Introduction to Solar Financing

Andy Black
“Introduction to Solar Financing” Solar Financial Analyst
(408) 428 0808x1
Solar Living Institute: April 20, 2008, Los Angeles, CA, andy@ongrid.net
9am-5pm
Contact: Solar Living Institute: www.solarliving.org, 707 744 2017 to register

Check-in (15 minutes before listed start time)

Introductions

Overview of Basic Financing Principals

Residential Conventional Financing

Break, Q & A, Networking

PACE & State Loan Programs

~12:00 Lunch, Q & A, Networking (~30 minutes if possible)

Lease Basics and Commercial Leases

Break, Q & A

PPA Basics and Commercial PPAs

Residential Leases & PPAs

~4:30 Formal Conclusion, Break, Q & A

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
“Introduction to Solar Financing” Solar Financial Analyst
(408) 428 0808x1
Solar Living Institute: April 20, 2008, Los Angeles, CA, andy@ongrid.net
9am-5pm
Contact: Solar Living Institute: www.solarliving.org, 707 744 2017 to register
Abstract:
This rigorous workshop is designed to help commercial systems integrators (dealers, installers, and
salespeople) understand and make the financial case for PV systems including specifics for how to
finance them with PPAs and Leases.
This class includes:
! 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 solar

All students will receive a copy of the demo version of the OnGrid Tool (licensing agreement will be
required).

Biography:
Andy Black is a Solar Financial Analyst and the owner of OnGrid Solar. OnGrid Solar provides
financial analysis and sales education & software to solar installers to help them make a strong sales
case 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 payback
of 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 and
served as Chapters Representative. He is also a member of the Advisory Board of the Northern
California Solar Energy Association.
Andy’s formal education includes a Bachelor’s in Electrical Engineering from Penn State University, a
Master’s in Electrical Engineering from University of Southern California, and a Marketing Certificate
at the University of California. His training in solar electricity includes Solar Energy International’s
intensive photovoltaic coursework and more than a dozen specialty courses in solar electric and related
fields. 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

INTRODUCTION TO Introductions & Thanks
SOLAR FINANCING
!  Solar Power International ‘10
Andy Black !  Solar Electric Power Association
Solar Financial Analyst "  Stuart Raper & Julia Hamm
& Sales Software Creator
!  Yennie Solheim
!  Andy Black, OnGrid Solar
"  Solar Financial Analyst & OnGrid Tool Creator
Solar Power International 2010
!  You for coming!
© 2010 OnGrid Solar, All rights reserved. Intro to Solar 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
business
!  New or hopeful salespeople
!  Want to learn about / have the OnGrid Tool
!  Government / Utilities

!  Customers / consumers / end users !  Want to increase your knowledge to develop

!  Manufacturers your own tool
!  Others?
!  Who’s taken the Residential/Basic Payback Class?
© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 3 © 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 4

Quick Survey -
Area(s) of Interest? Instructor Background
!  Came to learn specifically about: !  M.S. Electrical Engineering
"  Residential Conventional Financing !  SEI graduate
"  Residential Lease & PPA Financing !  NABCEP Certified Solar PV Installer Emeritus
"  Commercial Lease Financing !  Involved with Solar since 1991
"  Commercial PPA Financing !  Studying, writing, & presenting about Solar
"  Use PPAs in selling Financial Issues since 2000
"  Create new PPA offering to market !  Solar Salesperson 2001-2006

!  Other interests? !  Now a Solar Financial Analyst &

!  Networking list? Creator of the “OnGrid Tool” solar sales software

Handout Resource List Decorum
Resources available at www.ongrid.net !  Questions: Please focus on Solar Economics &
Payback
!  Articles & papers on solar “Payback”
!  Good environment:
!  Upcoming classes & events
"  Cell phones to fun mode
"  Sales & Marketing for Solar "  Side conversations: Yes or No?
!  Slides from past classes "  Please help each other

!  Free demos of the OnGrid Tool !  Site Logistics & Breaks
"  Facilities
"  Lunch & 2 breaks: Networking

Agenda
Basic Financing Principals
!  Overview of Basic Financing Principals
!  Residential Conventional Financing with !  Several ways to finance
Unsecured Loans & Home Equity !  Financing enables sales to those who can’t or
!  PACE & State Loan Programs won’t buy with their own cash
!  Lease Basics & Commercial Leases !  Good customer credit important (lately, critical)

!  PPA Basics & Commercial PPAs !  Financing makes sense when the project basic

!  Residential Leases & PPAs
economics are favorable (good IRR)
Questions preferred at points marked: Questions?
"  Please focus on Financing & Economics
Questions?

Ways to Finance Solar Sales Benefits of Financing
+Reduced Customer Risk
- Benefits Shared with more Parties !  Offering Financing keeps salesperson in control of
- Cost to Consumer the sale
!  PPA If the customer is out looking for financing, you’ve
+More Sales Control " 
!  Lease lost control of the sale.
"  If you offer it, you can continue to control the sale.
!  Loan
!  Creates more purchasing options, more chances at a
!  Cash
close
!  Can use to overcome objections
!  Bringing the financing keeps you in control !  Gets salesperson closer to decision maker & their
(as much as you can in this market!) real thinking

Commercial Selling Realities
Common Characteristics
!  Only 3% of all commercial quotes turn to sale !  Lower interest rate environment helps
"  Most quotes are made to private companies
#  Can’t make >5 year commitment
!  Can improve initial customer cash flow
"  Salesperson doesn’t know tax & accounting issues !  Requires good end-customer credit
#  Talks w/ building manager, facilities, etc "  Stricter credit environment hurts
#  Afraid to talk to CFO, Controller, CEO, Outside
Auditor & Banker
!  Typically only large public companies can go long
(10-12 yrs) - even they hesitate 18-20 years
!  Gov’t, Schools, some non-profits have long vision

“Good” or “Strong”
Credit Risks in Solar Finance
!  Three C’s of Credit:
"  Credit scores & reports (Dun & Bradstreet) !  Compare to Real Estate
"  Collateral
"  Capacity or Cash Flow
!  Residential: FICO score
!  Commercial:
"  >5 years in business
"  >$50 million revenue
"  Positive trends (increasing revenue & profits)
#  Hard to find in 2009 & 2010
"  Standard ratios (cash flow, etc)

Residential Rates
of Return
Requires Good IRR
!  The basic economics must be attractive
!  What about non-profits & gov’t facilities?

"  Economics are generally weak – no ITC
"  Use 3rd Party Financing (PPAs mostly)
"  Need good IRR if analyzed as commercial


Residential Rates
of Return


Commercial Rates
of Return


Commercial Rates
of Return
Commercially Attractive?
!  IRR must exceed a hurdle rate
"  > “Risk Free Rate” + ~1-2%
= Risk Free Rate + Sum of Risks (more later)
#  Source: Photon International, Aug 2007, p114

!  “Risk Free” interest rates:
"  1 Year LIBOR ~ 0.8% As of September 2010
"  Treasury: 10yr = 2.5%, 30yr = 3.4% As of 10/4/2010
!  ! Commercially Attractive >= 4-6%?


Residential Conventional Financing
!  Unsecured Loan
Addison Avenue FCU: 5.25%, 5 year, $5-50K
Residential Conventional " 

Real Estate Secured Loan
Financing with Unsecured ! 

"  Lowest interest rates (usually)
Loans & Home Equity "  Tax deductible interest

"  HUD EEMs - Energy Efficiency Mortgages

"  “Home Equity Loans” & “Home Equity Line
of Credit” (HELOC)
#  E.g. New Resources Bank

Cash Flow
Cash Flow with Loan !  Residential system
offsetting a large
!  Compares the savings on the utility bill bill
with the cost of financing the system
!  8% 20 year loan
!  At today’s rates (~5-8%) and including
!  Many Systems are
rebate benefits, cash flow is often cash positive from
positive immediately Year 0
"  Cost of borrowing is less than savings on
!  Spike is Inverter
electric bill Replacement Cost
"  Stabilizes long term utility costs


Solar Mortgage Cash Flow Analysis
!  Like buying vs. renting, but better !  Calculate net cash required to buy
!  House costs more up front "  This is the amount to be financed
"  Pays off over time !  Calculate monthly loan payments
!  Solar costs less up front "  Based on loan rate, term & amount
"  Pays off immediately & over time !  Subtract tax savings if loan interest is tax
!  Protects against inflation deductible. This is net monthly loan cost.
!  Savings grow over time !  Compare net loan cost to after tax value of
net electric bill savings (incl. maintenance)

How Much To Borrow? Alt. 3: “Smart Financing”
!  Efficient pay-down of principal using tax benefits when
!  How much should customer borrow? received (using Line Of Credit - business or home equity)
!  Alt. 1: Net Cost after Rebate & Grants? !  Find ‘payment’ amount that pays off evenly over term
"  Once ITC is received, have cash sitting around "  Lower payments than amortizing full “after-rebate amount”
"  Inefficient & expensive "  Higher payments than only amortizing the net “after-rebate,
!  Alt. 2: Net Cost after All Incentives (including tax after-tax-benefits amount”
credits, depreciation, PBIs, etc.)? !  No cash out of pocket waiting for ITC
"  Requires a bridge loan until tax benefits & PBIs are "  Doesn’t require ‘bridge loan’
received "  Realistic presentation of customer costs
"  Optimistically low monthly loan cost !  No excess interest paid on “un-used” money
"  Doesn’t weaken sales presentation

Commercial Cash Flow Commercial Cash Flow Options
! High Cost Loan:
Starting Principal = Net Costs
w/ Solar Utility Costs w/

!  Typical “Gross - Rebate” with High
Cost Loan
o Solar

Commercial
System Loan ! Optimistic* Loan:
!  X% Y year loan $25,000 Net Annual Savings Starting Principal =
$20,000
“Gross - Rebate -
ITC - Depreciation”
$15,000
Utility Costs w/
$10,000 o Solar

*Customer needs
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 bridge loan until tax Net Costs w/ Solar
savings realized
-$5,000
Year with Optimistic Loan
-$10,000


“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 6
Loan 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)
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 Cost
Net 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 year's principal)
Net Annual Electric Bill before Solar (with tax effects 25,714 8,493 5,230 3,267 3,267 1,814 336
& including Lifestylenext year's 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
Efficiency)
Net Annual Electric Bill before Solar (with tax effects
New 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 3,199
replacement)
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 1,414
Cost)
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) 213 222

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)
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)

“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)
25,714 8,493 5,230 3,267 3,267 1,814 336
& including Lifestyle changes, but not Energy 2,388 2,507 2,632 2,764 2,902 3,047 3,199
Efficiency)
including new electric bill, maintenance, inverter 755 800 847 897 950 1,006 1,065
replacement)
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)

Smart Financed
Commercial Cash Flow “Smart Financing” Timeline
!  “Smart Financed” LOAN: Year:
Loan Timeline New Net Cost: Loan, New Bill, Maintenance, etc.
LOAN: Loan Balance Year:
. 0
70,182
1
45,816
2
36,723
3
30,165
4
25,045
5
19,515
!  No bridge loan Loan Balance
Payment (monthly)
Payment (monthly) Interest (portion of payment)
Paid
0
70,182
(356)
1
45,816
(356)
2
36,723
(356)
3
30,165
(356)
4
25,045
5
(356)
19,515
(356) (356)
(356)
6
(356) 7
14,996 11,594
8
(356)
7,919
(305) (356) (245)
(356) (356)
9
3,951
10
(356)
(201)
(356)
11
(356)
(167)
(356)
(130)
needed Utility Bill w/o Solar
Paid Interest (portion of payment)
Unpaid Interest (added to Interest (added to loan principal)
Unpaid loan principal)
(356)
(112)
205
(305)

134
(245)

107
(201)

88
(167) (130)
(112)
73 205 57
(100)

134
44
(77)

34 107
(53)

23
(26)

12 88 73 57
Net Monthly Loan Cost (150) (222) (248) (267) (282) (298) (312) (322) (332) (344)

!  Not optimistic - Net Monthly Loan Cost
25,714
8,493 5,230 3,267 3,267
(150)
25,714
1,814
(222)
336

8,493
336
(248)
336

5,230
336
(267)
3,267
336
(282)
336

3,267
(298)
1,814
fair to the & including Lifestylenext year's principal)
Efficiency)
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

customer
& including Lifestyle changes, 755 not Energy
but
including new electric bill, maintenance, inverter800 847 897 2,388
950 1,006 2,507
1,065 1,127 2,632
1,193 2,764
1,262 1,336 2,902
1,414 3,047
replacement)
Efficiency)

Assumes customer
2,560 3,459 3,825 4,105 4,337 4,587 4,805 4,986 5,181 5,391 1,336 1,414
Cost)
!  New Net Annual Energy Cost (with tax effects,
including new electric bill, maintenance, inverter 755 800 (1,627) 847 897 950 1,006
will be efficient w/
Cash Flow (annual) (Old less New Net Costs) (172) (952) (1,193) (1,341) (1,435) (1,540) (1,605) (1,654) (1,687) 2,553 2,670
replacement)

tax benefits
2,560 3,459 3,825 4,105 4,337 4,587
Cost)

!  Interest Tax Cash Flow (annual) (Old less New Net Costs) (172) (952) (1,193) (1,341) (1,435) (1,540)
Benefit Drops so Cash Flow (monthly) (14) (79) (99) (112) (120) (128)

Net Cost Rises Net Annual Savings / Cost ACCUMULATED LOAN CASH FLOW: . (172) (1,124) (2,317) (3,658) (5,094) (6,633)

Commercial
“Smart Financing” Timeline Cash Flow
LOAN: Year:
0 1 2 3 4 5 6 7 8 9 10 11
Loan Balance 70,182 45,816 36,723 30,165 25,045 19,515 14,996 11,594 7,919 3,951
Payment (monthly) (356) (356) (356) (356) (356) (356) (356) (356) (356) (356)
Paid Interest (portion of payment) (356) (305) (245) (201) (167) (130) (100) (77) (53) (26)
Unpaid Interest (added to loan principal) (112)
Tax Deduction Benefit (monthly) 205 134 107 88 73 57 44 34 23 12
Net Monthly Loan Cost (150) (222) (248) (267) (282) (298) (312) (322) (332) (344)
25,714 8,493 5,230 3,267 3,267 1,814 336 336 336 336 336 336
& including Lifestyle 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
Efficiency)
including new electric bill, maintenance, inverter 755 800 847 897 950 1,006 1,065 1,127 1,193 1,262 1,336 1,414
replacement)
2,560 3,459 3,825 4,105 4,337 4,587 4,805 4,986 5,181 5,391 1,336 1,414
Cost)

Cash Flow (annual) (Old less New Net Costs) (172) (952) (1,193) (1,341) (1,435) (1,540) (1,605) (1,627) (1,654) (1,687) 2,553 2,670


Smart Financed Residential
Residential Cash Flow Utility Bill w/o Solar
Cash Flow
!  4 kW New Net Cost: Loan, New
Bill, Maintenance, etc.
residential
system

!  8% 20 year
“Smart
Financed”
Loan Net Annual Savings / Cost

!  No bridge
loan needed

Examples

Commercial
Cash Flow


Residential
Cash Flow


Agenda
Cumulative Cash Flow
!  Overview of Basic Financing Principals
!  Residential Conventional Financing with
Unsecured Loans & Home Equity
!  PACE & State/Utility Loan Programs

!  Lease Basics & Commercial Leases

!  PPA Basics & Commercial PPAs

!  Residential Leases & PPAs


Examples

PACE / Community
Financing Programs
!  PACE: Property Assessed Clean Energy
Property Assessed Clean !  PV system financing thru property tax assessment

Energy (PACE) Financing "  Paid by increased property tax liability
"  Liability attached to the property, not the individual
"  Transferrable to future owners

#  Removes concerns about resale value
#  Possible issue regarding ITC recapture vs. increased
resale value within first 5 years


Property Assessed Clean Energy (PACE) PACE / Community Financing
Programs (Berkeley FIRST, AB811)
www.dsireusa.org / October 2010

ME: 2010

OR: 2009
MN: 2010
NY: 2009
NH: 2010
VT: 2009
!  PACE Examples / in progress:
20 year, fixed interest rates, tax deductible interest
WI: 2009
" 
NV: 2009
CO: 2008
IL: 2009
OH: 2009 MD: 2009
#  Berkeley FIRST: ~7.75% as of 3/2009
DC DC: 2010
"  Palm Desert CA, Santa Fe, Albuquerque, Austin,
CA: 2008
VA: 2009
MO: 2010

NM: 2009 OK: 2009
NC: 2009
Babylon NY, San Diego, San Francisco
TX: 2009
LA: 2009
GA: 2010 !  State level initiatives:
23 states + DC "  CT, MD, OR, TX, VT, VA, WI, …
FL: 2010 authorize PACE (22
HI: Existing states have passed "  AB 811 allows all towns in CA to do same
Authority legislation and HI
PACE financing authorized by the state* permits it based on "  Listed in DSIRE: http://www.dsireusa.org
*The Federal Housing Financing Agency (FHFA) issued a statement in July 2010 concerning the existing law)
senior lien status associated with most PACE programs. In response to the FHFA statement, most
local PACE programs have been suspended until further clarification is provided.
!  Interest nationwide - U.S. D.O.E. PACE Initiative

Introduction to Solar Financing

Introduction to Solar Financing

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