CCSE Workshop on Commercial Solar Economics and Financing

[September 24, 2010 in San Diego, CA]

Proposal Contents and Investment Analysis

Created & Presented by Jock Patterson

Clean Power Finance Product Support, Training & Development jpatterson@cleanpowerfinance.com

Workshop Objective
Commercial solar sales are rooted in economics that lead to profits and the ability to finance the project. This course is an in-depth look into the calculations that lead to a reliable and accurate commercial quote.
What information is needed from Customer and Site? e.g., Customer goal and site readiness What Calculations are required? e.g., System sizing, utility-savings, return on investment How is this information presented? e.g., Text, tables, charts, links, cut sheets What proposal options, flexibility, and speed is needed? e.g., Quote v. Bid, PDF or printed, own v. lease

Workshop Outline
9am Start: Workshop Overview

Customer & Site Qualification

Understanding/Selecting the current Utility Rate System Sizing & Gross Cost Estimating

Noon lunch break

Energy Production & Solar Savings using CPF Tools System Net Cost: applying Incentives

How would you like to pay for that? (Financing)

Show me the money! (Payback Time)
ROI measurements Cash Flow
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Quote Contents (1/2)

Section Cover Letter Summary Customer Information Site Information System Information Gross System Cost (in Year 0) Incentives Net System Cost (in Year 0) Sample Content Address concerns/goals and introduce solution ROI; Cost Breakdown; System Description Name, Mailing Address, etc Address, Roof/Ground Dimensions, Electric Service, etc Module, Inverter, Array Parameters, Adders Equipment and labor pricing, service fees, upfront incentives Rebates and tax credits Contract Cost, Upfront

Quote Contents (2/2)

Objects Energy Production Utility Savings Investment Cash Flow Sample Properties DC-AC Derate Factor,(s) Shading, Microclimate variance, Insolation Monthly Bills without and with solar, Electricity inflation Installation and Investment period annual cash flow: itemized, annual totals, and cumulative flow.

ROI
Contract Miscellaneous

LCOE, Payback Period, Lifecycle Payback, Internal Rate of Return

Terms, conditions, cancellation notice, disclaimers, etc Equip spec/cut sheets, referrals, optional features (e.g., fullservice monitoring), links/URLs, format options

Acronym Check
# 1 2 Term REC PTC Ltr Meaning or Association A B Common rating of energy from entire system (Arrays & Inverters) County or City tax applied to utility services

3 4
5 6 7 8 9

CEC-AC LCOE
PACE IRR kW STC TOU

C D
E F G H I J K

Interest/discount rate that indicates the yield of an investment Also called a Green Tag
Real World output rating of DC Array The temp and insolation condition for Nameplate PV panel rating Type of financing tied to property assessments Power rating equivalent to 1000 Volt-Amps Unit cost of lifetime energy production Energy/power rates based on when electricity is used Solar cell temperature in Standard Operating Conditions

10 NOCT 11 UUT

1D, 2E, 3A, 4I, 5G, 6C, 7H, 8F, 9J, 10K, 11B
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Qualification: Contact (1/2)

Do we have a solar fit?
Whats the objective?
Be Energy Independent? Really?
Get off the Grid! Buy a Generator Go Green? Nice Thought! Get a Green Rate Consider EE Be Patriotic (CA not CA)? Reduce Energy Import Buy American (Incentive Bonus) Save Money? Go Net Metering! Traditional: No Annual NEG Credit Sell Excess: Annual NEG Credit/Payment Make Money? Feed-in Tariff, baby! Sell it All !!
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Qualification: Contact (2/2)

Objections to and goals in going solar:
Cost:
Upfront: Float incentives Suggest Loan/Lease Ongoing: Admin is up-to-you Maint. is low

Return on Investment (ROI)

IRR Payback Period Resale Value

Look: Aesthetics: Man, that clashes with my Gothic columns!

Visibility: Can you hide it? Got Parapet?

Technology: tomorrow will be better, right?

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Qualification: Site
Solar access/shading Foundation readiness:
Roof: Original 1970s Tar & Gravel Roof: Real Slate Marshy, muddy, quagmire bog? terra really darn firma?

Electrical compliance
Adequate power panel
Bus & Main Breaker Amperage rating Available breaker slot(s)

Line-side tap option? Acceptable transformer ?

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Commercial Tariff Book Review

Five Basic Charge types
1. 2. 3. 4. 5. Billing Period Service: Customer or Meter Charge Energy use (kWh) Demand peak (kW) Reactive Power creation (KVAR) Taxes, surcharges, adjustments, credits

Three Voltage Service levels for SDGE

1. 2. 3. Transmission: over 69kV Primary: 2.4 12V Secondary: 120 480V

[see www.sdge.com/regulatory/currentEffectiveTariffs.shtml]
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Billing Period Charges

Fixed Charge per time period per account and/or per meter; unrelated to consumption or demand except as minimum charge Customer Charge: $/month (per meter)
A : $9.56 AL-TOU (Secondary, <=500 kW): $58.22 A6-TOU (Primary, >500 kW): $232.87 You cant remove a customer/meter charge with solar energy credits! You may be able to select a cheaper tariff option or a whole new tariff, but you cant apply energy credits to a non-energy charges.
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Energy Rates (1/4)

Energy Consumption Charges: $/kWh The Aggregate (Bundled) Rate has charges for
Generation: Power plant generation Transmission: Power plant to Substation transmission Distribution: Substation to service end-users

Rates can be further altered by various riders to the tariff

Fuel Charges Plant Decommissioning Energy Credits Environmental Fees etc

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Energy Rates (2/4)

Example Consumption Charge Schedule A : Secondary Summer Rate = $0.1979/kWh
(winter rate is $0.1849)

A flat rate composed of Commodity Charges (Generation): SDG&E $0.10072 DWR $.00515 Transmission $0.01937 Distribution $0.0599 Other Charges Public Purpose Program $0.00866 Nuclear Decommissioning $0.00046 Competition Transition Charges $0.00281 Reliability Services $0.00083
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Energy Rates (3/4)

Energy Charge Variation Usually Flat but variable by Time:
Flat v. Tiered: rates change with Volume

Constant v. TOU: rates change with Day Time

More Common commercially TOU period times can vary From weekday to weekend Seasonally TOU period rates and non-TOU rates can vary seasonally

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Energy Rates (4/4)

TOU Energy Consumption Charges: $/kWh Example: Schedule A-TOU
Secondary Summer Rates
Peak = $0.28596/kWh Semi-Peak = $0.16477/kWh Off-Peak = $0.14362/kWh

Summer TOU Periods

Peak: 11a 6pm M-F Semi-Peak: 6a 11a and 6p 10p M-F Off-Peak: 10p 6a M-F ; All Weekend & Holidays

Q: What does Secondary refer to above?

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Time of Use Overview

TOU Tariffs have time-dependent rates (versus fixed rates)
Days are divided into TOU periods: Off-Peak: lowest cost; usually late evening to early morning; often the whole weekend and holidays. On-Peak: highest cost, especially expensive in summer months; often occurs midday when utility demand is high (machinery, A/C) but may not apply in winter season (e.g. temperate climates); Part-Peak: if it exists, it occurs between Peak and Off-Peak periods; that means it usually occurs twice in a day. For TOU tariffs with no winter peak period, a part-peak often exists. Two or three TOU rate periods most weekdays Period names vary among utilities (Mid-Peak or Part-Peak) A TOU period & rate can vary seasonally

Other possible TOU tariff attributes:

Tiered TOU rates TOU & Demand: Base Only: Regardless of when max demand occurs TOU with Highest Demand: Depends on when max demand occurs Each TOU Period: A max demand is measured and charged for each TOU period.

Demand Rates (1/2)

Demand Charges ($/KW): Maximum Monthly Demand
Measured energy use per every 15 (or 5) minutes / .25(.05) The highest average demand (max or peak demand) in any or all TOU periods, or just off-peak, is multiplied by the demand rate. Customer Power Demand often determines the rates available for a customer. Solar may lower peak demand during daylight hours but it wont necessarily lower maximum demand off-peak; either way, its difficult to prove/quantify. Non-TOU Demand: Only a Base Rate Demand Charge TOU : Charges in one or more periods
Off-peak only Single TOU period with highest demand Each TOU period with respective highest demand
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Demand Rates (2/2)

Examples of Demand Charges ($/KW) A6-TOU Primary Voltage
Base $12.75 Summer $15.9 Winter $5.47

DG-R Primary Voltage

Base $6.38 Summer $1.05 Winter $0.23
Still dont get demand? Ask about the swimmer or track runner analogy.
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Reactive Power Charges (1/2)

Reactive Power (KVAR)
A customer with either capacitive or inductive loads (motors, welders, etc) creates Reactive power from productive Real AC power; Reactive power disrupts the in-phase nature of AC powers Voltage(V) and Current(I) waveforms; they dont peak simultaneously, reducing Real Power [P = V * I]. Current is said to be out-of-phase with Voltage (either lagging or leading it).

Power Factor (VA)

When the Current lags or leads Voltage, more current is required to produce the same power. From the utilitys perspective its an increase in power consumption (Apparent Power = Voltage * Current) but no increase in Real Power (Watts) from the consumers perspective. Power Factor is the ratio of Real Power P to Apparent Power S = P / S A Power Factor of 1.0 means there is no Reactive power; anything less than one means there is reactive power demand. Usually no charge if > .90

[see http://www.the-power-factor-site.com for laymans explanation]

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Reactive Power Charges (2/2)

Power Factor / Reactive Power Charges for SDGE:
Schedules DG-R, AL-TOU, and A6-TOU: $0.25/kVAR Power Factor Metering required due to failing Power Factor Test Failure No indication of what triggers this test (no details)

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Taxes and Surcharges

Taxes Sales Tax: state sales tax (none in CA) CEC Tax: : $0.00022 / kWh consumed Utility Users Tax : municipal sales tax (0 - 10%)

Surcharges: see individual bills

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Sample SCE Bill

26.8%

1.11% 0.26%

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System Sizing Considerations

Super-Size Me? [Size Determinants]
Foundation surface area & setbacks Array shape and dimension
Building and Fire code setbacks Penetrations Roof weight limit

Electric Service Panel and Transformer limits 95% of Electricity Consumption limit if net metering Budget limitations: Whats the upfront expense limit? Module dimensions/orientation
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ACME Utility Usage & Size Estimate

Data and Calculation Types Rate Schedule Consumption (No Demand) Average Month Consumption Rate & Monthly Charge Season Usage and Charge Annual Consumption Values and Comments SDG&E; Commercial; Schedule A Rate Option UDC Bundled Service; Secondary Voltage Summer (5) 8,000 kWh $0.1979; $1,583.20 40,000 kWh; $7,916 Winter (7) 7,000 kWh $0.1849; $1,294.30 35,000 kWh; $9,060 89,000

Energy Charge and Rate

Max System Size Estimate AVG area Insolation (Solar Hours) EST. Operational Effectiveness Max Size ESTIMATE

$16,976 per year; $0.1907/kWh average

Site Insolation & Operational Effectiveness ~5.5 /day ; ~2,000 /year 1,500 kWh /year per kW STC 89,000 kWh/ 1,500 kWh = 59.33 kW
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ACME Array Planning (1/4)

Data and Calculation Types System Size Limitation Values and Comments Limited by space, not budget Array Quantity Potential 2; owner wants on just roof if possible

Array #1 Parameters

DC side only
Condition Good

Foundation Type Flat Tar & Gravel Roof

Foundation Shape & Size Rectangular: 120 x 65 (7,800sf) Orientation Southwest (225 deg); no slope Useable Area Shape & Size Rectangular: 100 x 50 (5,000sf) Net Tilt 15 degrees with tilt-ups % Occlusion: Soiling and Shading 4% Soiling; Minimal Shading Module & Qty 140 Generic 225 Watt (5 rows of 28) Inverter Generic 30kW Array Size 31.50kW STC
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ACME Array Planning (2/4)

True North

Array #1: 31.5 kW 5 rows (5.5 row spacing) 28 modules / row

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ACME Array Planning (3/4)

Data and Calculation Types Array #2 Parameters Values and Comments DC side only Foundation Type Unpaved Ground

Condition Good soil; slight grading; short trenching Foundation Shape & Size Rectangular: 50 x 25 (1,250sf)
Orientation South (180 deg); no slope Useable Area Shape & Size Rectangular: 50 x 25 (1,250sf) Net Tilt 27 degrees (6:12 pitch) % Occlusion: Soiling and Shading 3%; Minimal Shading Module 56 Generic 225 Watt (4 rows of 14) Inverter 2 Generic 6000 Watt Array Size 12.60kW STC

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ACME Array Planning (4/4)

North

Array #2: 31.5 kW 4 rows (in same plane) 14 modules / row

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ACME Equipment Specs

Data and Calculation Types Module DC Output Ratings 225W STC (+/-2%) ; 220W PTC Physical Characteristics 1,600 x 1,000 mm; 32 lbs Thermal Characteristics 47 deg NOCT; -.0045 Coef. of Power Inverter Array #1 One 30,000 Watt; 95.5% CEC efficiency; 480V Array #2 Two 6,000 Watt; 95.0% CEC efficiency: 480V Values and Comments

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ACME Array Net Derate Factor

Data and Calculation Types DC-AC System Derate Factors Module Mismatch .98 Nameplate Rating & Age .97 (1 + negative tolerance 1% degrade) AC & DC circuit loss & Downtime .960 (chiefly voltage drop: .99 * .975 * .995) System sub-total Derate Factor .913 Array #1 No Shading Soiling .96 (1 4%) Values and Comments

Inverter .955 NET Derate Factor = .837

Array #2 No Shading Soiling .97 (1 3%) Inverter .950 NET Derate Factor = .841
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Energy Production: PVWatts 2

Array #1 Site Location (here) Cell ID STC Derate Factor Tilt Azimuth Insolation Average Annual AC Energy 31.50 kW .837 15 225 5.45 48,282 kWh Array #2 12.60 kW .841 27 180 La la la Yada, yada! 0174365 (32.73 Lat / -117.248 Lon)

WHOA !! PVWatts actually returns Energy production for each month. An accurate quote would consider each month and if TOU calculations are included, each hour (8760 report: 24 * 365). Oops! That means well really need to use PVWatts 1. This is getting too hard and time consuming .

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Help me, somebody!!

We are seeing just how complicated it gets to generate an accurate quote manually. As we dont want to turn this workshop into how to build a quoting tool, I suggest we speed things up by using a quoting tool to calculate Energy Production, Solar Savings, ITC, et cetera. Therefore, I will be resorting to using Clean Power Finances Tools service to crunch the numbers. We dont need to perform all the calculations just to explain the resulting values. CPF Tools will do that work and we will talk about the details behind certain numbers as needed.

Psst! You might be able to do your taxes manually, but if you had to do them professionally for others, you would use software, right?
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Energy Production (1/3)

Energy Production for each array obtained from PVWatts (http://www.nrel.gov/rredc/pvwatts): PVWatts 1 for locations outside continental US and Alaska or if post-solar rate schedule is TOU; this includes US territories PVWatts 2 for Non-TOU post-solar rate schedules and sites in continental US or Alaska. Both PVWatts calculators return Energy and Insolation values for each month but PVWatts 1.0 returns hourly output values over a year (8760 report (24 * 365))

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Energy Production (2/3)

Good for Estimating in future

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Energy Production (3/3)

35

Lunch Time!

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Where were we?

Well, we covered the following so far Customer and Site Qualification Utility Rates System Sizing & Specs Why were using a tool to help us (e.g. Energy Production) Next up is Solar Savings . Using CPF TOOLS!!!

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Solar Savings (1/2)

The Post-solar billing is based on switching to a TOU version of Schedule A. Without doing so, the ROI would be less simply because the bill offset would be less. Q: What does the $10 monthly charge for May Aug represent?
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Solar Savings (2/2)

Before and After Solar billing based on switching to a TOU version of Schedule A.

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TOU period usage allocation

TOU period usage is allocated by combining the TOU schedule with Energy Usage Patterns (or Demand Curves):

Demand
3
3.0 2.5

2.5 2
1.5 1

2.0
1.5 1.0 0.5

0.5 0 1 3 5 7 9 11 13 15 17 19 21 23

0.0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

The area under the graph for each TOU period represents the amount of usage

Gross System Price Estimate (1/2)

Cost Determinants
Equipment: $/Watt (STC) for
PV Collector(s) Inverter(s) Typical BOS

Whats your cost per Watt or per unit? Whats your expected profit margin? Price = Cost /(1-margin)

Labor $/Watt for

Installation Crews: Racking, Electrical Subs: Roofers, Trenching/Backfill, Foundation/structure Clerical/Administrative: Rebate/Utility forms, Drawings, Permits, Project Mgt Price = Cost *(1+markup)

Other Adders (e.g, New Electric Service, transformer, tilt-ups)

Allowances: (e.g., steep roof fee, 2% contingency, 3% discount)
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Gross System Price Estimate (2/2)

Line Item PV Collectors (44.1kW STC) Inverters Balance of System Installation Administration Adder #1: Permit Fee Adder #2: Trenching Cost $3.232/Watt STC @ qty $8,250 / 30kW $2,250 / 6kW $0.46 / Watt STC $0.54 / Watt STC $0.055/ Watt STC $400 (pass-through) $5.00 / ft + $200 fixed cost (pass-through) Price (25% Gross Margin) $190,000 ($4.309 * 44,100) $11,000 $6,000 (2 x $3,000) $27,048 $31,752 $3,200 $400 $600 ($5.00 * 80 ft; $200 fixed) $270,000 No ($6.12/Watt STC) ($6.89/Watt PTC)commission on ($7.22/Watt AC-CEC) tax $19,590
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Gross System Price Array #1 CEC = 28.0kW PTC * .955 = 26.74kW AC Array #2 CEC = 11.2kW PTC * .950 = 10.64kW AC System AC-CEC = 37.38kW Sales Tax on Equipment 8.37% (pass-through)

Financial Incentives to Purchase

Installation Cost Reduction
Upfront Rebates Federal (DOT) Grant in-lieu of ITC (Section 1603) USDA: REAP/RES/EEI Grants Program

Tax Credits/Deductions
No CA tax credit Federal Investment Tax Credit Depreciation Deductions

On-going Reductions to Cost of Ownership

Performance-based Rebates

SRECS Avoided Green Tags

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Initial Financial Incentives (1/4)

California Solar Initiative (CSI) Expected Performance-Based Buydown (EPBB) Rebate
Authorization: SB1 2006; launched 2007: $223M for CCSE/SDGE Administration: Each CA IOU administers their territory and CSI allocation Applications: Reservation and Payment Request Amount per array = product of the following: Nominal Rebate Step Rate [Step 7 for SDGE = $0.65/Watt-AC] EPBB Design Factor [EPBB Calculator: www.csi-epbb.com] AC Array Size [Array PTC * Inverter CEC Efficiency] ACME Array #1: AC Array Size = 26.74kWac Rebate Rate = $0.65 Design Factor = .9761 EPPB Rebate = 26,740 * $0.65 * .9761 = $12,055.50

Q: Why wont the ACME system proposal include EPBB?

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Initial Financial Incentives (2/4)

Federal ITC Grant
For use in-lieu of 30% Solar ITC
Authorization: section 1603 of the ARRA Administration: Department of Treasury Qualification: Investment NOT Individual Commercial for-profit entities only Projects must start before 2011 Application: Funds wired to specified account (<60 days) Payee can be assigned see http://www.treas.gov/recovery/1603.shtml ACME 30% * Cost Basis where cost basis is net of untaxed upfront rebates ACME Cost Basis = $289,590 (Total Price) - $0.00 (no rebates) = $289,590 ITC Grant = 30% of $289,590 = $86,877
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Q: Is Jock an accountant, tax advisor, or lawyer ? A: No, he is not any of these !

Initial Financial Incentives (3/4)

USDA 25% Agricultural Grant
REAP/RES/EEI Grants Program (www.rurdev.usda.gov/rbs/busp/9006grant.htm) Section 9007 (Farm Security and Rural Investment Act of 2002) limited to $2,500 - 500,000 range for RES (form 5695) The program is designed to assist farmers, ranchers and rural small businesses that are able to demonstrate financial need RE System must be owned by the applicant.

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Initial Financial Incentives (4/4)

Tax Credits: The ITCs
No State tax credits in CA since 2005
Initial? Well, it can be carried over to subsequent tax years if tax credit > tax liability

Federal tax credits per US Code 26 (IRS): Credits Against Tax (26,A,1,A,IV) Individual Tax Credit: really Personal Tax Credit (PTC) (form 5695) Authorization: IRS Code 25D
Title: Residential Energy Efficient Property Amount: 30% of qualified PV property expenditures during tax year Restriction: for residential property or dwelling

Investment Tax Credit; the real ITC (forms 3468 & 3800) Authorization: IRS Code 48
Title: Energy Credit Amount: 30% of the cost basis of solar energy property placed in service

Q: Which ITC does a Sole Proprietorship use?

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System Description

Net Cost = Gross Price ($289,590) ITC Grant ($86,877) = $202,713

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Depreciation (1/3)
Federal Depreciation via MACRS
(CA uses the same depreciation method; so combine income tax rates) Accelerated Depreciation of a PV installations Cost Basis
As Energy Property [48a3Ai], it has a 5 year period [168e3BviI & 168c] default method is 20% declining balance (v. straightline)

Half-year convention: considered installed in middle of tax year

Salvage Value Zero after recovery period If system sold, must consider recapture tax

Q: How many tax years does it take to depreciate a 5 year property?

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Depreciation (2/3)
Tax Recovery Adjusted Year Period Basis for Remain- Depreciation ing 1 5.0 $100,000 2 4.5 $ 80,000 3 3.5 $ 48,000 4 2.5 $ 28,800 5 1.5 $ 17,280 6 0.5 $ 5,760 Total HY: 200% to Straight Line Method 40% annually Annually Revised (200% / 5yrs) Straight-line (Basis / yrs left) $20,000 $20,000 $32,000 $17,778 $19,200 $13,714 $11,520 $11,520 $11,520 $ 6,912 $ 5,760 $ 2,073.6 $100,000
% of Year 1 Cost Basis Half-Year Mid-Quarter 20.00% 5.00% 32.00% 38.00% 19.20% 22.80% 11.52% 13.68% 11.52% 10.94% 5.76% 9.58%
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5-yr Straight-line Method for comparison $ 10,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 10,000 $100,000

Tax Year 1 2 3 4 5 6

Depreciation (3/3)
ITC Amount 50% ITC Tax Rate MACRS Basis Apply 50% ? Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Total $ 86,877 $ 43,438 42% $246,151 No 20% 32% 19.2% 11.52% 11.52% 5.76%

$ $ $ $ $ $ $ $

Credit 49,230 78,768 47,261 28,357 28,357 14,178 246,151

Balance $ 246,151 $ 196,921 $ 118,153 $ 70,892 $ 42,535 $ 14,178 $ -

Tax Savings $ $ 20,677 $ 33,083 $ 19,850 $ 11,910 $ 11,910 $ 5,955 $ 103,384

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Q: What is the Cost Basis for MACRS?

Net Cost: Initial and All Years

The above table summarizes the deductions to Gross System Cost to get to Net Cost in both the year of installation (Year 0) and the all years (years till inverter replacement): Federal Tax Credit/Tax Impact = Federal ITC Grant CSI PBI: Step 7 = aggregate payments over 5 years less income tax (42%)

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Financial Analysis

Utility Savings Over System Life: The sum of annual utility savings in cash flow The cumulative utility savings = $366,508 (/300 = $1,221.69) Total Life-Cycle Payback: the cumulative change in cash flow / the initial cost (Cumulative cash flow Initial cash flow) / -(Initial Cash flow) = 232% Levelized Cost of Solar Energy: The initial Net Cost / lifetime energy production The Fix is in! 202,713 / (25 years production) = $0.131 /kWh Payback Period: the year in which cumulative cash flow first goes positive Rate of Return on Cash Invested: the Internal Rate of Return on upfront cash (IRR) 500 iterations of a calculation are performed to find the best fit for an interest rate estimate; Excel IRR comes up with 9.82%
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Financing Source (1/2)

How would you like to pay for that?
Conventional Loans: borrowing a set amount for a set term (ARM or FRM) and regular payments; greatest upfront cost. Mortgage/Equity loans Other collateral (the PV system itself)? Unsecured (no collateral) Lines of Credit (aka, credit line or credit limit): borrowing as needed up to a maximum amount (ARM or FRM); less upfront cost Equity based Unsecured (credit cards are such)

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Loan (1/2)

232%

9.9%

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Loan (2/2)

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Financing Source (2/2)

How would you like to pay for that?
Leases: many types but most basic is a True Lease wherein the Lessor owns the PV system but rents or leases it to the Lessee; low or no upfront cost Operating Lease: a true lease wherein the Lessor takes the tax credit and depreciation; this affords the Lessee a cheaper payment which is expensed (aka Tax Lease) Finance Lease: a method of purchasing the asset; sort of a seller-financed deal; long-term and essentially finance it till final option payment; Lessee is considered owner; greater payments but tax benefits.

57

Lease (1/2)

58

Lease (2/2)

Opt OutBuyout: for of Buyout: Payback: 9 years IRR: 14.7% 19.9%

59

Finance and the Solar Sale

Lease Benefits for Commercial Customer
Preserve Working Capital
No down payment - 100% financing Improved cash flow Protects customers bank line of credit Take advantage of tax and accounting incentives; may be able to fully deduct lease payments as a business expense Fixed Payments

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Other Financing Options

Power Purchase Agreements (PPAs): traditionally for large systems (100+ kW); in 2008, PPAs accounted for over 70 percent of the non-residential market according to Alta Terra Research. A PPA sets a term and rate for Buyer to purchase Sellers clean energy; requires site lease. Developer brings parties together; may do the PV sell and install System Owner/Investor/Seller the money entity buying the PV system and receiving the tax benefits of ownership; may be the Developer or a Fund Customer/Buyer the purchaser of clean energy from the System Owner at a fixed rate competitive with utility Installer the PV System seller and/or installer; may be the Developer Property Assessed Clean Energy (PACE) examples: 20 yr @7% or less Berkeley First: pilot program only Sonoma County (SCIEP): energy efficiency requirements; no upfront cost; available only for property owners http://www.greentechmedia.com/articles/read/SunRun-Versus-the-PACEProgram Federal Lending USDA ; US SBA ; US EPA ; US DOE

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Other Considerations
Renewable Energy Credits (RECs): RSP driven; Solar REC carveout (SRECs) not in CA; CA traditionally has kept the clean aspect of renewable energy bundled with the energy aspect for the RPS compliance market? This year the CPUC started allowing some Tradable RECs (TRECs) to be sold to IOUs, but DG systems are not considered RPS compliant by the CEC. So PV generated RECs can only be sold in the voluntary market. Stay tuned in 2011 when IOUs, CEC, CPUC, and the Courts hopefully settle issues.

Group Purchasing: buying in bulk!

Feed-in Tariffs & pricing:

CREST for SCE: Price depends on season & TOU period but < retail SDG&E Proposal Request: www.sdge.com/rfo/renewable2009/
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Thank You

Actually, there are more slides on Loans, Leases, & PPAs following this slide
63

Finance and the Solar Sale

What is a Lease?
An agreement by a customer (Lessee) to pay the Lessor a monthly fee for a set amount of time to use and, in most cases, ultimately own the equipment.
Equipment leases:
Capital and Finance Leases: lease to use and eventually own outright; lessee often will treat asset as purchased (e.g., $1 or 10% Purchase Option) True or Operating Lease: lease to use but not necessarily own; cheapest & usually qualifies for off-balance sheet treatment (e.g, FMV Purchase Option) Tax Lease: a version of True Lease in which all tax benefits are for the Lessor. Municipal/Not-for-Profit Lease: (Tax-Exempt)
See explanation in detail: http://www.efsolutionsinc.com/Common_lease_types .htm
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Finance and the Solar Sale

Tax vs. Non-Tax Lease
Tax / True Lease:
Lessor recognizes the tax incentives and depreciation Customer enjoys greatly reduced monthly payments as a result Customer can write off the lease payments and reduce taxes. Accounting-wise, true lease may qualify as an "off-Balance Sheet" financing transaction.

Non-Tax Lease:
Customer owns the system, uses the tax credit and accelerated depreciation IRS treats the lease as if it were a purchase or loan for tax purposes. Take advantage of Section 179 more write-offs

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Finance and the Solar Sale

What is a Loan
Secured Loan:
Borrower requires some kind of collateral. Fixed Rate Mortgage (FRM) lock energy costs Adjustable Rate Mortgage (ARM) variable rate mortgage Prime Rate Prepayment Restrictions?

Unsecured Loan:
NOT backed by collateral Solely based on customers credit Line of Credit , Cheaper and less risk for borrower Highest consideration is an individuals FICO score

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Unsecured Financing
Benefits
No title work or liens are placed on the customer assets. No fees or prepayment penalties Close the deal quickly Application to qualification to funding takes only a matter of minutes. The entire process is done online and is paperless.

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Finance and the Solar Sale

Secured Financing
Benefits Because banks have stronger collateral:

Longer Terms
Better Rates

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Finance and the Solar Sale

Leases vs. Loans
Loans
- Typically reserved for residential installations as most commercial companies will be reluctant to take a lien on their property - Lien may be used against borrowers other assets

- Either fixed-term or adjustable payments

Leases
- Typically utilized by commercial installers who dont want to take out mortgage or 2nd lien on their property - Financed only collateral. - Fixed payments over a fixed term

Apples to Oranges Compare monthly payments instead of loan interest rates and lease rates.
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Power Purchase Agreement (PPA)
Power Purchase Agreement (PPA) - legal contract between an electricity generator
and a host site owner or lessor. Customer purchases energy from the PPA Provider (the electricity generator). PPA Provider (the electricity generator) assumes the risks and responsibilities of ownership when it purchases, operates, and maintains the turnkey facility. Basic Parameters to a PPA project Commercial, Municipal, Industrial customer using large amounts of electricity, generally more than 150,000kWh annually Control of property Demonstrate credit-worthiness Offer a minimum of 10,000 square feet of usable space, preferably flat Located in an area with pro-solar policies and incentives

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PPA Benefits and Challenges
Benefits:
No upfront cost for solar - No capital investment, balance sheet debt, operating responsibilities Predetermined electricity rates for contract terms of 15-25 years Places emphasis on ensuring maximum productivity of solar purchase - Customer purchases only what they need Continued system monitoring and maintenance by solar professionals Option to purchase the system at fair market value after set time period

Challenges:
Complex negotiations and possibly higher transaction costs than buying system outright Ongoing administrative costs of paying separate electricity invoice and allowing access to equipment by maintenance personnel Customer may be contractually prohibited from making changes to property that could affect the solar production
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Recovery Through Retrofit: Property Assessed Clean Energy (PACE) program
Like Berkley First, this program is designed to tie the retrofitting loan to the property, allowing payments to be made annually through property taxes
Designed to overcome 4 crucial barriers that currently impede solar investments; (1) access to capital, (2) misinformation about paybacks schedules, (3) high initial transaction costs, (4) and eventual home sales. Department of Energy (DOE) will fund model PACE programs

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http://solarfinancing.1bog.org/municipal-solar-financing/