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Page 1 of 112Introduction to Solar Financing
3/11/2013http://www.slideshare.net/OnGridSolar/introduction-to-solar-financing
Introduction to Solar FinancingDocument Transcript
1. Andy Black “Introduction to Solar Financing” Solar Financial Analyst (408)
428 0808x1Solar Living Institute: April 20, 2008, Los Angeles, CA,
[email protected] 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
2. Andy Black “Introduction to Solar Financing” Solar Financial Analyst (408)
428 0808x1Solar Living Institute: April 20, 2008, Los Angeles, CA,
[email protected] 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 PV systems
including specifics for how tofinance 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 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
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Page 2 of 112Introduction to Solar Financing
3/11/2013http://www.slideshare.net/OnGridSolar/introduction-to-solar-financing
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
[email protected] www.ongrid.net
3. 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© 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 5 © 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 6
4. 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© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing -
7 © 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 8 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 !
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Page 3 of 112Introduction to Solar Financing
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Residential Leases & PPAs economics are favorable (good IRR) Questions
preferred at points marked: Questions? " Please focus on Financing &
Economics Questions?© 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 9 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 10 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© 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 11 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 12
5. 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© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 13 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 14 “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)© 2010 OnGrid Solar, All rights reserved. Intro
to Solar Financing - 15 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 16 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© 2010 OnGrid Solar, All
rights reserved. Intro to Solar Financing - 17 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 18
6. Residential Rates of Return© 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 1 Commercial Rates of Return© 2010 OnGrid Solar, All
rights reserved. Intro to Solar Financing - 2
7. 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%?©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 19 © 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 20 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© 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 21 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 22 Cash Flow Cash Flow with Loan ! Residential system offsetting
Page 4 of 112Introduction to Solar Financing
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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©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 23 © 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 24
8. 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)© 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 25 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 26 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©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 27 © 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 28 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© 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 29 © 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 30
9. “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
Page 5 of 112Introduction to Solar Financing
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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) © 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 3 “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) © 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 4
10. 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) Tax Deduction Benefit (monthly) Tax
Deduction Benefit (monthly) (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 Net Tax Benefit Received (put
towards paying down the next years principal) 25,714 Net Tax Benefit
Received (put towards paying down Net Annual Electric Bill before Solar (with
tax effects 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 years principal) Efficiency) the changes, but not Energy
2,388 Net Annual Electric Bill before Solar (with tax effects 2,507 2,632 2,764
2,902 3,047 3,199 3,359 3,527 3,704 3,889 4,083 customer New Net Annual
Page 6 of 112Introduction to Solar Financing
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Energy Cost (with tax effects, & 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) Net New Annual Cost (Loan plus New Net Energy
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) Cash Flow (monthly) (14) (79) (99) (112) (120) (128) (134) (136)
(138) (141) 213 222 tax benefits 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 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)© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 31 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 32 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) Net Tax Benefit Received
(put towards paying down 25,714 8,493 5,230 3,267 3,267 1,814 336 336 336
336 336 336 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 3,359 3,527 3,704 3,889 4,083 Efficiency) New
Net Annual Energy Cost (with tax effects, 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) 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 Net Costs) (172) (952) (1,193) (1,341)
(1,435) (1,540) (1,605) (1,627) (1,654) (1,687) 2,553 2,670 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)© 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 33 © 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 34 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© 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 35 © 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 36 Examples
11. Commercial Cash Flow© 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 5 Residential Cash Flow© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 6
12. 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© 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 37 © 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 38Examples PACE / Community
Financing Programs ! PACE: Property Assessed Clean Energy Property
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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© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 39 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 40 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 ©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 42
13. Property Assessed Clean Energy (PACE) www.dsireusa.org / October 2010
ME: 2010 MN: 2010 NH: 2010 NY: 2009 OR: 2009 VT: 2009 WI: 2009 NV:
2009 OH: 2009 MD: 2009 IL: 2009 CO: 2008 DC DC: 2010 CA: 2008 VA:
2009 MO: 2010 NC: 2009 NM: 2009 OK: 2009 GA: 2010 TX: 2009 LA: 2009
23 states + DC FL: 2010 authorize PACE (22 HI: Existing states have passed
Authority legislation and HI PACE financing authorized by the state* permits it
based on*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, mostlocal PACE
programs have been suspended until further clarification is provided. State Loan
Programs for Solar Projects www.dsireusa.org / September 2010 U U U U U U
U U U U DC U U U U U U 29 states + USVI Loan Programs for Solar Projects
U.S. Virgin Islands offer loans for U Utility Incentive(s) solar projects
14. PACE Status ! Currently stalled almost everywhere " FHFA currently
blocking PACE activities State / Utility Loan Programs ! State lawsuits against
FHFA ! Legislation pending to allow PACE to continue ! … Stay Tuned.
Follow at the DSIRE database: www.dsireusa.org , VoteSolar.org© 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 43 © 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 44 State Loan Programs for
Solar Projects NJ - PSE&G Utility Loan Program www.dsireusa.org /
September 2010 U ! Residential: 6.5%, 10 year term ! Non-Residential: 11.3%,
15 year term U U U U U U U ! Typically 40-60% of system value U U DC !
Repayment via either: U U U U " SRECs (minimum value 35.0¢/kWh to 43.5¢/
U kWh based on size) U 29 states + " Cash USVI " Can change once per year
Loan Programs for Solar Projects U.S. Virgin Islands offer loans for U Utility
Incentive(s) solar projects © 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 46 Agenda Example State Loan Programs ! Texas Schools,
Local Government, State ! Overview of Basic Financing Principals
Government, Hospitals ! Residential Conventional Financing with " 3%, Must
have ~10 year average term Unsecured Loans & Home Equity ! PACE &
State/Utility Loan Programs ! Oregon: All Sectors ! Lease Basics &
Commercial Leases " $20K to $20 Million, 5-15 year terms ! PPA Basics &
Commercial PPAs ! For loans in other states see the DSIRE ! Residential
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Leases & PPAs database: www.dsireusa.org© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 47 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 48
15. Sales Tip ! Failure to “sign” is not likely due to price ! Suggest don’t even
quote a system price 3rd Party Financing of " Only quote a monthly payment
Solar Projects ! Ask if they are, or will become subject to AMT if they go solar
" If so, only consider Lease or PPA " And only discuss monthly payments "
Then comparable to current expense© 2010 OnGrid Solar, All rights reserved.
Intro to Solar Financing - 49 © 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 50 3rd Party Financing Options For Solar ! Leases - Ways of
paying for ownership and/or use over time, having tax and/or cash flow benefits
during term, usually with intention of purchasing or renewing at the end "
Renting system with intent to purchase, while Leases allowing transfer of tax
benefits ! PPAs - Power Purchase Agreements - Paying for just the energy
if/when delivered with possible intent to purchase Disclaimer: I’m not a CPA or
lawyer, and am not providing tax advice. Seek qualified professional help©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 51 © 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 52 Returns for
Lessors CHECK W/ Baker & DaveLeases Clamage Check examples for
Typical cases too ! Was in ~6%-9% range before financial crisis, Ask for real
examples ! Several Types now in the low- to mid-teens " Finance / Capital
Lease ! Less money now available, so higher returns for those willing to deal "
True / Tax / Operating Lease " Tax-Exempt Lease Purchase ! Requires: "
Lessees with best credit ! Thanks: " Gene Beck, EnviroTech Financial "
Limited project risk " Baker Davenport, Davenport Group " Low transaction
costs via standard terms and " Scott Young, Sentry Financial “conforming”
projects© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 53
© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 54
16. What is a Lease Widely Used ! Finance contract between 2 parties ! Solar
Leases similar to other asset leases " Lessor & Lessee ! Well established
market " Vendor connects the 2 parties " 80% of companies and gov’t agencies
use leasing, rather than owning, for at least some ! Looks like either a loan or a
rental of their equipment ! Ability to transfer ownership benefits " Some
companies only use leasing, rather than " For Tax or Accounting purposes
purchasing ! Specified term & payment ! Lessor = Owner of system ! Lessee
= User (“renter”) of system© 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 55 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 56 Lease “Flow” & Parties Benefits of a Lease Lessor ! Terms
more flexible than a purchase Lease Payments ! Allows for 100% financing PV
System " Covering freight, maintenance, fees, … # Which might not be
allowed in a loan Purchase Payment ! Doesn’t tie up capital and/or effectively
stretches Use of System line of credit " Considered “Off Balance Sheet” Initial
“sales” interaction Info on leasing resources " Keeps bank line of credit free
Lessee Vendor ! Solves AMT problems ! Can include Energy Efficiency
measures© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing -
57 © 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 58
Lease vs. Loan AMT - Alternative Minimum Tax ! Corporate AMT occurs for
business with large “tax preferenced” items " Depletion, state income tax, real
estate tax, non-solar Tax Credits, Accelerated Depreciation ! Some business are
or will become subject to AMT if they go solar: " MACRS Depreciation on
solar can cause limitation " Solar ITC no longer causes a problem - AMT
relief ! Tax Equity Investors (banks) not usually affected by AMT, so have a
tax “appetite” and can offer *courtesy Conergy Commercial Financing
presentation by Baker investment $ to get tax benefits others can’t use
Davenport & Tim Pedersen, Rockwell Financial Group© 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 59 © 2010 OnGrid Solar, All
rights reserved. Intro to Solar Financing - 60
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17. Lease vs Loan Cost: Lease Term Set By: ! Loan/Cash: 100% Principal !
Price of project - larger is better " + Interest (or Time Value of Money if Cash
Purchase) ! Credit of customer " - ITC (30% if available) ! Structure of the
deal " - Depr (~30% if available) " = Net cost = 45-50% depending on interest
rates ! Lease: Total payments ~= 60% of principal (interest cost included), but
no ITC or Depreciation, therefore total cost is 60% net ! The (60% minus
~50%) difference is the Lessor’s profit© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 61 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 62 Finance / Capital Lease Capital Lease
Typical Terms ! 5 year, $100-150K ! Same as bank loan ! 7 year, $500K !
Fully amortizing or with balloons ! Over 8yrs will have a longer amortization
period, but with a 7 year due date ! Lessee gets tax credit & depreciation "
Banks don’t lend over 7 yrs unsecured ! Interest is deductible # Ie. w/o cash,
real estate, or marketable securities ! Most commonly utilized for energy
projects ! 8 year, $1MM, 5-7 year due date (7 w/ balloon) ! 10 year typical
max, 7 year due date " Not useful for solar projects needing to ! Limits: Longer
= higher risk transfer tax benefits to Tax Equity Investor ! Easiest lease to
create wrt due diligence " Typically 2 page agreement plus boilerplate© 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 63 © 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 64 Accounting vs. Taxes
Operating Lease wrt True & Operating Lease (Accounting Perspective) ! Two
perspectives when reviewing leases ! Rental contract w/ fixed terms &
conditions " Tax vs. Accounting ! Lower effective interest rate than capital
lease " Two different sets of books & calculations " Lessor gets depreciation &
tax credits ! Accounting: must meet FASB 13 rules " Payments ~40% lower
for solar than capital lease " FASB - Financial Accounting Standards Board !
Lessee expenses monthly payments ! Tax: must meet IRS rules ! Lease
considered “off balance sheet” ! Most solar leases are " Operating Leases for
accounting purposes ! This is the typical accounting treatment of an True "
True Lease / Tax Leases for tax purposes Tax / Tax Lease© 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 65 © 2010 OnGrid Solar, All
rights reserved. Intro to Solar Financing - 66
18. True Lease / Tax Lease True / Operating / Tax Lease CHEC Check (Tax
Perspective) Typical Terms Ask f ! Rental contract w/ fixed terms &
conditions ! E.g.: $500K+, 80kW+ system (as of 5/23/09) ! Lessee expenses
monthly payments ! Preferred: $3MM, 500kW+ system Get e ! Available to
non-profits & gov’t entities " 5-7-10yrs on strong credit for smaller projects To
se " ~10-15yrs on very strong credit & larger projects " Can do, but no transfer
of tax benefits # Credit requirements have gone up in 2009 " Use Tax Exempt
Lease Purchase ! End of lease: ! This is the one used for solar projects
suffering " Purchase equipment at Fair Market Value (more later) from AMT
tax benefit limits " Extend lease for add’l 12-60 months at fixed rental rate !
This is how Operating Leases are treated from Tax # Repeat indefinitely or sell
perspective " Return equipment to Lessor in good condition© 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 67 © 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 68 Cash Benefits of CHECK W/
Gene & Dave Clamage Operating Lease Docs Check examples for Typical
cases too True & Operating Leases Ask for real examples ! More difficult,
more due diligence than Capital Lease, ! Lessor offers lower monthly cost of
solar Less than PPA Get examples of Common lease because of and processing
costs system to end user paperwork enjoyed tax ! 10-15 pages basic lease:
benefits To set up a deal " 5% custom language, 95% boilerplate ! Lessor gets
lower taxes " Roof lease " Waivers ! Lessee gets lower cost PV system (lower
" Terminal Value Schedule & Purchase payments) " Master Lease, Equipment
Schedule " + other docs " = total of ~15-30 pages© 2010 OnGrid Solar, All
rights reserved. Intro to Solar Financing - 69 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 70 Loan Lease Payment Options Electric
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Bill Various Leases Loan Electric Bill ~50% are Cash Positive in 2009 w/
Lease Larger more likely to be cash positive if over 10 years© 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 71 © 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 72
19. True & Operating Lease Term Purchase Options: FMV ! Best IRS clarity:
purchase >6 years for FMV ! Typically >= 6 years to get all depreciation "
May be okay to have limited purchase options benefit and vest all of the tax
credit at set anniversaries at FMV " Should not be open ended option ! End of
Lease options: ! Fair Market Value (FMV) " Purchase at greater of Fair Market
Value (FMV)* or predetermined price " Best IRS clarity: Determined by
independent appraiser at time of exercise " Return to Lessor upon notice " May
be okay to come to agreement among " Auto-renewal for shorter term parties at
time of exercise *Critical to avoid tax violation " Should not be bargain fixed
price© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 73 ©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 74 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© 2010 OnGrid Solar, All rights reserved.
Intro to Solar Financing - 75 © 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 76 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© 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 77 © 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 78
20. 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© 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 79 © 2010 OnGrid Solar, All
rights reserved. Intro to Solar Financing - 80 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© 2010 OnGrid Solar, All rights reserved.
Intro to Solar Financing - 81 © 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 82 3rd-Party Solar Power Purchase Agreements (PPAs)
www.dsireusa.org / July 2010 Parties to the Transaction ! Agreement between
" PPA Provider / Vendor aka “Developer” Off-Taker / End User of Energy UT:
limited to certain sectors " AZ: limited to NM: effective " Building Owner
(might be End User) certain sectors 1/1/2011 At least 17 states + PR " System
Vendor / Installer / Integrator authorize or allow 3rd-party " 3rd Party Investor /
Financier (might be solar PPAs Authorized by state or otherwise currently in
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use installer and/or Developer) Apparently disallowed by state or otherwise
restricted by legal barriers Status unclear or unknown Puerto Rico Note: This
map is intended to serve as an unofficial guide; it does not constitute legal
advice. Seek qualified legal expertise before making binding financial decisions
related to a 3rd-party PPA. See following slide for authority references. © 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 84
21. 3rd-Party Solar Power Purchase Agreements (PPAs) www.dsireusa.org /
July 2010 UT: limited to certain sectors AZ: limited to NM: effective certain
sectors 1/1/2011 At least 17 states + PR authorize or allow 3rd-party solar PPAs
Authorized by state or otherwise currently in use Apparently disallowed by
state or otherwise restricted by legal barriers Status unclear or unknown Puerto
Rico Note: This map is intended to serve as an unofficial guide; it does not
constitute legal advice. Seek qualified legal expertise before making binding
financial decisions related to a 3rd-party PPA. See following slide for authority
references. PPA “Flow” PPA Developer PPA Investment Cash Financier /
Vendor ROI & Tax Benefits / Investor Monthly Energy PV System Building
Access / Payments Maintenance kWh Purchase Energy Payment Permission
Building Occupant / System Owner Off-Taker / Vendor/Installer Energy User©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 10
22. PPA “Flow” PPA Developer Investment Cash PPA Financier Party
Responsibilities / Vendor ROI & Tax Benefits / Investor ! Developer (might
also be installer) oversees: Monthly " Construction Energy " Operation &
maintenance of equipment Building PV System Access / Payments
Maintenance kWh Purchase " End User & Investor relationships & payments
Energy Payment " Execute the 80-100 ‘To Do’ items ! End-User Permission "
Receives energy from system Building Occupant / System Owner " Makes
predetermined payments for energy if/as it is Off-Taker / Vendor/Installer
Energy User produced© 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 85 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 86 Financier-Developer Relationships Sale-Leaseback ! Financier
is Tax Equity Investor ! Property Sold to Tax Equity Investor & " Has Tax
appetite Leased back to Developer/Operator " Doesn’t want to build or operate
projects - " Important that this lease is back to the same needs
developer/operator party that placed the property in service ! Sale-Leaseback or
Partnership-Flip " Tax benefits stay w/ Tax Equity Investor© 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 87 © 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 88 Partnership-Flip Sale-
Leaseback Time Flexibility ! Tax Equity Investor & Developer/Operator are !
Allows “Place-In-Service” date up to 3 months partners with unequal
ownerships before closing Sale-Leaseback " For initial period, Tax Equity
Investor owns 99% " More time flexibility in getting financing (max) and
receives 99% of benefit (tax and income) ! To qualify, delay In-Service as
needed: until “target” return is achieved " Construction completion # Must be
>5 years for full vesting of ITC " Asset conveyance " Entering second phase,
ownership “flips” so that # Sale to Tax Equity Investor Developer/Operator
owns up to 95%. # Use of asset by site user " Developer/Operator can buy
remaining share at FMV (or more, FMV decided at that future date) " Permits
signed off " Testing and customer signoff© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 89 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 90
23. Sale-Leaseback Benefits & Drawbacks End-User/Off-Taker Benefits + 3
extra months to close financial of deal ! No up-front costs, down payment or
deposit + 100% Tax Benefit Capture (vs. 99%) required ! Lower initial energy
costs - No “Limited Use” property (can’t be removable) ! Potentially lower
long term energy costs - 80% of useful life limit on lease term ! Future discount
purchase of system - Repurchase at end of term more expensive ! Reduced PV
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cost even if no tax appetite - Tax Indemnity required - Developer/Operator can’t
be a non-profit© 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 91 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 92 Energy Expense Comparison Investor/Owner Benefits !
Guaranteed stream of income from energy Utility Electric Rate including
estimated escalation at 5% sold 15¢ ! Tax benefits Cost 14¢ PPA Electric Rate
including Per contracted escalation at 3% ! No inflation/escalation risk kWh !
Keep or sell Green Tags / RECs 2007 2017 2027 Year© 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 93 © 2010 OnGrid Solar, All
rights reserved. Intro to Solar Financing - 94 User Energy and Performance
Terms Capacity Payments ! Most are Energy Payments only: $/kWh !
Performance Guarantees delivered " Annual & Project life " Sometimes
indexed to electric or gas markets " Actual Energy / Power delivered ! Some
also include a “Capacity” payment " Efficiency & Availability of Equipment "
Fixed $/kW/month based on average “availability” of PV equipment !
Liquidated Damages for failure to perform / " Comparable to Demand Charges
provide power or energy # Depends on profile # Recover some lost hidden
value© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 95 ©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 96
24. Performance Terms cont’d End User Risks PPA Electric Rate including !
REC / Green Tag ownership contracted escalation at 3% 15¢ " Usually retained
by system owners Cost 14¢ Per Utility Electric Rates may not rise or stay "
Potentially valuable as AB32 kicks in kWh above PPA Contract Rate !
Metering " Costs & Billing Systems 2007 2017 2027 Year ! Rights to Excess
Power ! Inverse of Electricity Escalation " If rates don’t rise, might cost more
" Use of and Value ! Might not get Green Tags/RECs " Additional cost if
desired© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 97
© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 98 2010
Average Upside Down Deals? Residential Electric Rates & Escalation (West,
partial) 14¢ PPA Electric Rate including 2008 U.S. Average Retail Price per
kWh is 9.74 Cents Cost contracted escalation at 3% Per 13¢ kWh Utility
Electric Rates assumed to rise at 5% and eventually go above PPA Contract
Rate ! Why take 10 years of guaranteed losses to maybe get 10 2007 2017 2027
Year future years of savings (consider Time Value of Money)? ! Is the hedge
worth that much? " Chances of rates not rising at 5%? Average Retail Price
(Cents per Kilowatt-hour) " U.S. Average: Rates Grew 3.8% /yr from 2001-
2010 " Large 2009 U.S. Natural Gas discoveries may limit escalation Source:
DOE Energy Information Administration.© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 99 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 100 *+,-+."/"&01" California Electric Rates
asa s Residential 1970 to 2001 plus 2001 to 2010 tiers asf sf • Deregulation in
1995 froze Tier 1 & 2 • AB1X during 2001 Power Crisis created Tier asdf
23+4"&"5"67"&%1" Investor/Owner Risks 3-5, which have risen 5x faster than
‘average’ f 23+4"87"#01" rates needed to rise to compensate for Tier 1&2
System Performance f • SB 695 (Kehoe) unlocks and raises Tier 1 & 2 ! rates
1% faster than ‘average’, up to 5% per year " Maintenance over 15+ years •
Tier 3,4,5 might now drop )$%" df ! End-User default or vacancy of property )
&$%" 23+4"#7")8$61" Good credit end-users required !"#$%&"(&)*+,-./01,2
(& Residential asf 23+4")7"))$01" " )#$%" a *95:"#%)%" )%$%" ($%" 1982
sdf " Require host supply another site or pay term. Fee $%" Be cautions about
" Lots of “due diligence” required - high transaction &$%" future rate hikes –
#$%" 2-3% max costs !" 9:;8& 9:<7& 9::=& 9::<& 3456&7889& 23+4"67"#1"
3456&7898& 23+4"67"&01" ! Incentive Receipt Certainty 23+4"&7"#&1"
23+4"&7"&)1"Source: California Public Utilities Commission, EIA, PG&E
23+4"87");1" 23+4"#7")81" 23+4"87"#;1" 23+4"#7")81" " Must have
confirmation of qualification/allocation "#$#1" <+=3.+>?,@" ";$;1" "))$1" "))
$81"" 23+4")7"))1" 23+4")7"))$61"© 2010 OnGrid Solar, All rights reserved.
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Intro to Solar Financing - 101 © 2010 OnGrid Solar, All rights reserved. Intro
to Solar Financing - 102
25. 2010 Average Residential Electric Rates & Escalation (West, partial) 2008
U.S. Average Retail Price per kWh is 9.74 Cents Average Retail Price (Cents
per Kilowatt-hour) Source: DOE Energy Information Administration.© 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 11 *+,-+."/"&01"
California Electric Rates asa s Residential 1970 to 2001 plus 2001 to 2010 tiers
asf sf asdf • Deregulation in 1995 froze Tier 1 & 2 23+4"&"5"67"&%1" •
AB1X during 2001 Power Crisis created Tier 3-5, which have risen 5x faster
than ‘average’ f 23+4"87"#01" rates needed to rise to compensate for Tier 1&2
f • SB 695 (Kehoe) unlocks and raises Tier 1 & 2 rates 1% faster than
‘average’, up to 5% per year • Tier 3,4,5 might now drop )$%" df )&$%"
23+4"#7")8$61" !"#$%&"(&)*+,-./01,2(& Residential asf )#$%" a 23+4")7"))
$01" *95:"#%)%" )%$%" 1982 sdf ($%" $%" Be cautions about &$%" future
rate hikes – #$%" 2-3% max !" 9:;8& 9:<7& 9::=& 9::<& 3456&7889&
3456&7898& 23+4"67"#1" 23+4"67"&01" 23+4"&7"#&1" 23+4"&7"&)
1"Source: California Public Utilities Commission, EIA, PG&E 23+4"87");1"
23+4"87"#;1" 23+4"#7")81" 23+4"#7")81" "#$#1" <+=3.+>?,@" ";$;1" "))$1"
"))$81"" 23+4")7"))1" 23+4")7"))$61"© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 12
26. Investor Access to Tax Benefits PPA Contract Documents ! Tax Equity
investor must have “unfettered” use of ! Total: 100-200+ pages valuable asset
after deal is over ! Standard Off-taker Contract Segments: " Will panels still be
valuable in 15+ years? " The PPA: 20-35p " Value can’t be stated now - must
be set at that time # Sale of Power/Energy: Output vs. Requirements " Term
can’t go over 80% of “useful life” # Metering & REC ownership ! Must not be
“Limited Use” or “Personal” property " Installation Contract: 20-50p w/
exhibits " Must be “attached” and not easily moved - non- # Equipment Supply
& Construction penetrating systems? " Operations & Maintenance Agreement:
10-15p ! Purchase Options: Fair Market Value (FMV) only " Site Lease gives
provider rights & protections " Dates can be set, but not value # O&M Access;
Transfer to new site owners© 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 103 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 104 PPA Contract Costs PPA Developer & ! High (long &
complicated) but dropping Investor Contract Documents rapidly for “generic”
& standard ! Additional agreements for Developer & Investors " Basic
Standard Agreements: $3K-20K " LLC w/ Partnership Flip: 40p + 15p exhibits
including tailoring w/ desired terms " Purchase Agreement: 24p + 7p of
“definitions” ! Moving to pre-approved deal checklists ! Covers the multi-year
legal structure to allow Tax ! SolarTech.org “Standard PPA” Equity Investor to
reap tax benefits as 99% initial " $395, free to members owner, then “flips”
ownership to Developer to reap ! SEIA “PPA Template” free for members long
term operating benefits. ! Per-Deal (legal) costs are now low(er): ! Flips occur
anywhere from Year 6 to Year 17 " Quick review (if standard & good basic "
Rebates/PBI, Host Payments, Tax Benefits (vesting) agreements are used)©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 105 © 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 106 Equipment
Supply & Complications - Legal & Tax Construction Agreement ! Product
Supply ! Long contracts - 40-60 pages ! Installation terms, timeline, etc ! High
initial transaction costs " In-Service Date not < 3 months before closing Sale-
Leaseback or not before closing Partnership Flip " Reduced with
standardization ! Warranty (5-10 yrs, useful terms to satisfy) ! Building
access / maintenance costs ! Performance Guarantee or Warranty !
Repossession / aftermarket value " Based on independent data & measurable
parameters ! Termination tax issues? - terminal price? ! Can installation be
subcontracted? " Must be at FMV or greater for tax benefits© 2010 OnGrid
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Solar, All rights reserved. Intro to Solar Financing - 107 © 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 108
27. Complications - Terms Common Mistakes ! Power Contract Form: !
Purchase Options: Fair Market Value (FMV) only " Value can’t be stated now -
must be set in future " Selling kWh? " No declining schedules of
value/purchase price # At what price? # TOU & Demand saving / costs !
Rebates are taxable to Host? # Who takes remaining utility bill? " Host signs
over rebate, but is stuck w/ tax liability? " Simpler but vague sales
presentation ! Usually no “Tax Indemnification” (unlike leases) ! Max length
<= 80% of expected life " May leave lots on table in customer’s ! Host can’t
share in upside benefit ! Host can’t be charged for electricity not received©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 109 © 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 110 PPA Deal
Sizes Aggregation ! Tax Equity Investors looking for big deals ! Collect 5 to
50 $3-$5million+ size projects " $25-$40 million minimum ! Master
Agreements: “All Deals …” " Keith Martin’s typical: $75-$150 million " In by
X date " Desirable $100-$200 million " Meet 10-12 item checklist " ? 5 to
50MW PV systems ? ! Standard checklist reduces due diligence & !
Aggregation legal costs per deal " Collect $3-$5million+ size projects© 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 111 © 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 112 Tax Equity
Investors & Lenders Investor Returns ! Recently Active (changes frequently):
" Union Bank of CA ! Financial Returns for Tax Equity Investors " US Bank
(U.S. Bancorp) ! Was High 6% to Low Teen % after tax " Deutsche Bank "
Now? – 14-18% depends on project " John Hancock ! Much less money now
available, so " Rabobank " Morgan Stanley demanding higher returns " Wells
Fargo ! Leveraged? " National City Bank (leaving the business?) " Increases
risk & complication ! Goldman Sachs invests in PPA companies to buy " Too
small to bother? & flip for profit© 2010 OnGrid Solar, All rights reserved. Intro
to Solar Financing - 113 © 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 114
28. Cash Flows at PPA Typical Terms Various Phases MN+4,?G>"
P3."5"QG>E" CD43>E" JD=H"KL+4" MN+4,?G>" 2+4O"R,L+4" !
$2.5Million+ (>350kW+) *A,=+" *4+!B,@+" FG>=H4DI?G>" FG>=H4DI?
G>" BAG4H"2+4O" S3NT" ! 15-20-25 yr commitment BGD4I+=" $
C+W+@GN+4" $ C+W+@GN+4" $ 24+,=D4^" $ V+."Z2F"R3U" $
C+N4+I3,?G>" GU"VD>.="" XB,@+="<3=-Y" F,=A"X=-3>"3>" 94,>H"
>GH"D=3>E" $ *]Z=" ! End of term: BH,4HDN" HA+"E,O+Y" $ BH,H+"5"
24+,=D4^" $ B<:F=" Z>W+=HO+>H" [#%" QGI,@"<+_,H+=" 94,>HT" "
Renew PPA $ *G`+4"B,@+=" $ ],>-" G4"94,>H=" $ BH,H+"Z2F" $ ],>-
"QG,>"HG" " Purchase of system FG>=H4DI?G>" $ Z>W+=HG4" $
PKF<B" +>."GU"P3." 2+4O"QG,>" F,N3H,@" C+N4+I3,?G>" # At greater of
FMV or pre-determined price 2+4O" $ ],>-"QG,>" R6%"_G>D=" ,II+@+4,?
G>T" $ C+W+@GN+4" Pay termination & have system removed " $ ],>-
"QG,>" _D^GDH"I,=A" HG"_D^GDH",H" ! Significant due diligence on
customer req’d HA+"S3N"© 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 115 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 116 PPA vs. Lease Dealing with PPA Developers Electric Bill !
Greed has set in: " Not really a “partner” with installers " Not trying to save
customers money Typical PPA " Working each as hard as possible Typical
Lease ! Shop around - help your customer find the best deal " Good service
gets you the repeats and installation work© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 117 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 118 Lease vs. PPA PPA Leasing Cash
Buyer vs. Lease vs. PPA Ease for Operation, Maintenance, Return Almost No
Effort Customer Inspection ! Profit / Reward - shared among the parties
Operating Risk PPA Vendor End User " Lessee: more risk, may get more of
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profit than with Long Term May Be Higher, to May Be Lower, Except Upon
PPA unless the PPA willing to take more risk than Costs Compensate for Risks
Return of Equipment the bank for the same returns Costs on Removal of
Equipment, Functional Termination Usually None Verification, Return
Shipment " Cash buyer: all risk, gets all profit Opportunity None None # Uses
up working capital - opportunity cost Costs ! Energy Efficiency REC Benefits
Stays w/ PPA Vendor End User " Cash buyers & Leases can enjoy add’l
savings Cash Flow Cash Neutral or Often Negative Up-Front, Positive Savings
Positive Whole Term Over Term " Typically not part of PPA deals (directly)
Include E. Hard to sell “negawatt-hours” More Difficult Yes # Efficiency #
May be able to sell kWh for higher value w/ EE© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 119 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 120
29. Cash Flows at Various Phases 89%#41.& <-=&>&?1./& +,-./& 5,$2&67%
& 89%#41.& :%;&@#7%& !"#$%& !%()#*%& 01.$2,341.&
01.$2,341.& )"12&:%;& A-9B& )1,3%$& ! +%E%*19%& ! +%E%*19%
& ! :%#$,P& ! D%=&J:0&@-C& ! +%9%3-#41.& 1C&D,.=$&& F)#*%
$&G-$HI& 0#$"&F$H-.&-.& Q#.2& .12&,$-./& ! !OJ$& )2#2,9& 2"%&/#;%
I& ! )2#2%&>& :%#$,P& ! )GT0$& J.E%$2;%.2& KLMN& ?13#*&G%
R#2%$& Q#.2B& ! !1U%&)#*%$& ! O#.H& 1&Q#.2$& ! )2#2%&J:0& !
O#.H&?1#.&21& 01.$2,341.& ! J.E%$21& ! <60G)& :%;&?1#.&
%.=&1C&<-=& 0#9-2#*& +%9%3-#41.& :%;& ! O#.H&?1#.&
@SMN&R1.,$& #33%*%#41.B& ! +%E%*19%& R,P1,2&3#$"& ! O#.H&?
1#.& 21&R,P1,2& 2"%&A-9&© 2010 OnGrid Solar, All rights reserved.
Intro to Solar Financing - 13 Lease vs. PPA PPA Leasing Ease for Operation,
Maintenance, Return Almost No Effort Customer Inspection Operating PPA
Vendor End User Risk Long Term May Be Higher, to May Be Lower, Except
Upon Costs Compensate for Risks Return of Equipment Costs on Removal of
Equipment, Functional Usually None Termination Verification, Return
Shipment Opportunity None None Costs REC Benefits Stays w/ PPA Vendor
End User Cash Flow Cash Neutral or Often Negative Up-Front, Positive
Savings Positive Whole Term Over Term Include E. More Difficult Yes
Efficiency© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing -
14
30. Which Product Is Right? PPA Vendors / Providers Not tax restricted, Cash,
Loan, Offer PPAs to 3rd Parties (may be looking for deals): wants to own
system Finance Lease " Sun Run Generation: Residential pseudo PPA (large
initial fee) Tax restricted, deal Tax/Operating " Renewable Ventures: 250kW+
under ~$3,000,000 Leas e " Tioga Energy Tax restricted, deal Tax/Operating "
Recurrent Energy (now owed by Sharp) over ~$3,000,000 Lease, PPA " Sun
Edison: 250kW+ # Vertically integrated on many sales, installation &
ownership Tax-Exempt Lease Many others available & more coming
Government entity " Purchase, PPA Non-profit PPA Uses PPAs on their own
projects only: " SunPower (former Powerlight): 250kW+ Deal w/ Energy
Usually Not PPA Efficiency Component© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 121 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 122 PPA and/or Lease Agents PPA/Lease
Legal Services Gene Beck Baker Davenport Keith Martin Stoel Rives LLP
Davenport Finance Company EnviroTech Financial, Inc Chadbourne & Parke,
LLP [email protected] [email protected]
[email protected] (202) 974-5674 (800) 88-STOEL 804-323-6061 714-
532-2731 [email protected] www.etfinancial.com Wrote SEIA Fed
Tax Manual. Charles Gerni Please call only to hire, not just National Lease
Financial Services questions David J. Clamage 858-546-4888 Saulsbury Hill
Financial Edwin F. Feo Jigar Shah [email protected] Milbank
[email protected] 303-629-8777 x102 Scott F. Young 213-892-4417,
[email protected] (202) 250 3651 Sentry Financial Teaches at Solar Power
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Founded SunEdison. Now consults (801) 303-1111 International and other on
“more unconventional” PPA/ [email protected] conferences finance
deals© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 123 ©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 124
Agenda ! Overview of Basic Financing Principals ! Residential Conventional
Financing with Residential 3rd Party Unsecured Loans & Home Equity
Financing with ! PACE & State/Utility Loan Programs ! Lease Basics &
Commercial Leases PPAs & Leases ! PPA Basics & Commercial PPAs !
Residential Leases & PPAs© 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 125 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 126
31. Sun Run Generation SolarCity “SolarLease” Residential Pseudo PPA
Residential Pseudo Lease ! Residential Pseudo PPA ! Residential Pseudo
Lease " Deposit or “installation fee” reduces per kWh price " $0-$2.25/Watt
down " Per kWh savings w/ performance guarantee " $0 to escalating monthly
payment w/ perf. guarantee ! 20 yr term & unknowable? buyout charge at end !
Otherwise could be ~ same as SunRun: ! Very small deal size needs low “due
diligence cost” " 15 yr term & unknowable buyout charge at end " FICO
score / credit check & large deposit " Very small deal size needs low “due
diligence cost” # No risk if Deposit >25% of gross cost # FICO score / credit
check " Risk spread over many customers # Risks spread over many customers
" Much higher relative savings on Residential Tiered # Much higher relative
savings on Residential Tiered TOU rates compared to commercial rates/PPAs
TOU rates compared to commercial rates/leases " Issues: Rate escalators &
ITC Basis ! Issues: Rate escalators & ITC Basis© 2010 OnGrid Solar, All
rights reserved. Intro to Solar Financing - 127 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 128 Unknowable Buyout Charges Tools To
Analyze Deals ! IRS rules around Fair Market Value discussed earlier prevent
stating the buyout ! CEI - Competitive Energy Insight value – what could it be?
" Complements OnGrid ! No obligation to purchase " More detailed,
sophisticated, expensive ! Minimum - $0 " Helps you (or your finance partner)
take ! Maximum – less than the future new system the deal to the next step
after-incentives net cost ! OnGrid ! If provider sets it too high, customers will
walk away, must be low enough to attract© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 129 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 130 The Economics of Stakeholders are
Linked CEI’s EconExpert Software Suite Bank / ! Universal Financial Pro
Forma Lessor Gas " For PV, Wind, CSP, Fuel Cells, CHP & other Construction
Loans Project Supplier ! Economics and Tax Benefit Monetization Finance !
Early Screening to Financial Closing Suppliers Project Tariffs ! From the
Viewpoint of Every Stakeholder Competing Developer/ Electric Equipment
O&M Suppliers Owner/ Utility Operator ! Before and After-Tax Discount Cash
Flow Tax Accelerated ! Book and Cash / Levered and Unlevered Credits
Depreciation * CEI is not a licensed legal, brokerage or accounting firm. You
are recommend to also consult licensed advisors Tax Monetization© 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 131 © 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 132
32. Competitive Energy The OnGrid Tool Insight, Inc. ! Sales Tool !
Specializing in: TM " Quickly Identify & Screen Leads " Energy Project
Ownership and Asset " Organizes Client Info Management " Financing !
Design Tool " Business and Contract Development " Size Systems Optimally
Steve Provol, President ! Proves the Payback www.CEInsight.com !
Automatically Creates Quotes & Proposals (858) 566 0221 ! Prepares
Documents & Paperwork [email protected]© 2010 OnGrid Solar, All
rights reserved. Intro to Solar Financing - 133 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 134 OnGrid Calculates Rates & Incentives
Cost & Performance ! Commercial, Residential, Agricultural ! West: CA, AZ,
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CO, HI! Costs, Adders, all Incentives, Net Cost ! East: PA, NJ, NY, DE, CT,
MA, OH! System Performance including Shading Data Upload: ! Southeast:
NC, FL, GA! TOU kWh Performance $12,000 Annual Savings Before and
After Payback ! Coming soon: TX, OR, NV, MI, WA,! Electric Bill $ savings
$10,000 MN, IL $8,000 Annual Savings $6,000 $4,000 Performs Financial
Analyses: $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 " Simple & Lifecycle Payback " Rate of
Return analysis " Cash Flow when financing $250,000 $200,000 Resale Value
$150,000 " Increase in Appraisal Valuation $100,000 $50,000 $- Years 1 3 5 7
9 11 13 15 17 19 21 23 25 Provides spreadsheet proof Effective Resale Value
(lesser of 20x annual or remaining 25yr savings) 20 times Annual Savings!
Remaining savings within 25 years Intro to Solar Financing - 135 © 2009
OnGrid Solar, All Rights Reserved. Economics of Solar PV - 18 Intro to Solar
Financing - 136© 2010 OnGrid Solar, All rights reserved. © 2010 OnGrid
Solar, All rights reserved. Scenario Options Agenda ! User Customizable to
Any Situation: " Commercial, Residential, Government & Non-Profit !
Overview of Basic Financing Principals " Any size system: 0-1000MW !
Residential Conventional Financing with " Any Rate Structure Unsecured
Loans & Home Equity " Any Incentive: FIT, Rebate, PBI, REC, Tax ! PACE
& State/Utility Loan Programs Credits & Depreciation ! Lease Basics &
Commercial Leases " Any Insolation Location ! PPA Basics & Commercial
PPAs ! Excel-based: Fast, Portable, non-web ! Residential Leases & PPAs !
Free Trial Available - License Agreement ! Conclusion Class Special – 15-Day
Bonus Use© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing -
137 © 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 138
33. Conclusion - Review Conclusion - Review ! Looked at the Basic Financing
Principals " Importance of Credit Quality ! Looked at " Lease Basics &
Commercial Leases " Must be a fundamentally good deal " PPA Basics &
Commercial PPAs " Tradeoff of Risk vs. Reward " Residential Leases &
PPAs ! Then Residential Conventional Financing ! Discussed the importance
of getting the " Unsecured Loans finance partner involved early to help you
Home Equity & Smart Financing " ! PACE & State/Utility Loan Programs©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 139 © 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 140 Learn More
Goal: Benefit You! Help you sell more: Resources available at
www.ongrid.net ! Understand the topic better ! Articles & papers on solar
“Payback” ! Be more confident in front of the customer ! Know which
questions to ask, so you know ! Upcoming classes & events which customers to
target, and avoid time- " Sales & Marketing for Solar (8 hour) wasters "
Economics of Solar (8 hour) ! Make the best case to each customer, avoid !
Slides from past classes mistakes, don’t present marginal info and weak
analyses ! Free demos of the OnGrid Tool Gain more trust and confidence of
your boss …so please go out and close loads more business!© 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 141 © 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 142 Thanks Andy Black The
OnGrid Tool ! Solar Power International ‘10 Solar Financial Analysis & Sales
Software ! Solar Electric Power Association " Stuart Raper & Julia Hamm !
Yennie Solheim ! Contact me with any questions or concerns ! Please turn in
your feedback forms (408) 428-0808x1 " What you did/didn’t you like/want
changed? [email protected] ! Thank you for coming! www.ongrid.net - Tools,
Classes, Articles & Papers© 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 143 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 144
34. !"#$#%&"(#)(*#+,-(!+."/-&"(*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
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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
35. 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,
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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-
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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
36. 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.
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Note: this graphic is to scale.Economics of Solar Electric Systems ! 2009, Andy
Black. All rights reserved. July 2009 - 3 of 19
37. $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
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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
38. 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
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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
39. 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,
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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
40. 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 &
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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)
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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
41. 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
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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
42. 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
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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
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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
43. 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:
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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
44. 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
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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
45. 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,
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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
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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
46. 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
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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
47. (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
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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
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48. 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
49. 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
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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
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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
50. 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
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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
51. 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
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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
52. 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.
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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
[email protected] 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
53. 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
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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
54. 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 [email protected] 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
55. Andy Black OnGrid Solar Feedback for Solar Financial Analyst Sales,
Marketing & Economics Classes (408) 428 0808 [email protected] 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: ! ! !
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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
56. Andy Black Acronyms Used In Sales, Marketing & OnGrid Solar Solar
Financial Analyst Economics Classes (408) 428 0808 [email protected]:
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
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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
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