We have gone through the FiT proposal from GWP and it is as bad as we had feared.  Here are our thoughts and concerns.

Public? What Public?

We have been pressing GWP to provide us with details about their FiT since January.  Emails sent to members of the GWP Commission were ignored.  In March we received this Tweet in response to our continued questioning:

We are currently working on the rates and community meetings will be scheduled for May/June.Info. will be posted on meetings soon.Thank u

Well, meetings were held in June about GWP’s proposed rate increase, but they did not touch on the proposed FiT at all.  To the best of our knowledge, no public meetings of any sort have been held by GWP in preparing its FiT proposal.  Contrast that with the years of joint effort between LADWP and stakeholders to produce a program that managed to be over-subscribed in its first tranche.

Sadly, it appears that GWP is actively seeking to avoid public input into its FiT proposal.  Indeed, even at the City Council meeting scheduled for tonight, this is not noticed for a public hearing, rather it is simply an action item.

Comparable Fees? You Betcha!

There is one place where the design of the GWP FiT rivals that of its sibling - the magnitude of the fees being charged to participants.  For the sake of discussion, we will assume throughout a 100 kW project being proposed in both locales.  (GWP caps system size at 1.4MW compared to 3 MW in LADWP territory.)  Both LADWP and GWP will assess the same types of fees: an application fee, an interconnection study fee (to determine how much the project owner will have to pay to get connected to the grid) and a refundable deposit based on the size of the system and which is paid back when the project goes live.  Here’s the comparison between the two:

Initially the 100 kW project in LADWP will payout roughly twice what it will cost to proceed in GWP territory ($6,250 vs $3,135) but the bulk of that gets refunded when the project is online.  So the true comparison is the non-refundable fees and there the two are nearly identical.

GWP’s published materials provide no guidance on what the actual interconnection costs might be - which adds to the uncertainty of the application process and makes it harder for a project developer to predict what her total costs might be.  This was something that all of the stakeholders demanded of LADWP during the development of its program - but that does not appear to be a lesson GWP chose to learn.

Comparable Prices? Not so Much!

While the fees being charged are comparable, the price to be paid for energy is not.

LADWP came up with a simple and predictable method for pricing its program, starting with a Base Price for Energy (BPE) that would step down with each tranche.  To make sure that the ultimate price paid reflected the value of the energy being purchased, they also adopted Time-of-Delivery multipliers that increased the BPE by as much as 225% or reduced it by as much as 50%.  LADWP’s first tranche BPE was 17¢/kWh - and that sold out in two weeks.  The next tranche, set to open sometime in July, will offer a BPE of 16¢/kWh, and each subsequent tranche reduces by one cent.

The virtue of this approach is transparency and predictability.  A project developer who anticipates submitting an application for a project in the time frame of the third tranche knows exactly what her return will be.

GWP’s method for setting its price is the exact opposite: opaque and entirely unpredictable.  From the Council packet, here is their “formula":

(1) for energy delivered to GWP during the peak [offpeak] period, the avoided peak [ offpeak] period cost of energy that would otherwise be purchased from the spot or short-term market during the upcoming calendar quarter, using the MEAD_ ON [MEAD_OFF] forward curve ($/MWh), as posted by the lntercontinentaiExchange (Mead 230 Day Ahead Clearing Price) for on-peak and off-peak periods, respectively; plus

(2) the value of Portfolio Content Category One (PCC1) Renewable Energy Credits (REGs) based on recent actual transactions by GWP ($/MWh); plus

(3) the avoided greenhouse gas (GHG) compliance costs, which are the product of (a) the default carbon emissions rate expressed in carbon allowances/MWh times (b) the price of carbon allowances from the most recent auction conducted by the California Energy Commission ($/MWh); plus

(4) the value of avoided transmission and distribution losses that would occur if energy were purchased on the spot or short-term market and imported into Glendale (eight percent (8%) multiplied by the avoided peak [offpeak] period cost of energy).

The “formula” is to be calculated on a quarterly basis, presumably to provide a new value for FiT contracts entered into that quarter.  So how can our project developer plan against this formula?  She cannot, since every component is subject to market changes. Again, this increases the uncertainty around the program which will only serve to decrease participation.

GWP includes a sample calculation but commits to nothing, saying that the numbers offered are “illustrative only".  Here’s their chart:

This means that if this were the pricing calculation to actually be used, GWP would be paying between 7.251¢/kWh and 9.292¢/kWh - which makes it a way worse deal than simply having a commercial solar system on a net-metering agreement.  Oh wait, GWP isn’t offering commercial net-metering at this time.

The peak-time rate is paid, according to GWP’s materials, Monday through Saturday from six a.m. to 10 p.m., excluding holidays.  However, since solar power systems without storage do not produce energy outside of those hours, the only time off-peak rates will be paid are on Sundays and holidays.

This rate is way lower than even LADWP’s Ratepayer Advocate urged - which was a BPE of 11-12¢/kWh - based on his study of 30 MW projects.  And that BPE was still subject to adjustments of as much as 225% based on time of delivery.  LADWP’s General Manager warned his Board that a FiT set at that level would not be subscribed - again, a lesson that GWP has apparently not learned.

So why the difference?  The staff report notes that LADWP is higher (although it frames it in a way to make that as unclear as possible) but insists that “A simple comparison of GWP’s proposed FIT rates and those of other publicly-owned utilities is not possible, because these other utilities have adopted significantly different approaches."  Really?  Why is that, if they all must comply with the same state mandate?  As always, the staff report remains obtuse: “There are multiple reasons for these differences, both in methodology and assumptions about avoided costs."  But there is no discussion whatsoever about those differences or the justification for the radically different approach that GWP is proposing.

How does this compare in terms of actual amounts paid?

We previously calculated the earnings for a 100 kW system in Year 1 under LADWP’s FiT.  For a BPE of 16¢/kWh - the price to be paid in the second tranche - the project owner would earn roughly $25,200 in Year 1, or roughly $463,000 over the twenty year lifetime of the project (allowing for system degradation of 0.9%/year).

To calculate the corresponding payment under GWP’s proposal, we would need to take the total kilowatt hours produced by the system and determine what percentage of those fall on holidays or Sundays.  Looking at 2014, there are 10 federal holidays, none of which occur on Sunday.  There are 365 days in 2014 (i.e., it is not a leap year) and so the total number of off-peak days would be 62, 52 Sundays plus 10 holidays.  Our 100 kW system oriented at 180 degrees with a 10 degree pitch will produce roughly 152,000 kWhs in Year 1.  Thus, the payment calculation is as follows:

For the exact same energy, our project developer is only going to earn 54% of what they would have made building the system in LADWP territory.  Over the course of 20 years, that is more than $213,000 less revenue to the hapless project developer who chooses to build her project in Glendale.

How do these systems compare in terms of Return on Investment?  Assume that our project developer can have her 100 kW system built for $4.00/Watt, making the install price $400,000.  Factoring in an Operations & Maintenance expense of 0.5% of cost/year and tax rates of 39% federal and 10% state (applied solely for calculating the benefit of depreciation), yields an Internal Rate of Return of 11.1% with Payback in Year 6.  Net earnings after 20 years (not adjusted for inflation) are $300,000.

But what of that same investment in Glendale?  Now the IRR drops to just 4.1% with Payback taking twice as long, occurring in Year 12.  Net earnings after 20 years?  Just $87,000.  So what project developer would choose to devote her energies - sorry, pun intended - into building her system in Glendale?

Of course, perhaps this is intended for folks playing at the upper limit of what is allowed - a 1.4 MW project - of which there could be exactly three in GWP territory at which point the entire FiT would be subscribed.  Assuming a conservative economy of scale and imagine that such a project developer could build his system for $3/Watt.  For such a developer the financials improve significantly with the IRR moving up to 7.1% and Payback in Year 8.  Net earnings after 20 years? $1.8M.

So… if you are a high roller developer your investment of $1.4M earns you 43% after 20 years but the little guy earns half of that.  The message seems clear: little guys need not apply.

What’s the Point?

Part of the point of the statute that demanded that GWP provide a Feed-in Tariff was to incentivize solar at all sizes.  Why?  Because small projects provide benefits that larger project do not, such as small business development and local jobs.  LADWP recognized that - and created a carve-out in their proposal to insure that small projects would be built throughout the City of the Angels.  Yet another lesson that Glendale failed to learn.

Having eschewed public input into the process of developing its FiT, GWP has sent the unmistakeable message that it simply does not care what the public thinks.  The program that it has proposed will empower just a handful of large-scale developers - if even they elect to participate.  But having waited until the last minute, GWP has put the City Council in an awkward position - it is unlikely that any Councilmember understands the nuances of this proposal well enough to push back and even if they did, how are they going to demand meaningful changes when staff has effectively managed to run out the clock?

It is unfortunate that in a city about to face a significant rate increase from their city-owned electric utility, this is the only game in town.  There is no commercial rebate program in Glendale, even though such programs thrive just down the road in Pasadena.  At best, this is an unfortunate missed opportunity. At worst, it is way worse.  It will be interesting to see who submits FiT applications when this program finally goes live.

• City Council Agenda for tomorrow’s meeting to be held in Council Chambers at 6:00 p.m.
  
• Staff report to the Council containing their description of the proposed FiT.

From what we can suss out quickly, it appears that the FiT will pay a maximum (peak periods) of 9.292¢/kWh and a low of just 7.251¢/kWh - well below the base price of energy of 17¢/kWh offered by DWP in its initial tranche.

More thoughts when we have had a chance to review these materials.

The flight was not without its drama, however.  Starting with an unexpected drenching of the aircraft in Cincinnati due to heavy overnight fog that delayed the takeoff for several hours while the craft was painstakingly dried out to reduce weight and prevent issues with controls freezing up at altitude. The flight was obliged to undergo multiple delays en route, with a particularly frustrating holding pattern before getting clearance to land at Dulles.

Despite all of that, the landing was perfect - “the best landing Dulles has ever seen” in the words of the head of the airport.  (The actual landing was recorded - it starts around the 20 minute mark on this video.)

If you are lucky enough to be in the Washington, D.C. area today, you can see the plane during an Open House from 1 to 5 p.m.  You can get directions here.

Here’s their proposed flight plan for today:

This morning’s departure was delayed due to the weight of condensation on the wings - all of which had to be removed before departure could be attempted - a painstaking, “almost surgical procedure” in the words of pilot Bertrand Piccard.

To reach Washington the plane must pass over the Appalachian Mountains which calls for a rather steep climb in the flight profile:

To follow along all day, click on the flight profile to access the Solar Impulse live site - there you can here conversations between the pilot and his support team, track the progress of the flight and read about this amazing aircraft and the people responsible for its success.

Commercial PACE

Another option that is starting to appear is PACE financing.  PACE – which stands for Property Assessed Clean Energy – operates in cooperation with a local government, typically a city or county, that agrees to finance solar power systems through the sale of municipal bonds.  Investors purchase the bonds and the proceeds are used to pay for the installation of the solar power system.  The government entity imposes a lien on the property to be paid back over time as an assessment on the annual property tax bills.  If the client chooses to sell the property, the obligation “runs with the land” and is assumed by the new owner (who, of course, also derives the benefit from the solar power system).

Under PACE, there is no personal obligation on behalf of the solar client so neither corporate nor personal credit is at issue.  In theory, PACE has the potential to greatly increase the number of entities that could qualify for solar financing.

Unfortunately, to date PACE has yet to live up to its potential.  Jurisdictions have been slow to adopt PACE programs and even in cities and counties where it has been adopted – such as in Los Angeles County - the pace of PACE-funded projects has been depressingly slow.  Part of that is due to the reluctance of some investors to get up to speed on the benefits of PACE as an investment vehicle, and the (perceived, if not real) inability to resell PACE investments in the secondary market.

Crowd Funding

The latest trend to hit solar financing is that offered by companies like Solar Mosaic which provide an online platform intended to bring together individual investors with selected solar projects.  At the Solar Mosaic website, potential investors can review projects and invest however much they choose, in $25 increments.  However, investors must be “qualified” per SEC rules based on income and/or net worth (without counting autos or residence). Investors who do not satisfy the qualification criteria have their total investment in any twelve months capped at $2,500.

By the end of May, 2013, Solar Mosaic had reported funding fourteen projects worth a combined investment of $2.1 million. The loans being provided by Solar Mosaic, however, are not covering the full cost of the systems being built.  Rather, they appear to be limited to something on the order of 25% of the total project cost.

Solar Mosaic offers an innovative, if limited, model for solar project financing.  It will be interesting to see if the crowd funding model succeeds with solar and expands over time as well as whether competitors, like UVest Solar, can build on what Solar Mosaic started.

Financing Limitations

Regardless of the financing vehicle – other than cash purchases – there are some common limitations as to the applicability of any of these methods.  The most common impediment is the size of the project.  Because all of these financing methods involve some amount of overhead, typically small projects are harder to fund, with project thresholds of $150,000 or even $250,000 being common.  While these limits aren’t a problem for mid-sized commercial projects, they can effectively leave small commercial projects in the 30-60kW range unfunded.

The credit worthiness of the solar client is also a consideration for each of these methods except PACE.  Non-profit organizations might find themselves shut-out of all of these funding methods because of concerns for longevity in some cases or simply because they do not pay property tax bills (a deal breaker for PACE programs).

Since non-profits do not qualify for tax benefits, their cash flow improvement is not as great as it is with their for-profit neighbors.  Moreover, whereas a small commercial customer might be able to secure a loan by making a personal guarantee (indeed, that may well be required), with a non-profit organization there is likely no one in a position to make such a guarantee.

More creative approaches may therefore be needed for non-profits.  For example, some non-profits are fortunate enough to have endowment funds that are restricted in how they can be used, but which might exceed many times over the cost of the proposed system.  Diverting some of those funds into a separate, interest-earning account against which the lending institution can attach a lien provides adequate collateral for the lender, with possibly acceptable risk to the endowed funds.

Non-profits that are not so well endowed, but which have a well-established donor base could consider the possibility of creating a free-standing, for-profit corporation to own the solar power system and to provide a PPA back to the system-hosting non-profit.  Since the for-profit owning entity can secure tax benefits, it can make the venture financially viable even if conventional funding cannot be found.

The preceding is an excerpt from Jim Jenal’s upcoming book, “Commercial Solar: Step-by-Step,” due out in July.

Leasing

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.

Capital Leases

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.

Operating Leases

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.

Power Purchase Agreements

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.)

Federal Trade Commission Concerns

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.

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.

Cash or Self-Financed Purchases

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.

Loans

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.

Amidst news reports of the permanent closure of SCE’s San Onofre Nuclear Generating Station (SONGS), an important milestone was largely overlooked: last week solar power produced over 2,000 Megawatts to the grid - nearly the equivalent of the now silenced SONGS.

Before it was shut down over safety concerns in January, 2012, SONGS was capable of producing 2,200 MW of power onto the grid, enough to power approximately 1.4 million Southern California homes.  When the plant was taken offline, it created a large gap in the energy mix for the region and an old, gas-fired power plant in Huntington Beach was brought online to support the region - adding conventional air pollution and expanded CO2 emissions along with it.

What a difference a year makes.  From the press release issued the same day that SCE was announcing its decision, the California Independent System Operator (CALISO) reported that solar power peaked at 2,071 MW at 12:59 p.m. and noted:

“This new record is remarkable considering the amount has more than doubled since last September when solar peaked at 1,000 megawatts,” says Steve Berberich, California ISO President and CEO. “We are excited by this trend and expect to hit more record peaks on a regular basis.”

Remarkable indeed - doubling solar power production in under a year. And keep in mind that these are the solar resources administered by the ISO - that is, utility scale solar power plants.  Not reported in that peak production is all of the rooftop solar around the state, helping to hold down power demands while simultaneously lowering customers’ bills.

Source: CALISO

Thanks in large part to the addition of more renewable sources, along with improved transmission infrastructure, the Huntington Beach facility is not expected to have to burn fuel this summer to stabilize the grid. (H/t, Devra Wang at NRDC.)

As we reported before, GWP is poised to impose a rate increase over the next five years in excess of 24%.  The first two of six scheduled public meetings to discuss the rate increase were held on Wednesday and Thursday and GWP posted their presentation materials from those meetings online.  Here are some of the highlights from those materials:

• Coal will continue to play a significant role in GWP’s energy mix, being as much as 18% by 2020.
• In 2012, GWP had more service outages per customer than any local utility, narrowly edging out SCE and more than five times as many as PWP.  (Indeed, GWP had nearly twice as many outages as PWP even in 2011 when PWP had the worst windstorm in living memory.)
• Perhaps because practice makes perfect, GWP had the shortest duration of its outages, with SCE being the worst.
• By the end of 2018, systemwide electric rates will increase 40.8% over 2007 prices if the proposed rate increase is approved.
• GWP’s requested 8% increase for 2013-14 compares with 6% in LADWP, 1% in PWP, 1.75% in BWP and 7.7% in SCE territories respectively.

Of course, in any systemwide rate increase like this, some customers will fare better than others.  So who are the winners and losers?  This chart is pretty definitive:

What is going on here?

In each and every year of this five-year rate increase, residential customers are seeing higher rate increases than any other class of customer in Glendale! They aren’t looking at a 24% rate increase, their rate increase is 26.4% or 5.28%/year.  In contrast, small commercial customers who do not exceed the threshold for demand charges (i.e., peak demand less than 30 kW) are seeing the smallest increases.  (GWP’s spokesperson asserted that this result is mandated by Proposition 26.)

Unfortunately, there is nothing in the presentation about the reinstitution of GWP’s solar rebate program, and the GWP website simply advises customers to “check back again after July 2013."  Of course, it would be more useful if GWP published its plans for that program - along with the FiT - and allowed the public time to comment and possibly improve the program.

At present, that doesn’t seem to be happening in Glendale.

So electric customers of GWP are going to see their rates increase substantially - albeit from a relatively low base at present - and the most effective tool that they could have to counter those increases, adding solar, remains in limbo.

Solar is a great fit for non-profit organizations - environmental awareness and good stewardship of resources go hand-in-hand with the mission of churches and schools.  But because non-profits are unable to take advantage of tax incentives, their sole sweetener for going solar are utility rebates - and in the City of the Angels, those rebates are about to drop dramatically before they go away entirely.

Will Churches and Schools in LA be Shut-Out of Solar Soon?

LADWP’s Solar Incentive Program (SIP) has been divided into two pieces: Residential and Non-Residential, the latter of which was further divided between Commercial (applicable to taxable entities) and Non-Profit/Government (i.e., tax exempt organizations).  The Non-Residential program is being phased out in favor of the Feed-in Tariff program (about which we have written extensively).  The thing is - the price paid for energy under the Feed-in Tariff program is just too small to pencil out for entities that cannot avail themselves of the 30% federal Investment Tax Credit and depreciation - and unlike under the existing SIP which offers higher rebate rates for non-profits, the FiT only provides a single payment level regardless of the tax status of the entity.

Most non-profits are looking for modest-sized solar systems in the 30 to 150kW range.  That is too small to attract lots of financing options and the boards of many non-profits are reluctant to commit to long-term leases for a depreciating asset.

Bottom line - without the help of a generous rebate, many - if not most non-profits - will be left on the sidelines of solar.

Which makes the news coming out of LADWP all the more troubling.  We have learned this week that when DWP goes before its Board on June 18th, it will seek a final re-authorization of the Non-Residential SIP with a requested budget of $15 million and rebate rates of $0.70/Watt for Commercial and just $1.45/Watt for Non-Profits.  As bad as that reduction is, when that $15 million is gone, that is it - no further funding of the SIP is planned.

How big is the shortfall caused by the lowered rebates?  Assume two neighboring entities, one commercial the other non-profit, that want to install a 100 kW solar power system on their respective buildings.  If we assume that the install cost comes in at $4.50/Watt, they are looking at an initial outlay of $450,000.  The commercial entity will get a rebate of $70,000 and a federal ITC of $135,000 leaving an out-of-pocket amount of $245,000 - and that is before figuring in depreciation.  The non-profit qualifies for a larger rebate, $145,000 under the proposed rates, but that’s it - leaving them with an out-of-pocket expense of $305,000 - $60,000 more than their for profit neighbor.

This is curious and troubling since the LADWP website has indicated - at the same time that we were being given this information - that when the SIP program resumed in July it would offer non-profit rebates of $2.25/Watt - a rate which would actually make our hypothetical non-profit come out ahead.  A more modest rate of $2.05/Watt would allow non-profits, at least at this level of project size, to break even.

Rebates are intended to serve a number of purposes but one of those is to help make solar commonplace - to insure that systems are installed where they will be seen and understood to be reliable components of our future.  Given that, where should limited rebate dollars be spent: assisting cash-strapped schools and churches to install solar where congregants and students can learn the lessons of sustainability - or simply to aid some company in lowering its operating costs and boosting its profits?  (Don’t misunderstand - we are all for commercial rebates, but if it comes down to a choice, surely the non-profits are in greater need of the support.)

On June 18th DWP staff will present this proposal to their Board and perhaps these rates can be adjusted to give more help to non-profits.  That would be a welcome outcome, but even more welcome would be an acknowledgement by DWP that as their program plans presently exist, there will soon be no way forward at all for non-profits to adopt solar.

Surely that cannot be the desired outcome.

When we first visited the USC Team’s build site they had just held their kickoff celebration - complete with The Band.  But at that point the house only existed on paper and in elaborate models; at the site, nothing existed but an empty space where soon - hopefully - a house, known as fluxHome, would bloom.

Well now things are really moving along, as this picture of the construction site makes clear:

Thanks to generous donations by Enphase Energy, Unirac and Bosch, the main solar components are all on hand. Still, one of the main points of complexity for the project is the need to break it down into three modules for transportation which can then be re-assembled into the working home at the competition site in Irvine.

As a general rule, solar power systems aren’t designed around a “dis-assembly needed” requirement!

In the weeks ahead we will be working with the team to advise them on mounting and flashing standoffs, assembling railing, mounting Enphase microinverters (including grounds that would satisfy LADWP), finishing the wiring and mounting the Bosch solar panels.  And we intend to be there when they take it apart and put it back together!

It is going to be an exciting summer for the Team and we are really looking forward to working with the them to make this happen.  Fight on!

The report, by KQED science reporter, Lauren Sommer, provides a mostly balanced view of the issue with the spokesperson from PG&E repeating the “unfairness” meme that the investor owned utilities have been floating for awhile now, offset by the revealing explanation of how the death spiral might work.  It is worth taking a listen (oh, and maybe supporting your local public radio station in the meantime!):

This is a typical utility quote:

The problem, Rubin says [who works on net metering at PG&E], is that solar customers aren’t paying their fair share. “Solar customers really use the grid more intensively than non-solar customers,” he says.

Everyone pays for the grid – building and maintaining the wires and substations – through the price of electricity. By reducing their bills close to zero, Rubin says solar customers avoid paying for power lines they’re still using.

Really?  First, a solar customer who was truly net-zero is making far less use of the grid than their energy-guzzling neighbor next door.  Second, by helping to meet peak demand in the hot summer days, they are reducing the spot energy needs of the utility.  Third, that peak demand energy surplus provided by the solar customer is given a one-to-one offset against energy that they consume in the evening and night.  But in a time-of-use rate structure, the utility is trading their cheapest energy for the most expensive energy produced by the solar customer - if that is unfair to anyone, it is unfair to the solar customer.

As long as the utilities approach this debate from such a disingenuous position, their death spiral will only tighten.

Mr. Tillerson responded to questions from proponents of the resolution - which Management had recommended be voted down - during the open comment period before the vote.  When asked about the problem of exceeding 350 parts per million CO2 - the limit widely acknowledged as the threshold for preventing significant climate change - he replied:

Well, I can not conclude there is something magical about 350 because that suggests these models are very competent and our examination of the models, are that they’re not that competent…

We do not see a viable pathway with any known technology today to achieve the 350 outcome that is not devastating to economies, societies, and people’s health and well being around the world. You cannot get there.

When he speaks of steps that might be “devastating to economies” he is deathly serious:

We do not have a readily available replacement for the energy that provides the means of living that the world has today, not our standard of living but equally, if not more importantly, a standard of living that more than 2 billion people on the planet are below anything any of us would find acceptable from a poverty, hunger, education standpoint.

How do you want to deal with that great social challenge?  To what good is it to save the planet if humanity suffers in the process of those efforts when you don’t know exactly what your impacts are going to be?

(Rough transcript here - edited for accuracy based on audio, starting 1:39 in.)

The irony here is pretty intense - Mr. Tillerson is only focused on the risks associated with reducing the use of his company’s products - but he glosses over the impact that climate change is having now, and will have in the future.  It is insulting to suggest that he, or ExxonMobil, is actually concerned with raising the standard of living of the billions to which he refers and yet they are exactly the people who will suffer the most from fossil fuel-ed climate change.

Instead, Mr. Tillerson expounds on his “faith” that technology will allow us - or at least the First-Worlder’s amongst us - to adopt a “mitigation and adaptation” approach to dealing with climate change.  That might work in Dallas - where the meeting was held - but it is a death sentence for say, the Maldives.

Taking comfort in his words, the shareholders dutifully voted down the resolution 73 to 27%.

We averaged over 132 visits per day during May, over the quarterly average of 122 which exceeds the first quarter average of 107.  And we did this without any paid advertising at all - sorry, Adwords.

Rather, this is the result of closing in on our goal of five blog posts per week - we averaged 4.74 posts per week during May, up from the quarterly average of 4.4 which is up from last quarter's average of 3.7.

Of course, we could write five times per day and it wouldn't matter without YOU, the folks who come and read these posts.  So thank you for taking the time to visit and read - and comment!  (Yes, like all bloggers, we love comments!)

Let's see what June has in store!

The article, titled Solar Industry Anxious Over Defective Panels, points to installations as close as the Inland Empire, having shockingly high failure rates after just two years of being installed. "Coatings that protect the panels disintegrated while other defects caused two fires that took the system offline for two years, costing hundreds of thousands of dollars in lost revenues." Wow - that is shocking.  So who made those defective panels?  The reporter doesn't say.

Nor are any of the problem panels alluded to in this story ever named, citing, in some cases, confidentiality agreements.

Which raises a serious problem with the article: if you cannot identify any of the solar module manufacturers that are having these problems you leave the impression that all solar modules are suspect. (Our analysis on who the guilty party might be is below...)

A quick perusal of the comments to the article reveals the predictable factions: those who echo the Fox News line that solar is a failed technology that only exists because of the Obama Administration's foolish indulgence in Green Tech; claims that all problems in the solar industry are a result of "Chinese dumping" and the associated China bashing; countered partially by a handful of comments from people who actually know something about the industry.

We find the Chinese bashing particularly problematic - after all, the Chinese are not putting a gun to any project developer's head and forcing them to use third-tier panels.

Greed is what is causing that.

We have been in business since 2006 and there have always been high quality solar panels available from reputable manufacturers - and they have always cost more than many of the panels offered to us for use in our projects.  Scanning the CSI data (see below) reveals that many projects - including many of the largest projects - were built using those "bargain basement" panels.  Why?  Because it maximized the project developer's profit.

This is not a new problem, despite it getting a major splash in the "Paper of Record."  Indeed, we wrote in the Spring of 2012 about how the decision by project developers to focus on the lowest cost per Watt "will continue to put undue pressure on quality manufacturers around the globe - whether in the US or China.  Consumer demand for quality is the ultimate way to improve this situation - and that means educating consumers as to what quality means in this market."  A year plus has gone by, but where has that educational effort been?  The need is as great - or greater than ever, but sadly, the NY Times piece fails on that score.  (If you want to read an earlier, and far more comprehensive article on this subject, check out this piece by the great Felicity Carus: Quality Issues Threaten to Give Solar a Black Eye.)

What's Up in the Inland Empire?

It's a Friday morning so we decided to indulge in one of our favorite pastimes and go diving into the CSI data to see if we could identify the guilty party alluded to in the NY Times piece.  Here is all they gave us to go on - the project has been in place for roughly four or more years (failed after 2 years, offline for 2 years), located in the "Inland Empire" and its downtime resulted in a loss of "hundreds of thousands of dollars" in revenue.  From that we concluded that we needed to look at systems from 2010 or earlier, in the Inland Empire - which we took to mean anywhere in the counties of Riverside or San Bernardino - and of at least 200 kW.  Those criteria provide us with 28 potential systems, built with solar panels from just seven manufacturers.  Here are our results:

What can we say about these manufacturers?  Well, certainly BP Solar, SunPower, Kyocera and Sanyo would all be considered top-tier manufacturers of solar panels - although BP is exiting the solar industry and Sanyo is now owned by Panasonic.

As for the others, Evergreen Solar was a US manufacturer that filed for bankruptcy in August 2011.  Solar Integrated Technologies was a subsidiary of Michigan-based Energy Conversion Devices which itself filed for bankruptcy in February 2012.  Solar Semiconductor is a vertically integrated systems provider with manufacturing facilities in India.

So who is the guilty party?  No way to know for sure, but a little online searching reveals other problems for one of these companies.  A September 14, 2012 article on the San Diego Union Tribune website documents problems with "Flawed Solar Panels" that were manufactured by Solar Integrated Technologies.  According to the article, the panels manufactured by the company, "had a manufacturing defect that allowed water to seep into crevices of the panels, which in some cases created corrosion and in the worst-case scenario could cause a short that could start rooftop fires" - which sounds a great deal like the problem cited in the New York Times piece.

Oh, and just a “head’s up” for the folks at Fox - people really, really do want to drive electric cars, particularly a Tesla!  If you are lucky enough to have one - or any EV for that matter - give us a shout and let us help you to fuel that sweet ride with clean, green power from the Sun!

Will GWP’s FiT Actually Support PV Like This?

As we have reported previously, GWP is under a state-law mandate to offer a solar Feed-in Tariff (FiT) program by July 1, 2013 - some 33 days from today. Keeping in mind that it took LADWP the better part of three years to design and approve its FiT does not fill one with confidence that GWP can go from having nothing in writing to distribute to the public to a successful program start in just 33 days.  (Of course, the law only requires that a program be “offered” - it says nothing about whether that program is designed in a way that gives it any chance of being successful.)

Despite having been told that public workshops would be held during May and June, it is clear that at least the May dates have gone by the board.  With the clock ticking, and nothing new on the GWP website about its FiT, we started combing the Glendale website for possible hints in the posted agendas for either the Water & Power Commission or the City Council - no luck.  So we decided to call the City Clerk’s office, because in any city, the City Clerk is the one person guaranteed to know what is going on.

Bingo!

We spoke with Michael Dunn who gave his title as Secretary to the City Clerk.  He informed us that indeed the FiT is scheduled to be considered by the City Council for the first time on June 18, with the second reading (and presumed adoption) one week later on June 25.  He also informed us that the Agenda, complete with downloadable materials, should be available to the public on June 13.  (You can access the Agendas for the Glendale City Council here.)  Of course, a first disclosure of a program as complicated as a FiT just 17 days before its state-mandated go-live date does not suggest that Glendale or GWP actually wants any input from the public.  Rather, this is a schedule that suggests that any public comment is entirely pro forma and whatever is put forward by GWP is what the Council will adopt.  (No doubt citing the state-mandated deadline as justification for taking the proposal “as-is."  Classic.)

Unfortunately, Mr. Dunn knew nothing more about the FiT himself, but he offered to send me to someone at GWP who might be able to answer more of my questions.  He transferred me to Victor Pacheco who gave his title as Senior Electric Service Planner.  Mr. Pacheco  told us that the program would be offered for projects between 30 kW and 1.4 MW capacity and that the program was limited to 4.5 MW total.  He was unable to tell us anything more about the remaining details of the program, such as the base price for energy to be offered, or whether time of delivery factors would be applied, or whether there would be any carve-out from the 4.5 MW total for smaller sized systems (as there is in Los Angeles).

He was able to tell us that a FiT Manager was going to be selected (apparently from existing staff) but no such appointment was yet in place.  Well, not like there’s any urgency here - after all, you still have 30+ days to figure this out - what could possibly go wrong?

As for public meetings to discuss the FiT, he was unaware of any and the only public meetings alluded to on GWP’s website concern their five-year, 24% proposed rate increase.  While the FiT is apparently bundled into that rate ordinance, it just doesn’t make sense to try and combine the two into the same public meeting.

As always, we will update this post as we learn more information.

GWP’s proposed rate increase breaks down as follows:

• 8% in fiscal year 2014;
• 7% FY15;
• 5% FY16;
• 2% FY17 and
• 2% FY18

Put that all together and you are looking at a 24% rate increase over the next five years, or 4.8% per year.  (By way of comparison, we generally assume a 4.5%/year rate increase for municipal utilities and 5.7%/year for SCE when we do our Return on Investment modeling.)

GWP is proposing to hold a series of public meetings during June to discuss these new rates.  From the GWP website, here is the presently scheduled set of meeting dates:

1. Wednesday, June 5, 2013, 7:00 p.m. – 8:30 p.m.
   Dunsmore Park Community Room - 4700 Dunsmore Ave., La Crescenta, 91214
2. Thursday, June 6, 2013, 7:00 p.m. – 8:30 p.m.
   Sparr Heights Community Center - 1613 Glencoe Way, Glendale, 91208
3. Wednesday, June 12, 2013, 7:00 p.m. – 8:30 p.m.
   Police Community Room, 131 N. Isabel St. 91206
4. Thursday, June 13, 2013, 7:00 p.m. – 8:30 p.m.
   Boy Scouts of America - 1325 Grandview Ave. Glendale, CA 91201
5. Wednesday, June 26, 2013, 7:00 p.m. – 8:30 p.m.
   Glendale Youth Center - 211 W. Chestnut St., Suite 302, Glendale, 91204
6. Thursday, June 27, 2013, 7:00 p.m. – 8:30 p.m.
   Pacific Edison Community Center - 501 S. Pacific Ave. Glendale, 91204

Unfortunately, at present the GWP solar program for both residential and commercial customers is “not available,” with the website advising interested residential customers to “check back again after July 2013,” but simply telling commercial customers that the “program is currently not available.”

Faced with a substantial rate increase - with 63% of that increase coming in the next two years - GWP customers should have the option to Go Solar NOW! Hopefully the process that implements these new rates will also provide some assistance for GWP customers who wish to do just that - we will keep you posted.

ROI

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.

Levelized Cost of Energy

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.

LCOE: Comparing System to Utility Cost

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.