hard as possible Costs None None !  Shop around - help your customer find the REC Benefits Stays w/ PPA Vendor End User best deal Cash Flow Cash Neutral or Often Negative Up-Front, Positive Savings Positive Whole Term Over Term "  Good service gets you the repeats and Include E. More Difficult Yes installation work Efficiency© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 167 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 168
  • Cash Buyer vs. Lease vs. PPA Which Product Is Right? Not tax restricted, Cash, Loan, !  Profit / Reward - shared among the parties wants to own system Finance Lease "  Lessee: more risk, may get more of profit than with Tax restricted, deal Tax/Operating PPA unless the PPA willing to take more risk than under ~$3,000,000 Leas e the bank for the same returns Tax restricted, deal Tax/Operating "  Cash buyer: all risk, gets all profit over ~$3,000,000 Lease, PPA #  Uses up working capital - opportunity cost Tax-Exempt Lease Government entity !  Energy Efficiency Purchase, PPA "  Cash buyers & Leases can enjoy add’l savings Non-profit PPA "  Typically not part of PPA deals (directly) Deal w/ Energy Usually Not PPA #  Hard to sell “negawatt-hours” Efficiency Component #  May be able to sell kWh for higher value w/ EE© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 169 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 170 PPA Vendors / Providers PPA and/or Lease Agents Gene Beck Baker Davenport Offer PPAs to 3rd Parties (may be looking for deals): Davenport Finance Company "  Sun Run Generation: Residential pseudo PPA (large initial fee) EnviroTech Financial, Inc bdavenport@davenportfinance.com "  Renewable Ventures: 250kW+ gbeck@etfinancial.com 804-323-6061 "  Tioga Energy 714-532-2731 "  Recurrent Energy www.etfinancial.com "  Sun Edison: 250kW+ Charles Gerni National Lease Financial Services #  Vertically integrated on many sales, installation & ownership David J. Clamage 858-546-4888 "  Many others available & more coming Saulsbury Hill Financial davidc@saulhill.com Uses PPAs on their own projects only: 303-629-8777 x102 Scott F. Young "  SunPower (former Powerlight): 250kW+ Sentry Financial (801) 303-1111 "  Solar Technologies syoung@sentryfinancial.com© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 171 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 172 PPA/Lease Legal Services Tools To Analyze Deals Keith Martin Stoel Rives LLP Chadbourne & Parke, LLP stoel_rives@stoel.com !  OnGrid - previously discussed (202) 974-5674 (800) 88-STOEL kmartin@chadbourne.com !  CEI - Competitive Energy Insight Wrote SEIA Fed Tax Manual. Please call only to hire, not just "  Complements OnGrid questions "  More detailed, sophisticated, expensive Edwin F. Feo Jigar Shah jigarshahdc@gmail.com "  Helps you (or your finance partner) take Milbank 213-892-4417, EFeo@milbank.com (202) 250 3651 the deal to the next step Teaches at Solar Power Founded SunEdison. Now consults International and other on “more unconventional” PPA/ conferences finance deals© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 173 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 174
  • The Economics of Stakeholders are Linked CEI’s EconExpert Software Suite Bank / Lessor !  Universal Financial Pro Forma Gas Construction Project Supplier "  For PV, Wind, CSP, Fuel Cells, CHP & other Loans Finance !  Economics and Tax Benefit Monetization Suppliers Project Competing Developer/ Tariffs Electric !  Early Screening to Financial Closing Equipment O&M Owner/ Utility Suppliers !  From the Viewpoint of Every Stakeholder Operator Accelerated !  Before and After-Tax Discount Cash Flow Tax Depreciation Credits !  Book and Cash / Levered and Unlevered Tax * CEI is not a licensed legal, brokerage or accounting firm. You are recommend Monetization to also consult licensed advisors© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 175 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 176 Competitive Energy Agenda Insight, Inc. !  Specializing in: TM !  Commercial Solar Financial Analysis "  Energy Project Ownership and Asset "  Commercial Incentive, Tax, & Tariff Issues Management "  Four Financial Analysis Methods & Examples "  Financing !  Choosing Rebates vs. PBIs "  Business and Contract Development !  Financing with Leasing & PPAs Steve Provol, President !  Conclusion of the Lecture section www.CEInsight.com !  Interactive Examples using the OnGrid Tool (858) 566 0221 SProvol@CEInsight.com© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 177 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 178 Before the Demo Conclusion - Review !  Wrap-up Formal Presentation !  Discussed Demand & TOU variables in !  Questions more depth !  Feedback Forms !  Understood the issues around PBI vs Rebate !  Looked at Leases & PPAs to pay for it© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 179 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 180
  • Conclusion Conclusion On Grid Solar Electric Systems can: !  An attractive investment… !  Be an attractive financial investment Demonstrably increase property value !  Hedge against inflation spikes !  Oh, it’s kinda nice environmentally & socially too…© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 181 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 182 Learn More Thanks !  Resources available at www.ongrid.net !  Solar Power International 09 "  Articles & papers on solar “Payback” !  Solar Electric Power Association "  PowerPoint slide presentation PDFs "  Stuart Raper, Julia Hamm & Emily Brown "  Upcoming classes & events !  Contact me with any questions or concerns #  Sales & Marketing !  Please turn in your feedback forms "  Free demos of the OnGrid Tool "  What you did/didn’t you like / want changed? !  Please see hosts for more solar classes !  Thank you for coming! !  Stick around for the interactive session next!© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 183 © 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 184 Andy Black Solar Financial Analysis & Sales Software (408) 428-0808 andy@ongrid.net www.ongrid.net - Tools, Articles & Papers available© 2009 OnGrid Solar, All rights reserved. Commercial Solar Economics & Financing - 185
  • !"#$#%&"(#)(*#+,-(!+."/-&"(*0/.%()#-(1#$2%.-3( 4,05,"6(,$7(#/8.-(9&$,$"&,+(:./( By Andy BlackSolar electric systems can be a good financial WHY DOES SOLAR PAY OFF NOW?investment for homeowners and businesses, Good system performance, high electric rates, Net Meteringdepending on a variety of factors including system and Time-Of-Use rate structures, Solar Renewable Energyperformance, electric rates, favorable utility rate Certificates (SRECs) and government incentives havestructures, and incentives. Several US states have the contributed to the financial viability of solar electricity. Howright combination of conditions to strongly encourage these factors come together varies significantly by location.end-consumer investment in solar electric systems Some locations have the combination of factors that yieldbased on economics alone. excellent results; in others, it makes no economic sense to go solar, especially when including the maintenance and inverter In places where solar is economically attractive, rates of return replacement costs.from 9% to 15% or better are common. If financed, the monthly The key element for most analyses is the ongoing valuenet loan cost is usually less than the monthly utility bill savings. generated by the solar system (the savings on the electric utilityAnd if the home is sold, the solar system should increase the bill or the monetary value of system output that can be sold). Aresale value by more than the system cost to install. properly sited, sized, designed, and installed solar system can The above claims are big, so rigorous treatment and critical usually eliminate most or all of a customer’s total annualanalyses from several angles including Compound Annual Rate electric bill.of Return, Cash Flow, Lifecycle Payback, and Appraisable The next pages will discuss system performance, electric rateResale Value need to be considered to do a fair assessment. structures, and incentives. The pages following will detail howUsing the above analysis methods helps compare the solar the economics can then be analyzed using Rate of Return,investment to other investments on an even basis. Payback and Lifecycle Payback, Property Value Increase, and Cash Flow when Financing.IN THIS ARTICLE: SYSTEM PERFORMANCE: ! What factors need to be considered to determine the Lots of Sunlight is just one of the many factors that must beeconomic payoff of solar, including rates, rate structures, included in a system performance calculation. Across much ofsystems performance, solar RECs, and incentives the United States, the amount of available sunlight is ! How to test the economic value in the ways listed above surprisingly uniform, with most areas within ± 20% of the This article also includes “Policy Discussion” paragraphs to sunlight level of Miami, Florida, as can be seen in Fig. 1. Thehelp individuals and policy makers in locations without strong National Renewable Energy Laboratory (NREL) has data oneconomics understand the issues around creating solar-friendly 239 locations across the U.S. and its territories available at:policies, which motivate and leverage individual investment. http://rredc.nrel.gov/solar/pubs/redbook/ and its PVWatts calculator will determine performance for a user specified PV Equivalent Noontime Sun Hours per Day (Annual Average): Portland, OR 4.0 Buffalo, NY 4.1 Chicago, IL 4.4 Newark, NJ 4.5 Boston, MA 4.6 Baltimore, MD 4.6 Raleigh, NC 5.0 Miami, FL 5.2 Austin, TX 5.3 San Francisco, CA 5.4 Boulder, CO 5.5 Los Angeles, CA 5.6 Phoenix, AZ 6.5 Fig. 1. Most U.S. locations are ± 20% of Miami’s sunlight level. Sources: NREL: http://rredc.nrel.gov/solar/pubs/redbook/ and http://www.nrel.gov/gis/solar.htmlEconomics of Solar Electric Systems ! 2009, Andy Black. All rights reserved. July 2009 - 1 of 19
  • system: http://www.nrel.gov/rredc/pvwatts/. related problems (long wires can have a kind of ‘voltage buildup’ in the wiring causing the inverter to think the utility is There are numerous loss factors that affect real system not safe to connect with, requiring it to shut down for at least 5performance including component performance, wire losses, minutes). The only way to know if a system is operatingsoiling, module degradation, module mismatch, system uptime reliably is to monitor it as often as possible. Monthlyand reliability, manufacturer production tolerance, and system observations via the electric bill savings are a crude minimumdesign factors such as tilt, orientation, shading, and air flow. but can take 45 days or longer to make even a simple problemThe California Energy Commission has produced “A Guide To (sometimes only requiring a simple reset of the inverter) visible,Photovoltaic (PV) System Design And Installation” available at: resulting in over 12% of a year’s energy to be lost. Activehttp://www.energy.ca.gov/reports/2001-09-04_500-01-020.PDF continuous real-time monitoring and automated alertingand is an excellent overview of system design considerations. solutions are available that should more than pay for themselvesFig. 2 lists performance loss factors, and the significance of in increased savings, peace of mind, and owner satisfaction.potential relative losses from tilt, orientation, and shading. System Performance Factors Policy Discussion: Including Inverters aren’t 100% efficient, with most achieving 94-96% predicted or actual system performance in determining the levelefficiency. Similarly, PV modules in operation put out of incentive to be paid (then actually verifying compliance withapproximately 7-14% less power at realistic operating the approved design) is an excellent way for incentive agenciestemperatures compared to the Standard Test Conditions (STC) to improve system quality. Before California adopted thecommonly measured in factory or laboratory settings. The State requirements of the new California Solar Initiative (CSI)of California provides lists of module and inverter ratings at: program, a significant fraction of sold and installed systemshttp://www.gosolarcalifornia.org/equipment. had major shading or other site-selection design problems, Soiling, module degradation, and module mismatch also must often only disclosed to the customer with a hand-wave ofbe accounted for. The designer and installer have some control “you’ll lose a little performance due to shading…” The CSI hasover wire losses, but by code, must not exceed 5%. received a lot of criticism because of the increased level ofManufacturer production tolerance losses result from some paperwork, scrutiny and repercussions for “failures” frommodules having a performance specification of +X%, -Y%. If those who would rather do things the old, easy, loosey-gooseythere is a negative tolerance, the customer can be sure she will way, but in the author’s opinion, the new level of accountabilitybe on the losing end of that bargain to at least some extent. is the best thing that could have happened to raise the quality of installations in the state. This higher level of quality is nothing The system designer in coordination with the property owner new to those in some other states such as Colorado and in somehas control over how the modules are mounted, especially how municipal utilities like SMUD. Going forward, the author hasfar off the roof, affecting how much airflow occurs. Thermal grave concerns about the quality of systems that will bestagnation starts to occur with less than 6” clear airflow space installed as a result of the expansion of the federal Investmentbehind the modules and can reduce performance up to 10% at Tax Credit, which has no performance or quality safeguards.0” air gap. Typical Loss and Performance Factors: The designer and property owner also have control of solarsystem orientation (tilt angle or ‘altitude’ above horizontal and Loss Performance Variabledirection or azimuth), and usually some control over shading. Factor FactorShading and/or orientation are usually the #1 9-12% 88-91% Module Temperatureunderestimated system performance loss factors except inlocations where incentive programs specifically (directly or 3-11% 89-97% Inverter Efficiencyindirectly) include these in the calculation of the incentive to be 1.5-5% 95-98.5% Wiring (AC & DC combined)paid. It is critical that the site analyst / installer use a shadeanalysis tool to accurately determine shade. Quality shade tools 5-15% 85-95% Dust & Dirtinclude the Solar Pathfinder (http://www.solarpathfinder.com/), Module Degradation over 20Solmetric SunEye (http://www.solmetric.com/), and the Wiley 5-10% 90-95% yearsASSET (http://www.we-llc.com/ASSET.html). It is impossible 1.5-2.5% 97.5-98.5% Module Mismatchto estimate shading by eye, and even a few percent can besignificant. Avoiding shading is often the most important Manufacturer Production 0-5% 95-100%criteria, even over selecting a south-facing roof. Tolerance ~27-33% ~67-73% Typical Totals for the System availability (uptime) is dependent on system Best Systemsreliability and monitoring. A well-designed system withknown reliable components (particularly the inverter) is Additional Design-Dependent Factors:important. Placing inverters in shaded, well-ventilated locations 0-10% 90-100% Air Flowthat won’t accumulate ventilation-inhibiting debris willeliminate many common overheating-related problems (reduced 0-40% 60-100% Orientation & Tiltpower output due to thermal protection or shortened component 0-100% 0-100% Shadinglifetime). Placing the inverter close to the utility connection 2-100% 0-98% System Availability (uptime)point will eliminate many common utility interconnection Fig. 2. Summary of Performance and Loss FactorsEconomics of Solar Electric Systems ! 2009, Andy Black. All rights reserved. July 2009 - 2 of 19
  • 2007 U.S. Average Retail Price per kWh is 9.13 Cents 2008 2004- 2001- 1990- State Rate 2008 2008 2008 ¢/kWh CAGR CAGR CAGR US 11.4 6.1% 4.1% 2.1% AZ 10.3 4.9% 3.1% 0.7% CA 14.4 4.2% 2.5% 2.1% CO 10.1 4.8% 4.5% 2.1% CT 19.4 13.6% 8.5% 3.7% DC 12.7 12.2% 7.2% 4.1% DE 13.9 12.2% 7.1% 2.8% FL 11.7 6.8% 4.5% 2.3% GA 10.1 6.4% 3.4% 1.7% HI 32.5 15.8% 10.3% 6.6% MA 17.5 10.5% 5.0% 3.4% MD 13.8 15.4% 8.8% 3.7% MN 9.8 5.4% 3.7% 2.0% NC 9.7 3.6% 2.6% 1.2% Average Retail Price (Cents per kWh) NJ 16.0 9.2% 6.6% 2.4% NM 10.0 3.7% 2.0% 0.6% NV 11.9 5.3% 4.0% 4.2% NY 18.8 6.6% 4.3% 2.8% OH 10.1 4.6% 2.8% 1.3%Fig. 3. The graphic above shows the 2007 U.S. average electric rates for all OR 8.5 4.4% 4.4% 3.3%sectors. The table at right shows 2008 average residential electric rates for PA 11.4 4.4% 2.4% 1.2%selected states and their Compound Annual Growth Rates (CAGR) for threetime periods before 2008. Source: U.S. Energy Information Administration: TX 12.8 7.2% 5.4% 3.3%http://www.eia.doe.gov/fuelelectric.html WA 7.6 4.4% 4.2% 3.1%ELECTRIC RATE STRUCTURES: efficient with how she uses electricity is to charge more for it, High Electricity Rates are an expensive fact of life in a but there are limits to how this can be appliednumber of US states and can be worse still in other countries. without disadvantaging lower incomeHawaii has the highest electric rates in the U.S. topping out at consumers. Many utilities have adopted a32¢/kWh for the average residential consumer (certain islands tiered pricing structure, as can been see in Fig.are higher), however, rates are also very high in Connecticut, 5, where the first part of a consumersCalifornia, New York and other states (Fig. 3). consumption is charged at a lower rate, but if the consumer uses more than a Rates have risen fast across the land since 2001 and especially “baseline” allocation (an amount deemedfast since 2004 (Fig. 3). Electric rate increases will likely be to be required to cover a consumer’stempered by the Great Recession of 2009. Future rate hikes can “basic needs”) she will pay more foronly be guessed at, as they depend on many factors. the next part of her usage. The In comparison, the Consumer Price index (CPI-U) has been more she uses, the more eachincreasing at 3.1% on average since 1982. One might ask, how kWh costs. The more tiers thereis it that electric rates have continuously increased faster than are in the system, the more thethe CPI – wouldn’t electricity become a bigger and bigger ratesportion of our consumerexpenses, until eventuallysomething brought it intocheck? The answer lies inthe fact that we arecontinuously getting moreefficient with how we useelectricity, so we are ableto produce more economicvalue per unit of electricity.We are therefore able tospend more per kWh. Fig. 4. Residential electric rates in California from 1970 to 2001 increased at a 6.7% compound One of the ways consumers annual rate (source: CPUC “Electric Rate Compendium” Nov. 2001 from EIA data). Since 2001,can be motivated to be more there has been no change in Tiers 1 & 2, but an exaggerated increase in Tiers 3-5. Enactment of AB413 and expiration of AB1X may alter these trends. Note: this graphic is to scale.Economics of Solar Electric Systems ! 2009, Andy Black. All rights reserved. July 2009 - 3 of 19
  • $269/mo $127/mo $59/mo $43/mo bill at top of Tier 1 Fig. 5. Progressive tiered rate pricing penalizes large users most with a marginal electricity cost at ever increasing rates. In these cases, solar offsets the highest tier usage first, making the solar customer look like a smaller user with a lower marginal cost. The graphic on the left indicates which tier a user is in for a given monthly electric usage (1650 kWh) and bill ($499) in San Jose, CA. On the right, the green area represents how much is offset by solar (1225 kWh and $463 out of $499).can be fine-tuned, but also, the more complicated billing Rates in Tier 3, 4 & 5 have gone up and down dramaticallybecomes. Fig. 5 illustrates a “progressive” pricing model for since 2001, with a recent average rate of increase that has beenrates (similar to progressive tax structures), which attempts to very high (double digit). This high average will not continuediscourage large use while protecting smaller using consumers. forever because of the eventual expiration of California AB1XThe progressive model encourages conservation, efficiency, and (the date of this is unknown for a variety of complicatedconveniently for the solar industry, solar installations as well. reasons, but may be soon, depending on what happens withThe graphic in the right half of Fig. 5 shows how a solar system AB413). When this happens, it is anyone’s guess how themakes a user look like a smaller consumer (the green area is politics will fall, but one of three possibilities is likely: 1. Ratessolar generation, the red area is the remaining net usage), and in all tiers will move in lock step at a more normal rate ofoffsets the most expensive electricity first, yielding the greatest escalation, 2. Rates in Tier 3-5 will be frozen while Tier 1 & 2savings first, boosting the economics of solar. This particular catch up, or 3. Rates in Tier 3-5 will be reduced and rates incase is saving 44¢/kWh for the first set of production, 38¢/kWh Tier 1 & 2 will move up to compensate.for the next set, and so on. Not all utilities use the above A conservative approach to electricity escalation suggests a“progressive” pricing model. Some utilities offer discounts for 5% annual escalation – anything more than that might bebuying in bulk – the larger the use, the less expensive the cost of viewed as “optimistic” which may cause customers to becomethe next kWh. This may be rational in some utility cost models, concerned. The scenario examples depicted later will assumebut it doesn’t encourage conservation, energy efficiency or solar 5% except as noted. The goal of this article is to provide ainstallation. conservative set of assumptions and a “bullet-proof” analysis Fig. 4 shows the California rate history since 1970. From 1970 methodology, that if followed, will be acceptable to the broadto 2001, rates increased at a compound annual average rate of majority of serious potential customers, and provide them and6.7%, as can be seen in the lower left portion of the graphic. their financial advisors a solid basis for making an informedThings got considerably more complicated in 2001 because of decision.the California Power Crisis in conjunction with the deregulation Tiered Rate Policy Discussion: Progressive Tiered Rates areprocess that affected rates starting in 1996. excellent motivators of conservation and energy efficiency (and During the power crisis California’s AB1X legislation froze conveniently, solar), but they may also be the government andthe rates for residential users using at or below the average utility officials ‘public relations friend’ as well. By creatingusage for their local climate zone (which equals usage at or multiple tiers, policy makers can shift some of the burden ofbelow the top of Tier 2), but at the same time, created Tiers 3, 4 future rate increases to the larger (above average), moreand 5 at much higher rates (17-26¢/kWh). The users using well wasteful users (residential only) and thereby lighten the burdenabove average found their bills almost doubled upon on the users who are at or below average consumption. Thisimplementation of the change. It had the desired effect: high works well for residential usage, because it is easy to quantifyusing residential consumers quickly became motivated to the average consumption per typical household, howeverreduce their usage by conservation, efficiency, and some turned average consumption per business would be meaningless in thisto solar systems, dramatically increasing the solar market. context, since most communities want their local business to grow (efficiently) from year to year, so penalizing ever growing Rate escalation in California got more complicated thereafter usage would be counterproductive.as well. Because state law AB1X prohibits changes to the ratesfor Tier 1 and Tier 2, all the increase must be borne in Tiers 3, 4 High electric rates are among the most important factorsand 5. If revenue needs to increase by 10%, Tier 3, 4 & 5 rates determining who will have the best economics with solar,must increase approximately 50%. That happened on January however, high rates are only valuable if the customer can also1st, 2006 to PG&E residential customers, as seen in Fig. 4. enjoy Net Metering, a regulatory structure set up for solarEconomics of Solar Electric Systems ! 2009, Andy Black. All rights reserved. July 2009 - 4 of 19
  • Time-Of-Use (TOU): Most residential electricity is billed to customers on a flat (or time independent) rate schedule, where electricity costs the customer the same at any time of the day. However, utilities often have increased demand for electricity during certain times of the day and certain days or months of the year. When this “Peak” demand occurs usually depends on local climate factors. For example, Arizona and California have their peak times near 4-6pm Monday thru Friday during the summer, because that’s the overlap of the workday and home activity, which both use air conditioning, which is one of the largest loads. At night and in the morning, because of the dry climate, it cools off, so the load is less. Eastern U.S. utilities see their peak demand all day long because the humidity keeps consumers using their air conditioning 24/7 in the home, and during the workday at work, so a typical peak period is 9am-9pm. To solve the increased demand regardless of when it occurs, utilities could build more power plants, but those plants would only run during peak times, which is only a relatively few hours of the year, and would therefore be an expensive solution on a per kWh produced basis because of the capital costs. Another solution is to encourage conservation during or load-shifting away from those “Peak” time periods. To create this encouragement, some utilities offer Time of Use Fig. 6. Net Metering allows the exchange of electricity (TOU) or Time of Day (TOD) rates, where the cost of produced or purchased to be valued at retail rates allowing electricity depends on the time of day and sometimes on the the grid to act like a 100% efficient battery for the consumer season of year. The TOU time periods and rates are usually to “store” her excess production during the day or over a labeled something like “Peak”, “Part-Peak” and “Off-Peak” and season until she needs it at night or during another season. often have a “Summer” and a “Winter” season.electricity producers (and sometimes certain other renewable The upper graphic in Fig. 7 shows the TOU pricing periodsproducers depending on the state) in 42 of the 50 U.S. states. for the PG&E E6 rate in California illustrating peak, part-peak, Under Net Metering, full retail value is credited when excess and off-peak time periods. Notice that there are also part-peakelectricity is produced and “sold” back to the utility, offsetting rates on weekends. The lower graphic shows the typicalthe customer’s electric bill (Fig. 6). There are a variety of Net (approximate) time periods of many Eastern U.S. utilities, suchMetering forms, the implementation of which vary by state and as in New Jersey, New York, and Pennsylvania.utility. An older form is “Monthly Net Metering,” whereby a High rates during peak periods encourage consumers to usesolar producer can eliminate her monthly electric bill, and any less or to change behavior and instead, consume the electricityexcess production would typically be paid to the producer at the during off-peak periods. Easy ways to shift usage are changingutility’s “avoided cost” or “fuel cost” per kWh (approximately what time of day laundry is done or when the pool filter pumps1-3¢/kWh). The problem is that solar production varies run at home. Small business sometimes have choice oversubstantially by season, so it is hard to design a system that whether to take service under a TOU rate schedule, and if so,balances a user’s needs in each of the 12 months without under- they may be able to save money by shifting how or when theyproducing in one season (usually winter) and over-producing in do things, such as change to 2 or 3 shifts of work hours, orthe other. Under-production results in large bills charged at high change when they make ice or pump water or do other energyretail costs of electricity. Over-production creates small credits intensive activities. Large businesses and many agriculturalbased on the “avoided cost” value of the excess energy. (pumping and refrigeration) operations have no choice and must The solution is the newer “Annual Net Metering,” which take TOU service, so are always encouraged in a financial way.allows summer excess production to offset winter shortfalls, TOU rate differentials between Peak and Off-Peak can rangewith the goal of allowing the customer (or her knowledgeable from just a cent or two, to up to 20¢/kWh or more, dependingand experienced designer/installer) to right-size the system to on the utility’s need to motivate change. In PG&E territory infully offset the annual electric bill, but not over-size it. With California, a further twist is that the tiered rate structure isannual Net Metering, the utility ends up looking like a 100% applied on top of the TOU rates (residential only), so off-peakefficient battery that can store energy for up to a year at no loss Tier 1 rates are as low as 9-10¢/kWh depending on season, butor penalty. The other half of this compromise is that any excess the summer peak Tier 5 rate can be over 61¢/kWh. That sounds thproduction credit after the 12 month is given to the utility, expensive, and it is, and one might question the wisdom of evendiscouraging over-sizing of systems and simplifying the utility’s considering switching to a TOU rate schedule, but there is aaccounting and saving them the processing costs of sending a convenient opportunity that solar customers can apply in theircheck or carrying a credit. favor.Economics of Solar Electric Systems ! 2009, Andy Black. All rights reserved. July 2009 - 5 of 19
  • Residential PG&E "E6" Time-of-Use Pricing Periods Sunday Monday Tuesday Wednesday Thursday Friday Saturday Midnight - 6am Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak 6am - 10am Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak 10am - 1pm Off-Peak Part-Peak Part-Peak Part-Peak Part-Peak Part-Peak Off-Peak 1pm - 7pm Off-Peak Peak Peak Peak Peak Peak Off-Peak 7pm - 9pm Part-Peak Part-Peak Part-Peak Part-Peak Part-Peak Part-Peak Part-Peak 9pm - Midnight Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Eastern U.S. Typical Residential Time-of-Use Pricing Periods Sunday Monday Tuesday Wednesday Thursday Friday Saturday Midnight - 9am Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak 9am - Noon Off-Peak Peak Peak Peak Peak Peak Off-Peak Noon - 9pm Off-Peak Peak Peak Peak Peak Peak Off-Peak 9pm - Midnight Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Fig. 7. Time-of-Use rate structures showing typical peak, part-peak and off-peak time periods for Western and Eastern U.S. utilities. Combining Net Metering with TOU allows a solar customer between peak and off-peak, the more motivated the user will beto take advantage of the benefits of Net Metering on a TOU rate (solar or not) to conserve during peak pricing periods. Effectiveschedule and, if timing and consumption patterns allow, “sell” TOU rate implementations help flatten out the utility’s loadenergy to the utility during peak periods at the high rate, then profile, requiring fewer “peaker” power plants which operatebuy energy during off-peak hours. The customer gets credited or at very high cost per kWh delivered (once capital costs/debtcharged for the value of the electricity when it is bought or sold service are included), because such plants run only a few hours(at its prevailing retail rate at that time). The utility then looks per year. In the right locations, solar can provide some of thislike a >100% efficient battery because in many cases, most “peaker” benefit. Solar advocates can use this to encouragesolar electricity is produced during peak hours, and most is their Public Utility Commissions and Legislatures to adopt pro-consumed in a residence during part-peak and off-peak hours. TOU policies.The customer gets more value for the same kWh produced, and Rate Structure vs. (Cash) Incentives Policy Discussion:therefore needs a smaller solar system to offset her electric bill. Economically viable solar systems are incentivized thru bothThe greater the differential in peak to off-peak rates, and the cash or cash equivalent (tax saving) payments and electric rate-better the solar production matches peak hours, and the better based (or regulatory) savings. Solar-friendly rate structures arethe homes consumption matches off-peak hours, the greater the incentives because they provide a higher value benefit to solarbenefit of opting for the TOU rate schedule upon adding the customers compared to the “commodity” value of the electricitysolar system. producers could otherwise sell into the power pool at This approach often (but not always) works well in utility commodity rates (as QFs or Qualifying Facilities). Using cashareas that have large daytime summer peak loads (often due to incentives to encourage solar is easy to understand, but it isair conditioning load), such as in the Eastern, Southern, and also highly visible, and there are several drawbacks comparedSouthwestern U.S., because this usually matches solar with solar-friendly rate structure incentives. Cash and cashproduction well. However, some northern utilities are winter equivalent incentives can and do come and go depending on thenight peaking because their peak load is caused by electric political winds. Even long-term incentive programs, such asheating loads of homes. In these cases, solar is a poor match. German EEG law or the California Solar Initiative could be overturned or modified with a change in government or its TOU Net Metering works best if the customer can mount her attitude. Spain is learning this the hard way after the summersolar array in a way that maximizes production during the peak and fall of 2008. The U.S. solar market became painfully awareperiod, for example facing southwest or south at an angle near of its dependence on the extension of the 30% Federal25 degrees up from horizontal (equal to a 6:12 roof). Slopes Investment Tax Credit which was due to expire at the end offrom 5 to 40 degrees and southeast and west arrays generally 2008 but was passed at the last moment as part of thealso work quite well. Note: it is usually not economically Emergency Economic Stabilization Act of 2008. Regulatoryfeasible to tilt a solar array away from parallel with the roof’s incentives are much more difficult to achieve, however, oncesurface to optimize performance, because the gain in production won, they are also much more difficult to lose. Any state with(bill savings) is often not worth the additional mounting Net Metering, TOU, or Tiered rates is likely to have them for ahardware and labor cost or the aesthetic penalty. long time and it will be a huge battle to take them away. TOU Policy Discussion: Time-of-Use rates are a powerfultool to motivate customers to voluntarily use less power duringpredictable times of shortage. The greater the differentialEconomics of Solar Electric Systems ! 2009, Andy Black. All rights reserved. July 2009 - 6 of 19
  • INCENTIVES: ! Equipment delivered and construction / installation There are several ways the government (in its various forms) completed. Minor tasks like painting need not be finishedcan provide incentives for solar. Already discussed were the ! Taxpayer has taken legal title and controlregulatory forms of incentive via favorable rate structures. Here, ! Pre-operational tests demonstrate the equipment functionswe discuss the various “Cash” or “Cash Equivalent” incentives, as intendedwhich include: ! Taxpayer has licenses, permits, and PTO (permission to ! Tax Credits and the U.S. Treasury Grant operate) ! Accelerated Depreciation Both the residential (Sec. 25D) and commercial (Sec. 48) ITC ! Sec. 179 Tax Deduction interaction with the ITC & Grant are one-time credits received when filing taxes for the year the ! Cash Rebates and Buy-downs system was placed in service. If not completely useable in the ! Performance Based Incentives (PBIs) system installation tax year, in theory, the residential ITC can be ! Feed-In Tariffs carried forward indefinitely but may run into the practical ! Tax abatements (waivers of sales and/or property taxes) difficulty that the 5695 tax form may no longer exist after the ! SRECs (Green Tags) mandated by state law 2016 tax year unless the IRS makes it available. SEIA is The Database for State Incentives for Renewable Energy (The working to address this with the IRS. The ITC can be carriedDSIRE database, http://www.dsireusa.org/solar/) is a database forward only by necessity, and must be claimed as soon asof all state and federal incentive programs around the country possible (i.e. can’t be carried forward simply for convenience).for all types of renewable energy and also energy efficiency, The business credit can be carried forward 20 years and may beand provides specific details and links state by state and at the able to be carried back for certain businesses under the Netfederal level. Operating Loss rules. The Solar Energy Industries Association (SEIA) has put As part of the American Recovery and Reinvestment Act oftogether an excellent and well researched “Guide to Federal Tax 2009 (ARRA), in order to stimulate the economy, and inIncentives for Solar Energy”, available free to members as a particular, the solar industry, commercial solar systems (Sec. 48membership benefit. Learn more at: http://www.seia.org/. ITC only) are able to convert the ITC that would normally be received at the end of the tax year, and only if there was tax Tax Benefits such as Tax Credits and Depreciation may be appetite, into a U.S. Treasury Grant that can be received asavailable to certain taxpayers who install solar energy early as 60 days after project completion or applicationequipment. The information in this article regarding taxes, tax (whichever is later). Only projects placed in service in 2009 orcredits and depreciation is meant to make the reader aware of 2010, or projects started in 2009 or 2010 and placed in servicethese benefits, risks and potential expenses, and help avoid before the end of 2016 are eligible for Grant treatment. Thisoverblown claims by aggressive salespeople. It is not tax solves the lost “time value of money” due to lengthy carry-advice, and the author is not a qualified tax professional. forwards for taxpayers with limited ability to use the ITC.Please seek professional advice from a qualified tax advisorto check the applicability and eligibility of incentives for a Most of the rules and eligibility for the Grant are the same asparticular situation. for the ITC, except as noted above. More information is available at: http://www.treasury.gov/recovery/ and Tax Credits come in several forms: Federal, State and Local. http://www.treasury.gov/recovery/1603.shtml.Thru the end of 2008, the Federal Investment Tax Credit(ITC) for Residential (individual tax filers) was 30% of system Although the ITC is received effectively “up-front” when thecost basis, capped at $2,000 for systems installed before the end system is installed (or at the end of that tax year), it is actuallyof 2008. From 2009 thru 2016 it is a full 30% (without cap). earned over 5 years in equal 20% increments. If the propertyThe residential ITC can be found in Sec. 25D of the Internal becomes ineligible for the ITC (is disposed of or sold by theRevenue Code (IRC) and can be claimed using IRS form 5695. taxpayer, taken out of service, or taken outside of the U.S.), IRC Sec. 50(a)(1) stipulates that the taxpayer must repay the The residential ITC will expire at the end of 2016 if not unearned portion via the recapture mechanism. For example, ifextended. Federal taxability of state, local, or utility rebates the taxpayer sells the system after 2.8 years of ownership, sheaffect the ITC system cost basis significantly, so please see the has only earned 2 of 5 years (40%) of the ITC, and must repay“No Double Benefit” section of this article (below) that 60%.discusses Sec. 136(b) of the IRC. The U.S. Treasury Grant has the same recapture mechanism, The Federal Investment Tax Credit (ITC) for Business but is slightly more relaxed. If the property is sold to anotherowned systems (IRS Schedule C business tax filers) is 30% of eligible party, the original party receiving the grant is notnet system cost with no cap for systems that are “placed in subject to recapture as long as the receiving party maintains theservice” by the end of 2016 (IRC Sec. 48). After 2016, if not property’s Grant eligibility for the remainder of the 5 years. Ifextended, the tax credit will revert to the previous permanent they don’t, the original party will suffer the recapture event.level of 10%. The IRS current federal form is 3468 available athttp://www.irs.gov/formspubs/. In 2008, home-based businesses (if >20% business allocation of the home) typically qualified for the ITC as well. Because the “Placed in service” as defined by the SEIA “Guide to Federal credit applies on both individual (residential) and business taxTax Incentives for Solar Energy” occurs when all of the returns, but was capped on residential, it needed to be properlyfollowing have occurred:Economics of Solar Electric Systems ! 2009, Andy Black. All rights reserved. July 2009 - 7 of 19
  • apportioned on each part of the tax return to ensure the right $85K ($100K minus one half of the $30K ITC). If thecredit amount is claimed. Home-based businesses are typically customer’s federal tax rate were 28%, the federal depreciationapportioned based on percentage of square footage attributed benefit would be approximately $24K ($85K times 28%).exclusively to the business. To figure the credit, one typically The state depreciation benefit is the state tax rate times theapplies the percentages to the two separate calculations then state depreciation basis, which may be different from the federalsums the results. From 2009 to 2016 with the uncapped ITC, depreciation basis, and may be affected by any state rebatesthis distinction is probably no longer relevant. received. Unfortunately, for the same reasons that state income Beginning in 2009 taxpayers (individuals and businesses) will tax credits aren’t really worth their face value, similarly, thebe able to claim the federal ITC even if they are subject to the state depreciation net benefit must factor in the effective federalAlternative Minimum Tax (AMT). Systems placed in service taxation effect of reducing state taxes.before the end of 2008 can suffer AMT limitation because the Federal depreciation for solar uses the MACRS 5-yearsolar ITC (and Accelerated Depreciation discussed in the next Accelerated Depreciation schedule and is calculated on IRSsection) are ‘Tax Preference Items’ that can cause AMT and form 4562. MACRS stands for Modified Accelerated Costlimit the enjoyment of the ITC benefit, even if the taxpayer Recovery System, and is a way of allowing businesses towasn’t subject to AMT before getting the solar system. Even depreciate some property more quickly than the normalwith the ITC “AMT relief” starting in 2009, the Accelerated schedule, to receive the write-off sooner (accelerate the benefit).Depreciation may still cause an AMT situation for businesses. Though it is called “5 year MACRS” it generally uses the “half- There is an open question in the solar industry about the year convention” assuming the property is placed in service inapplication of the ITC to “property used for lodging”. Sec. the middle of the tax year, which allows a lesser share of the50(b)(2) indicates that the Federal ITC is not available for write-off in the first year and extends the write-off into the 6th“property used for lodging”. This sentence has created a fair bit year. Different numbers may apply if the property was placed inof concern for the solar industry, because it appears to exclude service late in the tax year. Home-based business systems mayhotels/motels and rental property. However, Sec. 50(b)(2)(D) also qualify for proportional depreciation (if the business use ofseems to exempt “Any energy property” (which solar is as the property is greater than 50%).defined in Sec. 48(a)(3)(A)(i) “equipment which uses solar In 2008 and 2009 only, as part of the Economic Stimulus Actenergy to generate electricity”) from this exclusion. The author of 2008 and the ARRA of 2009, businesses can also receivehas not received a definitive answer from a qualified tax ‘50% Bonus Depreciation’ meaning that they can furtherprofessional or the IRS as to whether hotels and rentals are accelerate half the future depreciation amounts into the firsteligible. Thanks to Chad Blanchard and Michael Masek for year (2008 or 2009) the project was placed in service (it doeshelping research this. not mean they are getting 50% extra depreciation, just getting Please seek qualified tax advice before accepting anyone’s half of it even sooner). The 5-Year MACRS schedules (half-claims of applicability of these or other tax benefits to a year convention) are:particular situation. State Income Tax Credits are available in several states, Year 1st 2nd 3rd 4th 5th 6thsuch as Oregon, Hawaii, New Mexico, and New York, and can Not 2008 20% 32% 19.2% 11.52% 11.52% 5.76%be quite generous. However, potential recipients should be or 2009aware that if they itemize their federal tax deductions, a state tax 2008 and 60% 16% 9.6% 5.76% 5.76% 2.88%credit isn’t worth its full face value. When itemizing, state taxes 2009 onlyare usually deductible off federal taxable income. Reducing Fig. 8: MACRS Federal Depreciation Schedules for 2008 andstate taxes by the state tax credit means that federal taxable net 2009 and years other than 2008 or 2009.income will go up. In effect, federal income tax will be paid onthe value of the state tax credit. For most people, a state tax State depreciation sometimes depends on the type of business.credit is worth about 65-85% of its face value. In California, it is split between “Corporate” and “Non- Corporate” businesses. Non-Corporate businesses use the Depreciation and Accelerated Depreciation may be a regular federal MACRS 5-year accelerated depreciationpossibility for business owned systems. Depreciation is a (without the 50% bonus). California corporate businesses usemethod of ‘writing-off’ expenses for long lasting (durable) 12-year straight-line depreciation for state depreciation. Pleasegoods such as cars, computers, etc. The ‘write-off’ is generally check the DSIRE database for the applicable depreciation forrequired to be spread over several years, depending on the type other states.of property. Since depreciation is a write-off, it reduces taxableincome, and thus reduces tax liability. The net federal benefit of The Sec. 179 Deduction has a negative interaction with thedepreciation is the federal tax rate times the federal depreciation federal ITC and U.S. Treasury Grant. If the taxpayer uses eitherbasis. The federal depreciation basis amount is the federal ITC the ITC or the Grant for part or all of the property, they may notbasis, minus one-half the federal ITC amount (85% of the ITC also claim the Sec. 179 deduction for that part. The ITC orbasis in the case of the current 30% ITC). For example, a Grant benefit, combined with MACRS depreciation are muchsystem costing $100K (ignoring any rebate for this example) more valuable than the Sec. 179 Deduction. In previouswould have a tax credit basis was $100K, and thus receive a situations (typically Commercial Economics classes), the author$30K federal ITC (30%). Its federal depreciation basis would beEconomics of Solar Electric Systems ! 2009, Andy Black. All rights reserved. July 2009 - 8 of 19
  • incorrectly suggested that Sec. 179 may also be available and at either the federal or state level, or both. Contrary to what wasmight be able to be used with caution in certain situations. written in previous versions of this article, there appear to be significant grounds for individual (residential) taxpayers in Rebates, Buy-downs, and Grants provide direct cash some states to claim the rebate payment is non-taxable. Sec.incentives to purchasers or their installers. These types of 136(a) of the IRC specifies that ‘direct or indirect utilityincentives are usually proportional to system size based on the payments (i.e. from ratepayer funds) for energy conservationrated wattage of the system, and are often limited to a measures may be excluded from taxable income, where energypercentage of total system cost and/or a fixed total dollar conservation measures reduce the consumption of energy in aamount. The rating systems vary by program, using the CEC, dwelling.’ PV systems are energy conservation measuresPTC, or STC rating systems. In cases where a rebate is received, (source: Wiser & Bolinger, Lawrence Berkeley Lab - LBL).the customer can usually also enjoy savings via Net Metering on Therefore it seems clear that utility direct paid rebates for PV toher electric bill. homeowners are non-taxable, such as in most of California, Rebate programs are usually run and/or overseen by either a Colorado, New Jersey, and some other states.state agency or a utility, often in compliance with a state law or Other states, such as Florida, or cities such as San Francisco,voter initiative. pay rebates from general funds collected from taxpayers (not Rebate payments are paid and received up front, and are not ratepayers). In these cases, Sec. 136 would probably not apply,based on actual system performance. At best, they can be and the rebate payments would probably be taxable.adjusted to account for expected performance. Expected Less clear are rebates that are funded from ratepayer sources,performance rebates may be adjusted by the expected relative but paid by non-utility administrators, such as the Californiasystem performance compared to an optimal or ideal system, Energy Commission or the Energy Trust of Oregon. In a privatetaking into account reductions in performance due to shading, letter ruling an IRS administrative law judge found that thetilt, orientation, and/or geographic location (to account for Energy Trust of Oregon rebate was indeed tax exempt, but thevariations in sunlight levels due to location). reader is cautioned to note that private letter rulings are not Performance Based Incentives (or PBIs) provide incentive precedents and do not bind a different IRS administrative lawpayments based on actual delivered system performance, and so judge to the same finding, nor do they apply to any otherautomatically account for shading, tilt, orientation, and taxpayer than the one named in the ruling. It is not expected thatgeographic location, as well as the other factors mentioned in the IRS will make a public ruling, so it’s likely to remain a greyFig. 2. The PBI amount is usually a set value in cents per kWh area for now.(commonly 10-40¢/kWh) paid for each kWh produced, Some state agencies, such as the California Energymeasured, and reported by the system for a set number of years Commission have issued 1099 tax forms to rebate recipients.(commonly 1, 3, 5, 10, 15, or 20 years) from the date the system Simply receiving a 1099 tax form may not require payment ofis first placed in service. Usually PBIs are received in addition tax on the amount. Such a 1099 may be advisory and a way forto the customer savings via Net Metering of her electric bill. the issuer to cover itself and ensure compliance with IRS rules, Since PBI payments are paid over time the customer must even if Sec. 136 applies. On the other hand, not receiving await for payment, and bear the risk that something will interfere 1099 doesn’t excuse the taxpayer from tax liability if due (i.e. ifwith system performance. Because of the time value of money, Sec. 136 doesn’t apply). Please check with a qualified taxand this additional risk, the total of the PBI payments must be professional when making these important decisions.more than a rebate would have been in order to provide an equal It was mistakenly suggested in previous writings of this articletime- and risk-adjusted incentive. This increases the cash cost of that if the installer accepted the rebate on the customer’s behalf,the incentive program to the incentive provider, but increases it might eliminate the customer’s rebate tax liability. The authorcustomer attention to her system (in order to receive payment), has been informed that this is not true, and that tax is due whenso per kWh delivered, PBIs may be more cost effective to the value is received (including non-monetary value in the form ofincentive providing agency and funding parties than rebate-type part of a PV system), unless specifically exempted (as may beincentives. the case if Sec. 136 applies) (source: Wiser, LBL). There is a major marketing benefit to PBI programs as well. Despite this, there are other reasons why it is still better forUnlike rebates, which are received one-time up-front when the the customer to have the installer accept the rebate as part ofcustomer is already excited about her system, PBIs are received payment for the project: 1. Less cash is required (by theat regular intervals (usually every 1, 3, or 6 months) providing customer) during the project, and 2. The customer has greaterthe customer a reminder of her solar system and a reason to leverage over the installer should the installer do a substandardsmile (or call for warranty service). A smart installer or job (if either the customer or inspector doesn’t sign off on thesalesperson will time her follow-up communications to the job, the rebate may be withheld). This is less attractive for thecustomer to ensure the customer got her PBI check, and also to installer because it hurts her cash flow, but might provide her amake sure she is remembered for referrals. This residual benefit sales advantage over a competitor. It doesn’t impact thecan last for years, generating many new sales. installer’s tax return because the rebate is part of the job’s Taxability of Rebates and PBIs: Depending on the structure revenue whether received directly or thru the customer, and allof the program, and the type of taxpayer (residential or job revenue minus expenses is already subject to taxation.commercial), rebates, PBIs, and grants may be taxable incomeEconomics of Solar Electric Systems ! 2009, Andy Black. All rights reserved. July 2009 - 9 of 19
  • A sales and cash flow optimization strategy is to have the were lower than 30%, then she would prefer the rebate becustomer pay full price and receive the incentive directly unless taxable (if she had a choice or if she and her tax advisor feelshe requests otherwise, optimizing installer cash flow on as there is enough uncertainty in the applicability of Sec. 136)many jobs as possible, while providing the sales flexibility to because she would then pay less in rebate tax than she wouldmatch the competition upon customer request. gain in getting the full ITC. On the other hand, a taxpayer in a tax bracket over 30% would prefer the rebate to be non-taxable. Non-profits, governments and schools don’t pay income taxes, Each 1% of difference between the customer’s tax bracket andso incentives received are generally not taxable. 30% makes 1% difference in the net value of the rebate to them. Business/commercial solar system rebates are likely subject to For most taxpayers, this isn’t going to be very much in absolutetaxation, as Sec. 136 applies only to systems installed on the dollars either way compared to the total cost of a PV system, asdwellings of individual taxpayers. There is no known exemption is evidenced by the examples.for business taxpayers, but it turns out that, in general, a For business taxpayers, Sec. 136 does not apply, and there isbusiness wouldn’t want to use it – more on this later. no other known section of the IRC that might exempt the rebate No Double Benefit: Sec. 136(b) states that if the rebate is tax from federal taxation. This turns out to be convenient, becauseexempt, then the taxpayer will need to reduce the tax credit while paying tax on the rebate is a cost, not only does it allow abasis for any related ITC, and will then get less tax credit. On larger ITC to be enjoyed, but since the depreciation basis isthe other hand, if she does pay tax on the rebate, then she does proportional to the ITC basis, it allows more depreciation to benot deduct the rebate amount when she calculates the tax credit enjoyed as well. The larger amounts of both ITC andbasis (and therefore get relatively more tax credit benefit). depreciation far more than compensate for the tax on the rebate. See Fig. 10 for a comparison of the two results. For residential taxpayers, the above interaction and theimportance that Sec. 136 apply to any rebate she has received Even when the rebate is taxed, it is usually only taxed by thewas much more significant before 2009, because the Federal federal government. State governments that have enactedITC was capped at $2,000. Now that the Federal ITC is an rebates in support of solar generally don’t tax their ownuncapped full 30%, the impact is usually far less, and depends incentives, however, tax laws vary by state, so check with youron the marginal tax rate of the customer. If the taxpayer’s state taxing authority.bracket is 30%, then it makes no difference to the customer PBI Taxation: Since PBIs are paid over time and the totalwhether the rebate is federally taxable or not, since she will gain value that will be received is unknowable at the time the federalthe same amount either in no tax on the rebate or in higher ITC ITC needs to be calculated, the interaction between them andvalue. See the 4 cases illustrated in Fig. 9. If her tax bracket the ITC is less straightforward. For businesses, PBIs are almost certainly taxable. Case 1: Non-Taxable Rebate For residential customers however, one might be able to argue $100K System Cost that Sec. 136 should also make PBIs paid from ratepayer funds -$30K Rebate for PV systems non-taxable, but this would create the difficulty -$21K Tax Credit Value (30% of $70K after rebate cost) of calculating how much to reduce the ITC basis by, since it =$49K Net Cost would require the impossible task of calculating the present value of the unknowable stream of PBI payments that will be Case 2: Taxable Rebate at 30% Federal Tax Bracket received as and if the PV system produces electricity. Even if $100K System Cost -$30K Rebate +9K Rebate Tax ($30K * 30% Fed Tax) Case 1: Non-Taxed Rebate -$30K Tax Credit Value (30% of $100K) $150K System Cost =$49K Net Cost -$50K Rebate -$30K Tax Credit Value (30% of $100K) Case 3: Taxable Rebate at 20% Federal Tax Bracket -$35K Depreciation Value (85K * 41%) $100K System Cost =$35K Net Cost -$30K Rebate +$6K Rebate Tax ($30K * 20% Fed Tax) Case 2: Taxed Rebate -$30K Tax Credit Value (30% of $100K) $150K System Cost =$46K Net Cost -$50K Rebate +17.5K Rebate Tax ($50K * 35% Fed Tax) Case 4: Taxable Rebate at 40% Federal Tax Bracket -$45K Tax Credit Value (30% of $150K) $100K System Cost -$52K Depreciation Value (127.5K * 41%) -$30K Rebate =$20.5K Net Cost +$12K Rebate Tax ($30K * 40% Fed Tax) -$30K Tax Credit Value (30% of $100K) 41% = combined net federal & state tax rate (35% Federal =$52K Net Cost & 8.84% CA State) Fig. 9. Residential examples of rebate/ITC interactions. Fig. 10. Commercial examples of rebate/ITC interactions.Economics of Solar Electric Systems ! 2009, Andy Black. All rights reserved. July 2009 - 10 of 19
  • you could agree with the IRS on a discount rate for PBI industry (which was over 40% of the world solar market inpayments to be received in the future, no one can know how 2008) is effectively completely shut down as of 2009.many kWh will actually be produced until it has happened, ! Solar benefits some customers much more than otherswhich is usually well after the ITC needs to be calculated and (customers high in the rate tiers, those with avoidablesubmitted with a tax return. Guidance from Mark Bolinger at demand charges, and/or those who can benefit from Time-of-LBL (not a qualified tax professional, but someone who has Use rates), each of which is a hidden artifact of Net Metering.studied this in greater depth than the author, see “Further Losing the Net Metering benefit levels the playing field, whichReading” at end for more info) is to assume PBIs are taxable for is democratic, but removes a lot of existing salesresidential customers as well as businesses, to be on the safe opportunities for those who know where to look, and mayside. completely eliminate the market if the FIT is set too low. Of course, the ideal and much more valuable result would be ! FITs have no ‘End Game’ unless the customer can switchfor the IRS to accept an argument that the PBIs are non-taxable back to Net Metering (without other incentive) at her choice.to homeowners due to Sec. 136, but also not challenge the This means that if only FITs are available (without Nethigher claimed amount of the ITC since there was no rebate Metering), the FIT payment can never be reduced to 0¢/kWhreceived up front to reduce it. The author is not advocating this because the customer will always need some payment to makepotentially risky strategy, and a competent qualified tax it worth going solar (since she won’t be saving on her electricprofessional should be consulted before considering this bill). This makes the solar industry perpetually dependent onmaneuver. However, it is fairly certain that even if the IRS the existence of FITs and their future renewal. If the customerwould to approve such an approach, they aren’t likely to chase can always choose between a FIT or Net Metering, then thisthe taxpayer around attempting to provide a refund unless she problem goes away, because once the Net Metering benefitfiles her taxes in this way. becomes greater than the FIT payment, customers will chose Feed-In Tariffs (FITs) are very similar to PBIs in that they Net Metering.provide a payment to the customer for each kWh delivered to Tax Abatements are offered by some taxing jurisdictions inthe grid. The difference being that usually a Feed-In Tariff is the the form of Sales Tax or Property Tax exemptions. Many statesonly benefit received from owning the solar system – there is no exempt solar systems from being included in the assessed valueNet Metering benefit, so the customer continues to pay her of a home, so installing a solar system doesn’t cause theregular electric bill. In order to make Feed-In Tariffs attractive, homeowner’s property taxes to increase. For example, solarthe payment per kWh needs to be higher than a comparable PBI systems installed in California between January 1, 1999 andbecause of the lost Net Metering. Common feed-in tariff terms January 1, 2017, are exempt from triggering Property Taxare 10, 15, and 20 years. reassessments (California Taxation Code, Sec. 73). Sales Tax Gainesville, Florida and Ontario, Canada have implemented exemptions help reduce the up-front cost of the solar system.feed-in tariffs. Gainesville’s tariff of 32¢/kWh for 20 years was Solar Renewable Energy Credits/Certificates (often knownvery popular and used up the first allocation of money quickly. as SRECs, S-RECs, sRECs, RECs, or Green Tags) are a newOntario’s first attempt at CAD 42¢/kWh for 20 years was not and growing way to value the greenness of the energy from ahigh enough to be strongly popular, so in May 2009 revised solar energy system. SRECs represent the bundle of legal rightsincentives of CAD 44-80¢/kWh depending on system size and to the green part of each kWh produced by a solar system. Thismounting type were proposed (not yet finalized). green part can be sold for a value, which generates additional Feed-In Tariff Policy Discussion: Feed-In Tariffs (FITs) are revenue for the seller.very simple incentives for solar, and are very popular in SREC value is created in two common ways. The first is theGermany and Spain because they have very quickly created “voluntary” market, where individuals buy SRECs as a way oflarge markets in each of those countries. There are a number of “greening” their world by paying extra to someone else torisks associated with FITs however: install some new solar capacity, often because they can’t or! The incentive is 100% visible, and makes solar look chose not to make the large, long-term investment themselves. expensive, making it an easy target for solar detractors, This is common for apartment dwellers and business renting the whereas Net Metering ascribes value to the publicly received space they occupy. Business such as Kinko’s, Wal-Mart, Whole benefit of the electricity generated and delivered when the Foods, and White Wave (the makers of Silk soy milk) have utility needs it. The cost to the ratepayer is equal, so it’s a bought SRECs to offset some of the emissions from their matter of perceptions and visibility, however Net Metering operations. better reflects the public benefits. Voluntary SREC purchases do actually “green” the grid if! The entire incentive for solar becomes vulnerable to political they result in net new solar (or wind or other renewable changes – FITs can come and go with a change of elected or generation depending on the type of REC or Green Tag appointed officials, creating potentially large changes in purchased) that wouldn’t have been installed if the SRECs fortunes of the solar industry. Germany and Spain both found weren’t purchased for the agreed price. For example, a solar their incentives aggressively cut back in the summer of 2008 ‘farmer’ wants to build a solar farm on some open land or on when they started to be viewed as too expensive. Spain’s solar the roof she has access too. If the value of the electricity she will be getting from the utility (via sales or Net Metering),Economics of Solar Electric Systems ! 2009, Andy Black. All rights reserved. July 2009 - 11 of 19
  • combined with the incentives discussed (excluding SRECs) assurance of long-term agreements, the customers (homes andabove isn’t enough to provide the rate of return the ‘solar businesses) installing solar don’t need to be paid as much forfarmer’ is looking for, the investment won’t happen. If the their SRECs because they know the value is locked, which also‘farmer’ can sell the SRECs to a buyer for enough extra value saves the utilities in the short term, and probably also in the(1-5¢/kWh is common in ‘voluntary’ locations), the total long term, because the risk-premium is eliminated.investment may become attractive, and the ‘farmer’ will invest Maryland has a 2009 ACP of 40¢/kWh which will declinethe money and effort to make it happen, and Voila! – net new over time (see the DSIRE Database for current details).generation happened in part because of the SREC value. Pennsylvania and other states will likely also have similar The second common (and very important) way SREC value is arrangements. There is no guarantee that actual value will becreated is thru the regulatory “compliance” market where state anywhere near the ACP unless the ultimate buyer (the utility)law or voter initiative has required that a certain percentage of agrees to it.electricity in a given geographic or territorial area must come Colorado has an RPS as well, but rather than paying for eachfrom solar sources. Often, the percentage is set to rise over time. SREC as it is produced, the two main utilities, Xcel and BlackFourteen states have Renewable Portfolio Standards (RPS) with Hills Energy (formerly Aquila) buy 20 years worth of the SRECsuch a requirement. In these states, the utilities must either build output from smaller systems for $1.50/W STC of installedand own solar installations (if allowed), or buy SRECs from capacity (looking more like a rebate) in addition to the regularproducer/owners. Usually, there is an Alternate Compliance $2/W rebate. This equates to an approximate SREC value of 5-Payment (ACP) that sets a maximum on the value of the SREC 7¢/kWh depending on sunlight levels and system performance.value, whereby, if the utility isn’t able to buy SRECs for lessthan the ACP, they can pay the ACP as a penalty for failure to California and several other states have Renewable Portfoliodo so. Standards too, but these RPSs don’t have requirements that any of the energy be sourced from solar, so it is likely that most will New Jersey is the best known of the states where its solar come from wind and other sources, which are currently lessprogram is supported mostly by SREC value. Currently, the expensive. That means that the SREC market in these states isACP in New Jersey is the equivalent of 71.1¢/kWh. The market voluntary (including some speculators buying or trading SRECsin which the NJ utilities can buy SRECs is set up as a bid- on the bet that they will become more valuable if/as theauction market, so supply and demand rule the price of SRECs government and industry take on global warming). Currentat any given moment, with the artificial cap of the ACP. As of voluntary SREC values are estimated to be in the range of 1-June 2009, the auction market in NJ had set the price of SRECs 5¢/kWh, which is not insignificant compared to Net Meteredat 60-65¢/kWh. This value may continue for the short-, mid- or electricity value that is sometimes as low as 6-20¢/kWh.long-term, but there is no assurance of it. The price could alsocollapse if an oversupply of SRECs becomes available, The only way an SREC has any real value though, is to ensuredepending on the rate of installation of solar systems compared that the bundle of legal rights to the greenness it represents hasto the increasing requirements of the NJ RPS. only been sold once to its ultimate consumer for “retirement”, the same way as a publicly traded company can only sell a fixed SREC Policy Discussion: The New Jersey style incentive number of shares of its stock. Within a state RPS complianceusing SRECs is one of the author’s favorites, because it allows market, this is usually done by an administrator who tracks allmarket mechanisms to automatically readjust the incentive the production, sales, and retirements. In voluntary markets,(SREC) level to changes in market conditions. For example, the SRECs should be certified by a certifier such as Green-e (auncapping of the federal ITC provided a lot more federal service of the Center for Resource Solutions) http://www.green-incentive for solar, and so would require less state support and e.org/, which is the nations leading independent consumerwould allow the SREC level to decline, all things being equal. protection program for the sale of renewable energy andSimilarly, the recent rapid decline in solar module prices has greenhouse gas reductions in the retail market. Only then canlowered end-customer costs, again requiring less support to be the consumer be sure she is buying something of value.required in the form of SRECs. The U.S. economy of 2009 is insuch bad shape that the above two have not actually manifested One should take care to consider whether she really wants toin substantially increased solar purchasing and supply of sell the SRECs her system generates. By selling them, she losesSRECs yet, but the Rate of Return on a solar investment in NJ the right to claim she is using any of the clean green energyhas been increasing due to the two events. Eventually, the generated by the system. That right would belong to the newreturn will get good enough, and the economy will get stable SREC owner. The system owner could claim she is a host forenough, that individuals will start to buy systems and put new the generation, but not a user. The distinction is important inSRECs on the market, creating more supply to satisfy an order to prevent double counting of the SRECs, which isinelastic demand, causing SREC values to come down at least important to maintaining their value.somewhat. The missing element in the New Jersey program has beenlong-term contracts whereby solar customers can get anassurance of future SREC value. Without such an agreement, apotentially oversupplied SREC auction market could cause thetraded price to plummet, so customers installing systems needto insist on a risk-premium. This is starting to shift. With theEconomics of Solar Electric Systems ! 2009, Andy Black. All rights reserved. July 2009 - 12 of 19
  • HOW IS THE SOLAR PAYOFF PROVEN? after-tax savings of $100. The example would then be Independent tests of the financial viability of solar energy calculated as follows:include:! Rate of Return for comparison to other interest rate based AfterTax $100 $100 $100 investments PreTax = = = = = $100 * 2 = $200 1" TaxRate 1" 50% 1" .50 .50! Payback in a reasonable time! Total Lifecycle Payback! Net increase in property value compared to solar system cost Meaning that $100 after-tax is equivalent to $200 pre-tax at a! Positive cash flow when financing the project ! 50% tax rate. To put it in context of a solar system: if a customer were choosing between investing $15K in a solar All of the analyses and analysis methods presented here apply system that would save them $100/month on her electric billonly to residential scenarios. Different mechanisms, (tax-free), vs. $15K in a taxable investment, the taxableassumptions, and accepted financial and accounting practices investment would need to earn them $200/month so that afterapply to commercial cases, which are not discussed here. For she paid taxes on the $200, she would have $100 left over toexample, commercial analyses must be done on an after-tax pay the electric bill, for the two choices to be consideredbasis, which has important consequences relating to the loss of equivalent. In reality, combined federal and state tax rates arethe electric bill tax deduction a business otherwise would have currently lower than 50%, with an effective rate of 20-40% forenjoyed, and commercial property resale valuation is done using most taxpayers. At these rates, $100 after-tax savings would beCapitalization Rate, rather than the method discussed here. equal to $125-$165 pre-tax equivalent.Future versions of this article may include this material, socheck back later please. Once the value of the savings, maintenance costs and other amounts are properly adjusted to their pre-tax values, they canRATE OF RETURN: be inserted into a 25-year financial timeline (the warranted life Compound Annual Rate of Return on an investment is of most solar electric/PV modules) representing the cash flowsanother term for effective interest rate or yield, which is a way for each year, to calculate the Compound Annual Rate ofof comparing one investment to another. For example, a savings Return. This allows the accurate inclusion of all relevant costaccount might pay 0.5%-1% interest, and the long-term (80 and benefit components.year) Dow Jones Industrial Average of the stock market,assuming dividend reinvestment had earned 8.5% per year The initial capital cost is the only amount that doesn’t get(CAGR) to its height of 13,500 in 2008. At its level of 8,000 in adjusted. That amount is the net system up-front cost (total outJune 2009, the long-term CAGR of the Dow has been 7.5%. of pocket), and is unaffected by the taxation or lack thereof of future savings in the utility bill. Consider it the same as The author chose 10% as the test point for solar, because that principal that is invested anywhere. The principal is not taxedcompares favorably to other long term investment average upon its departure or return.returns from common, readily accessible, higher yieldinginvestments such as stocks and bonds and provides a slight Tax savings and consequences, inverter replacement,premium to compensate for solar’s lack of familiarity to much maintenance, and other significant financial events can beof the public. included at their appropriate places on the timeline. Inflation, escalation, and module degradation are also easily included. For To properly value the savings from a solar system, it should each year, the values can be summed, creating a 25-yearbe noted that solar saves after-tax expense, while most other timeline of net expense or net savings by year. The Internal Rateinvestments earn pre-tax income. In order to compare solar to of Return (IRR) function in most spreadsheets can thenother investments, all investments should be placed on the same calculate the IRR, which is the same as the Compound Annualside of the tax equation. Since most investments are taxable (i.e. (interest) Rate of Return (CARR) for the investment.stocks, savings interest, etc.), and because most people thinkabout their investments on the pre-tax side, it is most One should note that there is a significant and very importantmeaningful to convert solar savings to its taxable equivalent difference between Compound Annual Rate of Return andvalue (i.e. PreTax value). average return or total return divided by the number of years an investment is held. Average return does not factor in AfterTax dollars are worth more to a taxpayer than the same compounding of interest, and may make an investment looknumber of PreTax dollars, because PreTax dollars are subject to more attractive than it really is. This article uses CARR for alltaxation. Therefore, an AfterTax dollar saved (with solar) is items under consideration (solar, stocks, savings, etc).worth more than $1 on a PreTax basis, by an amountproportional to the taxation rate. To make this conversion from The difference becomes more visible the longer the timeAfterTax value to PreTax value, the following equation can be horizon. A brief example: Suppose an investment doubles everyused (where TaxRate is the net total effective income tax rate): year. Its CARR would be 100% because you get 100% increase each year on your investment. No matter how long you hold it, AfterTax its CARR is 100% because you need to compound for the PreTax = number of years it’s held. Alternatively, if you were to look at (1" TaxRate) the “average rate of return”, over 1 year, it would still be 100%. However, if you held it 3 years, your investment would be To illustrate this with an example, let’s assume a Tax Rate of 800% of the original, or a total return of 800%50% (unrealistically high, but easy to illustrate with) and an !Economics of Solar Electric Systems ! 2009, Andy Black. All rights reserved. July 2009 - 13 of 19
  • (100%>200%>400%>800%). The average annual return wouldbe 800%/3years-100% or 167%, which looks great, but isn’trepresentative, because it isn’t factoring in the compounding.This faulty method of analysis is highlighted here becauseunfortunately there are several inaccurate (misleading) solaranalyses and sales presentations being given to the public thatuse averaging, rather than compounding. Total Lifecycle Savings is Please see Fig. 14 for example analyses from several states several timesand their Compound Annual Rates of Return. These cases are Initial Cost paid Initial Cost back in 8 yearsfor full service residential system installations, using typicalinstalled system costs on a simple composition shingle roof.Utility & state specific assumptions for the examples are listedin Fig 13. General variables and assumptions are: ! 28% federal tax bracket, corresponding state tax bracket Fig. 12. Simple Payback vs. Total Lifecycle Payback. Total ! Facing south, 22° pitch, simple composition shingle roof by Lifecycle Savings over 25 years is several times the initial cost full service provider, no complications represented by the area up until year 8. Year 15 shows ! Slightly conservative real system performance, no shade diminished savings due to inverter replacement. ! Final Net Cost = total installed system costs - Rebate (if any) - 2009 Fed 30% ITC + $500 Permit + $0 Utility Fee residential long-term investment; it does not properly include ! System maintenance cost is 0.25% of gross system cost per the tax savings and consequences, it does not account for year, adjusted for inflation maintenance or inverter replacement expenses, and it makes it ! 5.0% electric escalation (2.2% in CO) difficult to compare to other investments such as stocks, savings, etc. because of inflation and other factors. ! Module degradation 0.5% per year ! Module PTC/STC Ratio: 89.6%, Inverter Efficiency: 95.0% TOTAL LIFECYCLE PAYBACK: ! Inverter replacement costing $700/kW occurs in year 15 Comparing the savings of a solar electric system over 25 years These analyses were performed using the OnGrid Tool, of operation to its initial cost is a better way of looking at payback, because it more fairly values the savings due to theavailable at http://www.ongrid.net/payback. Other tools are compounding effect of electric rate escalation. Because of thislisted in the Design and Analysis Tools section at the end. effect, the savings in the later years is much greater than thePAYBACK: savings in the first few years. Typical systems give back 1.5 to 3 What about calculating the payback? Payback is a simple but times their initial cost. See Fig. 14 for several examples and Fig.crude tool for comparing investments. Solar is an inflation- 12 for an illustration. One drawback to this analysis is it fails toprotected investment but many others are not. This improves the account for the time value of money. A dollar saved in thepayback for solar (electric rates double every 15 years at 5% future isn’t worth as much as a dollar saved today, so that a totalescalation). To properly calculate the solar payback, it is lifecycle payback isn’t worth quite as much as it might initiallynecessary to add in the rate escalation adjusted savings of each appear. The better methods of comparing solar as an investmentsuccessive year, less the reduction due to module degradation are the Compound Annual Rate of Return, Increase in Propertyand maintenance costs, until payback has been achieved. Value, and Cash Flow.Savings in the latter years are larger than savings in the first INCREASE IN PROPERTY VALUE:years, so the payback is faster than simply dividing the cost by Solar electric systems increase property value by decreasingthe savings. See Fig. 12 for an illustration. utility operating costs. According to the Appraisal Journal Payback analysis on an after-tax basis does not reflect the true (Nevin, Rick et al, “Evidence of Rational Market Valuations forvalue of the saved utility expense, because after-tax savings are Home Energy Efficiency,” Oct 1998 (available at variousworth more on a pre-tax basis. However, trying to do payback locations on-line, including atusing the pre-tax value gives an unrealistically optimistic view http://www.icfi.com/Markets/Community_Development/doc_filof when “payback” has occurred. The examples in Fig. 11 show es/apj1098.pdf), a home’s value is increased by $20,000 forhow long paybacks on other investments really are in every $1,000 reduction in annual operating costs from energycomparison to solar, when taken on an after-tax basis. efficiency. There are numerous other flaws in using payback for a Net Interest Earned or After-Tax After-Tax Payback / Time-to- Investment Type Investment Net Electric Bill Value the Value the Doubling including Amount Savings First Year Eighth Year taxes & inflation Savings $30,000 $300 (at 1% rate) $196 $196 153 years Stocks $30,000 $2,400 (at 8% rate) $1,567 $1,567 19.1 years Solar – CA PG&E 5.5 kW $30,000 $2,321 (1st year) $2,321 $3,176 10.4 years Fig. 11. Investment Payback Comparisons: Solar savings grow due to escalation (4.5% net w/ degradation). Assumed 28% federal & 9.3% state tax rates play a big role in the different outcomes. Stocks & savings are more liquid, but it’s clear why Wall Street and banks don’t talk “Payback”.Economics of Solar Electric Systems ! 2009, Andy Black. All rights reserved. July 2009 - 14 of 19
  • AC kWh Production Installed Cost per Staring/Ending Rate Utility Insolation per rated kW per rated Watt Incentives Schedule, Peak % year (~October 2008) $2.40/W Rebate (net) AZ - APS Phoenix 1660 / STC kW $8.25 STC E-12 / ET-2, 50% 25% State Tax Credit CA - PG&E San Francisco 1630 / CEC kW E1XB / E6XB, 35% $1.55/W Rebate 3kW: $9.50 CEC D-10-Basic / CA - SCE Los Angeles 1675 / CEC kW 6kW: $9.25 CEC $1.90/W Rebate TOU-D-1, 36% 9kW: $9.00 CEC DR-Coastal-Basic / CA - SDG&E San Diego 1700 / CEC kW $1.55/W Rebate DR-SES, 28% CO - Xcel Boulder 1398 / STC kW $8.25 STC R $3.50/W Rebate & SREC CT - UI Hartford 1262 / PTC kW $8.75 PTC R / RT, 45% $1.75/W Rebate FL – FPL Miami 1345 / ST kW $8.25 STC RS-1 $4/W Rebate HI - HECO Honolulu 1460 / STC kW $8.25 STC Res 35% State Tax Credit $1.20/W Rebate (net), MD – BGE Baltimore 1236 / STC kW $8.25 STC R / RL-2, 65% SRECs: 10¢/5yrs, 5¢/10yrs NC - Progress Raleigh 1260 / STC kW $8.25 STC RES / R-TOUD, 60% 35% State Tax Credit SRECs: 48¢/1yr, 30¢/12yrs, NJ - JCP&L Newark 1140 / STC kW $8.25 STC RS / RT, 58% 10¢/12yrs; $1.55/W Rebate Rate I / Rate II TOU, $2.81/W Rebate (net) NY - ConEd New York City 1178 / STC kW $8.25 STC 75% 25% State Tax Credit $2.25/W Rebate, PA – PPL Philadelphia 1217 / STC kW $8.25 STC RS / RTD R, 70% SRECs: 10¢/5yrs, 5¢/10yrsFig. 13. Utility specific residential assumptions. Module prices have dropped since October 2008, and selling prices are declining,but still in a state of flux. For now, the analyses assume 10/2008 pricing. Before Solar Size & Net Cost Results, Savings, and Benefits Cumulative Net Monthly Cash Flow Final Net Appraisal kWh Savings Pre- PV System Cost w/ Lifecycle Years Pre-Tax Compared to 8% 30-yr Equity / Usage Over First Loan Annual Utility Solar Size & Tax Payback To Annual Resale per 25 Years Savings Bill Rating Benefits Ratio Payback Return In First In Fifth Increase in Month (including & Rebate Year Year First Year inflation)AZ - APS $77 800 5 kW STC $18K $22K 1.2x 22.2 6.6% $-31/mo $-38/mo $539 $11KCA - PG&E $74 550 3 kW CEC $17K $28K 1.7x 18.6 10.0% $-11/mo $-15/mo $671 $13KCA - PG&E $258 1100 6 kW CEC $33K $120K 3.6x 9.7 19.5% $100/mo $123/mo $2,761 $55KCA - PG&E $499 1650 9 kW CEC $48K $234K 4.9x 7.8 24.6% $259/mo $320/mo $5,355 $107KCA - SCE $85 550 3 kW CEC $16K $36K 2.2x 15.5 12.9% $6/mo $6/mo $835 $17KCA - SCE $414 1650 9 kW CEC $45K $193K 4.3x 8.5 22.1% $193/mo $238/mo $4,446 $89KCA - SDG&E $97 550 3 kW CEC $17K $38K 2.2x 15.4 12.9% $6/mo $7/mo $877 $18KCA - SDG&E $455 1650 9 kW CEC $47K $206K 4.4x 8.4 22.4% $207/mo $255/mo $4,722 $94KCO - Xcel $72 800 5 kW STC $17K $13K 0.7x 31.9 3.1% $-47/mo $-46/mo $521 $10KCT - UI $183 800 5 kW PTC $25K $57K 2.3x 15.2 11.9% $-20/mo $1/mo $1,333 $27KFL – FPL $89 800 5 kW STC $15K $24K 1.6x 19.3 7.5% $-35/mo $-25/mo $591 $12KGA - GaPwr $88 800 5 kW STC $21K $20K 0.9x 27.0 6.9% $-80/mo $-67/mo $493 $10KHI - HECO $164 800 5 kW STC $25K $62K 2.5x 13.2 15.1% $-10/mo $16/mo $1,442 $29KMD – BGE $131 800 5 kW STC $25K $39K 1.6x 18.4 9.3% $-25/mo $-30/mo $1,262 $17KNC-Progress $80 800 5 kW STC $21K $25K 1.2x 23.2 9.6% $-66/mo $-51/mo $601 $12KNJ - JCP&L $143 800 5 kW STC $24K $66K 2.8x 9.3 19.4% $71/mo $85/mo $2,947 $22KNY – ConEd $134 800 5 kW STC $16K $40K 2.6x 12.4 16.5% $-2/mo $16/mo $956 $19KPA – PPL $95 800 5 kW STC $21K $32K 1.5x 18.9 8.5% $-22/mo $-30/mo $1,100 $14KFig. 14. Example residential cases with their net costs and financial benefits.Economics of Solar Electric Systems ! 2009, Andy Black. All rights reserved. July 2009 - 15 of 19
  • add more than 215% of their value upon resale (Alfano, Sal, “2003 Cost vs. Value Report”, Remodeling Online – www.remodeling.hw.net downloaded March 5, 2004). Other types of remodels like kitchens and bathrooms had similar results related to geography. So it makes sense that in certain geographies where the sun shines brightly and the electric rates are high, solar would return more than its installed cost, while in other states with less sun and lower rates, the return might be much lower, with a national average comparable to other types of remodel. Fig. 16 lists projected resale value of various solar systems, compared with nationwide averages for some other home improvements. The increase in property value is currently theoretical. A very high fraction of the grid-tied solar electric systems in California were installed since the state’s Power Crisis and the Fig. 15. Resale value increases over time because savings get Deregulation fiasco in 2001. Most of these homes have not been larger each year. Total remaining lifetime savings in the sold and there are no broad studies of comparable resale values system declines annually, putting a limit on the increase in available. However, some evidence is beginning to emerge that resale value after year 11. there are significant jumps in resale value being realized by The rationale is that the money from the reduction in some solar home sellers.operating costs can be spent on a larger mortgage with no net It is also interesting to note that PV systems will appreciatechange in monthly cost of ownership. Nevin states that average over time, rather than depreciate as they age. The appreciationhistoric mortgage costs have an after-tax effective interest rate comes from the increasing annual savings the system will yieldof about 5%. If $1,000 of reduced operating costs is put towards as electric rates and bill savings rise. All the calculations in thisdebt service at 5%, it can support an additional $20,000 of debt. article assume electric rate escalation will be 5%. If so, the PVTo the borrower, total monthly cost of home ownership is system will save 5% more value each successive year, and thusidentical. Instead of paying the utility, the homeowner (or future gain from the 20:1 multiplier effect. The resale value will thenhomeowner) pays the bank, but her total cost doesn’t change. increase 5% per year compounded, less 0.5% moduleSince the Nevin article is from 1998, is it dated? No more than degradation.2+2=4 is dated - the rationale is mathematical, not based onmarket whims, so it is timeless. This cannot continue forever, as the increase in resale value runs into the second limit, which relates to the remaining life Please see the column labeled “Appraisal Equity Increase” in left in the system. For these analyses, the system is assumed toFig. 14 for examples of the increase in home value. In some be worthless at the end of 25 years. This is probably verycases, a solar system can increase home value by more than its conservative, since the panels are warranted to be working atcost to install. This effectively reduces the payback period to 0 least 80% of their new performance. So if the system isyears if the owner chose or needed to sell the property worthless at the end of 25 years, the only value the system hasimmediately. It could even lead to a profit on resale. as it nears that time, are the remaining savings it can generate th There are two limits to the increase in resale value over before the end of the 25 year. Fig. 15 shows both thesystem net installed cost. First, why should a homeowner pay in increasing value due to increasing annual savings and thetotal more for a home with a solar system, when she could buy a remaining value limitation that takes over at approximately yearnon-solar home, and solarize it for less money? Yet this 11. If the system does have additional resale value, so much thehappens with other remodels. Decks, on average across the better.nation, return 104% of their cost upon resale. However, in Still, the skeptical homebuyer might question the abovecertain markets like St. Louis, San Francisco, and Boston, decks assertions in light of the lack of hard evidence. Perhaps the best evidence to present would be a stack of old bills showing usage Investment and cost before solar, and a stack of new bills showing a Resale Home Improvement Amount / % substantial savings. The question might be posed, “What are a Value Type Net System Return continuous, if not growing, stream of these savings worth to the Increase Cost prospective buyer?” That sort of evidence can’t easily be CA PG&E Solar 3 kW $17K $13K 76% ignored. Of course, other factors will weigh heavily in the CA PG&E Solar 6 kW $33K $55K 167% value. How attractive is the home? A tidy, attractive installation CA PG&E Solar 9 kW $48K $107K 223% should add all of the value shown above, but like a spa, some Deck Addition $6.3K $6.7K 104% prospective buyers may not care or value it, while others may Bathroom Remodel $10.1K $9.1K 89% love it. Window Replacement $9.6K $8.2K 85% Kitchen Remodel $44K $33K 75% Fig. 16. Resale value comparison of various home improvements.Economics of Solar Electric Systems ! 2009, Andy Black. All rights reserved. July 2009 - 16 of 19
  • Utility Bill w/o Solar at 5% escalation Accumulated 8% Loan (net cost), New Savings Smaller Bill, & Maintenance Fig. 18. Accumulated net savings of solar system financed over 20 years, including all costs, thus showing pure cash profit accumulated over time with no additional expense. has 2 parts: principal and interest. As the balance is paid down, the interest portion of each successive payment is reduced, so the tax deduction benefit is also reduced. In after-tax terms, the loan is least expensive in the first year when the borrower is Net Annual enjoying the maximum tax deduction for interest paid. Savings The difference between the two lines in the top of Fig. 17 is the amount the scenario is cash-positive (or cash-negative) for the customer, and is reflected in the lower graphic, which showsFig. 17. Effect of a solar system financed at a fixed 8% interest “Net Annual Savings” by having purchased a solar system withrate over 20 years showing a cash-positive result from the a loan (put no money down). In this case, the savings arefirst day of ownership, including maintenance costs and the substantial even before the loan is paid off in the 20th year, andinverter replacement at year 15. gets even better after that. The Net Annual Savings can be accumulated as shown in Fig. 18 to show how much extra cashCASH FLOW WHEN FINANCING: a purchaser will have in her pocket before the inverter needs to Financing a solar system makes the purchase achievable to be replaced in year 15, or before the loan is paid off in year 20,more consumers. If the situation is right, the savings on the or before the equipment is out of warranty in year 25.electric bill can more than compensate for the cost of the loanand maintenance, making it a cash-positive maneuver. That is, The uncapping of the residential federal ITC has made it morecompared to the occupant’s current cost of energy (her current difficult to figure out how much a customer should borrow. Theelectric bill), going solar but paying for it entirely with a loan problem is that the ITC is a significant incentive, but it isn’t(no money down) can actually be less expensive on a monthly received until the customer files her taxes, which can be a yearbasis. or more after the system needs to be paid for. Electric rates and electric bills are subject to electric rate In what one might call the “Optimistic Loan” scenario, theescalation, as can be seen in the top graphic in Fig. 17, where customer would borrow the net cost after all incentivesthe cost of energy increases steadily over the years, doubling (including the ITC) have been received. This would produce theapproximately every 15 years. While interest rates might vary lowest loan payments, and have the best chance of being cash-depending on the loan type, loans are not subject to inflation or positive from the start, making the salesperson happy. However,rate escalation, so the loan payments do not increase the customer would need to have the cash to cover the ITCcontinuously. This means that the difference between what the amount or get a bridge loan until the ITC is received because ofelectric bill will become and what the loan & maintenance costs the optimistically low loan & payments.will become continues to move in the customer’s favor. Even if In an “Inefficient Loan” scenario, the customer would borrowa customer didn’t start out cash-positive in the first year, she the net cost after all other incentives, except the ITC. This willmay become cash positive after a few years. allow them to acquire the system with no money down. In the top graphic of Fig. 17, the lower line labeled “8% Loan However it will also result in a lot of cash on hand once the ITC(net cost), New Smaller Bill, & Maintenance” represents all the is received, which she is paying interest on, which is expensivenew costs compared to the old Utility Bill cost. While the loan and not very efficient. It is also less likely to be cash-positive,rate is fixed at 8% and the monthly loan payments are steady, which will be a disadvantage for the salesperson.there are 3 components to this new set of costs that do increase The solution is what OnGrid Solar calls “Smart Financing”over time: 1. The new maintenance cost will rise with inflation. where the customer uses a “line of credit” financing source that2. The new small electric bill will rise with electric rate she can borrow from and repay without pre-payment penalty.escalation. 3. In fixed amortization loans, each loan payment Assuming the ITC will be received in a year, and that she canEconomics of Solar Electric Systems ! 2009, Andy Black. All rights reserved. July 2009 - 17 of 19
  • apply it to the principal of the loan at that time, one can partnership with cities, whereby a citizen property owner cancalculate the necessary loan payment that allows them to pay off receive a loan for a solar system and have it collateralized andthe loan in the desired number of years including interest. The paid back on her property tax bill. The program was pioneeredcalculation is complex, and is not a standard function in most in Berkeley, California, and is now available in several citiesspreadsheets, but can be done. The resulting loan payment will thanks to AB811, the “Community Financing” bill.be somewhere between the Inefficient Loan and the Optimistic The loans are obligations to the city, the interest is taxLoan, typically tending to be pretty close to, but slightly more deductible, and the property tax bill shows the itemization of theexpensive than the Optimistic Loan. loan amount, the principal and interest. The interest rate is set Results of Smart Financing can be seen in Fig. 17. A subtle by the city and their partner bank and is generally at marketfeature of it is the slight dip in savings in the 2nd year. In the 1st rates. However, even if the financing was at what might beyear the loan principal is very high because it includes the ITC considered a subsidized level, because of the ARRA of 2009,amount causing the interest cost to be quite high. This allows there is no longer any negative interaction with the ITC (therefor a large 1st year tax deduction benefit, even though the loan used to be a tax rule that allowed one but not both of an ITC orpayments are fixed and steady. Once the ITC is received and subsidized energy financing to be enjoyed). The loans areapplied to reduce the principal, the interest is reduced, so the tax generally transferable to a future buyer of the property if she isdeduction shrinks, effectively raising the cost of the loan willing to agree to assume the loan payments.compared to the fixed loan payments. These loans pose little risk to the city and their funding Refer to Fig. 14 for several examples showing the initial and partner, because property taxes are considered to be in “1st5th year monthly cash flow assuming 100% Smart Financing of position” to get paid in cased of a foreclosure. This has caused aa solar system using a 30-year loan. Because of the 2nd year dip, controversy in the banking community because this now placesthe 5th year monthly cash flow isn’t always better than the 1st more risk on the holder of the 1st mortgage (who is in 2ndyear’s, but is a basis for continuous improvements in cash flow position), and the lawsuits have started. The mortgagees insistgoing forward. Note, we use the 5th year because most these loans be in at least 3rd position to protect their mortgages.depreciation (in commercial systems) and PBI benefits (both of Depending on how they are structured, that may work for thewhich are applied to loan principal in the same way as the ITC) cities. Stay tuned, it’s developing as this is written.have been received and included by then. There are also two commercial financing products being Sources of financing funds can include: applied to residential situations: Power Purchase Agreements ! Unsecured (PPAs) and leases. PPAs are the agreement for one party to sell ! Home equity power to another at agreed upon terms. The sale is for kWh of ! Community Financing energy only. The leases for solar are rentals, where a customer ! Power Purchase Agreements (PPAs) rents (leases) a solar system from another party. In both ! Leases products, the parties owning the systems have large investors who have money to finance systems and who can use both the Unsecured financing can include credit cards or other types of ITC and depreciation.unsecured loans. These are generally a terrible idea for any kindof long term financing because they usually have high interest In the typical PPA scenario, the site occupant agrees to a PPArates and the interest is not tax deductible. It may be reasonable for electricity kWh at a certain price and in exchange allows ato consider them to temporarily finance the rebate or tax credit solar system to be placed on her roof. In residential applicationsuntil it is received, however, it requires discipline to ensure the of a PPA, the homeowner usually pays a deposit of anywhereloan is paid off as soon as the incentive is received. from $2,000 to 25% to 50% of the cost of the system in addition st to the price she will pay for the electricity. Naturally, the more Home equity sources of funding can include 1 mortgage nd she puts down as a deposit, the lower the price of the electricity.refinances, 2 mortgages, Home Equity Loans, and Home The contract lengths are typically 15-20 years, and there may beEquity Lines of Credit (HELOCs). In general, home equity a buyout cost at the end if the homeowner wishes to purchase itborrowing is tax deductible, has the best unsubsidized interest at that time, or she may have to pay a removal fee if she doesn’t.rates, and has the longest repayment terms, all of which allow The price of electricity may be fixed by the agreement, or itfor lowest monthly costs. However, the decline in real estate may have an escalator, causing it to get more expensive overvalues have hurt Loan-to-Value (LTV) ratios for most time. There is usually a guaranteed minimum performance, buthomeowners, and the tight credit market in 2009 have put strict the customer must purchase any extra electricity, whether shelimits on LTV ratios, credit scores, and income requirements, wants it or not.making use of home equity difficult. Only the Line of Credit islikely to work with Smart Financing. Other loans tend to be less A typical residential solar lease is similar, in that there is oftenflexible on borrowing and repayment term. Attractive FHA a deposit paid and a long-term agreement to rent a system forEnergy Efficient Mortgages (EEMs) may be available from the placement on the customer’s roof. The monthly rent mayU.S. Dept of Housing and Urban Development (HUD) at: include an escalator, increasing costs over time, and mayhttp://www.hud.gov/offices/hsg/sfh/eem/energy-r.cfm. include a buyout clause and termination costs. The buyout clause must not allow the system to be purchased for less than A new idea and source of funds are local loan programs called Fair Market Value (FMV) at the end of the term, and that the“Community Financing” developed by funding sources in FMV must be determined at the end of the term, otherwise theEconomics of Solar Electric Systems ! 2009, Andy Black. All rights reserved. July 2009 - 18 of 19
  • lease will fail to satisfy IRS tax rules. The system usually comes o Property Tax Assessments as a Finance Vehicle forwith a performance guarantee, and the homeowner enjoys any Residential PV Installations: …extra production at no extra charge. o Exploring the Economic Value of EPAct 2005s PV Tax Credits Things a customer should watch out for regarding leases & ! SEIA “Guide to Federal Tax Incentives for Solar Energy”PPAs: 1. High escalators in the contracts and their compounding http://www.seia.org, Solar Energy Industries Associationnature. These vehicles can be good hedges against future rate ! Utility Tariff and Rate Tables (see desired utility’s website) –inflation, but a customer should be cautious about overpaying great for insomniafor that hedge. Rates may not rise fast in the future for anynumber of reasons, and are certainly not likely to rise much DESIGN & ANALYSIS TOOLS:faster than 6% per year over the long term. Currently, state or ! OnGrid Tool, which incorporates all of the elements of thisfederal government does not regulate these products, so there is paper, plus up-to-date rates and incentives, to allow the usera lot of risk of customers agreeing to very expensive terms over to design and analyze PV systems at a high level. It alsothe long term. 2. Large deposits without performance guarantees produces proposals and sales documentation:and without clarity in the contract on what happens to the http://www.ongrid.net/paybacksystem in the event of the provider’s bankruptcy. 3. Large ! Clean Power Estimator:buyout charges or removal costs at the end of the term. http://www.consumerenergycenter.org/renewables/estimator. ! PVWatts: http://www.nrel.gov/rredc/pvwatts Leases and PPAs with $0 deposits are easy to understand and ! PVSyst: http://www.pvsyst.comsell if the monthly costs or $/kWh are less than the customer’s ! RETscreen: http://www.retscreen.netcurrent costs. Otherwise the customer must figure out how soon ! PV Design Pro: http://www.mauisolarsoftware.comthe deposit amount will be recovered. ! QuickQuotes: clean-power.com/quickquotes/products.aspx Leases and PPAs can be attractive to customers who have no ! CPF Tools: http://www.cpftools.comother way of financing a system, or who can’t use the ITC. But ACKNOWLEDGEMENTS:if she has her own cash, or can get her own financing, she can Thank you to the following that have provided invaluableusually do better and keep more of the benefits for herself, insights knowledge, corrections, and review:rather than sharing them with the financing party and the Michael Bishop, OnGrid Solarprovider. Customer shouldn’t be taken in by claims that these Chad Blanchardproducts are a lot less expensive because of the depreciation – Mark Bolinger, Lawrence Berkeley Laboratory (LBL)effectively the depreciation offsets the taxability of the revenue Keith Martin & John Marciano, Chadbourne & Parke LLPreceived the provider. These deals are currently a goldmine to Ryan Wiser, Lawrence Berkeley Laboratory (LBL)developers and providers, but are just “ok” for the consumer,and will be until more competition comes along. !Copyright 2009, Andy Black. All rights reserved. This information changes periodically. The author maintains anCONCLUSION: updated version of this article at: It is important to compare the solar investment to other http://www.ongrid.net/papers/PaybackOnSolarSERG.pdf. Forinvestments on an even basis. Rigorous treatment and critical more info on solar payback, analysis tools, upcoming classes,analyses from several angles including Compound Annual Rate and other papers and articles, see http://www.ongrid.net.of Return, Cash Flow, and Resale Value need to be consideredto do a fair assessment. Andy Black is a Solar Financial Analyst and CEO of OnGrid Solar, creator of the OnGrid Tool, and educator on the Solar will make economic sense for many, but only a hard financial aspects of solar electric systems. He is a formerlook at the numbers will tell. The reader is encouraged to check NABCEP Certified PV Installer, is on the Advisory Board of theit out. Run the numbers, get evaluations and proposals from at NorCal Solar Association, and is a recent past board member ofleast 3 solar providers, and take them to a CPA to check them the American Solar Energy Society. He can be contacted atout. That way the smile on your wallet can be as big as the (408) 428-0808x1 or andy@ongrid.net for questions about thesmile on your face! payback on solar.SUGGESTED ADDITIONAL READING:! OnGrid Solar’s papers, publications, and presentation slides: http://www.ongrid.net/papers! “A Guide To Photovoltaic (PV) System Design And Installation” http://www.energy.ca.gov/reports/2001-09- 04_500-01-020.PDF, California Energy Commission! Bolinger, Wiser, et al, LBL papers and presentations at: http://eetd.lbl.gov/ea/emp/re-pubs.html, particularly: o Shaking Up the Residential PV Market: … o The Impact of Retail Rate Structures on the Economics of Commercial Photovoltaic Systems in California And at: http://eetd.lbl.gov/ea/emp/cases/EMP_case.htmlEconomics of Solar Electric Systems ! 2009, Andy Black. All rights reserved. July 2009 - 19 of 19
  • The OnGrid Solar Financial Analysis & Sales Tool Simplify Solar Sales: (866) 966-5577 Qualify and Close in www.ongrid.net Less Than a Day! Show Your Customers Simplify Your Sales Their internal rate of return  Identify and screen hot leads (solar vs. stock market or interest-based investment) (guides salespeople through the entire sales process) Their cash flow for financed systems  Size PV systems accurately (positive and increasing over time) (time of use, shading, tilt, orientation, incentives and more) System’s total lifecycle payback and savings  Price systems considering all factors (show how much they save over time) (e.g., tile roof, custom mounting, etc.) Their increased resale value  Create proposals, price quotes quickly, onsite (often is more than system cost & increases over time) (one button form generation, documentation, includes CSI) Use customer data to paint them a picture. Example Output*: Cash Flow: Cash Flow: Annual Costs: Solar with Loan vs. No Solar Net Annual Savings When Financed Annual Savings Utility Bill w/o Solar at 5% rate escalation Loan cost, Maintenance, Inverter Net Annual Replacement, & new small electric bill Savings Lifecycle Payback: Resale: Annual Savings Before & After Payback Resale Value Over Time Resale Value Lifetime savings are typically 2-3.5 times system cost Payback Resale Value increases due to increasing annual savings *See website for detailed description and comprehensive list of customizable outputs and displays. 9:00 a.m. 9:30 a.m. 11:00 a.m. 12:00 p.m. 12:30 p.m. 1:00 p.m. 1:30 p.m. Receive Qualify, Site Update Present Bid, Close Turn in Incoming Gather Data, Visit Estimate Contract & the Closed Sales Call Email Print All Docs Docs Sale Sale Estimate (on site) Example Sales Call FREE Demo / Examples: www.ongrid.net/payback  2008 OnGrid Solar
  • The OnGrid Solar Financial Analysis & Sales Tool for Commercial & Residential PV Sales A Time-Saving, (866) 966-5577 Comprehensive Tool for Solar Sales www.ongrid.net Helps Create & Close More Sales Calculates TOU Value with Shading Proves Payback for the Customer Prepares Rebate & Utility Docs Easily The OnGrid Solar Sales Tool Helps Commercial & Residential Salespeople: (See www.ongrid.net for comprehensive lists of all details and options) Perform Multiple Solar FinancialIdentify and Screen Hot Leads, Analyses, option to generate a Develop Accurate Price Quotes, guide them successfully thru Variety Of Proposals including all material, the entire sales process regulatory and job-site factors Fill out Closing Sales Paperwork and Documents (including CSI) with the touch of a button Size PV systems based on customer needs, incentive programs and site data Solar Pathfinder ® Upload shading device data for SunEye ® accurate Time-of-Use value analysis Demonstrate the financial benefits of a solar electric system to your customer with customized calculations. Tailor and brand your printouts. Use them for direct presentations as your sales materials.  PV System Size & Production  Financing & Cash Flow  Current & Future Electric Bills  Resale Calculations & Graphics  Cost, Rebate & Tax breakdowns  Rate of Return CalculationsThe OnGrid Tool is offered on a subscription basis and is updated frequently with current Rate Schedules,Incentive, Tax and Product information, and periodically with new tool features and benefits. Download thefree demo. Then, contact Andy Black at andy@ongrid.net or (866) 966-5577 to start closing more sales. (866) 966-5577 FREE Demo / Examples: www.ongrid.net/payback  2008 OnGrid Solar Net Annual Savings
  • Andy Black OnGrid Solar Feedback for Solar Financial Analyst Sales, Marketing & Economics Classes (408) 428 0808 andy@ongrid.netPlease Rate the Following: Excellent Very Good Good Fair PoorInstructor’s knowledge of the subject matter?      Comments: ___________________________________________________________________Instructor’s ability to communicate effectively with the class?      Comments: ___________________________________________________________________Effectiveness of the handout materials & overhead slides?      Comments: ___________________________________________________________________Relevance of the subject matter?      Comments: ___________________________________________________________________Overall rating of this instructor’s part of the class?      Comments: ___________________________________________________________________ Too Short Just Right Too LongGive the topic, this workshop was:    Comments: ___________________________________________________________________ Introductory Intermediate AdvancedIn your opinion, this workshop was?    Comments: ___________________________________________________________________ Yes NoWould you recommend this workshop to others?   Comments: ___________________________________________________________________How would you improve this workshop? ___________________________________________________________________________ ___________________________________________________________________________What did you like LEAST about this class? ___________________________________________________________________________What did you like MOST about this class? ___________________________________________________________________________Please share any additional comments: ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________Your Name (optional):__________________________ May we quote you? YES NO
  • Andy Black Acronyms Used In Sales, Marketing & OnGrid Solar Solar Financial Analyst Economics Classes (408) 428 0808 andy@ongrid.netAC: Alternating Current (standard AC wall power) kWh: kilowatt-hourACP: Alternative Compliance Payment LADWP: Los Angeles Department of Water & PowerACEEE: American Council for an Energy Efficient LBL: Lawrence Berkeley Laboratory Economy: www.aceee.org LTV: Loan-To-ValueAMT: Alternative Minimum Tax MACRS: Modified Accelerated Cost Recovery SystemARRA: American Recovery and Reinvestment Act NABCEP: North American Board of Certified EnergyASES: American Solar Energy Society PractitionersCA: California NCSC: North Carolina Solar CenterCAD: Computer Aided Design NESEA: North-East Sustainable Energy AssociationCalSEIA: California Solar Energy Industries Assn NJCEP: New Jersey Clean Energy PartnershipCAGR: Compound Annual Growth Rate NLP: Neuro-Linguistic ProgrammingCARR: Compound Annual Rate of Return NOL: Net Operating LossCCSE: California Center for Sustainable Energy NOx: Nitrous OxidesCEC AC: The California Energy Commission AC NREL: National Renewable Energy Laboratory (Alternating Current) Power Rating NSHP: New Solar Homes PartnershipCEC: California Energy Commission PACE: Property Assessed Clean EnergyCEO: Chief Executive Officer PBI: Performance Based IncentiveCFO: Chief Financial Officer PEC: PG&E’s Pacific Energy CenterCHEERS: California Home Energy Efficiency Rating PG&E: Pacific Gas & Electric System PPA: Power Purchase AgreementCL&P: Connecticut Light & Power PSE&G: Public Service Electric & Gas (NJ)COO: Chief Operating Officer PTC: PVUSA Test ConditionsCO2: Carbon Dioxide PUC: See CPUCCoSEIA: Colorado Solar Energy Industries Assn PURPA: Public Utility Regulatory Policies Act of 1978CPI-U: Consumer Price Index-Urban PV: Photovoltaics (Solar Electricity)CPUC: California Public Utilities Commission PVUSA: PV for Utility Scale ApplicationsCRES: Colorado Renewable Energy Society QF: Qualifying FacilityCRM: Customer Relationship Management REC: Renewable Energy Certificate/CreditCSI: California Solar Initiative ROI: Return On InvestmentDC: Direct Current (what comes out of PV modules) ROR: Rate of ReturnDER: Distributed Energy Resource/Renewable RPS: Renewable Portfolio StandardDGR: Distributed Generation Resource SB1: CA Senate Bill 1, the law that created the CSIDOE: Department of Energy (U.S.) SCE: Southern California EdisonDSIRE: Database for State Incentives for Renewable SDG&E: San Diego Gas & Electric Energy: www.dsireusa.org SDREO: San Diego Regional Energy Office (now calledDWR: Department of Water Resources CCSE)EPBB: Expected Performance Based Buydown SEI: Solar Energy InternationalEEM: Energy Efficient Mortgage SEIA: Solar Energy Industries AssociationEIA: Energy Information Administration (of DOE) SLI: Solar Living InstituteEPBI: Expected Performance Based Incentive SMUD: Sacramento Municipal Utility DistrictFASB: Financial Accounting Standards Board SOx: Sulfur OxidesFICA: Social Security Payroll Tax S-REC, sREC: Solar Renewable Energy CertificateFMV: Fair Market Value STC DC: Standard Test Conditions DC (Direct Current)FIT: Feed-In Tariff ratingHELOC: Home Equity Line of Credit STC: Standard Test ConditionsHERS: Home Energy Rating System SVP: Silicon Valley PowerIDR: Interval Data Recording (meter) SWOT: Strengths, Weaknesses, Opportunities, ThreatsIID: Imperial Irrigation District TOD: Time Of DayIRC: Internal Revenue Code TOU: Time Of UseIRR: Internal Rate of Return TRC: Tradable Renewable Certificate (= sREC = REC =IRS: Internal Revenue Service Green Tag)ISO: Independent System Operator UI: United Illuminating Co. (CT)ITC: Investment Tax Credit URG: Utility Retained GenerationJCP&L: Jersey Central Power & Light WIIFM: What’s In It For Me