Over the weekend I had the opportunity to record an interview for the Disruption! podcast, hosted by Roger Willhite. We talked about my book, Commercial Solar: Step-by-Step, the origin and future of Run on Sun, and larger solar industry trends.
In case you are not familiar with Roger’s work, you should check out his website, Second Silicon, which operates under the tagline, “Get absorbed in Solar” - a sentiment we strongly endorse!
His podcast series, Disruption!, has now recorded fifteen segments, and has included such well known solar industry players as Danny Kennedy, Tor “Solar Fred” Valenza, Frank Andorka, and Jigar Shah, to name a few. Heady company indeed, and we were honored to be invited to participate. (One interesting thing about the process - Roger lives in South Korea so the interview was recorded over Skype—pretty cool!)
In any event, here’s the interview - the opening audio features some sound bites from prior podcasts before we get started - how many of those voices can you identify?
Thanks again to Roger for including me in his wonderful series.
We have been teasing out bits and pieces of our new book, Commercial Solar: Step-by-Step, all summer as we neared the end of the publication process. Well today we can formally announce that it is available both at the Run on Sun Publishing eStore (where we get a better royalty - hint, hint!) and on Amazon.com!
Commercial Solar is intended for two primary audiences:
As the title suggests, the book provides an overview of the process by which an interested party - say, a facilities manager - can go from knowing next to nothing about commercial solar to identifying appropriate contractors to provide bids, analyzing those bids to make meaningful comparisons, determining financing options that are appropriate and even overseeing the actual installation process.
The book features a Foreword written by Boaz Soifer, VP of Sales at Focused Energy:
The material could be dry (much of the reading on this subject is), but is instead casual but precise, clearly laid out, and made accessible through handy use of a narrative in which the Facilities Manager of a fictional company undertakes a commercial solar project himself…
In his typical style—approachable, honest, quirky, and occasionally scathing—Jim has thoughtfully flattened out the complex world of commercial solar PV into an understandable roadmap that anyone can follow to project success.
Interested? You can download a two-chapter excerpt of the book for free, here. Better yet, you can purchase the book today from either our eStore or Amazon for just $9.95. If you are interested in bulk sales (i.e., ten or more copies), discounts are available. Please contact us at Bulk Sales for more information.
And of course, we welcome your comments either here on the blog or at Amazon. Thanks for your support.
In Part 1 of this series on financing commercial solar power systems we explored the basics - cash purchases and commercial loans. Now in Part 2 we move on to examine the pros and cons of solar leasing arrangements and Power Purchase Agreements (PPA’s).
An option that has gained significant traction in the past few years are leases. (Indeed, it is the explosion of solar leasing in the residential market that has fueled the growth of major players like SolarCity and Verengo.) But leases can come with unexpected traps for the unwary and a commercial customer needs to look closely at the details before signing on to a lease agreement for a commercial solar power system.
In a solar lease arrangement the right to use the solar power system is transferred from the owner, referred to as the lessor, to the lessee. From an accounting perspective, all leases are either considered a capital lease (or finance lease) or an operating lease. Generally speaking, “capital leases are considered equivalent to a purchase, while operating leases cover the use of an asset for a period of time.”
When leases are applied to solar power systems, other important considerations apply.
Under accounting standards, a capital lease is defined as “a lease that transfers substantially all the benefits and risks of ownership to the lessee.”
Therefore, with a capital lease, as with a cash purchase or loan, the solar client is treated as the owner of the system and receives the benefits of ownership: utility rebates and tax incentives (if applicable). The capital lease is often for a longer term – the basic criteria is that the lease must run for at least 75 percent of the estimated economic life of the system – that is, between 15 and 19 years or longer.
The longer term can keep payments lower, but because the solar client lessee receives the rebate and tax incentives, the capital lease might carry a higher interest rate than does an operating lease. At the end of the term, the lessee can typically purchase the system at below market cost, perhaps for as little as a nominal one dollar.
In contrast, with an operating lease the solar client lessee does not effectively own the system and the lessor retains the utility rebate and the tax incentives. Rather, the lessee is simply acquiring the right to use the system for a limited time in exchange for periodic rental payments. Typically an operating lease will be for a shorter period of time, and potentially at a lower interest rate. However, at the end of the lease term the lessee either has the system removed by the lessor, enters into a new lease arrangement, or must purchase the system for fair market value.
A related, but different vehicle for making use of a solar power system is a Power Purchase Agreement or PPA. As with an operating lease, the solar client under a PPA does not own the system. Rather, they purchase the electricity that the system produces from the system owner. (Presumably at a price lower than what they would be paying their utility for the same quantity of energy.)
Since the solar client under a PPA only pays for the energy actually produced by the system, the system owner has a greater incentive to maintain the system at peak efficiency and the solar client may receive more of the “benefit of their bargain” under a PPA than they would under an operating lease.
PPA’s typically contain “escalator clauses” by which the price paid per kilowatt hour generated may increase over time. As long as PPA costs increase more slowly than do utility rate increases, the solar client’s savings will grow over time. However, it is possible under a PPA to actually end up paying more for energy to the system owner than the client would have to the local utility. (Indeed, this possibility is what gave rise to a class action lawsuit against Sunrun.)
The Federal Trade Commission (FTC) is the federal agency charged with regulating false or deceptive marketing claims, and solar leasing options can surprisingly lead to unwanted scrutiny from the FTC. The FTC’s concern is “double counting” - multiple entities taking credit for the same environmental benefit. This sort of double counting can occur when a company hosts a solar power system, but does not own it.
The FTC provides this as an illustrative example:
A toy manufacturer places solar panels on the roof of its plant to generate power, and advertises that its plant is “100% solar-powered.” The manufacturer, however, sells renewable energy certificates based on the renewable attributes of all the power it generates. Even if the manufacturer uses the electricity generated by the solar panels, it has, by selling renewable energy certificates, transferred the right to characterize that electricity as renewable. The manufacturer’s claim is therefore deceptive. It also would be deceptive for this manufacturer to advertise that it “hosts” a renewable power facility because reasonable consumers likely interpret this claim to mean that the manufacturer uses renewable energy. It would not be deceptive, however, for the manufacturer to advertise, “We generate renewable energy, but sell all of it to others.”
Deceptive claims are actionable under the FTC’s mandate and offending companies could be subject to enforcement actions and fines. Under either an operating lease or a PPA (though likely not under a capital lease unless the Renewable Energy Credits (RECs) associated with the system are assigned to the utility), the solar client does not own the solar power system and any claim to be “solar-powered” or “using green energy” would be deceptive under the FTC’s guidance.
The series concludes with Part 3 - Commercial PACE and Crowd Funding.
The preceding is an excerpt from Jim Jenal’s upcoming book, “Commercial Solar: Step-by-Step,” due out in July.
Installing a solar power system is a major investment, and part of what determines your return on that investment is how the system is financed. In this three-part excerpt from our upcoming book, Commercial Solar: Step-by-Step, we explain the most common methods for financing a small to medium-sized commercial solar power system.
In recent years a great deal of creativity (some would say perhaps too much creativity) has been brought to bear on the subject of how to finance solar systems resulting in the introduction of myriad financing schemes from the terribly simple (straight cash purchase) to the terribly complex (e.g., flips and swaps) - and as the amount of money at stake grows, the more complex the schemes become.
Fortunately or unfortunately, in the realm of small to mid-sized commercial solar systems, the options are more limited and include cash purchases, loans, various types of leases, Power Purchase Agreements (PPA’s) and a handful of more novel approaches. In Part 1 today, we will look at the pros and cons of cash purchases and loans. Part 2 will explore leases and PPA and Part 3 will conclude with a handful of novel approaches and overall limitations.
The simplest financing method is the cash purchase – simple, that is, if you have the cash on hand and it isn’t needed elsewhere.
When a company self-finances through a cash purchase, they own the system outright and receive the rebate payment from the utility and all of the tax benefits. For those entities with the cash on hand, a cash purchase may be the best possible option since, unlike all of the other methods available, there is no added cost to the price of the system. Instead, a solar power system that is purchased outright should be looked at in terms of its opportunity cost. That is, what advantage/disadvantage does the solar investment provide compared to where the same capital could have otherwise been invested.
These days, with interest rates at historic lows, capital invested in traditional savings instruments - savings accounts or certificates of deposit (CD’s) - provide safety, but returns in the 1-2% range - not terribly attractive. On the other hand, investments with higher returns - individual stocks or stock funds - come with substantial risk, as the crash of 2008 painfully reminded us.
As a result, a solar power system - with next to no risk and an IRR of 12-19% - compares quite favorably. Put most simply, a safer investment will provide a far, far worse rate of return whereas an investment with a higher yield will be far, far riskier.
When viewed through such a lens, a solar power system becomes a very attractive investment indeed. In fact, when analyzed in that fashion, investing in solar even makes sense as a way of employing endowment funds designated for the maintenance of non-profit organizations like private schools and churches.
Unfortunately, not every entity that would like to add solar is in a position to self-finance. For those who must seek other financing sources, a conventional loan is the obvious alternative — if it is available. While interest rates remain at historic lows, many banks are historically reluctant to make loans at all, let alone for “exotic” projects like solar power installations. Or if they are willing to consider it at all, they may impose onerous terms or prohibitively restrictive conditions that keep solar loans more of a theoretical option than a practical one.
Bankers are focused on collateral and cash flow considerations, with solar being strong on the latter but notoriously weak on the former. Normally a loan for an equipment acquisition could be collateralized by the equipment itself — if you don’t pay on your car loan, for example, the bank simply repossess the car. But repossessing a solar power system is a complicated project and, unlike a used car which has a known resale value, the resale value of used solar equipment is uncertain, at best.
On the other hand, solar power systems significantly enhance the cash flow situation of the loan customer since the combination of remnant electric bill and loan payment will be substantially less than the old electric bill, with that difference only improving over time.
In the end, it comes down to a question of the banker’s comfort level with solar. Does the reduced risk that the customer will default thanks to the improved cash-flow prospects outweigh the downside increased risk of poor or no collateral? Some banks are starting to emerge with a specialized practice in solar loans but for the moment, loans for small to mid-sized commercial solar projects remain painfully hard to come by.
The series continues with Part 2: Leases and PPAs.
The preceding is an excerpt from Jim Jenal’s upcoming book, “Commercial Solar: Step-by-Step,” due out in July.
Our Four-Part Series on Comparing Commercial Solar Bids concludes today with Part 4: Comparing Return on Investment (ROI) and Levelized Cost of Energy (LCOE). (You can read our earlier installments here: Part One: Comparing Solar Modules; Part Two: Comparing Solar Inverters; and Part Three: Your Utility Savings Analysis.)
We learned in Part Three what should be contained in a Utility Savings Analysis - power and energy production over the system lifetime, savings in Year 1, and savings over the subsequent years as a function of guesstimated utility cost increases over time. Given the energy saving starting in Year 1, the cost of the system, any Operations & Maintenance costs, the anticipated rebate from the utility, and the tax benefits anticipated for the system, your prospective solar contractor should map out for you the cash flows associated with your system.
The O&M piece is worth pausing on for a moment as the system design will play a major role in estimating what your annual O&M costs will be. It is true that for the most part, solar power systems require little or no maintenance. Indeed, the solar modules will most likely still be producing plenty of power long after everyone associated with the project is long gone! (NREL has solar modules that have been producing power for forty years with no sign of stopping and the modules being manufactured today - at least from the top tier manufacturers - are of much higher quality than what was available in the 1970’s.)
The inverter(s), however, are another story. There is a reason that central inverters and string inverters come with relatively short warranties - typically five years standard for central inverters and ten years for string inverters - and that reason is heat. Since large inverters process very large amounts of power they also generate a lot of heat and that ultimately takes its toll on the electronics. If you add in adverse environmental conditions - high humidity, dust, the occasional rodent, etc., and sooner or later that inverter will fail. A proper ROI analysis will factor in the cost of inverter replacement over the lifetime of the project. If the included warranty is ten years, then inverter costs should appear every ten years. If the warranty is five, then replacement costs should be included every five.
Conversely, one of the main selling features of microinverters in the commercial marketplace is the length of the warranty provided. At a full twenty-five years, that means that inverter replacement is covered over the modeled lifetime of the system. (Of course, offering a warranty and being able to honor that warranty are two different things and there are few inverter companies that have been around for twenty-five years.) If you can reduce or eliminate inverter replacement costs, that will have a significant impact on O&M costs over the lifetime of the system.
Other O&M items include system monitoring (if not included in the purchase price), security (if conditions warrant), and cleaning (a very nominal expense).
For commercial systems the O&M expense is often modeled as a percentage of the purchase price per year, rather than discrete payments representing replacement events. In this way the O&M expenditure is actually more like a set-aside for a maintenance fund to be used as needed over time. It should accumulate to at least the value of inverter replacement within the inverter warranty period.
The other wildcard element in this analysis involves calculating the cash value of any received tax benefits. While we don’t provide tax advice (and accountants shouldn’t be designing solar power systems, either!), we can say that aspects of tax benefits to be considered are: the 30% federal investment tax credit, plus state and federal depreciation, the latter elements being a function of the tax rate of the system owner who will try to utilize the benefits. Of course, if the client is a non-profit, there will be no tax benefits to consider - the primary reason why the payback on solar for non-profits is so much longer.
The final piece - the rebate from the utility - should be factored in either as a lump-sum payment if the rebate is an EPBB rebate, or in annual payments over time (typically five years worth) if it is a PBI rebate. In California, these will be based on the output from the CSI rebate calculator, and those calculations should be made available.
Put all of that together over time and you have a series of cash flows, positive and negative, from which an Internal Rate of Return can be calculated and, more importantly, the payback period determined. Keep in mind, however, that this calculation is dependent in part upon assumptions about utility rate changes which, while possibly quite accurate in the short term, become increasingly speculative over time. Still, if the calculation is done in a manner where the assumptions are properly identified, the ROI calculation should provide a reasonable means of comparing competing bids as to relative value.
While it is common in the solar industry to express the cost of the system in dollars/Watt, that is a misleading statistic at best since it masks variables affecting real world performance. A far better metric - and one that your installer should be able to provide you - is the cost per kWh for the energy that will be produced by the system over its anticipated lifetime.
The calculation is actually quite simple - determine the total out-of-pocket costs for the system owner over the system’s lifetime (including purchase price less rebate and tax credits, plus all O&M costs) and divide it by the total amount of energy to be produced (allowing for the system’s performance degradation over time).
We prefer this number because it reflects the real world performance and it allows for direct comparisons against the client’s previous costs for energy. Indeed, we typically find costs per kWh in the 8-10¢ range compared to utility costs of 15-25¢ starting in Year 1. But because the energy cost for the solar power system is fixed over its entire lifetime versus the cost of energy from the utility which is constantly rising (even if we don’t know how fast), the comparison is quite compelling.
Note that by applying an agreed upon (or at least disclosed) rate for utility increases, a graphical comparison over time can be produced – but the underlying LCOE is not at all dependent upon future utility rate changes. This gives the client the ability to compare multiple proposal against a true value proposition – how much will the energy from the proposed system cost? From a financial perspective, this is the best comparison point that we have been able to identify. A potential solar contractor who balks at providing this should, you guessed it, be scratched from your list!
The preceding is an excerpt from Jim Jenal’s upcoming book, “Commercial Solar Step-by-Step,” due out in July.