“introduction to solar financing”s3.amazonaws.com/zanran_storage/ file“introduction to solar...

“Introduction to Solar Financing”

Solar Living Institute: April 20, 2008, Los Angeles, CA, 9am-5pm

Contact: Solar Living Institute: www.solarliving.org, 707 744 2017 to register

Check-in (15 minutes before listed start time) Introductions Overview of Basic Financing Principals Residential Conventional Financing Break, Q & A, Networking PACE & State Loan Programs ~12:00 Lunch, Q & A, Networking (~30 minutes if possible) Lease Basics and Commercial Leases

Break, Q & A

PPA Basics and Commercial PPAs Residential Leases & PPAs

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

We must be out by 5:00 (add’l questions outside)

Diligence:

Heights by great men reached and kept were not obtained by sudden flight, but they, while their companions slept, were toiling upward in the night.

- Henry Wadsworth Longfellow

Andy Black Solar Financial Analyst

(408) 428 0808x1 [email protected]

“Introduction to Solar Financing”

Solar Living Institute: April 20, 2008, Los Angeles, CA, 9am-5pm

Contact: Solar Living Institute: www.solarliving.org, 707 744 2017 to register Abstract: This rigorous workshop is designed to help commercial systems integrators (dealers, installers, and salespeople) understand and make the financial case for PV systems including specifics for how to finance them with PPAs and Leases. This class includes: ! PPAs: Understanding the basics, subtleties, complexities, risks, and opportunities ! Leases: Understanding the major types, how and when they are used ! A short list of financing, legal, tax, and accounting providers who specialize in solar All students will receive a copy of the demo version of the OnGrid Tool (licensing agreement will be required). Biography: Andy Black is a Solar Financial Analyst and the owner of OnGrid Solar. OnGrid Solar provides financial analysis and sales education & software to solar installers to help them make a strong sales case for solar electricity to their customers. Andy has more than a dozen years of design, consulting, teaching, sales, and research experience in solar. He specializes in demonstrating the financial payback of solar electricity systems. He is a former NABCEP certified solar installer.

Andy Black is a recent member of the Board of Directors of the American Solar Energy Society and served as Chapters Representative. He is also a member of the Advisory Board of the Northern California Solar Energy Association.

Andy’s formal education includes a Bachelor’s in Electrical Engineering from Penn State University, a Master’s in Electrical Engineering from University of Southern California, and a Marketing Certificate at the University of California. His training in solar electricity includes Solar Energy International’s intensive photovoltaic coursework and more than a dozen specialty courses in solar electric and related fields. He presents regularly on the financial analysis of solar electricity to audiences nationwide.

Andy is also the groundskeeper and servant for a cat at his home in San Jose, CA.

Contact Info: Andy Black, CEO OnGrid Solar 4175 Renaissance Dr #4, San Jose, CA 95134 (408) 428 0808x1 [email protected] www.ongrid.net


(408) 428 0808x1 [email protected]


& Sales Software Creator

Solar Power International 2010

INTRODUCTION TO SOLAR FINANCING

© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 2

Introductions & Thanks

!  Solar Power International ‘10

!  Solar Electric Power Association " Stuart Raper & Julia Hamm

!  Yennie Solheim !  Andy Black, OnGrid Solar

"  Solar Financial Analyst & OnGrid Tool Creator

!  You for coming!


Quick Survey - Who’s Here? !  Existing integrators / dealer / installers

" Managers & Owners !  Salesperson for integrator / dealer / installer !  New or hopeful integrators / dealers / installers !  New or hopeful salespeople !  Government / Utilities !  Customers / consumers / end users !  Manufacturers !  Others? !  Who’s taken the Residential/Basic Payback Class?


Quick Survey - Your Goals for Today?

!  Learn about economics for general knowledge !  Want to use economics for selling / grow

business !  Want to learn about / have the OnGrid Tool !  Want to increase your knowledge to develop

your own tool


Quick Survey - Area(s) of Interest?

!  Came to learn specifically about: " Residential Conventional Financing " Residential Lease & PPA Financing " Commercial Lease Financing " Commercial PPA Financing " Use PPAs in selling " Create new PPA offering to market

!  Other interests? !  Networking list?


Instructor Background !  M.S. Electrical Engineering !  SEI graduate !  NABCEP Certified Solar PV Installer Emeritus !  Involved with Solar since 1991 !  Studying, writing, & presenting about Solar

Financial Issues since 2000 !  Solar Salesperson 2001-2006 !  Now a Solar Financial Analyst &

Creator of the “OnGrid Tool” solar sales software


Handout Resource List

Resources available at www.ongrid.net !  Articles & papers on solar “Payback” !  Upcoming classes & events

" Sales & Marketing for Solar !  Slides from past classes !  Free demos of the OnGrid Tool


Decorum

!  Questions: Please focus on Solar Economics & Payback

!  Good environment: " Cell phones to fun mode " Side conversations: Yes or No? " Please help each other

!  Site Logistics & Breaks " Facilities " Lunch & 2 breaks: Networking


Agenda !  Overview of Basic Financing Principals !  Residential Conventional Financing with

Unsecured Loans & Home Equity !  PACE & State Loan Programs !  Lease Basics & Commercial Leases !  PPA Basics & Commercial PPAs !  Residential Leases & PPAs Questions preferred at points marked:

"  Please focus on Financing & Economics Questions? Questions?


Basic Financing Principals

!  Several ways to finance !  Financing enables sales to those who can’t or

won’t buy with their own cash !  Good customer credit important (lately, critical) !  Financing makes sense when the project basic

economics are favorable (good IRR)

Questions? Questions?


Ways to Finance Solar

!  PPA !  Lease !  Loan !  Cash

!  Bringing the financing keeps you in control (as much as you can in this market!)

+Reduced Customer Risk - Benefits Shared with more Parties - Cost to Consumer +More Sales Control


Sales Benefits of Financing

!  Offering Financing keeps salesperson in control of the sale "  If the customer is out looking for financing, you’ve

lost control of the sale. "  If you offer it, you can continue to control the sale.

!  Creates more purchasing options, more chances at a close

!  Can use to overcome objections !  Gets salesperson closer to decision maker & their

real thinking


Commercial Selling Realities

!  Only 3% of all commercial quotes turn to sale "  Most quotes are made to private companies

# Can’t make >5 year commitment "  Salesperson doesn’t know tax & accounting issues

# Talks w/ building manager, facilities, etc # 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


Common Characteristics !  Lower interest rate environment helps !  Can improve initial customer cash flow !  Requires good end-customer credit

" Stricter credit environment hurts


“Good” or “Strong” Credit

!  Three C’s of Credit: " Credit scores & reports (Dun & Bradstreet) " 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)


Risks in Solar Finance !  Compare to Real Estate


Requires Good IRR

!  The basic economics must be attractive !  What about non-profits & gov’t facilities?

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


Residential Rates of Return


Residential Rates of Return


Commercial Rates of Return


Commercially Attractive? !  IRR must exceed a hurdle rate

"  > “Risk Free Rate” + ~1-2% = Risk Free Rate + Sum of Risks (more later) #  Source: Photon International, Aug 2007, p114

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

!  ! Commercially Attractive >= 4-6%?


Commercial Rates of Return


Residential Conventional Financing with Unsecured

Loans & Home Equity


Residential Conventional Financing !  Unsecured Loan

" Addison Avenue FCU: 5.25%, 5 year, $5-50K !  Real Estate Secured Loan

" Lowest interest rates (usually) " Tax deductible interest " HUD EEMs - Energy Efficiency Mortgages " “Home Equity Loans” & “Home Equity Line

of Credit” (HELOC) # E.g. New Resources Bank


Cash Flow with Loan

!  Compares the savings on the utility bill with the cost of financing the system

!  At today’s rates (~5-8%) and including rebate benefits, cash flow is often positive immediately " Cost of borrowing is less than savings on

electric bill " Stabilizes long term utility costs


Cash Flow !  Residential system

offsetting a large bill

!  8% 20 year loan !  Many Systems are

cash positive from Year 0

!  Spike is Inverter Replacement Cost


Solar Mortgage

!  Like buying vs. renting, but better !  House costs more up front

" Pays off over time !  Solar costs less up front

" Pays off immediately & over time !  Protects against inflation !  Savings grow over time


Cash Flow Analysis

!  Calculate net cash required to buy " This is the amount to be financed

!  Calculate monthly loan payments " Based on loan rate, term & amount

!  Subtract tax savings if loan interest is tax deductible. This is net monthly loan cost.

!  Compare net loan cost to after tax value of net electric bill savings (incl. maintenance)


How Much To Borrow?

!  How much should customer borrow? !  Alt. 1: Net Cost after Rebate & Grants?

"  Once ITC is received, have cash sitting around "  Inefficient & expensive

!  Alt. 2: Net Cost after All Incentives (including tax credits, depreciation, PBIs, etc.)? "  Requires a bridge loan until tax benefits & PBIs are

received "  Optimistically low monthly loan cost


Alt. 3: “Smart Financing” !  Efficient pay-down of principal using tax benefits when

received (using Line Of Credit - business or home equity) !  Find ‘payment’ amount that pays off evenly over term

"  Lower payments than amortizing full “after-rebate amount” "  Higher payments than only amortizing the net “after-rebate,

after-tax-benefits amount” !  No cash out of pocket waiting for ITC

"  Doesn’t require ‘bridge loan’ "  Realistic presentation of customer costs

!  No excess interest paid on “un-used” money "  Doesn’t weaken sales presentation


Net Annual Savings

-$10,000

-$5,000

$0

$5,000

$10,000

$15,000

$20,000

$25,000

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

Net Annual Savings

Commercial Cash Flow

!  Typical Commercial System Loan

!  X% Y year loan


Commercial Cash Flow Options !  High Cost Loan: Starting Principal =

“Gross - Rebate”

!  Optimistic* Loan: Starting Principal =

“Gross - Rebate - ITC - Depreciation”

*Customer needs bridge loan until tax savings realized

Net Costs w/ Solar with High Cost Loan

Utility Costs w/o Solar

Net Costs w/ Solar with Optimistic Loan

Utility Costs w/o Solar


“Smart Financing” Timeline LOAN: Year:

0 1 2 3 4 5 6 7 8 9 10 11Loan 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 the next year's principal) 25,714 8,493 5,230 3,267 3,267 1,814 336 336 336 336 336 336

Net Annual Electric Bill before Solar (with tax effects & including Lifestyle changes, but not Energy Efficiency)

2,388 2,507 2,632 2,764 2,902 3,047 3,199 3,359 3,527 3,704 3,889 4,083

New Net Annual Energy Cost (with tax effects, including new electric bill, maintenance, inverter replacement)

755 800 847 897 950 1,006 1,065 1,127 1,193 1,262 1,336 1,414

Net New Annual Cost (Loan plus New Net Energy Cost) 2,560 3,459 3,825 4,105 4,337 4,587 4,805 4,986 5,181 5,391 1,336 1,414

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)

.

.

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 the next year's principal) 25,714 8,493 5,230 3,267 3,267 1,814 336 336 336 336 336 336


2,388 2,507 2,632 2,764 2,902 3,047 3,199 3,359 3,527 3,704 3,889 4,083


755 800 847 897 950 1,006 1,065 1,127 1,193 1,262 1,336 1,414








2,388 2,507 2,632 2,764 2,902 3,047 3,199 3,359 3,527 3,704 3,889 4,083


755 800 847 897 950 1,006 1,065 1,127 1,193 1,262 1,336 1,414





Smart Financed Commercial Cash Flow

!  “Smart Financed” Loan Timeline

!  No bridge loan needed

!  Not optimistic - fair to the customer

!  Assumes customer will be efficient w/ tax benefits

!  Interest Tax Benefit Drops so Net Cost Rises Net Annual Savings / Cost

Utility Bill w/o Solar

New Net Cost: Loan, New Bill, Maintenance, etc.





2,388 2,507 2,632 2,764 2,902 3,047 3,199 3,359 3,527 3,704 3,889 4,083


755 800 847 897 950 1,006 1,065 1,127 1,193 1,262 1,336 1,414




.

.

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 the next year's principal) 25,714 8,493 5,230 3,267 3,267 1,814 336 336 336 336 336 336


2,388 2,507 2,632 2,764 2,902 3,047 3,199 3,359 3,527 3,704 3,889 4,083


755 800 847 897 950 1,006 1,065 1,127 1,193 1,262 1,336 1,414








2,388 2,507 2,632 2,764 2,902 3,047 3,199 3,359 3,527 3,704 3,889 4,083


755 800 847 897 950 1,006 1,065 1,127 1,193 1,262 1,336 1,414







Smart Financed Residential Cash Flow

!  4 kW residential system

!  8% 20 year “Smart Financed” Loan

!  No bridge loan needed

Utility Bill w/o Solar

New Net Cost: Loan, New Bill, Maintenance, etc.

Net Annual Savings / Cost

Examples


Residential Cash Flow




Residential Cash Flow


Cumulative Cash Flow

Examples


Agenda

!  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


Property Assessed Clean Energy (PACE) Financing


PACE / Community Financing Programs

!  PACE: Property Assessed Clean Energy !  PV system financing thru property tax assessment

"  Paid by increased property tax liability "  Liability attached to the property, not the individual "  Transferrable to future owners

# Removes concerns about resale value # Possible issue regarding ITC recapture vs. increased

resale value within first 5 years

Property Assessed Clean Energy (PACE)

PACE financing authorized by the state*

www.dsireusa.org / October 2010

CA: 2008

NM: 2009

CO: 2008

WI: 2009

ME: 2010

VA: 2009

OK: 2009

TX: 2009 LA: 2009

IL: 2009 OH: 2009 NV: 2009

OR: 2009 NY: 2009

NC: 2009

FL: 2010

HI: Existing Authority

23 states + DC authorize PACE (22 states have passed legislation and HI

permits it based on existing law)

DC

MN: 2010

VT: 2009

MD: 2009

GA: 2010

DC: 2010

MO: 2010

NH: 2010

*The Federal Housing Financing Agency (FHFA) issued a statement in July 2010 concerning the 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.


PACE / Community Financing Programs (Berkeley FIRST, AB811)

!  PACE Examples / in progress: "  20 year, fixed interest rates, tax deductible interest

# Berkeley FIRST: ~7.75% as of 3/2009 "  Palm Desert CA, Santa Fe, Albuquerque, Austin,

Babylon NY, San Diego, San Francisco !  State level initiatives:

"  CT, MD, OR, TX, VT, VA, WI, … "  AB 811 allows all towns in CA to do same "  Listed in DSIRE: http://www.dsireusa.org

!  Interest nationwide - U.S. D.O.E. PACE Initiative

Property Assessed Clean Energy (PACE)

PACE financing authorized by the state*

www.dsireusa.org / October 2010

CA: 2008

NM: 2009

CO: 2008

WI: 2009

ME: 2010

VA: 2009

OK: 2009

TX: 2009 LA: 2009

IL: 2009 OH: 2009 NV: 2009

OR: 2009 NY: 2009

NC: 2009

FL: 2010

HI: Existing Authority

23 states + DC authorize PACE (22 states have passed legislation and HI

permits it based on existing law)

DC

MN: 2010

VT: 2009

MD: 2009

GA: 2010

DC: 2010

MO: 2010

NH: 2010

*The Federal Housing Financing Agency (FHFA) issued a statement in July 2010 concerning the 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.

State Loan Programs for Solar Projects www.dsireusa.org / September 2010

Loan Programs for Solar Projects

Utility Incentive(s) U

U

U

U

U

U

U

U

U

U

U

U

U

U

U

29 states + USVI

offer loans for solar projects

DC

U.S. Virgin Islands

U

U


PACE Status

!  Currently stalled almost everywhere " FHFA currently blocking PACE activities

!  State lawsuits against FHFA !  Legislation pending to allow PACE to

continue !  … Stay Tuned. Follow at the DSIRE database:

www.dsireusa.org , VoteSolar.org


State / Utility Loan Programs

State Loan Programs for Solar Projects www.dsireusa.org / September 2010

Loan Programs for Solar Projects

Utility Incentive(s) U

U

U

U

U

U

U

U

U

U

U

U

U

U

U

29 states + USVI

offer loans for solar projects

DC

U.S. Virgin Islands

U

U


NJ - PSE&G Utility Loan Program

!  Residential: 6.5%, 10 year term !  Non-Residential: 11.3%, 15 year term !  Typically 40-60% of system value !  Repayment via either:

" SRECs (minimum value 35.0¢/kWh to 43.5¢/kWh based on size)

" Cash " Can change once per year


Example State Loan Programs

!  Texas Schools, Local Government, State Government, Hospitals " 3%, Must have ~10 year average term

!  Oregon: All Sectors " $20K to $20 Million, 5-15 year terms

!  For loans in other states see the DSIRE database: www.dsireusa.org


Agenda




3rd Party Financing of Solar Projects


Sales Tip

!  Failure to “sign” is not likely due to price !  Suggest don’t even quote a system price

"  Only quote a monthly payment

!  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


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

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


Leases


Returns for Lessors !  Was in ~6%-9% range before financial crisis,

now in the low- to mid-teens !  Less money now available, so higher returns

for those willing to deal !  Requires:

" Lessees with best credit " Limited project risk " Low transaction costs via standard terms and

“conforming” projects

CHECK W/ Baker & Dave Clamage Check examples for Typical cases too Ask for real examples


Leases

!  Several Types " Finance / Capital Lease " True / Tax / Operating Lease " Tax-Exempt Lease Purchase

!  Thanks: "  Gene Beck, EnviroTech Financial "  Baker Davenport, Davenport Group "  Scott Young, Sentry Financial


What is a Lease

!  Finance contract between 2 parties " Lessor & Lessee " Vendor connects the 2 parties

!  Looks like either a loan or a rental !  Ability to transfer ownership benefits

" For Tax or Accounting purposes !  Specified term & payment


Widely Used

!  Solar Leases similar to other asset leases !  Well established market

" 80% of companies and gov’t agencies use leasing, rather than owning, for at least some of their equipment

" Some companies only use leasing, rather than purchasing

!  Lessor = Owner of system !  Lessee = User (“renter”) of system


Lease “Flow” & Parties

Lessee

Lessor

Vendor

Purchase Payment

PV System

Initial “sales” interaction Info on leasing resources

Use of System

Lease Payments


Benefits of a Lease !  Terms more flexible than a purchase !  Allows for 100% financing

"  Covering freight, maintenance, fees, … # Which might not be allowed in a loan

!  Doesn’t tie up capital and/or effectively stretches line of credit "  Considered “Off Balance Sheet” "  Keeps bank line of credit free

!  Solves AMT problems !  Can include Energy Efficiency measures


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 investment $ to get tax benefits others can’t use


Lease vs. Loan

*courtesy Conergy Commercial Financing presentation by Baker Davenport & Tim Pedersen, Rockwell Financial Group


Lease vs Loan Cost:

!  Loan/Cash: 100% Principal "  + Interest (or Time Value of Money if Cash Purchase) "  - ITC (30% if available) "  - 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


Lease Term Set By:

!  Price of project - larger is better !  Credit of customer !  Structure of the deal


Finance / Capital Lease

!  Same as bank loan !  Fully amortizing or with balloons !  Lessee gets tax credit & depreciation !  Interest is deductible !  Most commonly utilized for energy projects

" Not useful for solar projects needing to transfer tax benefits to Tax Equity Investor


Capital Lease Typical Terms !  5 year, $100-150K !  7 year, $500K !  Over 8yrs will have a longer amortization period,

but with a 7 year due date "  Banks don’t lend over 7 yrs unsecured

# Ie. w/o cash, real estate, or marketable securities !  8 year, $1MM, 5-7 year due date (7 w/ balloon) !  10 year typical max, 7 year due date !  Limits: Longer = higher risk !  Easiest lease to create wrt due diligence

"  Typically 2 page agreement plus boilerplate


Accounting vs. Taxes wrt True & Operating Lease

!  Two perspectives when reviewing leases "  Tax vs. Accounting "  Two different sets of books & calculations

!  Accounting: must meet FASB 13 rules "  FASB - Financial Accounting Standards Board

!  Tax: must meet IRS rules !  Most solar leases are

"  Operating Leases for accounting purposes "  True Lease / Tax Leases for tax purposes


Operating Lease (Accounting Perspective)

!  Rental contract w/ fixed terms & conditions !  Lower effective interest rate than capital lease

" Lessor gets depreciation & tax credits " Payments ~40% lower for solar than capital lease

!  Lessee expenses monthly payments !  Lease considered “off balance sheet” !  This is the typical accounting treatment of an True

Tax / Tax Lease


True Lease / Tax Lease (Tax Perspective)

!  Rental contract w/ fixed terms & conditions !  Lessee expenses monthly payments !  Available to non-profits & gov’t entities

" Can do, but no transfer of tax benefits " Use Tax Exempt Lease Purchase

!  This is the one used for solar projects suffering from AMT tax benefit limits

!  This is how Operating Leases are treated from Tax perspective


True / Operating / Tax Lease Typical Terms

!  E.g.: $500K+, 80kW+ system (as of 5/23/09) !  Preferred: $3MM, 500kW+ system

"  5-7-10yrs on strong credit for smaller projects "  ~10-15yrs on very strong credit & larger projects

#  Credit requirements have gone up in 2009 !  End of lease:

"  Purchase equipment at Fair Market Value (more later) "  Extend lease for add’l 12-60 months at fixed rental rate

#  Repeat indefinitely or sell "  Return equipment to Lessor in good condition

CHECK W/ Gene & Dave Clamage Check examples for Typical cases too Ask for real examples

Get examples of Common lease paperwork and processing costs To set up a deal


Operating Lease Docs !  More difficult, more due diligence than Capital Lease,

Less than PPA !  10-15 pages basic lease:

"  5% custom language, 95% boilerplate "  Roof lease "  Waivers "  Terminal Value Schedule & Purchase "  Master Lease, Equipment Schedule "  + other docs "  = total of ~15-30 pages

CHECK W/ Gene & Dave Clamage Check examples for Typical cases too Ask for real examples

Get examples of Common lease paperwork and processing costs To set up a deal


Cash Benefits of True & Operating Leases

!  Lessor offers lower monthly cost of solar system to end user because of enjoyed tax benefits

!  Lessor gets lower taxes !  Lessee gets lower cost PV system (lower

payments)


Loan

Electric Bill

Loan


Lease Payment Options

Electric Bill Various Leases

~50% are Cash Positive in 2009 w/ Lease Larger more likely to be cash positive if over 10 years


True & Operating Lease Term

!  Typically >= 6 years to get all depreciation benefit and vest all of the tax credit

!  End of Lease options: " Purchase at greater of Fair Market Value

(FMV)* or predetermined price " Return to Lessor upon notice " Auto-renewal for shorter term *Critical to avoid tax violation


Purchase Options: FMV !  Best IRS clarity: purchase >6 years for FMV

" May be okay to have limited purchase options at set anniversaries at FMV

" Should not be open ended option !  Fair Market Value (FMV)

" Best IRS clarity: Determined by independent appraiser at time of exercise

" May be okay to come to agreement among parties at time of exercise

" Should not be bargain fixed price


Typical Lease Terms

!  Lease can’t exceed 80% of life of asset "  Must have a residual value

!  Lessor owns, but takes no operating risk "  Hell or high water - Lessee must pay for system

regardless of performance "  Incentive on Lessee to maintain system

!  Property tax, insurance, maintenance is responsibility of lessee

!  May require tax indemnity if tax benefits aren’t transferable to Lessor


Tax Exempt Lease Purchase

!  Primarily for State & Local governments "  Includes public schools & universities "  Longer terms: 10-20 yrs by project size (>20kW)

!  Current debt obligation for lessee !  Non-profits qualify for larger projects (> $1MM)

"  Must have gov’t sponsor !  Special structuring - more “complicated” lease !  “Tax Exempt” means the lessor doesn’t pay Fed tax

on income: Reduces interest ~ 300 basis points


Non-Profits w/o Gov’t Sponsors

!  Non-Profits not eligible for True / Operating Leases " Can’t pass tax benefits to lessor " Instead - Capture via a 3rd party ownership

structure: PPA


Lease Contract Costs

!  Were long & complicated (50-60 pages and $10Ks) " Now have 8-9 page standard lease agreements

!  Need a common set of terms " Current diversity of lease names &

approaches confuses & slows the sale " Increases sales cost


Get Lessor, Lender or Broker Involved Up Front

!  They can help present and sell the deal - include them early on

!  Helps and increases sales person’s control !  Helps get the right questions asked up front

" Speeds the sale " Or determines early that this is a no-go " Determine which type is best


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

! PPAs - Power Purchase Agreements - Paying for just the energy if/when delivered


PPAs


Power Purchase Agreement - PPA

!  A Type of Offering or Proposal " Contract for the sale of energy (kWh) " 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

3rd-Party Solar Power Purchase Agreements (PPAs) www.dsireusa.org / July 2010

Apparently disallowed by state or otherwise restricted by legal barriers

Status unclear or unknown

Authorized by state or otherwise currently in use

Puerto Rico

At least 17 states + PR authorize or

allow 3rd-party solar PPAs

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.

UT: limited to certain sectors

NM: effective 1/1/2011

AZ: limited to certain sectors


Parties to the Transaction

!  Agreement between " PPA Provider / Vendor aka “Developer” " Off-Taker / End User of Energy " Building Owner (might be End User) " System Vendor / Installer / Integrator " 3rd Party Investor / Financier (might be

installer and/or Developer)

3rd-Party Solar Power Purchase Agreements (PPAs) www.dsireusa.org / July 2010

Apparently disallowed by state or otherwise restricted by legal barriers

Status unclear or unknown

Authorized by state or otherwise currently in use

Puerto Rico

At least 17 states + PR authorize or

allow 3rd-party solar PPAs

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.

UT: limited to certain sectors

NM: effective 1/1/2011

AZ: limited to certain sectors


PPA “Flow” PPA Developer

/ Vendor

System Vendor/Installer

Occupant / Off-Taker /

Energy User

PPA Financier / Investor

Building Owner

PV System

kWh Energy

Monthly Energy Payments Building

Access / Maintenance

Permission

Purchase Payment

Investment Cash ROI & Tax Benefits


PPA “Flow” PPA Developer

/ Vendor

System Vendor/Installer

Occupant / Off-Taker /

Energy User

PPA Financier / Investor

Building Owner

PV System

kWh Energy

Monthly Energy Payments Building

Access / Maintenance

Permission

Purchase Payment

Investment Cash ROI & Tax Benefits


Party Responsibilities

!  Developer (might also be installer) oversees: "  Construction "  Operation & maintenance of equipment "  End User & Investor relationships & payments "  Execute the 80-100 ‘To Do’ items

!  End-User "  Receives energy from system "  Makes predetermined payments for energy if/as it is

produced


Financier-Developer Relationships

!  Financier is Tax Equity Investor " Has Tax appetite " Doesn’t want to build or operate projects -

needs developer/operator !  Sale-Leaseback or Partnership-Flip


Sale-Leaseback

!  Property Sold to Tax Equity Investor & Leased back to Developer/Operator " Important that this lease is back to the same

party that placed the property in service " Tax benefits stay w/ Tax Equity Investor


Partnership-Flip

!  Tax Equity Investor & Developer/Operator are partners with unequal ownerships "  For initial period, Tax Equity Investor owns 99%

(max) and receives 99% of benefit (tax and income) until “target” return is achieved # Must be >5 years for full vesting of ITC

"  Entering second phase, ownership “flips” so that Developer/Operator owns up to 95%.

"  Developer/Operator can buy remaining share at FMV (or more, FMV decided at that future date)


Sale-Leaseback Time Flexibility

!  Allows “Place-In-Service” date up to 3 months before closing Sale-Leaseback "  More time flexibility in getting financing

!  To qualify, delay In-Service as needed: "  Construction completion "  Asset conveyance

# Sale to Tax Equity Investor # Use of asset by site user

"  Permits signed off "  Testing and customer signoff


Sale-Leaseback Benefits & Drawbacks

+ 3 extra months to close financial of deal + 100% Tax Benefit Capture (vs. 99%)

- No “Limited Use” property (can’t be removable) - 80% of useful life limit on lease term - Repurchase at end of term more expensive - Tax Indemnity required - Developer/Operator can’t be a non-profit


End-User/Off-Taker Benefits

!  No up-front costs, down payment or deposit required

!  Lower initial energy costs !  Potentially lower long term energy costs !  Future discount purchase of system !  Reduced PV cost even if no tax appetite


Energy Expense Comparison

2007 2017 2027 Year

Cost Per kWh

PPA Electric Rate including contracted escalation at 3%

Utility Electric Rate including estimated escalation at 5%

15¢ 14¢


Investor/Owner Benefits

!  Guaranteed stream of income from energy sold

!  Tax benefits !  No inflation/escalation risk !  Keep or sell Green Tags / RECs


User Energy and Capacity Payments

!  Most are Energy Payments only: $/kWh delivered " Sometimes indexed to electric or gas markets

!  Some also include a “Capacity” payment " Fixed $/kW/month based on average

“availability” of PV equipment " Comparable to Demand Charges

# Depends on profile # Recover some lost hidden value


Performance Terms

!  Performance Guarantees " Annual & Project life " Actual Energy / Power delivered " Efficiency & Availability of Equipment

!  Liquidated Damages for failure to perform / provide power or energy


Performance Terms cont’d

!  REC / Green Tag ownership " Usually retained by system owners " Potentially valuable as AB32 kicks in

!  Metering " Costs & Billing Systems

!  Rights to Excess Power " Use of and Value


!  Inverse of Electricity Escalation "  If rates don’t rise, might cost more

!  Might not get Green Tags/RECs "  Additional cost if desired

End User Risks

2007 2017 2027 Year

Cost Per kWh


Utility Electric Rates may not rise or stay above PPA Contract Rate

15¢ 14¢


Upside Down Deals?

2007 2017 2027 Year

Cost Per kWh


Utility Electric Rates assumed to rise at 5% and eventually go above PPA Contract Rate

13¢

14¢

!  Why take 10 years of guaranteed losses to maybe get 10 future years of savings (consider Time Value of Money)?

!  Is the hedge worth that much? "  Chances of rates not rising at 5%? "  U.S. Average: Rates Grew 3.8% /yr from 2001-2010 "  Large 2009 U.S. Natural Gas discoveries may limit escalation


2010 Average Residential Electric Rates &

Escalation (West, partial)

Source: DOE Energy Information Administration.

2008 U.S. Average Retail Price per kWh is 9.74 Cents

Average Retail Price (Cents per Kilowatt-hour)


!"

#$%"

&$%"

'$%"

($%"

)%$%"

)#$%"

)&$%"

)'$%"

Residential

1982

!"#$%&'"

(&)*+,-./

01,2

(&

*+,-+."/"&01"

23+4"&"5"67"&%1"

23+4"87"#01"

23+4"#7")8$61"23+4")7"))$01"*95:"#%)%"

asa

s asf

sf asdf

f f

df

asf a

sdf

3456&7889&23+4"67"#'1"23+4"&7"#&1"23+4"87");1"23+4"#7")81"23+4")7"))1"

•  Deregulation in 1995 froze Tier 1 & 2 •  AB1X during 2001 Power Crisis created Tier 3-5, which have risen 5x faster than ‘average’ rates needed to rise to compensate for Tier 1&2 •  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

Residential 1970 to 2001 plus 2001 to 2010 tiers California Electric Rates

Source: California Public Utilities Commission, EIA, PG&E

<+=3.+>?,@""#$#1" ";$;1" "))$'1" "))$81""

9:;8& 9:<7& 9::=& 9::<& 3456&7898&23+4"67"&01"23+4"&7"&)1"23+4"87"#;1"23+4"#7")81"23+4")7"))$61"

Be cautions about future rate hikes – 2-3% max


Investor/Owner Risks

!  System Performance "  Maintenance over 15+ years

!  End-User default or vacancy of property "  Good credit end-users required "  Require host supply another site or pay term. Fee "  Lots of “due diligence” required - high transaction

costs !  Incentive Receipt Certainty

"  Must have confirmation of qualification/allocation


2010 Average Residential Electric Rates &

Escalation (West, partial)

Source: DOE Energy Information Administration.


Average Retail Price (Cents per Kilowatt-hour)


!"#$%"

&$%"

'$%"

($%"

)%$%"

)#$%"

)&$%"

)'$%"

Residential

1982

!"#$%&'"

(&)*+,-./

01,2

(&

*+,-+."/"&01"

23+4"&"5"67"&%1"

23+4"87"#01"

23+4"#7")8$61"23+4")7"))$01"*95:"#%)%"

asa

s asf

sf asdf

f f

df

asf a

sdf

3456&7889&23+4"67"#'1"23+4"&7"#&1"23+4"87");1"23+4"#7")81"23+4")7"))1"

•  Deregulation in 1995 froze Tier 1 & 2 •  AB1X during 2001 Power Crisis created Tier 3-5, which have risen 5x faster than ‘average’ rates needed to rise to compensate for Tier 1&2 •  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

Residential 1970 to 2001 plus 2001 to 2010 tiers California Electric Rates

Source: California Public Utilities Commission, EIA, PG&E

<+=3.+>?,@""#$#1" ";$;1" "))$'1" "))$81""

9:;8& 9:<7& 9::=& 9::<& 3456&7898&23+4"67"&01"23+4"&7"&)1"23+4"87"#;1"23+4"#7")81"23+4")7"))$61"

Be cautions about future rate hikes – 2-3% max


Investor Access to Tax Benefits !  Tax Equity investor must have “unfettered” use of

valuable asset after deal is over "  Will panels still be valuable in 15+ years? "  Value can’t be stated now - must be set at that time "  Term can’t go over 80% of “useful life”

!  Must not be “Limited Use” or “Personal” property "  Must be “attached” and not easily moved - non-

penetrating systems? !  Purchase Options: Fair Market Value (FMV) only

"  Dates can be set, but not value © 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 104

PPA Contract Documents !  Total: 100-200+ pages !  Standard Off-taker Contract Segments:

" The PPA: 20-35p # Sale of Power/Energy: Output vs. Requirements # Metering & REC ownership

" Installation Contract: 20-50p w/ exhibits # Equipment Supply & Construction

" Operations & Maintenance Agreement: 10-15p " Site Lease gives provider rights & protections

# O&M Access; Transfer to new site owners


PPA Contract Costs !  High (long & complicated) but dropping

rapidly for “generic” & standard " Basic Standard Agreements: $3K-20K

including tailoring w/ desired terms !  Moving to pre-approved deal checklists !  SolarTech.org “Standard PPA”

" $395, free to members !  SEIA “PPA Template” free for members !  Per-Deal (legal) costs are now low(er):

" Quick review (if standard & good basic agreements are used)


PPA Developer & Investor Contract Documents

!  Additional agreements for Developer & Investors "  LLC w/ Partnership Flip: 40p + 15p exhibits "  Purchase Agreement: 24p + 7p of “definitions”

!  Covers the multi-year legal structure to allow Tax Equity Investor to reap tax benefits as 99% initial owner, then “flips” ownership to Developer to reap long term operating benefits.

!  Flips occur anywhere from Year 6 to Year 17 "  Rebates/PBI, Host Payments, Tax Benefits (vesting)


Equipment Supply & Construction Agreement

!  Product Supply !  Installation terms, timeline, etc

"  In-Service Date not < 3 months before closing Sale-Leaseback or not before closing Partnership Flip

!  Warranty (5-10 yrs, useful terms to satisfy) !  Performance Guarantee or Warranty

"  Based on independent data & measurable parameters !  Can installation be subcontracted?


Complications - Legal & Tax

!  Long contracts - 40-60 pages !  High initial transaction costs

" Reduced with standardization !  Building access / maintenance costs !  Repossession / aftermarket value !  Termination tax issues? - terminal price?

" Must be at FMV or greater for tax benefits


Complications - Terms

!  Power Contract Form: " Selling kWh?

# At what price? # TOU & Demand saving / costs # Who takes remaining utility bill?

" Simpler but vague sales presentation " May leave lots on table in customer’s

benefit


Common Mistakes

!  Purchase Options: Fair Market Value (FMV) only "  Value can’t be stated now - must be set in future "  No declining schedules of value/purchase price

!  Rebates are taxable to Host? "  Host signs over rebate, but is stuck w/ tax liability?

!  Usually no “Tax Indemnification” (unlike leases) !  Max length <= 80% of expected life !  Host can’t share in upside !  Host can’t be charged for electricity not received


PPA Deal Sizes

!  Tax Equity Investors looking for big deals " $25-$40 million minimum " Keith Martin’s typical: $75-$150 million " Desirable $100-$200 million " ? 5 to 50MW PV systems ?

!  Aggregation " Collect $3-$5million+ size projects


Aggregation

!  Collect 5 to 50 $3-$5million+ size projects !  Master Agreements: “All Deals …”

" In by X date " Meet 10-12 item checklist

!  Standard checklist reduces due diligence & legal costs per deal


Tax Equity Investors & Lenders !  Recently Active (changes frequently):

"  Union Bank of CA "  US Bank (U.S. Bancorp) "  Deutsche Bank "  John Hancock "  Rabobank "  Morgan Stanley "  Wells Fargo "  National City Bank (leaving the business?)

!  Goldman Sachs invests in PPA companies to buy & flip for profit


Investor Returns

!  Financial Returns for Tax Equity Investors !  Was High 6% to Low Teen % after tax

" Now? – 14-18% depends on project !  Much less money now available, so

demanding higher returns !  Leveraged?

" Increases risk & complication " Too small to bother?


PPA Typical Terms

!  $2.5Million+ (>350kW+) !  15-20-25 yr commitment !  End of term:

" Renew PPA " Purchase of system

# At greater of FMV or pre-determined price " Pay termination & have system removed

!  Significant due diligence on customer req’d © 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 116

Cash Flows at Various Phases

*A,=+" *4+!B,@+"CD43>E"

FG>=H4DI?G>"JD=H"KL+4"FG>=H4DI?G>"

MN+4,?G>"BAG4H"2+4O"

MN+4,?G>"P3."5"QG>E"2+4O"R,L+4"

S3NT"

BGD4I+="GU"VD>.=""

$  C+W+@GN+4"XB,@+="<3=-Y"BH,4HDN"Z>W+=HO+>H"

$  C+W+@GN+4"F,=A"X=-3>"3>"HA+"E,O+Y"[#%\"

$  ],>-"FG>=H4DI?G>"2+4O"QG,>"

$  24+,=D4^"94,>H"

$  BH,H+"5"QGI,@"<+_,H+="G4"94,>H="

$  Z>W+=HG4"F,N3H,@"

$  ],>-"QG,>"

$  V+."Z2F"R3U">GH"D=3>E"24+,=D4^"94,>HT"

$  BH,H+"Z2F"

$  PKF<B"C+N4+I3,?G>"R6%\"_G>D=",II+@+4,?G>T"

$  ],>-"QG,>"

$  C+N4+I3,?G>"

$  *]Z="

$  B<:F="

$  *G`+4"B,@+="

$  ],>-"QG,>"HG"+>."GU"P3."2+4O"

$  C+W+@GN+4"_D^GDH"I,=A"HG"_D^GDH",H"HA+"S3N"


PPA vs. Lease

Electric Bill

Typical Lease

Typical PPA


Dealing with PPA Developers !  Greed has set in:

" Not really a “partner” with installers " Not trying to save customers money " Working each as hard as possible

!  Shop around - help your customer find the best deal " Good service gets you the repeats and

installation work


Lease vs. PPA PPA Leasing

Ease for Customer Almost No Effort Operation, Maintenance, Return

Inspection Operating

Risk PPA Vendor End User

Long Term Costs

May Be Higher, to Compensate for Risks

May Be Lower, Except Upon Return of Equipment

Costs on Termination Usually None Removal of Equipment, Functional

Verification, Return Shipment Opportunity

Costs None None

REC Benefits Stays w/ PPA Vendor End User

Cash Flow Savings

Cash Neutral or Positive Whole Term

Often Negative Up-Front, Positive Over Term

Include E. Efficiency More Difficult Yes


Cash Buyer vs. Lease vs. PPA !  Profit / Reward - shared among the parties

"  Lessee: more risk, may get more of profit than with PPA unless the PPA willing to take more risk than the bank for the same returns

"  Cash buyer: all risk, gets all profit # Uses up working capital - opportunity cost

!  Energy Efficiency "  Cash buyers & Leases can enjoy add’l savings "  Typically not part of PPA deals (directly)

# Hard to sell “negawatt-hours” # May be able to sell kWh for higher value w/ EE


Cash Flows at Various Phases

!"#$%& !'%()#*%&+,'-./&

01.$2',341.&5,$2&67%'&01.$2',341.&

89%'#41.&)"1'2&:%';&

89%'#41.&<-=&>&?1./&:%';&@#7%'&

A-9B&

)1,'3%$&1C&D,.=$&&

!  +%E%*19%'&F)#*%$&G-$HI&)2#'2,9&J.E%$2;%.2&

!  +%E%*19%'&0#$"&F$H-.&-.&2"%&/#;%I&KLMN&

!  O#.H&01.$2',341.&:%';&?1#.&

!  :'%#$,'P&Q'#.2&

!  )2#2%&>&?13#*&G%R#2%$&1'&Q'#.2$&

!  J.E%$21'&0#9-2#*&

!  O#.H&?1#.&

!  D%=&J:0&@-C&.12&,$-./&:'%#$,'P&Q'#.2B&

!  )2#2%&J:0&

!  <60G)&+%9'%3-#41.&@SMN&R1.,$&#33%*%'#41.B&

!  O#.H&?1#.&

!  +%9'%3-#41.&

!  !OJ$&

!  )GT0$&

!  !1U%'&)#*%$&

!  O#.H&?1#.&21&%.=&1C&<-=&:%';&

!  +%E%*19%'&R,P1,2&3#$"&21&R,P1,2&#2&2"%&A-9&


Lease vs. PPA PPA Leasing

Ease for Customer Almost No Effort Operation, Maintenance, Return

Inspection Operating

Risk PPA Vendor End User

Long Term Costs

May Be Higher, to Compensate for Risks

May Be Lower, Except Upon Return of Equipment

Costs on Termination Usually None Removal of Equipment, Functional

Verification, Return Shipment Opportunity

Costs None None

REC Benefits Stays w/ PPA Vendor End User

Cash Flow Savings

Cash Neutral or Positive Whole Term

Often Negative Up-Front, Positive Over Term

Include E. Efficiency More Difficult Yes


Which Product Is Right? Not tax restricted,

wants to own system Cash, Loan,

Finance Lease

Tax restricted, deal under ~$3,000,000

Tax/Operating Leas e

Tax restricted, deal over ~$3,000,000

Tax/Operating Lease, PPA

Government entity Tax-Exempt Lease Purchase, PPA

Non-profit PPA

Deal w/ Energy Efficiency Component Usually Not PPA


PPA Vendors / Providers Offer PPAs to 3rd Parties (may be looking for deals):

"  Sun Run Generation: Residential pseudo PPA (large initial fee) "  Renewable Ventures: 250kW+ "  Tioga Energy "  Recurrent Energy (now owed by Sharp) "  Sun Edison: 250kW+

#  Vertically integrated on many sales, installation & ownership "  Many others available & more coming

Uses PPAs on their own projects only: "  SunPower (former Powerlight): 250kW+


PPA and/or Lease Agents Gene Beck EnviroTech Financial, Inc [email protected] 714-532-2731 www.etfinancial.com

David J. Clamage Saulsbury Hill Financial [email protected] 303-629-8777 x102

Baker Davenport Davenport Finance Company [email protected] 804-323-6061

Charles Gerni National Lease Financial Services 858-546-4888

Scott F. Young Sentry Financial (801) 303-1111 [email protected]


PPA/Lease Legal Services Keith Martin Chadbourne & Parke, LLP (202) 974-5674 [email protected] Wrote SEIA Fed Tax Manual. Please call only to hire, not just

questions

Edwin F. Feo Milbank 213-892-4417, [email protected] Teaches at Solar Power

International and other conferences

Stoel Rives LLP [email protected] (800) 88-STOEL

Jigar Shah [email protected] (202) 250 3651 Founded SunEdison. Now consults

on “more unconventional” PPA/finance deals


Agenda




Residential 3rd Party Financing with PPAs & Leases


Sun Run Generation Residential Pseudo PPA

!  Residential Pseudo PPA "  Deposit or “installation fee” reduces per kWh price "  Per kWh savings w/ performance guarantee

!  20 yr term & unknowable? buyout charge at end !  Very small deal size needs low “due diligence cost”

"  FICO score / credit check & large deposit # No risk if Deposit >25% of gross cost

"  Risk spread over many customers "  Much higher relative savings on Residential Tiered

TOU rates compared to commercial rates/PPAs "  Issues: Rate escalators & ITC Basis


SolarCity “SolarLease” Residential Pseudo Lease

!  Residential Pseudo Lease "  $0-$2.25/Watt down "  $0 to escalating monthly payment w/ perf. guarantee

!  Otherwise could be ~ same as SunRun: "  15 yr term & unknowable buyout charge at end "  Very small deal size needs low “due diligence cost”

# FICO score / credit check # Risks spread over many customers # Much higher relative savings on Residential Tiered

TOU rates compared to commercial rates/leases !  Issues: Rate escalators & ITC Basis


Unknowable Buyout Charges !  IRS rules around Fair Market Value

discussed earlier prevent stating the buyout value – what could it be?

!  No obligation to purchase !  Minimum - $0 !  Maximum – less than the future new system

after-incentives net cost !  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 - 130

Tools To Analyze Deals

!  CEI - Competitive Energy Insight " Complements OnGrid " More detailed, sophisticated, expensive " Helps you (or your finance partner) take

the deal to the next step !  OnGrid


The Economics of Stakeholders are Linked

Project Developer/

Owner/ Operator

Tax Monetization

Tax Credits

Accelerated Depreciation

Bank / Lessor

Construction Loans

Project Finance

O&M Competing Equipment Suppliers

Suppliers Tariffs Electric Utility

Gas Supplier


CEI’s EconExpert Software Suite !  Universal Financial Pro Forma

" For PV, Wind, CSP, Fuel Cells, CHP & other !  Economics and Tax Benefit Monetization !  Early Screening to Financial Closing !  From the Viewpoint of Every Stakeholder !  Before and After-Tax Discount Cash Flow !  Book and Cash / Levered and Unlevered * CEI is not a licensed legal, brokerage or accounting firm. You are recommend

to also consult licensed advisors


Competitive Energy Insight, Inc.

TM !  Specializing in: " Energy Project Ownership and Asset

Management " Financing " Business and Contract Development

Steve Provol, President www.CEInsight.com

(858) 566 0221 [email protected]


The OnGrid Tool !  Sales Tool

" Quickly Identify & Screen Leads " Organizes Client Info

!  Design Tool " Size Systems Optimally

!  Proves the Payback !  Automatically Creates Quotes & Proposals !  Prepares Documents & Paperwork


OnGrid Calculates Cost & Performance

!  Costs, Adders, all Incentives, Net Cost

!  System Performance including Shading Data Upload:

!  TOU kWh Performance !  Electric Bill $ savings !  Performs Financial Analyses:

"  Simple & Lifecycle Payback "  Rate of Return analysis "  Cash Flow when financing "  Increase in Appraisal Valuation

!  Provides spreadsheet proof

Annual Savings Before and After Payback

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

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 25Year

Ann

ual S

avin

gs

Annual Savings Before PaybackPayback Year (Occurs at 9.7 Years)Annual Savings After Payback

$-

$50,000

$100,000

$150,000

$200,000

$250,000

1 3 5 7 9 11 13 15 17 19 21 23 25Years

Resa

le V

alue

Effective Resale Value (lesser of 20x annual or remaining 25yr savings)20 times Annual SavingsRemaining savings within 25 years

© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 136 © 2009 OnGrid Solar, All Rights Reserved. Economics of Solar PV - 18

Rates & Incentives !  Commercial, Residential, Agricultural !  West: CA, AZ, CO, HI !  East: PA, NJ, NY, DE, CT, MA, OH !  Southeast: NC, FL, GA !  Coming soon: TX, OR, NV, MI, WA,

MN, IL


Scenario Options !  User Customizable to Any Situation:

"  Commercial, Residential, Government & Non-Profit

"  Any size system: 0-1000MW "  Any Rate Structure "  Any Incentive: FIT, Rebate, PBI, REC, Tax

Credits & Depreciation "  Any Insolation Location

!  Excel-based: Fast, Portable, non-web !  Free Trial Available - License Agreement

Class Special – 15-Day Bonus Use © 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 138

Agenda


Unsecured Loans & Home Equity !  PACE & State/Utility Loan Programs !  Lease Basics & Commercial Leases !  PPA Basics & Commercial PPAs !  Residential Leases & PPAs !  Conclusion


Conclusion - Review !  Looked at the Basic Financing Principals

" Importance of Credit Quality " Must be a fundamentally good deal " Tradeoff of Risk vs. Reward

! Then Residential Conventional Financing " Unsecured Loans " Home Equity & Smart Financing

! PACE & State/Utility Loan Programs © 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 140

Conclusion - Review

!  Looked at " Lease Basics & Commercial Leases " PPA Basics & Commercial PPAs " Residential Leases & PPAs

!  Discussed the importance of getting the finance partner involved early to help you


Learn More

Resources available at www.ongrid.net !  Articles & papers on solar “Payback” !  Upcoming classes & events

" Sales & Marketing for Solar (8 hour) " Economics of Solar (8 hour)

!  Slides from past classes !  Free demos of the OnGrid Tool


Goal: Benefit You! Help you sell more: !  Understand the topic better !  Be more confident in front of the customer !  Know which questions to ask, so you know

which customers to target, and avoid time-wasters

!  Make the best case to each customer, avoid mistakes, don’t present marginal info and weak analyses

Gain more trust and confidence of your boss …so please go out and close loads more business!


Thanks !  Solar Power International ‘10 !  Solar Electric Power Association

" Stuart Raper & Julia Hamm !  Yennie Solheim !  Contact me with any questions or concerns !  Please turn in your feedback forms

" What you did/didn’t you like/want changed? !  Thank you for coming!


Andy Black The OnGrid Tool

Solar Financial Analysis & Sales Software

(408) 428-0808x1 [email protected]

www.ongrid.net - Tools, Classes, Articles & Papers

Economics of Solar Electric Systems !2009, Andy Black. All rights reserved.

July 2009 - 1 of 19

Solar electric systems can be a good financial

investment for homeowners and businesses,

depending on a variety of factors including system

performance, electric rates, favorable utility rate

structures, and incentives. Several US states have the

right combination of conditions to strongly encourage

end-consumer investment in solar electric systems

based on economics alone.

In places where solar is economically attractive, rates of return

from 9% to 15% or better are common. If financed, the monthly

net loan cost is usually less than the monthly utility bill savings.

And if the home is sold, the solar system should increase the

resale value by more than the system cost to install.

The above claims are big, so rigorous treatment and critical

analyses from several angles including Compound Annual Rate

of Return, Cash Flow, Lifecycle Payback, and Appraisable

Resale Value need to be considered to do a fair assessment.

Using the above analysis methods helps compare the solar

investment to other investments on an even basis.

IN THIS ARTICLE: ! What factors need to be considered to determine the

economic payoff of solar, including rates, rate structures,

systems performance, solar RECs, and incentives

! How to test the economic value in the ways listed above

This article also includes “Policy Discussion” paragraphs to

help individuals and policy makers in locations without strong

economics understand the issues around creating solar-friendly

policies, which motivate and leverage individual investment.

WHY DOES SOLAR PAY OFF NOW? Good system performance, high electric rates, Net Metering

and Time-Of-Use rate structures, Solar Renewable Energy

Certificates (SRECs) and government incentives have

contributed to the financial viability of solar electricity. How

these factors come together varies significantly by location.

Some locations have the combination of factors that yield

excellent results; in others, it makes no economic sense to go

solar, especially when including the maintenance and inverter

replacement costs.

The key element for most analyses is the ongoing value

generated by the solar system (the savings on the electric utility

bill or the monetary value of system output that can be sold). A

properly sited, sized, designed, and installed solar system can

usually eliminate most or all of a customer’s total annual

electric bill.

The next pages will discuss system performance, electric rate

structures, and incentives. The pages following will detail how

the economics can then be analyzed using Rate of Return,

Payback and Lifecycle Payback, Property Value Increase, and

Cash Flow when Financing.

SYSTEM PERFORMANCE: Lots of Sunlight is just one of the many factors that must be

included in a system performance calculation. Across much of

the United States, the amount of available sunlight is

surprisingly uniform, with most areas within ± 20% of the

sunlight level of Miami, Florida, as can be seen in Fig. 1. The

National Renewable Energy Laboratory (NREL) has data on

239 locations across the U.S. and its territories available at:

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.html

!"#$#%&"'(#)(*#+,-(!+."/-&"(*0'/.%'()#-(1#$'2%.-'3(

4,05,"6(,$7(#/8.-(9&$,$"&,+(:.'/'(By Andy Black


July 2009 - 2 of 19

system: http://www.nrel.gov/rredc/pvwatts/.

There are numerous loss factors that affect real system

performance including component performance, wire losses,

soiling, module degradation, module mismatch, system uptime

and reliability, manufacturer production tolerance, and system

design factors such as tilt, orientation, shading, and air flow. The California Energy Commission has produced “A Guide To

Photovoltaic (PV) System Design And Installation” available at:

http://www.energy.ca.gov/reports/2001-09-04_500-01-020.PDF

and is an excellent overview of system design considerations.

Fig. 2 lists performance loss factors, and the significance of

potential relative losses from tilt, orientation, and shading.

Inverters aren’t 100% efficient, with most achieving 94-96%

efficiency. Similarly, PV modules in operation put out

approximately 7-14% less power at realistic operating

temperatures compared to the Standard Test Conditions (STC)

commonly measured in factory or laboratory settings. The State

of California provides lists of module and inverter ratings at: http://www.gosolarcalifornia.org/equipment.

Soiling, module degradation, and module mismatch also must

be accounted for. The designer and installer have some control

over wire losses, but by code, must not exceed 5%.

Manufacturer production tolerance losses result from some

modules having a performance specification of +X%, -Y%. If

there is a negative tolerance, the customer can be sure she will

be on the losing end of that bargain to at least some extent.

The system designer in coordination with the property owner

has control over how the modules are mounted, especially how

far off the roof, affecting how much airflow occurs. Thermal stagnation starts to occur with less than 6” clear airflow space

behind the modules and can reduce performance up to 10% at

0” air gap.

The designer and property owner also have control of solar

system orientation (tilt angle or ‘altitude’ above horizontal and

direction or azimuth), and usually some control over shading.

Shading and/or orientation are usually the #1

underestimated system performance loss factors except in

locations where incentive programs specifically (directly or

indirectly) include these in the calculation of the incentive to be

paid. It is critical that the site analyst / installer use a shade

analysis tool to accurately determine shade. Quality shade tools include the Solar Pathfinder (http://www.solarpathfinder.com/),

Solmetric SunEye (http://www.solmetric.com/), and the Wiley

ASSET (http://www.we-llc.com/ASSET.html). It is impossible

to estimate shading by eye, and even a few percent can be

significant. Avoiding shading is often the most important

criteria, even over selecting a south-facing roof.

System availability (uptime) is dependent on system

reliability and monitoring. A well-designed system with

known reliable components (particularly the inverter) is

important. Placing inverters in shaded, well-ventilated locations

that won’t accumulate ventilation-inhibiting debris will eliminate many common overheating-related problems (reduced

power output due to thermal protection or shortened component

lifetime). Placing the inverter close to the utility connection

point will eliminate many common utility interconnection

related problems (long wires can have a kind of ‘voltage

buildup’ in the wiring causing the inverter to think the utility is

not safe to connect with, requiring it to shut down for at least 5

minutes). The only way to know if a system is operating

reliably is to monitor it as often as possible. Monthly

observations via the electric bill savings are a crude minimum but can take 45 days or longer to make even a simple problem

(sometimes only requiring a simple reset of the inverter) visible,

resulting in over 12% of a year’s energy to be lost. Active

continuous real-time monitoring and automated alerting

solutions are available that should more than pay for themselves

in increased savings, peace of mind, and owner satisfaction.

System Performance Factors Policy Discussion: Including

predicted or actual system performance in determining the level

of incentive to be paid (then actually verifying compliance with

the approved design) is an excellent way for incentive agencies

to improve system quality. Before California adopted the

requirements of the new California Solar Initiative (CSI)

program, a significant fraction of sold and installed systems

had major shading or other site-selection design problems,

often only disclosed to the customer with a hand-wave of

“you’ll lose a little performance due to shading…” The CSI has

received a lot of criticism because of the increased level of

paperwork, scrutiny and repercussions for “failures” from

those who would rather do things the old, easy, loosey-goosey

way, but in the author’s opinion, the new level of accountability

is the best thing that could have happened to raise the quality of

installations in the state. This higher level of quality is nothing

new to those in some other states such as Colorado and in some

municipal utilities like SMUD. Going forward, the author has

grave concerns about the quality of systems that will be

installed as a result of the expansion of the federal Investment

Tax Credit, which has no performance or quality safeguards.

Typical Loss and Performance Factors:

Loss Factor

Performance Factor

Variable

9-12% 88-91% Module Temperature

3-11% 89-97% Inverter Efficiency

1.5-5% 95-98.5% Wiring (AC & DC combined)

5-15% 85-95% Dust & Dirt

5-10% 90-95% Module Degradation over 20 years

1.5-2.5% 97.5-98.5% Module Mismatch

0-5% 95-100% Manufacturer Production Tolerance

~27-33% ~67-73% Typical Totals for the Best Systems

Additional Design-Dependent Factors:

0-10% 90-100% Air Flow

0-40% 60-100% Orientation & Tilt

0-100% 0-100% Shading

2-100% 0-98% System Availability (uptime)

Fig. 2. Summary of Performance and Loss Factors


July 2009 - 3 of 19

State

2008 Rate

¢/kWh

2004-2008

CAGR

2001-2008

CAGR

1990-2008

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%

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%

OR 8.5 4.4% 4.4% 3.3%

PA 11.4 4.4% 2.4% 1.2%

TX 12.8 7.2% 5.4% 3.3%

WA 7.6 4.4% 4.2% 3.1%

ELECTRIC RATE STRUCTURES:

High Electricity Rates are an expensive fact of life in a

number of US states and can be worse still in other countries.

Hawaii has the highest electric rates in the U.S. topping out at

32¢/kWh for the average residential consumer (certain islands

are higher), however, rates are also very high in Connecticut,

California, New York and other states (Fig. 3).

Rates have risen fast across the land since 2001 and especially

fast since 2004 (Fig. 3). Electric rate increases will likely be

tempered by the Great Recession of 2009. Future rate hikes can only be guessed at, as they depend on many factors.

In comparison, the Consumer Price index (CPI-U) has been

increasing at 3.1% on average since 1982. One might ask, how

is it that electric rates have continuously increased faster than

the CPI – wouldn’t electricity become a bigger and bigger

portion of our consumer

expenses, until eventually

something brought it into

check? The answer lies in

the fact that we are

continuously getting more efficient with how we use

electricity, so we are able

to produce more economic

value per unit of electricity.

We are therefore able to

spend more per kWh.

One of the ways consumers

can be motivated to be more

efficient with how she uses electricity is to charge more for it,

but there are limits to how this can be applied

without disadvantaging lower income

consumers. Many utilities have adopted a

tiered pricing structure, as can been see in Fig.

5, where the first part of a consumers

consumption is charged at a lower rate, but

if the consumer uses more than a

“baseline” allocation (an amount deemed

to be required to cover a consumer’s “basic needs”) she will pay more for

the next part of her usage. The

more she uses, the more each

kWh costs. The more tiers there

are in the system, the more the

rates

Fig. 3. The graphic above shows the 2007 U.S. average electric rates for all sectors. The table at right shows 2008 average residential electric rates for selected states and their Compound Annual Growth Rates (CAGR) for three time periods before 2008. Source: U.S. Energy Information Administration: http://www.eia.doe.gov/fuelelectric.html

Fig. 4. Residential electric rates in California from 1970 to 2001 increased at a 6.7% compound annual rate (source: CPUC “Electric Rate Compendium” Nov. 2001 from EIA data). Since 2001, there has been no change in Tiers 1 & 2, but an exaggerated increase in Tiers 3-5. Enactment of AB413 and expiration of AB1X may alter these trends. Note: this graphic is to scale.


Average Retail Price (Cents per kWh)


July 2009 - 4 of 19

can be fine-tuned, but also, the more complicated billing

becomes. Fig. 5 illustrates a “progressive” pricing model for

rates (similar to progressive tax structures), which attempts to

discourage large use while protecting smaller using consumers. The progressive model encourages conservation, efficiency, and

conveniently for the solar industry, solar installations as well.

The graphic in the right half of Fig. 5 shows how a solar system

makes a user look like a smaller consumer (the green area is

solar generation, the red area is the remaining net usage), and

offsets the most expensive electricity first, yielding the greatest

savings first, boosting the economics of solar. This particular

case is saving 44¢/kWh for the first set of production, 38¢/kWh

for the next set, and so on. Not all utilities use the above

“progressive” pricing model. Some utilities offer discounts for

buying in bulk – the larger the use, the less expensive the cost of

the next kWh. This may be rational in some utility cost models, but it doesn’t encourage conservation, energy efficiency or solar

installation.

Fig. 4 shows the California rate history since 1970. From 1970

to 2001, rates increased at a compound annual average rate of

6.7%, as can be seen in the lower left portion of the graphic.

Things got considerably more complicated in 2001 because of

the California Power Crisis in conjunction with the deregulation

process that affected rates starting in 1996.

During the power crisis California’s AB1X legislation froze

the rates for residential users using at or below the average

usage for their local climate zone (which equals usage at or below the top of Tier 2), but at the same time, created Tiers 3, 4

and 5 at much higher rates (17-26¢/kWh). The users using well

above average found their bills almost doubled upon

implementation of the change. It had the desired effect: high

using residential consumers quickly became motivated to

reduce their usage by conservation, efficiency, and some turned

to solar systems, dramatically increasing the solar market.

Rate escalation in California got more complicated thereafter

as well. Because state law AB1X prohibits changes to the rates

for Tier 1 and Tier 2, all the increase must be borne in Tiers 3, 4

and 5. If revenue needs to increase by 10%, Tier 3, 4 & 5 rates

must increase approximately 50%. That happened on January 1st, 2006 to PG&E residential customers, as seen in Fig. 4.

Rates in Tier 3, 4 & 5 have gone up and down dramatically

since 2001, with a recent average rate of increase that has been

very high (double digit). This high average will not continue

forever because of the eventual expiration of California AB1X (the date of this is unknown for a variety of complicated

reasons, but may be soon, depending on what happens with

AB413). When this happens, it is anyone’s guess how the

politics will fall, but one of three possibilities is likely: 1. Rates

in all tiers will move in lock step at a more normal rate of

escalation, 2. Rates in Tier 3-5 will be frozen while Tier 1 & 2

catch up, or 3. Rates in Tier 3-5 will be reduced and rates in

Tier 1 & 2 will move up to compensate.

A conservative approach to electricity escalation suggests a

5% annual escalation – anything more than that might be

viewed as “optimistic” which may cause customers to become

concerned. The scenario examples depicted later will assume 5% except as noted. The goal of this article is to provide a

conservative set of assumptions and a “bullet-proof” analysis

methodology, that if followed, will be acceptable to the broad

majority of serious potential customers, and provide them and

their financial advisors a solid basis for making an informed

decision.

Tiered Rate Policy Discussion: Progressive Tiered Rates are

excellent motivators of conservation and energy efficiency (and

conveniently, solar), but they may also be the government and

utility officials ‘public relations friend’ as well. By creating

multiple tiers, policy makers can shift some of the burden of

future rate increases to the larger (above average), more

wasteful users (residential only) and thereby lighten the burden

on the users who are at or below average consumption. This

works well for residential usage, because it is easy to quantify

the average consumption per typical household, however

average consumption per business would be meaningless in this

context, since most communities want their local business to

grow (efficiently) from year to year, so penalizing ever growing

usage would be counterproductive.

High electric rates are among the most important factors

determining who will have the best economics with solar,

however, high rates are only valuable if the customer can also enjoy Net Metering, a regulatory structure set up for solar

$269/mo

$43/mo bill at top of Tier 1

$59/mo

$127/mo

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).


July 2009 - 5 of 19

electricity producers (and sometimes certain other renewable

producers depending on the state) in 42 of the 50 U.S. states.

Under Net Metering, full retail value is credited when excess

electricity is produced and “sold” back to the utility, offsetting the customer’s electric bill (Fig. 6). There are a variety of Net

Metering forms, the implementation of which vary by state and

utility. An older form is “Monthly Net Metering,” whereby a

solar producer can eliminate her monthly electric bill, and any

excess production would typically be paid to the producer at the

utility’s “avoided cost” or “fuel cost” per kWh (approximately

1-3¢/kWh). The problem is that solar production varies

substantially by season, so it is hard to design a system that

balances a user’s needs in each of the 12 months without under-

producing in one season (usually winter) and over-producing in

the other. Under-production results in large bills charged at high

retail costs of electricity. Over-production creates small credits based on the “avoided cost” value of the excess energy.

The solution is the newer “Annual Net Metering,” which

allows summer excess production to offset winter shortfalls,

with the goal of allowing the customer (or her knowledgeable

and experienced designer/installer) to right-size the system to

fully offset the annual electric bill, but not over-size it. With

annual Net Metering, the utility ends up looking like a 100%

efficient battery that can store energy for up to a year at no loss

or penalty. The other half of this compromise is that any excess

production credit after the 12th month is given to the utility,

discouraging over-sizing of systems and simplifying the utility’s accounting and saving them the processing costs of sending a

check or carrying a credit.

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

(TOU) or Time of Day (TOD) rates, where the cost of

electricity depends on the time of day and sometimes on the

season of year. The TOU time periods and rates are usually

labeled something like “Peak”, “Part-Peak” and “Off-Peak” and

often have a “Summer” and a “Winter” season.

The upper graphic in Fig. 7 shows the TOU pricing periods for the PG&E E6 rate in California illustrating peak, part-peak,

and off-peak time periods. Notice that there are also part-peak

rates on weekends. The lower graphic shows the typical

(approximate) time periods of many Eastern U.S. utilities, such

as in New Jersey, New York, and Pennsylvania.

High rates during peak periods encourage consumers to use

less or to change behavior and instead, consume the electricity

during off-peak periods. Easy ways to shift usage are changing

what time of day laundry is done or when the pool filter pumps

run at home. Small business sometimes have choice over

whether to take service under a TOU rate schedule, and if so,

they may be able to save money by shifting how or when they do things, such as change to 2 or 3 shifts of work hours, or

change when they make ice or pump water or do other energy

intensive activities. Large businesses and many agricultural

(pumping and refrigeration) operations have no choice and must

take TOU service, so are always encouraged in a financial way.

TOU rate differentials between Peak and Off-Peak can range

from just a cent or two, to up to 20¢/kWh or more, depending

on the utility’s need to motivate change. In PG&E territory in

California, a further twist is that the tiered rate structure is

applied on top of the TOU rates (residential only), so off-peak

Tier 1 rates are as low as 9-10¢/kWh depending on season, but the summer peak Tier 5 rate can be over 61¢/kWh. That sounds

expensive, and it is, and one might question the wisdom of even

considering switching to a TOU rate schedule, but there is a

convenient opportunity that solar customers can apply in their

favor.

Fig. 6. Net Metering allows the exchange of electricity produced or purchased to be valued at retail rates allowing the grid to act like a 100% efficient battery for the consumer to “store” her excess production during the day or over a season until she needs it at night or during another season.


July 2009 - 6 of 19

Combining Net Metering with TOU allows a solar customer

to take advantage of the benefits of Net Metering on a TOU rate

schedule and, if timing and consumption patterns allow, “sell”

energy to the utility during peak periods at the high rate, then

buy energy during off-peak hours. The customer gets credited or

charged for the value of the electricity when it is bought or sold

(at its prevailing retail rate at that time). The utility then looks

like a >100% efficient battery because in many cases, most

solar electricity is produced during peak hours, and most is

consumed in a residence during part-peak and off-peak hours.

The customer gets more value for the same kWh produced, and therefore needs a smaller solar system to offset her electric bill.

The greater the differential in peak to off-peak rates, and the

better the solar production matches peak hours, and the better

the homes consumption matches off-peak hours, the greater the

benefit of opting for the TOU rate schedule upon adding the

solar system.

This approach often (but not always) works well in utility

areas that have large daytime summer peak loads (often due to

air conditioning load), such as in the Eastern, Southern, and

Southwestern U.S., because this usually matches solar

production well. However, some northern utilities are winter

night peaking because their peak load is caused by electric heating loads of homes. In these cases, solar is a poor match.

TOU Net Metering works best if the customer can mount her

solar array in a way that maximizes production during the peak

period, for example facing southwest or south at an angle near

25 degrees up from horizontal (equal to a 6:12 roof). Slopes

from 5 to 40 degrees and southeast and west arrays generally

also work quite well. Note: it is usually not economically

feasible to tilt a solar array away from parallel with the roof’s

surface to optimize performance, because the gain in production

(bill savings) is often not worth the additional mounting

hardware and labor cost or the aesthetic penalty.

TOU Policy Discussion: Time-of-Use rates are a powerful

tool to motivate customers to voluntarily use less power during

predictable times of shortage. The greater the differential

between peak and off-peak, the more motivated the user will be

(solar or not) to conserve during peak pricing periods. Effective

TOU rate implementations help flatten out the utility’s load

profile, requiring fewer “peaker” power plants which operate

at very high cost per kWh delivered (once capital costs/debt

service are included), because such plants run only a few hours

per year. In the right locations, solar can provide some of this

“peaker” benefit. Solar advocates can use this to encourage

their Public Utility Commissions and Legislatures to adopt pro-

TOU policies.

Rate Structure vs. (Cash) Incentives Policy Discussion:

Economically viable solar systems are incentivized thru both

cash or cash equivalent (tax saving) payments and electric rate-

based (or regulatory) savings. Solar-friendly rate structures are

incentives because they provide a higher value benefit to solar

customers compared to the “commodity” value of the electricity

producers could otherwise sell into the power pool at

commodity rates (as QFs or Qualifying Facilities). Using cash

incentives to encourage solar is easy to understand, but it is

also highly visible, and there are several drawbacks compared

with solar-friendly rate structure incentives. Cash and cash

equivalent incentives can and do come and go depending on the

political winds. Even long-term incentive programs, such as

German EEG law or the California Solar Initiative could be

overturned or modified with a change in government or its

attitude. Spain is learning this the hard way after the summer

and fall of 2008. The U.S. solar market became painfully aware

of its dependence on the extension of the 30% Federal

Investment Tax Credit which was due to expire at the end of

2008 but was passed at the last moment as part of the

Emergency Economic Stabilization Act of 2008. Regulatory

incentives are much more difficult to achieve, however, once

won, they are also much more difficult to lose. Any state with

Net Metering, TOU, or Tiered rates is likely to have them for a

long time and it will be a huge battle to take them away.

Fig. 7. Time-of-Use rate structures showing typical peak, part-peak and off-peak time periods for Western and Eastern U.S. utilities.

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

Eastern U.S. Typical Residential 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

Residential PG&E "E6" Time-of-Use Pricing Periods


July 2009 - 7 of 19

INCENTIVES: There are several ways the government (in its various forms)

can provide incentives for solar. Already discussed were the

regulatory forms of incentive via favorable rate structures. Here,

we discuss the various “Cash” or “Cash Equivalent” incentives,

which include: ! Tax Credits and the U.S. Treasury Grant

! Accelerated Depreciation

! Sec. 179 Tax Deduction interaction with the ITC & Grant

! Cash Rebates and Buy-downs

! Performance Based Incentives (PBIs)

! Feed-In Tariffs

! Tax abatements (waivers of sales and/or property taxes)

! SRECs (Green Tags) mandated by state law

The Database for State Incentives for Renewable Energy (The

DSIRE database, http://www.dsireusa.org/solar/) is a database

of all state and federal incentive programs around the country

for all types of renewable energy and also energy efficiency, and provides specific details and links state by state and at the

federal level.

The Solar Energy Industries Association (SEIA) has put

together an excellent and well researched “Guide to Federal Tax

Incentives for Solar Energy”, available free to members as a

membership benefit. Learn more at: http://www.seia.org/.

Tax Benefits such as Tax Credits and Depreciation may be

available to certain taxpayers who install solar energy

equipment. The information in this article regarding taxes, tax

credits and depreciation is meant to make the reader aware of

these benefits, risks and potential expenses, and help avoid overblown claims by aggressive salespeople. It is not tax

advice, and the author is not a qualified tax professional.

Please seek professional advice from a qualified tax advisor

to check the applicability and eligibility of incentives for a

particular situation.

Tax Credits come in several forms: Federal, State and Local.

Thru the end of 2008, the Federal Investment Tax Credit

(ITC) for Residential (individual tax filers) was 30% of system

cost basis, capped at $2,000 for systems installed before the end

of 2008. From 2009 thru 2016 it is a full 30% (without cap).

The residential ITC can be found in Sec. 25D of the Internal

Revenue Code (IRC) and can be claimed using IRS form 5695.

The residential ITC will expire at the end of 2016 if not

extended. Federal taxability of state, local, or utility rebates

affect the ITC system cost basis significantly, so please see the

“No Double Benefit” section of this article (below) that

discusses Sec. 136(b) of the IRC.

The Federal Investment Tax Credit (ITC) for Business

owned systems (IRS Schedule C business tax filers) is 30% of

net system cost with no cap for systems that are “placed in

service” by the end of 2016 (IRC Sec. 48). After 2016, if not

extended, the tax credit will revert to the previous permanent

level of 10%. The IRS current federal form is 3468 available at http://www.irs.gov/formspubs/.

“Placed in service” as defined by the SEIA “Guide to Federal

Tax Incentives for Solar Energy” occurs when all of the

following have occurred:

! Equipment delivered and construction / installation

completed. Minor tasks like painting need not be finished

! Taxpayer has taken legal title and control

! Pre-operational tests demonstrate the equipment functions

as intended

! Taxpayer has licenses, permits, and PTO (permission to operate)

Both the residential (Sec. 25D) and commercial (Sec. 48) ITC

are one-time credits received when filing taxes for the year the

system was placed in service. If not completely useable in the

system installation tax year, in theory, the residential ITC can be

carried forward indefinitely but may run into the practical

difficulty that the 5695 tax form may no longer exist after the

2016 tax year unless the IRS makes it available. SEIA is

working to address this with the IRS. The ITC can be carried

forward only by necessity, and must be claimed as soon as

possible (i.e. can’t be carried forward simply for convenience).

The business credit can be carried forward 20 years and may be able to be carried back for certain businesses under the Net

Operating Loss rules.

As part of the American Recovery and Reinvestment Act of

2009 (ARRA), in order to stimulate the economy, and in

particular, the solar industry, commercial solar systems (Sec. 48

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

appetite, into a U.S. Treasury Grant that can be received as

early as 60 days after project completion or application

(whichever is later). Only projects placed in service in 2009 or

2010, or projects started in 2009 or 2010 and placed in service before the end of 2016 are eligible for Grant treatment. This

solves the lost “time value of money” due to lengthy carry-

forwards for taxpayers with limited ability to use the ITC.

Most of the rules and eligibility for the Grant are the same as

for the ITC, except as noted above. More information is

available at: http://www.treasury.gov/recovery/ and

http://www.treasury.gov/recovery/1603.shtml.

Although the ITC is received effectively “up-front” when the

system is installed (or at the end of that tax year), it is actually

earned over 5 years in equal 20% increments. If the property

becomes ineligible for the ITC (is disposed of or sold by the

taxpayer, taken out of service, or taken outside of the U.S.), IRC Sec. 50(a)(1) stipulates that the taxpayer must repay the

unearned portion via the recapture mechanism. For example, if

the taxpayer sells the system after 2.8 years of ownership, she

has only earned 2 of 5 years (40%) of the ITC, and must repay

60%.

The U.S. Treasury Grant has the same recapture mechanism,

but is slightly more relaxed. If the property is sold to another

eligible party, the original party receiving the grant is not

subject to recapture as long as the receiving party maintains the

property’s Grant eligibility for the remainder of the 5 years. If

they don’t, the original party will suffer the recapture event.

In 2008, home-based businesses (if >20% business allocation

of the home) typically qualified for the ITC as well. Because the

credit applies on both individual (residential) and business tax

returns, but was capped on residential, it needed to be properly


July 2009 - 8 of 19

apportioned on each part of the tax return to ensure the right

credit amount is claimed. Home-based businesses are typically

apportioned based on percentage of square footage attributed

exclusively to the business. To figure the credit, one typically

applies the percentages to the two separate calculations then

sums the results. From 2009 to 2016 with the uncapped ITC, this distinction is probably no longer relevant.

Beginning in 2009 taxpayers (individuals and businesses) will

be able to claim the federal ITC even if they are subject to the

Alternative Minimum Tax (AMT). Systems placed in service

before the end of 2008 can suffer AMT limitation because the

solar ITC (and Accelerated Depreciation discussed in the next

section) are ‘Tax Preference Items’ that can cause AMT and

limit the enjoyment of the ITC benefit, even if the taxpayer

wasn’t subject to AMT before getting the solar system. Even

with the ITC “AMT relief” starting in 2009, the Accelerated

Depreciation may still cause an AMT situation for businesses.

There is an open question in the solar industry about the application of the ITC to “property used for lodging”. Sec.

50(b)(2) indicates that the Federal ITC is not available for

“property used for lodging”. This sentence has created a fair bit

of concern for the solar industry, because it appears to exclude

hotels/motels and rental property. However, Sec. 50(b)(2)(D)

seems to exempt “Any energy property” (which solar is as

defined in Sec. 48(a)(3)(A)(i) “equipment which uses solar

energy to generate electricity”) from this exclusion. The author

has not received a definitive answer from a qualified tax

professional or the IRS as to whether hotels and rentals are

eligible. Thanks to Chad Blanchard and Michael Masek for helping research this.

Please seek qualified tax advice before accepting anyone’s

claims of applicability of these or other tax benefits to a

particular situation.

State Income Tax Credits are available in several states,

such as Oregon, Hawaii, New Mexico, and New York, and can

be quite generous. However, potential recipients should be

aware that if they itemize their federal tax deductions, a state tax

credit isn’t worth its full face value. When itemizing, state taxes

are usually deductible off federal taxable income. Reducing

state taxes by the state tax credit means that federal taxable net

income will go up. In effect, federal income tax will be paid on the value of the state tax credit. For most people, a state tax

credit is worth about 65-85% of its face value.

Depreciation and Accelerated Depreciation may be a

possibility for business owned systems. Depreciation is a

method of ‘writing-off’ expenses for long lasting (durable)

goods such as cars, computers, etc. The ‘write-off’ is generally

required to be spread over several years, depending on the type

of property. Since depreciation is a write-off, it reduces taxable

income, and thus reduces tax liability. The net federal benefit of

depreciation is the federal tax rate times the federal depreciation

basis. The federal depreciation basis amount is the federal ITC basis, minus one-half the federal ITC amount (85% of the ITC

basis in the case of the current 30% ITC). For example, a

system costing $100K (ignoring any rebate for this example)

would have a tax credit basis was $100K, and thus receive a

$30K federal ITC (30%). Its federal depreciation basis would be

$85K ($100K minus one half of the $30K ITC). If the

customer’s federal tax rate were 28%, the federal depreciation

benefit would be approximately $24K ($85K times 28%).

The state depreciation benefit is the state tax rate times the

state depreciation basis, which may be different from the federal

depreciation basis, and may be affected by any state rebates received. Unfortunately, for the same reasons that state income

tax credits aren’t really worth their face value, similarly, the

state depreciation net benefit must factor in the effective federal

taxation effect of reducing state taxes.

Federal depreciation for solar uses the MACRS 5-year

Accelerated Depreciation schedule and is calculated on IRS

form 4562. MACRS stands for Modified Accelerated Cost

Recovery System, and is a way of allowing businesses to

depreciate some property more quickly than the normal

schedule, to receive the write-off sooner (accelerate the benefit).

Though it is called “5 year MACRS” it generally uses the “half-

year convention” assuming the property is placed in service in the middle of the tax year, which allows a lesser share of the

write-off in the first year and extends the write-off into the 6th

year. Different numbers may apply if the property was placed in

service late in the tax year. Home-based business systems may

also qualify for proportional depreciation (if the business use of

the property is greater than 50%).

In 2008 and 2009 only, as part of the Economic Stimulus Act

of 2008 and the ARRA of 2009, businesses can also receive

‘50% Bonus Depreciation’ meaning that they can further

accelerate half the future depreciation amounts into the first

year (2008 or 2009) the project was placed in service (it does not mean they are getting 50% extra depreciation, just getting

half of it even sooner). The 5-Year MACRS schedules (half-

year convention) are:

State depreciation sometimes depends on the type of business.

In California, it is split between “Corporate” and “Non-

Corporate” businesses. Non-Corporate businesses use the regular federal MACRS 5-year accelerated depreciation

(without the 50% bonus). California corporate businesses use

12-year straight-line depreciation for state depreciation. Please

check the DSIRE database for the applicable depreciation for

other states.

The Sec. 179 Deduction has a negative interaction with the

federal ITC and U.S. Treasury Grant. If the taxpayer uses either

the ITC or the Grant for part or all of the property, they may not

also claim the Sec. 179 deduction for that part. The ITC or

Grant benefit, combined with MACRS depreciation are much

more valuable than the Sec. 179 Deduction. In previous

situations (typically Commercial Economics classes), the author

Year 1st 2nd 3rd 4th 5th 6th

Not 2008 or 2009

20% 32% 19.2% 11.52% 11.52% 5.76%

2008 and 2009 only

60% 16% 9.6% 5.76% 5.76% 2.88%

Fig. 8: MACRS Federal Depreciation Schedules for 2008 and 2009 and years other than 2008 or 2009.


July 2009 - 9 of 19

incorrectly suggested that Sec. 179 may also be available and

might be able to be used with caution in certain situations.

Rebates, Buy-downs, and Grants provide direct cash

incentives to purchasers or their installers. These types of

incentives are usually proportional to system size based on the

rated wattage of the system, and are often limited to a percentage of total system cost and/or a fixed total dollar

amount. The rating systems vary by program, using the CEC,

PTC, or STC rating systems. In cases where a rebate is received,

the customer can usually also enjoy savings via Net Metering on

her electric bill.

Rebate programs are usually run and/or overseen by either a

state agency or a utility, often in compliance with a state law or

voter initiative.

Rebate payments are paid and received up front, and are not

based on actual system performance. At best, they can be

adjusted to account for expected performance. Expected

performance rebates may be adjusted by the expected relative system performance compared to an optimal or ideal system,

taking into account reductions in performance due to shading,

tilt, orientation, and/or geographic location (to account for

variations in sunlight levels due to location).

Performance Based Incentives (or PBIs) provide incentive

payments based on actual delivered system performance, and so

automatically account for shading, tilt, orientation, and

geographic location, as well as the other factors mentioned in

Fig. 2. The PBI amount is usually a set value in cents per kWh

(commonly 10-40¢/kWh) paid for each kWh produced,

measured, and reported by the system for a set number of years (commonly 1, 3, 5, 10, 15, or 20 years) from the date the system

is first placed in service. Usually PBIs are received in addition

to the customer savings via Net Metering of her electric bill.

Since PBI payments are paid over time the customer must

wait for payment, and bear the risk that something will interfere

with system performance. Because of the time value of money,

and this additional risk, the total of the PBI payments must be

more than a rebate would have been in order to provide an equal

time- and risk-adjusted incentive. This increases the cash cost of

the incentive program to the incentive provider, but increases

customer attention to her system (in order to receive payment),

so per kWh delivered, PBIs may be more cost effective to the incentive providing agency and funding parties than rebate-type

incentives.

There is a major marketing benefit to PBI programs as well.

Unlike rebates, which are received one-time up-front when the

customer is already excited about her system, PBIs are received

at regular intervals (usually every 1, 3, or 6 months) providing

the customer a reminder of her solar system and a reason to

smile (or call for warranty service). A smart installer or

salesperson will time her follow-up communications to the

customer to ensure the customer got her PBI check, and also to

make sure she is remembered for referrals. This residual benefit can last for years, generating many new sales.

Taxability of Rebates and PBIs: Depending on the structure

of the program, and the type of taxpayer (residential or

commercial), rebates, PBIs, and grants may be taxable income

at either the federal or state level, or both. Contrary to what was

written in previous versions of this article, there appear to be

significant grounds for individual (residential) taxpayers in

some states to claim the rebate payment is non-taxable. Sec.

136(a) of the IRC specifies that ‘direct or indirect utility

payments (i.e. from ratepayer funds) for energy conservation measures may be excluded from taxable income, where energy

conservation measures reduce the consumption of energy in a

dwelling.’ PV systems are energy conservation measures

(source: Wiser & Bolinger, Lawrence Berkeley Lab - LBL).

Therefore it seems clear that utility direct paid rebates for PV to

homeowners are non-taxable, such as in most of California,

Colorado, New Jersey, and some other states.

Other states, such as Florida, or cities such as San Francisco,

pay rebates from general funds collected from taxpayers (not

ratepayers). In these cases, Sec. 136 would probably not apply,

and the rebate payments would probably be taxable.

Less clear are rebates that are funded from ratepayer sources, but paid by non-utility administrators, such as the California

Energy Commission or the Energy Trust of Oregon. In a private

letter ruling an IRS administrative law judge found that the

Energy Trust of Oregon rebate was indeed tax exempt, but the

reader is cautioned to note that private letter rulings are not

precedents and do not bind a different IRS administrative law

judge to the same finding, nor do they apply to any other

taxpayer than the one named in the ruling. It is not expected that

the IRS will make a public ruling, so it’s likely to remain a grey

area for now.

Some state agencies, such as the California Energy Commission have issued 1099 tax forms to rebate recipients.

Simply receiving a 1099 tax form may not require payment of

tax on the amount. Such a 1099 may be advisory and a way for

the issuer to cover itself and ensure compliance with IRS rules,

even if Sec. 136 applies. On the other hand, not receiving a

1099 doesn’t excuse the taxpayer from tax liability if due (i.e. if

Sec. 136 doesn’t apply). Please check with a qualified tax

professional when making these important decisions.

It was mistakenly suggested in previous writings of this article

that if the installer accepted the rebate on the customer’s behalf,

it might eliminate the customer’s rebate tax liability. The author

has been informed that this is not true, and that tax is due when value is received (including non-monetary value in the form of

part of a PV system), unless specifically exempted (as may be

the case if Sec. 136 applies) (source: Wiser, LBL).

Despite this, there are other reasons why it is still better for

the customer to have the installer accept the rebate as part of

payment for the project: 1. Less cash is required (by the

customer) during the project, and 2. The customer has greater

leverage over the installer should the installer do a substandard

job (if either the customer or inspector doesn’t sign off on the

job, the rebate may be withheld). This is less attractive for the

installer because it hurts her cash flow, but might provide her a sales advantage over a competitor. It doesn’t impact the

installer’s tax return because the rebate is part of the job’s

revenue whether received directly or thru the customer, and all

job revenue minus expenses is already subject to taxation.


July 2009 - 10 of 19

A sales and cash flow optimization strategy is to have the

customer pay full price and receive the incentive directly unless

she requests otherwise, optimizing installer cash flow on as

many jobs as possible, while providing the sales flexibility to

match the competition upon customer request.

Non-profits, governments and schools don’t pay income taxes, so incentives received are generally not taxable.

Business/commercial solar system rebates are likely subject to

taxation, as Sec. 136 applies only to systems installed on the

dwellings of individual taxpayers. There is no known exemption

for business taxpayers, but it turns out that, in general, a

business wouldn’t want to use it – more on this later.

No Double Benefit: Sec. 136(b) states that if the rebate is tax

exempt, then the taxpayer will need to reduce the tax credit

basis for any related ITC, and will then get less tax credit. On

the other hand, if she does pay tax on the rebate, then she does

not deduct the rebate amount when she calculates the tax credit

basis (and therefore get relatively more tax credit benefit).

For residential taxpayers, the above interaction and the

importance that Sec. 136 apply to any rebate she has received

was much more significant before 2009, because the Federal

ITC was capped at $2,000. Now that the Federal ITC is an

uncapped full 30%, the impact is usually far less, and depends

on the marginal tax rate of the customer. If the taxpayer’s

bracket is 30%, then it makes no difference to the customer

whether the rebate is federally taxable or not, since she will gain

the same amount either in no tax on the rebate or in higher ITC

value. See the 4 cases illustrated in Fig. 9. If her tax bracket

were lower than 30%, then she would prefer the rebate be

taxable (if she had a choice or if she and her tax advisor feel

there is enough uncertainty in the applicability of Sec. 136)

because she would then pay less in rebate tax than she would

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. Each 1% of difference between the customer’s tax bracket and

30% makes 1% difference in the net value of the rebate to them.

For most taxpayers, this isn’t going to be very much in absolute

dollars either way compared to the total cost of a PV system, as

is evidenced by the examples.

For business taxpayers, Sec. 136 does not apply, and there is

no other known section of the IRC that might exempt the rebate

from federal taxation. This turns out to be convenient, because

while paying tax on the rebate is a cost, not only does it allow a

larger ITC to be enjoyed, but since the depreciation basis is

proportional to the ITC basis, it allows more depreciation to be

enjoyed as well. The larger amounts of both ITC and depreciation far more than compensate for the tax on the rebate.

See Fig. 10 for a comparison of the two results.

Even when the rebate is taxed, it is usually only taxed by the

federal government. State governments that have enacted

rebates in support of solar generally don’t tax their own

incentives, however, tax laws vary by state, so check with your

state taxing authority.

PBI Taxation: Since PBIs are paid over time and the total

value that will be received is unknowable at the time the federal

ITC needs to be calculated, the interaction between them and

the ITC is less straightforward. For businesses, PBIs are almost certainly taxable.

For residential customers however, one might be able to argue

that Sec. 136 should also make PBIs paid from ratepayer funds

for PV systems non-taxable, but this would create the difficulty

of calculating how much to reduce the ITC basis by, since it

would require the impossible task of calculating the present

value of the unknowable stream of PBI payments that will be

received as and if the PV system produces electricity. Even if

Case 1: Non-Taxed Rebate $150K System Cost -$50K Rebate -$30K Tax Credit Value (30% of $100K) -$35K Depreciation Value (85K * 41%) =$35K Net Cost Case 2: Taxed Rebate $150K System Cost -$50K Rebate +17.5K Rebate Tax ($50K * 35% Fed Tax) -$45K Tax Credit Value (30% of $150K) -$52K Depreciation Value (127.5K * 41%) =$20.5K Net Cost 41% = combined net federal & state tax rate (35% Federal & 8.84% CA State) Fig. 10. Commercial examples of rebate/ITC interactions.

Case 1: Non-Taxable Rebate $100K System Cost -$30K Rebate -$21K Tax Credit Value (30% of $70K after rebate cost) =$49K Net Cost Case 2: Taxable Rebate at 30% Federal Tax Bracket $100K System Cost -$30K Rebate +9K Rebate Tax ($30K * 30% Fed Tax) -$30K Tax Credit Value (30% of $100K) =$49K Net Cost Case 3: Taxable Rebate at 20% Federal Tax Bracket $100K System Cost -$30K Rebate +$6K Rebate Tax ($30K * 20% Fed Tax) -$30K Tax Credit Value (30% of $100K) =$46K Net Cost Case 4: Taxable Rebate at 40% Federal Tax Bracket $100K System Cost -$30K Rebate +$12K Rebate Tax ($30K * 40% Fed Tax) -$30K Tax Credit Value (30% of $100K) =$52K Net Cost Fig. 9. Residential examples of rebate/ITC interactions.


July 2009 - 11 of 19

you could agree with the IRS on a discount rate for PBI

payments to be received in the future, no one can know how

many kWh will actually be produced until it has happened,

which is usually well after the ITC needs to be calculated and

submitted with a tax return. Guidance from Mark Bolinger at

LBL (not a qualified tax professional, but someone who has studied this in greater depth than the author, see “Further

Reading” at end for more info) is to assume PBIs are taxable for

residential customers as well as businesses, to be on the safe

side.

Of course, the ideal and much more valuable result would be

for the IRS to accept an argument that the PBIs are non-taxable

to homeowners due to Sec. 136, but also not challenge the

higher claimed amount of the ITC since there was no rebate

received up front to reduce it. The author is not advocating this

potentially risky strategy, and a competent qualified tax

professional should be consulted before considering this

maneuver. However, it is fairly certain that even if the IRS would to approve such an approach, they aren’t likely to chase

the taxpayer around attempting to provide a refund unless she

files her taxes in this way.

Feed-In Tariffs (FITs) are very similar to PBIs in that they

provide a payment to the customer for each kWh delivered to

the grid. The difference being that usually a Feed-In Tariff is the

only benefit received from owning the solar system – there is no

Net Metering benefit, so the customer continues to pay her

regular electric bill. In order to make Feed-In Tariffs attractive,

the payment per kWh needs to be higher than a comparable PBI

because of the lost Net Metering. Common feed-in tariff terms are 10, 15, and 20 years.

Gainesville, Florida and Ontario, Canada have implemented

feed-in tariffs. Gainesville’s tariff of 32¢/kWh for 20 years was

very popular and used up the first allocation of money quickly.

Ontario’s first attempt at CAD 42¢/kWh for 20 years was not

high enough to be strongly popular, so in May 2009 revised

incentives of CAD 44-80¢/kWh depending on system size and

mounting type were proposed (not yet finalized).

Feed-In Tariff Policy Discussion: Feed-In Tariffs (FITs) are

very simple incentives for solar, and are very popular in

Germany and Spain because they have very quickly created

large markets in each of those countries. There are a number of

risks associated with FITs however:

! The incentive is 100% visible, and makes solar look

expensive, making it an easy target for solar detractors,

whereas Net Metering ascribes value to the publicly received

benefit of the electricity generated and delivered when the

utility needs it. The cost to the ratepayer is equal, so it’s a

matter of perceptions and visibility, however Net Metering

better reflects the public benefits.

! The entire incentive for solar becomes vulnerable to political

changes – FITs can come and go with a change of elected or

appointed officials, creating potentially large changes in

fortunes of the solar industry. Germany and Spain both found

their incentives aggressively cut back in the summer of 2008

when they started to be viewed as too expensive. Spain’s solar

industry (which was over 40% of the world solar market in

2008) is effectively completely shut down as of 2009.

! Solar benefits some customers much more than others

(customers high in the rate tiers, those with avoidable

demand charges, and/or those who can benefit from Time-of-

Use rates), each of which is a hidden artifact of Net Metering.

Losing the Net Metering benefit levels the playing field, which

is democratic, but removes a lot of existing sales

opportunities for those who know where to look, and may

completely eliminate the market if the FIT is set too low.

! FITs have no ‘End Game’ unless the customer can switch

back to Net Metering (without other incentive) at her choice.

This means that if only FITs are available (without Net

Metering), the FIT payment can never be reduced to 0¢/kWh

because the customer will always need some payment to make

it worth going solar (since she won’t be saving on her electric

bill). This makes the solar industry perpetually dependent on

the existence of FITs and their future renewal. If the customer

can always choose between a FIT or Net Metering, then this

problem goes away, because once the Net Metering benefit

becomes greater than the FIT payment, customers will chose

Net Metering.

Tax Abatements are offered by some taxing jurisdictions in

the form of Sales Tax or Property Tax exemptions. Many states

exempt solar systems from being included in the assessed value

of a home, so installing a solar system doesn’t cause the

homeowner’s property taxes to increase. For example, solar

systems installed in California between January 1, 1999 and

January 1, 2017, are exempt from triggering Property Tax reassessments (California Taxation Code, Sec. 73). Sales Tax

exemptions help reduce the up-front cost of the solar system.

Solar Renewable Energy Credits/Certificates (often known

as SRECs, S-RECs, sRECs, RECs, or Green Tags) are a new

and growing way to value the greenness of the energy from a

solar energy system. SRECs represent the bundle of legal rights

to the green part of each kWh produced by a solar system. This

green part can be sold for a value, which generates additional

revenue for the seller.

SREC value is created in two common ways. The first is the

“voluntary” market, where individuals buy SRECs as a way of

“greening” their world by paying extra to someone else to install some new solar capacity, often because they can’t or

chose not to make the large, long-term investment themselves.

This is common for apartment dwellers and business renting the

space they occupy. Business such as Kinko’s, Wal-Mart, Whole

Foods, and White Wave (the makers of Silk soy milk) have

bought SRECs to offset some of the emissions from their

operations.

Voluntary SREC purchases do actually “green” the grid if

they result in net new solar (or wind or other renewable

generation depending on the type of REC or Green Tag

purchased) that wouldn’t have been installed if the SRECs weren’t purchased for the agreed price. For example, a solar

‘farmer’ wants to build a solar farm on some open land or on

the roof she has access too. If the value of the electricity she

will be getting from the utility (via sales or Net Metering),


July 2009 - 12 of 19

combined with the incentives discussed (excluding SRECs)

above isn’t enough to provide the rate of return the ‘solar

farmer’ is looking for, the investment won’t happen. If the

‘farmer’ can sell the SRECs to a buyer for enough extra value

(1-5¢/kWh is common in ‘voluntary’ locations), the total

investment may become attractive, and the ‘farmer’ will invest the money and effort to make it happen, and Voila! – net new

generation happened in part because of the SREC value.

The second common (and very important) way SREC value is

created is thru the regulatory “compliance” market where state

law or voter initiative has required that a certain percentage of

electricity in a given geographic or territorial area must come

from solar sources. Often, the percentage is set to rise over time.

Fourteen states have Renewable Portfolio Standards (RPS) with

such a requirement. In these states, the utilities must either build

and own solar installations (if allowed), or buy SRECs from

producer/owners. Usually, there is an Alternate Compliance

Payment (ACP) that sets a maximum on the value of the SREC value, whereby, if the utility isn’t able to buy SRECs for less

than the ACP, they can pay the ACP as a penalty for failure to

do so.

New Jersey is the best known of the states where its solar

program is supported mostly by SREC value. Currently, the

ACP in New Jersey is the equivalent of 71.1¢/kWh. The market

in which the NJ utilities can buy SRECs is set up as a bid-

auction market, so supply and demand rule the price of SRECs

at any given moment, with the artificial cap of the ACP. As of

June 2009, the auction market in NJ had set the price of SRECs

at 60-65¢/kWh. This value may continue for the short-, mid- or long-term, but there is no assurance of it. The price could also

collapse if an oversupply of SRECs becomes available,

depending on the rate of installation of solar systems compared

to the increasing requirements of the NJ RPS.

SREC Policy Discussion: The New Jersey style incentive

using SRECs is one of the author’s favorites, because it allows

market mechanisms to automatically readjust the incentive

(SREC) level to changes in market conditions. For example, the

uncapping of the federal ITC provided a lot more federal

incentive for solar, and so would require less state support and

would allow the SREC level to decline, all things being equal.

Similarly, the recent rapid decline in solar module prices has

lowered end-customer costs, again requiring less support to be

required in the form of SRECs. The U.S. economy of 2009 is in

such bad shape that the above two have not actually manifested

in substantially increased solar purchasing and supply of

SRECs yet, but the Rate of Return on a solar investment in NJ

has been increasing due to the two events. Eventually, the

return will get good enough, and the economy will get stable

enough, that individuals will start to buy systems and put new

SRECs on the market, creating more supply to satisfy an

inelastic demand, causing SREC values to come down at least

somewhat.

The missing element in the New Jersey program has been

long-term contracts whereby solar customers can get an

assurance of future SREC value. Without such an agreement, a

potentially oversupplied SREC auction market could cause the

traded price to plummet, so customers installing systems need

to insist on a risk-premium. This is starting to shift. With the

assurance of long-term agreements, the customers (homes and

businesses) installing solar don’t need to be paid as much for

their SRECs because they know the value is locked, which also

saves the utilities in the short term, and probably also in the

long term, because the risk-premium is eliminated.

Maryland has a 2009 ACP of 40¢/kWh which will decline over time (see the DSIRE Database for current details).

Pennsylvania and other states will likely also have similar

arrangements. There is no guarantee that actual value will be

anywhere near the ACP unless the ultimate buyer (the utility)

agrees to it.

Colorado has an RPS as well, but rather than paying for each

SREC as it is produced, the two main utilities, Xcel and Black

Hills Energy (formerly Aquila) buy 20 years worth of the SREC

output from smaller systems for $1.50/W STC of installed

capacity (looking more like a rebate) in addition to the regular

$2/W rebate. This equates to an approximate SREC value of 5-

7¢/kWh depending on sunlight levels and system performance.

California and several other states have Renewable Portfolio

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

come from wind and other sources, which are currently less

expensive. That means that the SREC market in these states is

voluntary (including some speculators buying or trading SRECs

on the bet that they will become more valuable if/as the

government and industry take on global warming). Current

voluntary SREC values are estimated to be in the range of 1-

5¢/kWh, which is not insignificant compared to Net Metered

electricity value that is sometimes as low as 6-20¢/kWh.

The only way an SREC has any real value though, is to ensure

that the bundle of legal rights to the greenness it represents has

only been sold once to its ultimate consumer for “retirement”,

the same way as a publicly traded company can only sell a fixed

number of shares of its stock. Within a state RPS compliance

market, this is usually done by an administrator who tracks all

the production, sales, and retirements. In voluntary markets,

SRECs should be certified by a certifier such as Green-e (a

service of the Center for Resource Solutions) http://www.green-

e.org/, which is the nation's leading independent consumer

protection program for the sale of renewable energy and

greenhouse gas reductions in the retail market. Only then can the consumer be sure she is buying something of value.

One should take care to consider whether she really wants to

sell the SRECs her system generates. By selling them, she loses

the right to claim she is using any of the clean green energy

generated by the system. That right would belong to the new

SREC owner. The system owner could claim she is a host for

the generation, but not a user. The distinction is important in

order to prevent double counting of the SRECs, which is

important to maintaining their value.


July 2009 - 13 of 19 !

PreTax =AfterTax

(1"TaxRate)

HOW IS THE SOLAR PAYOFF PROVEN?

Independent tests of the financial viability of solar energy

include:

! Rate of Return for comparison to other interest rate based

investments

! Payback in a reasonable time ! Total Lifecycle Payback

! Net increase in property value compared to solar system cost

! Positive cash flow when financing the project

All of the analyses and analysis methods presented here apply

only to residential scenarios. Different mechanisms,

assumptions, and accepted financial and accounting practices

apply to commercial cases, which are not discussed here. For

example, commercial analyses must be done on an after-tax

basis, which has important consequences relating to the loss of

the electric bill tax deduction a business otherwise would have

enjoyed, and commercial property resale valuation is done using

Capitalization Rate, rather than the method discussed here. Future versions of this article may include this material, so

check back later please.

RATE OF RETURN: Compound Annual Rate of Return on an investment is

another term for effective interest rate or yield, which is a way

of comparing one investment to another. For example, a savings

account might pay 0.5%-1% interest, and the long-term (80

year) Dow Jones Industrial Average of the stock market,

assuming dividend reinvestment had earned 8.5% per year

(CAGR) to its height of 13,500 in 2008. At its level of 8,000 in

June 2009, the long-term CAGR of the Dow has been 7.5%.

The author chose 10% as the test point for solar, because that

compares favorably to other long term investment average

returns from common, readily accessible, higher yielding

investments such as stocks and bonds and provides a slight

premium to compensate for solar’s lack of familiarity to much

of the public.

To properly value the savings from a solar system, it should

be noted that solar saves after-tax expense, while most other

investments earn pre-tax income. In order to compare solar to

other investments, all investments should be placed on the same

side of the tax equation. Since most investments are taxable (i.e.

stocks, savings interest, etc.), and because most people think about their investments on the pre-tax side, it is most

meaningful to convert solar savings to its taxable equivalent

value (i.e. PreTax value).

AfterTax dollars are worth more to a taxpayer than the same

number of PreTax dollars, because PreTax dollars are subject to

taxation. Therefore, an AfterTax dollar saved (with solar) is

worth more than $1 on a PreTax basis, by an amount

proportional to the taxation rate. To make this conversion from

AfterTax value to PreTax value, the following equation can be

used (where TaxRate is the net total effective income tax rate):

To illustrate this with an example, let’s assume a Tax Rate of

50% (unrealistically high, but easy to illustrate with) and an

after-tax savings of $100. The example would then be

calculated as follows:

Meaning that $100 after-tax is equivalent to $200 pre-tax at a 50% tax rate. To put it in context of a solar system: if a

customer were choosing between investing $15K in a solar

system that would save them $100/month on her electric bill

(tax-free), vs. $15K in a taxable investment, the taxable

investment would need to earn them $200/month so that after

she paid taxes on the $200, she would have $100 left over to

pay the electric bill, for the two choices to be considered

equivalent. In reality, combined federal and state tax rates are

currently lower than 50%, with an effective rate of 20-40% for

most taxpayers. At these rates, $100 after-tax savings would be

equal to $125-$165 pre-tax equivalent.

Once the value of the savings, maintenance costs and other amounts are properly adjusted to their pre-tax values, they can

be inserted into a 25-year financial timeline (the warranted life

of most solar electric/PV modules) representing the cash flows

for each year, to calculate the Compound Annual Rate of

Return. This allows the accurate inclusion of all relevant cost

and benefit components.

The initial capital cost is the only amount that doesn’t get

adjusted. That amount is the net system up-front cost (total out

of pocket), and is unaffected by the taxation or lack thereof of

future savings in the utility bill. Consider it the same as

principal that is invested anywhere. The principal is not taxed upon its departure or return.

Tax savings and consequences, inverter replacement,

maintenance, and other significant financial events can be

included at their appropriate places on the timeline. Inflation,

escalation, and module degradation are also easily included. For

each year, the values can be summed, creating a 25-year

timeline of net expense or net savings by year. The Internal Rate

of Return (IRR) function in most spreadsheets can then

calculate the IRR, which is the same as the Compound Annual

(interest) Rate of Return (CARR) for the investment.

One should note that there is a significant and very important

difference between Compound Annual Rate of Return and average return or total return divided by the number of years an

investment is held. Average return does not factor in

compounding of interest, and may make an investment look

more attractive than it really is. This article uses CARR for all

items under consideration (solar, stocks, savings, etc).

The difference becomes more visible the longer the time

horizon. A brief example: Suppose an investment doubles every

year. Its CARR would be 100% because you get 100% increase

each year on your investment. No matter how long you hold it,

its CARR is 100% because you need to compound for the

number of years it’s held. Alternatively, if you were to look at the “average rate of return”, over 1 year, it would still be 100%.

However, if you held it 3 years, your investment would be

800% of the original, or a total return of 800%

!

PreTax =AfterTax

1" TaxRate=$100

1" 50%=$100

1" .50=$100

.50= $100*2 = $200


July 2009 - 14 of 19

Investment Type

Net Investment

Amount

Interest Earned or Net Electric Bill

Savings

After-Tax Value the First Year

After-Tax Value the

Eighth Year

Payback / Time-to-Doubling including 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”.

(100%>200%>400%>800%). The average annual return would

be 800%/3years-100% or 167%, which looks great, but isn’t

representative, because it isn’t factoring in the compounding.

This faulty method of analysis is highlighted here because

unfortunately there are several inaccurate (misleading) solar

analyses and sales presentations being given to the public that use averaging, rather than compounding.

Please see Fig. 14 for example analyses from several states

and their Compound Annual Rates of Return. These cases are

for full service residential system installations, using typical

installed system costs on a simple composition shingle roof.

Utility & state specific assumptions for the examples are listed

in Fig 13. General variables and assumptions are:

! 28% federal tax bracket, corresponding state tax bracket

! Facing south, 22° pitch, simple composition shingle roof by

full service provider, no complications

! Slightly conservative real system performance, no shade

! Final Net Cost = total installed system costs - Rebate (if any)

- 2009 Fed 30% ITC + $500 Permit + $0 Utility Fee

! System maintenance cost is 0.25% of gross system cost per

year, adjusted for inflation

! 5.0% electric escalation (2.2% in CO)

! Module degradation 0.5% per year ! Module PTC/STC Ratio: 89.6%, Inverter Efficiency: 95.0%

! Inverter replacement costing $700/kW occurs in year 15

These analyses were performed using the OnGrid Tool,

available at http://www.ongrid.net/payback. Other tools are

listed in the Design and Analysis Tools section at the end.

PAYBACK: What about calculating the payback? Payback is a simple but

crude tool for comparing investments. Solar is an inflation-

protected investment but many others are not. This improves the

payback for solar (electric rates double every 15 years at 5%

escalation). To properly calculate the solar payback, it is

necessary to add in the rate escalation adjusted savings of each

successive year, less the reduction due to module degradation

and maintenance costs, until payback has been achieved.

Savings in the latter years are larger than savings in the first

years, so the payback is faster than simply dividing the cost by the savings. See Fig. 12 for an illustration.

Payback analysis on an after-tax basis does not reflect the true

value of the saved utility expense, because after-tax savings are

worth more on a pre-tax basis. However, trying to do payback

using the pre-tax value gives an unrealistically optimistic view

of when “payback” has occurred. The examples in Fig. 11 show

how long paybacks on other investments really are in

comparison to solar, when taken on an after-tax basis.

There are numerous other flaws in using payback for a

residential long-term investment; it does not properly include

the tax savings and consequences, it does not account for

maintenance or inverter replacement expenses, and it makes it

difficult to compare to other investments such as stocks, savings, etc. because of inflation and other factors.

TOTAL LIFECYCLE PAYBACK: Comparing the savings of a solar electric system over 25 years

of operation to its initial cost is a better way of looking at

payback, because it more fairly values the savings due to the

compounding effect of electric rate escalation. Because of this

effect, the savings in the later years is much greater than the

savings in the first few years. Typical systems give back 1.5 to 3

times their initial cost. See Fig. 14 for several examples and Fig.

12 for an illustration. One drawback to this analysis is it fails to

account for the time value of money. A dollar saved in the

future isn’t worth as much as a dollar saved today, so that a total lifecycle payback isn’t worth quite as much as it might initially

appear. The better methods of comparing solar as an investment

are the Compound Annual Rate of Return, Increase in Property

Value, and Cash Flow.

INCREASE IN PROPERTY VALUE: Solar electric systems increase property value by decreasing

utility operating costs. According to the Appraisal Journal

(Nevin, Rick et al, “Evidence of Rational Market Valuations for

Home Energy Efficiency,” Oct 1998 (available at various

locations on-line, including at

http://www.icfi.com/Markets/Community_Development/doc_files/apj1098.pdf), a home’s value is increased by $20,000 for

every $1,000 reduction in annual operating costs from energy

efficiency.

Total Lifecycle Savings is

several times Initial Cost Initial Cost paid

back in 8 years

Fig. 12. Simple Payback vs. Total Lifecycle Payback. Total Lifecycle Savings over 25 years is several times the initial cost represented by the area up until year 8. Year 15 shows diminished savings due to inverter replacement.


July 2009 - 15 of 19

Utility Insolation

AC kWh Production per rated kW per

year

Installed Cost per rated Watt

(~October 2008)

Staring/Ending Rate Schedule, Peak %

Incentives

AZ - APS Phoenix 1660 / STC kW $8.25 STC E-12 / ET-2, 50% $2.40/W Rebate (net) 25% State Tax Credit

CA - PG&E San Francisco 1630 / CEC kW E1XB / E6XB, 35% $1.55/W Rebate

CA - SCE Los Angeles 1675 / CEC kW D-10-Basic /

TOU-D-1, 36% $1.90/W Rebate

CA - SDG&E San Diego 1700 / CEC kW

3kW: $9.50 CEC 6kW: $9.25 CEC 9kW: $9.00 CEC

DR-Coastal-Basic / DR-SES, 28%

$1.55/W Rebate

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

MD – BGE Baltimore 1236 / STC kW $8.25 STC R / RL-2, 65% $1.20/W Rebate (net),

SRECs: 10¢/5yrs, 5¢/10yrs

NC - Progress Raleigh 1260 / STC kW $8.25 STC RES / R-TOUD, 60% 35% State Tax Credit

NJ - JCP&L Newark 1140 / STC kW $8.25 STC RS / RT, 58% SRECs: 48¢/1yr, 30¢/12yrs, 10¢/12yrs; $1.55/W Rebate

NY - ConEd New York City 1178 / STC kW $8.25 STC Rate I / Rate II TOU,

75%

$2.81/W Rebate (net) 25% State Tax Credit

PA – PPL Philadelphia 1217 / STC kW $8.25 STC RS / RTD R, 70% $2.25/W Rebate,

SRECs: 10¢/5yrs, 5¢/10yrs

Fig. 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

Net Monthly Cash Flow Compared to 8% 30-yr

Loan Utility

Pre-Solar Bill

kWh Usage per

Month

PV System Size & Rating

Final Net Cost w/

Tax Benefits & Rebate

Cumulative Savings

Over First 25 Years (including inflation)

Lifecycle Payback Ratio

Years To

Payback

Pre-Tax Annual Return In First

Year In Fifth Year

Annual Savings

Appraisal Equity / Resale

Increase in First Year

AZ - APS $77 800 5 kW STC $18K $22K 1.2x 22.2 6.6% $-31/mo $-38/mo $539 $11K

CA - PG&E $74 550 3 kW CEC $17K $28K 1.7x 18.6 10.0% $-11/mo $-15/mo $671 $13K

CA - PG&E $258 1100 6 kW CEC $33K $120K 3.6x 9.7 19.5% $100/mo $123/mo $2,761 $55K

CA - PG&E $499 1650 9 kW CEC $48K $234K 4.9x 7.8 24.6% $259/mo $320/mo $5,355 $107K

CA - SCE $85 550 3 kW CEC $16K $36K 2.2x 15.5 12.9% $6/mo $6/mo $835 $17K

CA - SCE $414 1650 9 kW CEC $45K $193K 4.3x 8.5 22.1% $193/mo $238/mo $4,446 $89K

CA - SDG&E $97 550 3 kW CEC $17K $38K 2.2x 15.4 12.9% $6/mo $7/mo $877 $18K

CA - SDG&E $455 1650 9 kW CEC $47K $206K 4.4x 8.4 22.4% $207/mo $255/mo $4,722 $94K

CO - Xcel $72 800 5 kW STC $17K $13K 0.7x 31.9 3.1% $-47/mo $-46/mo $521 $10K

CT - UI $183 800 5 kW PTC $25K $57K 2.3x 15.2 11.9% $-20/mo $1/mo $1,333 $27K

FL – FPL $89 800 5 kW STC $15K $24K 1.6x 19.3 7.5% $-35/mo $-25/mo $591 $12K

GA - GaPwr $88 800 5 kW STC $21K $20K 0.9x 27.0 6.9% $-80/mo $-67/mo $493 $10K

HI - HECO $164 800 5 kW STC $25K $62K 2.5x 13.2 15.1% $-10/mo $16/mo $1,442 $29K

MD – BGE $131 800 5 kW STC $25K $39K 1.6x 18.4 9.3% $-25/mo $-30/mo $1,262 $17K

NC-Progress $80 800 5 kW STC $21K $25K 1.2x 23.2 9.6% $-66/mo $-51/mo $601 $12K

NJ - JCP&L $143 800 5 kW STC $24K $66K 2.8x 9.3 19.4% $71/mo $85/mo $2,947 $22K

NY – ConEd $134 800 5 kW STC $16K $40K 2.6x 12.4 16.5% $-2/mo $16/mo $956 $19K

PA – PPL $95 800 5 kW STC $21K $32K 1.5x 18.9 8.5% $-22/mo $-30/mo $1,100 $14K

Fig. 14. Example residential cases with their net costs and financial benefits.


July 2009 - 16 of 19

Home Improvement Type

Investment Amount /

Net System Cost

Resale Value

Increase

% Return

CA PG&E Solar 3 kW $17K $13K 76% CA PG&E Solar 6 kW $33K $55K 167% CA PG&E Solar 9 kW $48K $107K 223%

Deck Addition $6.3K $6.7K 104% Bathroom Remodel $10.1K $9.1K 89%

Window Replacement $9.6K $8.2K 85% Kitchen Remodel $44K $33K 75%

Fig. 16. Resale value comparison of various home improvements.

The rationale is that the money from the reduction in

operating costs can be spent on a larger mortgage with no net

change in monthly cost of ownership. Nevin states that average

historic mortgage costs have an after-tax effective interest rate of about 5%. If $1,000 of reduced operating costs is put towards

debt service at 5%, it can support an additional $20,000 of debt.

To the borrower, total monthly cost of home ownership is

identical. Instead of paying the utility, the homeowner (or future

homeowner) pays the bank, but her total cost doesn’t change.

Since the Nevin article is from 1998, is it dated? No more than

2+2=4 is dated - the rationale is mathematical, not based on

market whims, so it is timeless.

Please see the column labeled “Appraisal Equity Increase” in

Fig. 14 for examples of the increase in home value. In some

cases, a solar system can increase home value by more than its

cost to install. This effectively reduces the payback period to 0 years if the owner chose or needed to sell the property

immediately. It could even lead to a profit on resale.

There are two limits to the increase in resale value over

system net installed cost. First, why should a homeowner pay in

total more for a home with a solar system, when she could buy a

non-solar home, and solarize it for less money? Yet this

happens with other remodels. Decks, on average across the

nation, return 104% of their cost upon resale. However, in

certain markets like St. Louis, San Francisco, and Boston, decks

add more than 215% of their value upon resale (Alfano, Sal,

“2003 Cost vs. Value Report”, Remodeling Online –

www.remodeling.hw.net downloaded March 5, 2004). Other

types of remodels like kitchens and bathrooms had similar

results related to geography. So it makes sense that in certain

geographies where the sun shines brightly and the electric rates are high, solar would return more than its installed cost, while in

other states with less sun and lower rates, the return might be

much lower, with a national average comparable to other types

of remodel. Fig. 16 lists projected resale value of various solar

systems, compared with nationwide averages for some other

home improvements.

The increase in property value is currently theoretical. A very

high fraction of the grid-tied solar electric systems in California

were installed since the state’s Power Crisis and the

Deregulation fiasco in 2001. Most of these homes have not been

sold and there are no broad studies of comparable resale values

available. However, some evidence is beginning to emerge that there are significant jumps in resale value being realized by

some solar home sellers.

It is also interesting to note that PV systems will appreciate

over time, rather than depreciate as they age. The appreciation

comes from the increasing annual savings the system will yield

as electric rates and bill savings rise. All the calculations in this

article assume electric rate escalation will be 5%. If so, the PV

system will save 5% more value each successive year, and thus

gain from the 20:1 multiplier effect. The resale value will then

increase 5% per year compounded, less 0.5% module

degradation.

This cannot continue forever, as the increase in resale value

runs into the second limit, which relates to the remaining life

left in the system. For these analyses, the system is assumed to

be worthless at the end of 25 years. This is probably very

conservative, since the panels are warranted to be working at

least 80% of their new performance. So if the system is

worthless at the end of 25 years, the only value the system has

as it nears that time, are the remaining savings it can generate

before the end of the 25th year. Fig. 15 shows both the

increasing value due to increasing annual savings and the

remaining value limitation that takes over at approximately year

11. If the system does have additional resale value, so much the better.

Still, the skeptical homebuyer might question the above

assertions in light of the lack of hard evidence. Perhaps the best

evidence to present would be a stack of old bills showing usage

and cost before solar, and a stack of new bills showing a

substantial savings. The question might be posed, “What are a

continuous, if not growing, stream of these savings worth to the

prospective buyer?” That sort of evidence can’t easily be

ignored. Of course, other factors will weigh heavily in the

value. How attractive is the home? A tidy, attractive installation

should add all of the value shown above, but like a spa, some prospective buyers may not care or value it, while others may

love it.

Fig. 15. Resale value increases over time because savings get larger each year. Total remaining lifetime savings in the system declines annually, putting a limit on the increase in resale value after year 11.


July 2009 - 17 of 19

CASH FLOW WHEN FINANCING: Financing a solar system makes the purchase achievable to

more consumers. If the situation is right, the savings on the

electric bill can more than compensate for the cost of the loan

and maintenance, making it a cash-positive maneuver. That is,

compared to the occupant’s current cost of energy (her current

electric bill), going solar but paying for it entirely with a loan

(no money down) can actually be less expensive on a monthly

basis.

Electric rates and electric bills are subject to electric rate

escalation, as can be seen in the top graphic in Fig. 17, where the cost of energy increases steadily over the years, doubling

approximately every 15 years. While interest rates might vary

depending on the loan type, loans are not subject to inflation or

rate escalation, so the loan payments do not increase

continuously. This means that the difference between what the

electric bill will become and what the loan & maintenance costs

will become continues to move in the customer’s favor. Even if

a customer didn’t start out cash-positive in the first year, she

may become cash positive after a few years.

In the top graphic of Fig. 17, the lower line labeled “8% Loan

(net cost), New Smaller Bill, & Maintenance” represents all the new costs compared to the old Utility Bill cost. While the loan

rate is fixed at 8% and the monthly loan payments are steady,

there are 3 components to this new set of costs that do increase

over time: 1. The new maintenance cost will rise with inflation.

2. The new small electric bill will rise with electric rate

escalation. 3. In fixed amortization loans, each loan payment

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

enjoying the maximum tax deduction for interest paid.

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 shows

“Net Annual Savings” by having purchased a solar system with

a loan (put no money down). In this case, the savings are

substantial even before the loan is paid off in the 20th year, and

gets even better after that. The Net Annual Savings can be

accumulated as shown in Fig. 18 to show how much extra cash

a purchaser will have in her pocket before the inverter needs to be replaced in year 15, or before the loan is paid off in year 20,

or before the equipment is out of warranty in year 25.

The uncapping of the residential federal ITC has made it more

difficult to figure out how much a customer should borrow. The

problem is that the ITC is a significant incentive, but it isn’t

received until the customer files her taxes, which can be a year

or more after the system needs to be paid for.

In what one might call the “Optimistic Loan” scenario, the

customer would borrow the net cost after all incentives

(including the ITC) have been received. This would produce the

lowest loan payments, and have the best chance of being cash-

positive from the start, making the salesperson happy. However, the customer would need to have the cash to cover the ITC

amount or get a bridge loan until the ITC is received because of

the optimistically low loan & payments.

In an “Inefficient Loan” scenario, the customer would borrow

the net cost after all other incentives, except the ITC. This will

allow them to acquire the system with no money down.

However it will also result in a lot of cash on hand once the ITC

is received, which she is paying interest on, which is expensive

and not very efficient. It is also less likely to be cash-positive,

which will be a disadvantage for the salesperson.

The solution is what OnGrid Solar calls “Smart Financing” where the customer uses a “line of credit” financing source that

she can borrow from and repay without pre-payment penalty.

Assuming the ITC will be received in a year, and that she can

Fig. 17. Effect of a solar system financed at a fixed 8% interest rate over 20 years showing a cash-positive result from the first day of ownership, including maintenance costs and the inverter replacement at year 15.

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.

Utility Bill w/o Solar at 5% escalation

8% Loan (net cost), New Smaller Bill, & Maintenance

Accumulated Savings

Net Annual Savings


July 2009 - 18 of 19

apply it to the principal of the loan at that time, one can

calculate the necessary loan payment that allows them to pay off

the loan in the desired number of years including interest. The

calculation is complex, and is not a standard function in most

spreadsheets, but can be done. The resulting loan payment will

be somewhere between the Inefficient Loan and the Optimistic Loan, typically tending to be pretty close to, but slightly more

expensive than the Optimistic Loan.

Results of Smart Financing can be seen in Fig. 17. A subtle

feature of it is the slight dip in savings in the 2nd year. In the 1st

year the loan principal is very high because it includes the ITC

amount causing the interest cost to be quite high. This allows

for a large 1st year tax deduction benefit, even though the loan

payments are fixed and steady. Once the ITC is received and

applied to reduce the principal, the interest is reduced, so the tax

deduction shrinks, effectively raising the cost of the loan

compared to the fixed loan payments.

Refer to Fig. 14 for several examples showing the initial and 5th year monthly cash flow assuming 100% Smart Financing of

a solar system using a 30-year loan. Because of the 2nd year dip,

the 5th year monthly cash flow isn’t always better than the 1st

year’s, but is a basis for continuous improvements in cash flow

going forward. Note, we use the 5th year because most

depreciation (in commercial systems) and PBI benefits (both of

which are applied to loan principal in the same way as the ITC)

have been received and included by then.

Sources of financing funds can include:

! Unsecured

! Home equity ! Community Financing

! Power Purchase Agreements (PPAs)

! Leases

Unsecured financing can include credit cards or other types of

unsecured loans. These are generally a terrible idea for any kind

of long term financing because they usually have high interest

rates and the interest is not tax deductible. It may be reasonable

to consider them to temporarily finance the rebate or tax credit

until it is received, however, it requires discipline to ensure the

loan is paid off as soon as the incentive is received.

Home equity sources of funding can include 1st mortgage

refinances, 2nd mortgages, Home Equity Loans, and Home Equity Lines of Credit (HELOCs). In general, home equity

borrowing is tax deductible, has the best unsubsidized interest

rates, and has the longest repayment terms, all of which allow

for lowest monthly costs. However, the decline in real estate

values have hurt Loan-to-Value (LTV) ratios for most

homeowners, and the tight credit market in 2009 have put strict

limits on LTV ratios, credit scores, and income requirements,

making use of home equity difficult. Only the Line of Credit is

likely to work with Smart Financing. Other loans tend to be less

flexible on borrowing and repayment term. Attractive FHA

Energy Efficient Mortgages (EEMs) may be available from the U.S. Dept of Housing and Urban Development (HUD) at:

http://www.hud.gov/offices/hsg/sfh/eem/energy-r.cfm.

A new idea and source of funds are local loan programs called

“Community Financing” developed by funding sources in

partnership with cities, whereby a citizen property owner can

receive a loan for a solar system and have it collateralized and

paid back on her property tax bill. The program was pioneered

in Berkeley, California, and is now available in several cities

thanks to AB811, the “Community Financing” bill.

The loans are obligations to the city, the interest is tax deductible, and the property tax bill shows the itemization of the

loan amount, the principal and interest. The interest rate is set

by the city and their partner bank and is generally at market

rates. However, even if the financing was at what might be

considered a subsidized level, because of the ARRA of 2009,

there is no longer any negative interaction with the ITC (there

used to be a tax rule that allowed one but not both of an ITC or

subsidized energy financing to be enjoyed). The loans are

generally transferable to a future buyer of the property if she is

willing to agree to assume the loan payments.

These loans pose little risk to the city and their funding

partner, because property taxes are considered to be in “1st position” to get paid in cased of a foreclosure. This has caused a

controversy in the banking community because this now places

more risk on the holder of the 1st mortgage (who is in 2nd

position), and the lawsuits have started. The mortgagees insist

these loans be in at least 3rd position to protect their mortgages.

Depending on how they are structured, that may work for the

cities. Stay tuned, it’s developing as this is written.

There are also two commercial financing products being

applied to residential situations: Power Purchase Agreements

(PPAs) and leases. PPAs are the agreement for one party to sell

power to another at agreed upon terms. The sale is for kWh of energy only. The leases for solar are rentals, where a customer

rents (leases) a solar system from another party. In both

products, the parties owning the systems have large investors

who have money to finance systems and who can use both the

ITC and depreciation.

In the typical PPA scenario, the site occupant agrees to a PPA

for electricity kWh at a certain price and in exchange allows a

solar system to be placed on her roof. In residential applications

of a PPA, the homeowner usually pays a deposit of anywhere

from $2,000 to 25% to 50% of the cost of the system in addition

to the price she will pay for the electricity. Naturally, the more

she puts down as a deposit, the lower the price of the electricity. The contract lengths are typically 15-20 years, and there may be

a buyout cost at the end if the homeowner wishes to purchase it

at that time, or she may have to pay a removal fee if she doesn’t.

The price of electricity may be fixed by the agreement, or it

may have an escalator, causing it to get more expensive over

time. There is usually a guaranteed minimum performance, but

the customer must purchase any extra electricity, whether she

wants it or not.

A typical residential solar lease is similar, in that there is often

a deposit paid and a long-term agreement to rent a system for

placement on the customer’s roof. The monthly rent may include an escalator, increasing costs over time, and may

include a buyout clause and termination costs. The buyout

clause must not allow the system to be purchased for less than

Fair Market Value (FMV) at the end of the term, and that the

FMV must be determined at the end of the term, otherwise the


July 2009 - 19 of 19

lease will fail to satisfy IRS tax rules. The system usually comes

with a performance guarantee, and the homeowner enjoys any

extra production at no extra charge.

Things a customer should watch out for regarding leases &

PPAs: 1. High escalators in the contracts and their compounding

nature. These vehicles can be good hedges against future rate inflation, but a customer should be cautious about overpaying

for that hedge. Rates may not rise fast in the future for any

number of reasons, and are certainly not likely to rise much

faster than 6% per year over the long term. Currently, state or

federal government does not regulate these products, so there is

a lot of risk of customers agreeing to very expensive terms over

the long term. 2. Large deposits without performance guarantees

and without clarity in the contract on what happens to the

system in the event of the provider’s bankruptcy. 3. Large

buyout charges or removal costs at the end of the term.

Leases and PPAs with $0 deposits are easy to understand and

sell if the monthly costs or $/kWh are less than the customer’s current costs. Otherwise the customer must figure out how soon

the deposit amount will be recovered.

Leases and PPAs can be attractive to customers who have no

other way of financing a system, or who can’t use the ITC. But

if she has her own cash, or can get her own financing, she can

usually do better and keep more of the benefits for herself,

rather than sharing them with the financing party and the

provider. Customer shouldn’t be taken in by claims that these

products are a lot less expensive because of the depreciation –

effectively the depreciation offsets the taxability of the revenue

received the provider. These deals are currently a goldmine to developers and providers, but are just “ok” for the consumer,

and will be until more competition comes along.

CONCLUSION: It is important to compare the solar investment to other

investments on an even basis. Rigorous treatment and critical

analyses from several angles including Compound Annual Rate

of Return, Cash Flow, and Resale Value need to be considered

to do a fair assessment.

Solar will make economic sense for many, but only a hard look at the numbers will tell. The reader is encouraged to check

it out. Run the numbers, get evaluations and proposals from at

least 3 solar providers, and take them to a CPA to check them

out. That way the smile on your wallet can be as big as the

smile on your face!

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.html

o Property Tax Assessments as a Finance Vehicle for

Residential PV Installations: …

o Exploring the Economic Value of EPAct 2005's PV Tax

Credits

! SEIA “Guide to Federal Tax Incentives for Solar Energy”

http://www.seia.org, Solar Energy Industries Association ! Utility Tariff and Rate Tables (see desired utility’s website) –

great for insomnia

DESIGN & ANALYSIS TOOLS: ! OnGrid Tool, which incorporates all of the elements of this

paper, plus up-to-date rates and incentives, to allow the user

to design and analyze PV systems at a high level. It also

produces proposals and sales documentation:

http://www.ongrid.net/payback

! Clean Power Estimator:

http://www.consumerenergycenter.org/renewables/estimator.

! PVWatts: http://www.nrel.gov/rredc/pvwatts

! PVSyst: http://www.pvsyst.com ! RETscreen: http://www.retscreen.net

! PV Design Pro: http://www.mauisolarsoftware.com

! QuickQuotes: clean-power.com/quickquotes/products.aspx

! CPF Tools: http://www.cpftools.com

ACKNOWLEDGEMENTS: Thank you to the following that have provided invaluable

insights knowledge, corrections, and review:

Michael Bishop, OnGrid Solar

Chad Blanchard

Mark Bolinger, Lawrence Berkeley Laboratory (LBL)

Keith Martin & John Marciano, Chadbourne & Parke LLP Ryan Wiser, Lawrence Berkeley Laboratory (LBL)

!Copyright 2009, Andy Black. All rights reserved. This

information changes periodically. The author maintains an

updated version of this article at:

http://www.ongrid.net/papers/PaybackOnSolarSERG.pdf. For more info on solar payback, analysis tools, upcoming classes,

and other papers and articles, see http://www.ongrid.net.

Andy Black is a Solar Financial Analyst and CEO of OnGrid

Solar, creator of the OnGrid Tool, and educator on the

financial aspects of solar electric systems. He is a former

NABCEP Certified PV Installer, is on the Advisory Board of the

NorCal Solar Association, and is a recent past board member of

the American Solar Energy Society. He can be contacted at

(408) 428-0808x1 or [email protected] for questions about the

payback on solar.

The OnGrid Solar Financial Analysis & Sales Tool

Simplify Solar Sales: Qualify and Close in

Less Than a Day!

(866) 966-5577

www.ongrid.net

Show Your Customers

! Their internal rate of return (solar vs. stock market or interest-based investment)

! Their cash flow for financed systems (positive and increasing over time)

! System’s total lifecycle payback and savings (show how much they save over time)

! Their increased resale value (often is more than system cost & increases over time)

Simplify Your Sales

! Identify and screen hot leads (guides salespeople through the entire sales process)

! Size PV systems accurately (time of use, shading, tilt, orientation, incentives and more)

! Price systems considering all factors (e.g., tile roof, custom mounting, etc.)

! Create proposals, price quotes quickly, onsite (one button form generation, documentation, includes CSI)

Use customer data to paint them a picture. Example Output*:

*See website for detailed description and comprehensive list of customizable outputs and displays.

Example Sales Call

FREE Demo / Examples: www.ongrid.net/payback! 2008 OnGrid Solar

9:00 a.m.

Receive

Incoming Sales Call

9:30 a.m.

Qualify,

Gather Data, Email

Estimate

11:00 a.m.

Site Visit

12:00 p.m.

Update

Estimate Print All Docs

(on site)

12:30 p.m.

Present Bid,

Contract & Docs

1:00 p.m.

Close

the Sale

1:30 p.m.

Turn in

Closed Sale

Cash Flow: Annual Costs: Solar with Loan vs. No Solar

Loan cost, Maintenance, Inverter Replacement, & new small electric bill

Lifecycle Payback: Annual Savings Before & After Payback

Utility Bill w/o Solar at 5% rate

escalation

Lifetime savings are typically 2-3.5 times system cost

Payb

ack

Resale: Resale Value Over Time

Resale Value increases due to increasing annual savings

Re

sa

le V

alu

e

Cash Flow: Net Annual Savings When Financed

Net Annual Savings

A

nn

ua

l S

avin

gs

! 2008 OnGrid Solar

The OnGrid Solar Financial Analysis & Sales Tool for Commercial & Residential PV Sales

A Time-Saving, Comprehensive

Tool for Solar Sales

(866) 966-5577

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)

Identify and Screen Hot Leads,

guide them successfully thru

the entire sales process

Perform Multiple Solar Financial

Analyses, option to generate a

Variety Of Proposals

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

Upload shading device data for

accurate Time-of-Use value analysis

Develop Accurate Price Quotes,

including all material,

regulatory and job-site factors

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

! Current & Future Electric Bills

! Cost, Rebate & Tax breakdowns

! Financing & Cash Flow

! Resale Calculations & Graphics

! Rate of Return Calculations

The 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 the

free 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

Solar Pathfinder® SunEye®

Net Annual

Savings

Excellent Very Good Good Fair Poor ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Too Short Just Right Too Long ! ! ! Introductory Intermediate Advanced ! ! ! Yes No ! !

Feedback for Sales, Marketing & Economics Classes

Please Rate the Following: Instructor’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: ___________________________________________________________________

Give the topic, this workshop was: Comments: ___________________________________________________________________

In your opinion, this workshop was?

Comments: ___________________________________________________________________ Would you recommend this workshop to others?

Comments: ___________________________________________________________________ How would you improve this workshop?

___________________________________________________________________________ ___________________________________________________________________________

What did you like LEAST about this class?

___________________________________________________________________________ What did you like MOST about this class?

___________________________________________________________________________ Please share any additional comments:

___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________

Your Name (optional):__________________________ May we quote you? YES NO

Andy Black OnGrid Solar

Solar Financial Analyst (408) 428 0808

[email protected]

Acronyms Used In Sales, Marketing & Economics Classes

AC: Alternating Current (standard AC wall power) ACP: Alternative Compliance Payment ACEEE: American Council for an Energy Efficient

Economy: www.aceee.org AMT: Alternative Minimum Tax ARRA: American Recovery and Reinvestment Act ASES: American Solar Energy Society CA: California CAD: Computer Aided Design CalSEIA: California Solar Energy Industries Assn CAGR: Compound Annual Growth Rate CARR: Compound Annual Rate of Return CCSE: California Center for Sustainable Energy CEC AC: The California Energy Commission AC

(Alternating Current) Power Rating CEC: California Energy Commission CEO: Chief Executive Officer CFO: Chief Financial Officer CHEERS: California Home Energy Efficiency Rating

System CL&P: Connecticut Light & Power COO: Chief Operating Officer CO2: Carbon Dioxide CoSEIA: Colorado Solar Energy Industries Assn CPI-U: Consumer Price Index-Urban CPUC: California Public Utilities Commission CRES: Colorado Renewable Energy Society CRM: Customer Relationship Management CSI: California Solar Initiative DC: Direct Current (what comes out of PV modules) DER: Distributed Energy Resource/Renewable DGR: Distributed Generation Resource DOE: Department of Energy (U.S.) DSIRE: Database for State Incentives for Renewable

Energy: www.dsireusa.org DWR: Department of Water Resources EPBB: Expected Performance Based Buydown EEM: Energy Efficient Mortgage EIA: Energy Information Administration (of DOE) EPBI: Expected Performance Based Incentive FASB: Financial Accounting Standards Board FICA: Social Security Payroll Tax FMV: Fair Market Value FIT: Feed-In Tariff HELOC: Home Equity Line of Credit HERS: Home Energy Rating System IDR: Interval Data Recording (meter) IID: Imperial Irrigation District IRC: Internal Revenue Code IRR: Internal Rate of Return IRS: Internal Revenue Service ISO: Independent System Operator ITC: Investment Tax Credit JCP&L: Jersey Central Power & Light

kWh: kilowatt-hour LADWP: Los Angeles Department of Water & Power LBL: Lawrence Berkeley Laboratory LTV: Loan-To-Value MACRS: Modified Accelerated Cost Recovery System NABCEP: North American Board of Certified Energy

Practitioners NCSC: North Carolina Solar Center NESEA: North-East Sustainable Energy Association NJCEP: New Jersey Clean Energy Partnership NLP: Neuro-Linguistic Programming NOL: Net Operating Loss NOx: Nitrous Oxides NREL: National Renewable Energy Laboratory NSHP: New Solar Homes Partnership PACE: Property Assessed Clean Energy PBI: Performance Based Incentive PEC: PG&E’s Pacific Energy Center PG&E: Pacific Gas & Electric PPA: Power Purchase Agreement PSE&G: Public Service Electric & Gas (NJ) PTC: PVUSA Test Conditions PUC: See CPUC PURPA: Public Utility Regulatory Policies Act of 1978 PV: Photovoltaics (Solar Electricity) PVUSA: PV for Utility Scale Applications QF: Qualifying Facility REC: Renewable Energy Certificate/Credit ROI: Return On Investment ROR: Rate of Return RPS: Renewable Portfolio Standard SB1: CA Senate Bill 1, the law that created the CSI SCE: Southern California Edison SDG&E: San Diego Gas & Electric SDREO: San Diego Regional Energy Office (now called

CCSE) SEI: Solar Energy International SEIA: Solar Energy Industries Association SLI: Solar Living Institute SMUD: Sacramento Municipal Utility District SOx: Sulfur Oxides S-REC, sREC: Solar Renewable Energy Certificate STC DC: Standard Test Conditions DC (Direct Current)

rating STC: Standard Test Conditions SVP: Silicon Valley Power SWOT: Strengths, Weaknesses, Opportunities, Threats TOD: Time Of Day TOU: Time Of Use TRC: Tradable Renewable Certificate (= sREC = REC =

Green Tag) UI: United Illuminating Co. (CT) URG: Utility Retained Generation WIIFM: What’s In It For Me

Andy Black OnGrid Solar

Solar Financial Analyst (408) 428 0808

[email protected]