Economics of PV Overview for Selling to the Residential Grid-Tied Market

Introductions & Thanks

Andy Black CEO, OnGrid Solar

!

ASES

!

Conergy "

!

Andy Black, OnGrid Solar "

!

Jyl Safier & Jaymie Fuentes

Solar Financial Analyst & OnGrid Tool Creator

You for coming!

© 2009 OnGrid Solar, All Rights Reserved.

Audience Survey !

Economics of PV Overview - 2

Instructor Background

Operating where?:

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East: NY, NJ, CT, PA, MD, MA, NC, FL " West: AZ, CA, OR, HI, CO " Outside those? "

Been in solar less than 6 months? ! Want a powerful proposal & selling case? !

! ! !

! !

M.S. Electrical Engineering SEI graduate & NABCEP Certified PV Installer 13 Years involved with Solar 9 Years studying, writing, & presenting about Solar Financial Issues 5 Years as Solar Salesperson Now a Solar Financial Analyst & Creator of the

“OnGrid Tool” solar sales software © 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 3

© 2009 OnGrid Solar, All Rights Reserved.

Handout Resource List !

Resources available at www.ongrid.net

Decorum !

Articles & papers on solar “Payback” " Upcoming classes & events "

Payback Basics & Residential - Saturday Commercial Payback, PPA & Leases # Sales & Marketing # Slides from past classes

Questions: Please focus on Marketing, Sales & Payback "

# #

"

Economics of PV Overview - 4

!

No Side Conversations Please "

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Please focus on general concepts & clarity, not on specific states or situations Hard for others to hear

Cell phones to fun mode

Free demos of the OnGrid Tool

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 5

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Economics of PV Overview - 6

Agenda Solar Financial Payback Overview ! Solar Tools & the OnGrid Tool !

Solar Financial Payback - An Brief Introduction

Questions: Please focus on Marketing, Sales & Payback ! Handouts !

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 7

© 2009 OnGrid Solar, All Rights Reserved.

Financial Payback !

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Right or Wrong

Payback on solar isn’t the most important thing…

95% see energy as a commodity ! Few will pay more ! Must meet them on their terms: !

… it’s the only thing the vast majority of potential solar homeowners care about

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 8

Economics of PV Overview - 9

$$ FINANCIAL! $$ © 2009 OnGrid Solar, All Rights Reserved.

Payback Analysis Why is it Needed?

Economics of PV Overview - 10

Explodes the Market Not to dismiss Environment & Independence motivation ! “Payback” is very important !

If we’re going to put solar on every roof, it needs to make $ense.

© 2009 OnGrid Solar, All Rights Reserved.

Took the CA market from ~300 systems per year to 3000+/year since 2001 " Economics need to be attractive "

Economics of PV Overview - 11

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 12

Factors That Could Make Solar Viable

Attractive Economics PV systems can be financially attractive to customers using enough electricity: > $80/mo in CA > $60/mo in NJ > $90/mo in CT

Attractive defined as: Rate of Return > 10% " Property Value Increase > System Cost " Bill Savings > Loan Cost "

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 13

Net Metering

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Time of Use Rates

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High Rates

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Tiered Rates

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Incentives

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Annual Net Metering

Economics of PV Overview - 14

Time Of Use Billing and Rates Residential "E7" Time-of-Use

Sell Power to the Utility by Day Buy Power at Night and Winter

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Midnight - 6am 6am - Noon Noon - 6pm 6pm - Midnight

Off-Peak Peak Peak Off-Peak Off-Peak Off-Peak

! .

Exchange at Retail 100% Efficient Battery •Annual Cycle •

!

•

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 15

Pricing Periods

Sunday Monday Tuesday Wednesday Thursday Friday Saturday Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Peak Off-Peak

Peak Peak Off-Peak Off-Peak Off-Peak Off-Peak

Peak rates during Summer Afternoons … the best time to sell Off-Peak rates at Night, Mornings & Weekends … when most people are home & using (buying)

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 16

Time of Use with Annual Net Metering Net Metering on an annual basis Combined with ! Time Of Use metering !

Sell high, Buy at low ! Improves ratio in customer favor ! Can reduce system size for same $ savings !

" "

Time of day shading analysis

Reduction depends on % on-peak usage Shading and orientation

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 17

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 18

2008 Average Residential Electric Rates & Escalation (East, partial)

Factors That Make Solar Viable !

Net Metering

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Time of Use Rates

! ! !

State US

High Rates Tiered Rates Incentives

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 19

2008 2004- 2001Rate 2008 2008 ¢/kWh CAGR CAGR 11.4 6.1% 4.1%

CT

19.4

13.6%

8.5%

3.7%

DC

12.7

12.2%

7.2%

4.1%

DE

13.9

12.2%

7.1%

2.8%

FL

11.7

6.8%

4.5%

2.3%

MA

17.5

10.5%

5.0%

3.4%

MD

13.8

15.4%

8.8%

3.7%

NC

9.7

3.6%

2.6%

1.2%

NJ

16.0

9.2%

6.6%

2.4%

NY

18.8

6.6%

4.3%

2.8%

PA

11.4

4.4%

2.4%

1.2%

© 2009 OnGrid Solar, All Rights Reserved.

2008 Average Residential Electric Rates & Escalation (West, partial) State

2008 2004- 2001- 1990Rate 2008 2008 2008 ¢/kWh CAGR CAGR CAGR

US

11.4

6.1%

4.1%

2.1%

AZ

10.3

4.9%

3.1%

0.7%

CA

14.4

4.2%

2.5%

2.1%

CO

10.1

4.8%

4.5%

2.1%

HI

32.5

15.8% 10.3% 6.6%

MN

9.8

5.4%

3.7%

2.0%

NM

10.0

3.7%

2.0%

0.6%

NV

11.9

5.3%

4.0%

4.2%

OR

8.5

4.4%

4.4%

3.3%

TX

12.8

7.2%

5.4%

3.3%

WA

7.6

4.4%

4.2%

3.1%

© 2009 OnGrid Solar, All Rights Reserved.

Source: DOE Energy Information Administration.

Economics of PV Overview - 21

Residential Tiered Usage Before Solar

Cents per kWh

25.0¢

20.0¢

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Net Metering

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Time of Use Rates

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High Rates

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Tiered Rates

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Incentives

© 2009 OnGrid Solar, All Rights Reserved.

15.0¢ 10.0¢

Economics of PV Overview - 22

Factors That Make Solar Viable !

Net Metering

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Time of Use Rates

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High Rates

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Tiered Rates

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Incentives

20.0¢ 15.0¢ 10.0¢ 5.0¢

5.0¢

Use/Bill Before Solar Marginal Use at 41¢

Net Usage

Tier 5

Tier 4

Tier 2

Tier 5

Tier 4

Tier 2

Tier 3

Tier 1

Net Usage

Tier 3

0.0¢

0.0¢

Tier 1

Cents per kWh

30.0¢

25.0¢

Economics of PV Overview - 20

Residential Tiered Usage With Solar

35.0¢

30.0¢

Source: DOE Energy Information Administration.

Factors That Make Solar Viable

Tiered Rate System 35.0¢

19902008 CAGR 2.1%

Production

Small “Net” Use After Solar Marginal Use at 11.4¢ - 13.3¢ .

Solar systems offset the most expensive usage first Examples © 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 23

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 24

Rebates (East, partial) !

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Rebates (West, partial)

Up-Front Reductions in System Cost NJ: $1.55/Watt STC up to 10kW CT: Now $0 NY: $3/Watt STC first 4kW + $2/Watt next 4kW NY-LIPA: $3.50/Watt STC up to $35K (10kW) PA: Local Grants (for now, state program coming soon) MD: $2.50/Watt STC up to $10K (4kW STC) DE: 50% of system cost as rebate MA: $1.00-$4.40/Watt STC depending on “adders”, Utilities DC: $3/W STC first 3kW + $2/W next 7kW + $1/W next 10kW

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Up-Front Reductions in System Cost California CSI Rebate: $1.10-2.20/watt (AC) AZ: $3.00/Watt STC up to 4kW " CO: $3.50/Watt STC up to 10kW " "

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Rebates are paid in addition to savings on the bill "

Typically received 30-120 days after inspection

Rebates are paid in addition to savings on the bill "

Typically received 30-120 days after inspection

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 25

© 2009 OnGrid Solar, All Rights Reserved.

PBIs & RECs

PBI & REC Examples

PBI: Performance Based Incentive ! REC: Renewable Energy Credits (Green Tag Value) ! Both are paid for actual kWh produced or estimated to be produced ! Both are paid in addition to savings on the bill ! FITs are different !

California CSI PBI: $0.15 - $0.34 / kWh produced for 5 years " Fixed at time of reservation, held for term ! NJ SRECs: $.30-$.65/kWh (estimate) !

SRECs are a type of PBI Set by market bid/auction, so price varies each period " Now can do longer term contracts too " "

! © 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 27

Mass Energy RECs $.03/kWh

© 2009 OnGrid Solar, All Rights Reserved.

30% Federal Investment Tax Credit: ITC Commercial - no cap (Sect 48) Residential - no cap starting in 2009 (Sect 25D) " 2009-2010 ITC becomes Grant for Sect 48 (commercial) only " "

Makes ITC effectively refundable (available even w/o tax appetite) # Paid by Treasury within 60 days of completion #

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Depreciation - commercial only "

50% Bonus Depr in 2009 also

© 2009 OnGrid Solar, All Rights Reserved.

! ! ! ! ! ! !

Tax Credit vs. Tax Deduction NC: 35% State ITC NY: 25% State ITC up to $5K or 10kW PA: MD: $.0085/kWh PTC MA: 15% State ITC up to $1K In practice, worth about 65-80% of face value due to reduced federal deduction of the now reduced state taxes "

! Economics of PV Overview - 29

Economics of PV Overview - 28

State & Local Tax Incentives (East, partial)

Federal Tax Incentives !

Economics of PV Overview - 26

Effectively “federally taxed”

Property Tax Exemption/Abatement: NYC, MA, MD (some areas)

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 30

State & Local Tax Incentives (West, partial) ! ! ! ! !

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Total Lifecycle Payback ! Rate of Return analysis ! Cash Flow when financing ! Increase in Appraisal Valuation

Tax Credit vs. Tax Deduction

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OR: 50% State ITC (Investment Tax Credit) HI: 35% State ITC AZ: 25% State ITC NM: 10% State ITC up to $9K (now add’l to Fed ITC)

In practice, worth about 65-80% of face value due to reduced federal deduction of the now reduced state taxes "

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Test the Viability of Solar

Effectively “federally taxed”

Property Tax Exemption: CA - Com & Res to 2016

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 31

Total Lifecycle Payback

© 2009 OnGrid Solar, All Rights Reserved.

Residential Total Lifecycle Payback PG&E

PreSolar Bill $74

kWh Usage per Month 550

PV System Size & Rating 3 kW CEC

Final Net Cost w/ Tax Benefits & Rebate $17K

Cumulative Savings Over First 25 Years (including inflation) $28K

Lifecycle Payback Ratio 1.7x

PG&E

$258

1100

6 kW CEC

$33K

$119K

3.6x

PG&E

$499

1650

9 kW CEC

$48K

$234K

4.9x

7.6

Utility

Total Savings Initial Cost

!

Total Savings (whole area) is much larger than Initial Cost

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 33

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! ! !

28% federal tax bracket, corresponding state tax bracket Facing south, 22° pitch, simple composition shingle roof by full service provider, no complications Slightly conservative real system performance, no shade Final Net Cost = total installed system costs - Rebate (if any) - 2009 Fed 30% ITC + $500 Permit + $0 Utility Fee System maintenance cost is 0.25% of gross system cost per year, adjusted for inflation 5.0% electric inflation Module degradation 0.5% per year Inverter replacement costing $700/kW occurs in year 15

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 35

Years To Payback 18.7 9.7

SCE

$81

550

3 kW CEC

$16K

$34K

2.2x

15.6

SCE

$219

1100

6 kW CEC

$30K

$100K

3.4x

10.3

SCE

$373

1650

9 kW CEC

$43K

$173K

4.0x

9

SDG&E

$97

550

3 kW CEC

$16K

$38K

2.3x

13.7

SDG&E

$460

1650

9 kW CEC

$45K

$209K

4.6x

8

NY – ConEd

$152

800

5 kW STC

$14K

$62K

4.5x

9.1

NJ - JCPL

$130

800

5 kW STC

$24K

$60K

2.5x

10

NC - Progress

$80

800

5 kW STC

$22K

$24K

1.1x

23.7

CT - UI

17.2

$183

800

5 kW PTC

$31K

$58K

1.9x

AZ - APS

$89

800

5 kW STC

$20K

$33K

1.6x

19

HI - HECO

$164

800

5 kW STC

$26K

$60K

2.3x

13.6

CO - Xcel

$70

800

5 kW STC

$17K

$10K

0.6x

37.9

© 2009 OnGrid Solar, All Rights Reserved.

General Residential Variables & Assumptions !

Economics of PV Overview - 32

Economics of PV Overview - 34

Utility Specific Residential Assumptions Utility CA - PG&E

AC kWh Production per rated kW per year San Francisco 1630 / CEC kW Insolation

CA - SCE

Los Angeles

1675 / CEC kW

CA - SDG&E

San Diego

1700 / CEC kW

NY - ConEd

New York City

1151 / STC kW

~2008 Cost per rated Watt

Staring/Ending Rate Schedule, Peak %

Incentives

E1XB / E6XB, 35% $1.55/W Rebate 3kW: $9.50 CEC D-10-Basic / $2.20/W Rebate 6kW: $9.25 CEC TOU-D-1, 36% 9kW: $9.00 CEC DR-Coastal-Basic / $1.90/W Rebate DR-SES, 28% Rate I / Rate II TOU, $2.80/W Rebate (net) $8.25 STC 75% 25% State Tax Credit SRECs: 48¢/1yr, 30¢/12yrs, 10¢/12yrs $8.25 STC RS / RT, 58% $1.55/W Rebate $8.25 STC RES / R-TOUD, 60% 35% State Tax Credit

NJ - JCPL

Newark

1140 / STC kW

NC - Progress

Raleigh

1260 / STC kW

CT - UI

Hartford

1260 / PTC kW

$8.75 PTC

R / RT, 54%

AZ - APS

Phoenix

1660 / STC kW

$8.25 STC

E-12 / ET-2, 50%

HI - HECO

Honolulu

1460 / STC kW

$8.25 STC

Res

none $2.40/W Rebate (net) 25% State Tax Credit 35% State Tax Credit

CO - Xcel

Boulder

1380 / STC kW

$8.25 STC

R

$3.50/W Rebate

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 36

Residential Total Lifecycle Payback PG&E

PreSolar Bill $74

kWh Usage per Month 550

PV System Size & Rating 3 kW CEC

Final Net Cost w/ Tax Benefits & Rebate $17K

Cumulative Savings Over First 25 Years (including inflation) $28K

Lifecycle Payback Ratio 1.7x

PG&E

$258

1100

6 kW CEC

$33K

$119K

3.6x

PG&E

$499

1650

9 kW CEC

$48K

$234K

4.9x

7.6

SCE

$81

550

3 kW CEC

$16K

$34K

2.2x

15.6

SCE

$219

1100

6 kW CEC

$30K

$100K

3.4x

10.3

SCE

$373

1650

9 kW CEC

$43K

$173K

4.0x

9

SDG&E

$97

550

3 kW CEC

$16K

$38K

2.3x

13.7

SDG&E

$460

1650

9 kW CEC

$45K

$209K

4.6x

8

NY – ConEd

$152

800

5 kW STC

$14K

$62K

4.5x

9.1

NJ - JCPL

$130

800

5 kW STC

$24K

$60K

2.5x

10

NC - Progress

$80

800

5 kW STC

$22K

$24K

1.1x

23.7

CT - UI

$183

800

5 kW PTC

$31K

$58K

1.9x

17.2

AZ - APS

$89

800

5 kW STC

$20K

$33K

1.6x

19

HI - HECO

$164

800

5 kW STC

$26K

$60K

2.3x

13.6

CO - Xcel

$70

800

5 kW STC

$17K

$10K

0.6x

37.9

Utility

© 2009 OnGrid Solar, All Rights Reserved.

Years To Payback 18.7 9.7

Economics of PV Overview - 34

General Residential Variables & Assumptions ! !

! !

!

! ! !

28% federal tax bracket, corresponding state tax bracket Facing south, 22° pitch, simple composition shingle roof by full service provider, no complications Slightly conservative real system performance, no shade Final Net Cost = total installed system costs - Rebate (if any) - 2009 Fed 30% ITC + $500 Permit + $0 Utility Fee System maintenance cost is 0.25% of gross system cost per year, adjusted for inflation 5.0% electric inflation Module degradation 0.5% per year Inverter replacement costing $700/kW occurs in year 15

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 35

Utility Specific Residential Assumptions AC kWh Production per rated kW per year San Francisco 1630 / CEC kW Insolation

~2008 Cost per rated Watt

CA - SCE

Los Angeles

1675 / CEC kW

CA - SDG&E

San Diego

1700 / CEC kW

3kW: $9.50 CEC 6kW: $9.25 CEC 9kW: $9.00 CEC

NY - ConEd

New York City

1151 / STC kW

$8.25 STC

NJ - JCPL

Newark

1140 / STC kW

$8.25 STC

NC - Progress

Raleigh

1260 / STC kW

$8.25 STC

CT - UI

Hartford

1260 / PTC kW

$8.75 PTC

R / RT, 54%

AZ - APS

Phoenix

1660 / STC kW

$8.25 STC

E-12 / ET-2, 50%

HI - HECO

Honolulu

1460 / STC kW

$8.25 STC

Res

none $2.40/W Rebate (net) 25% State Tax Credit 35% State Tax Credit

CO - Xcel

Boulder

1380 / STC kW

$8.25 STC

R

$3.50/W Rebate

Utility CA - PG&E

Staring/Ending Rate Schedule, Peak %

Incentives

E1XB / E6XB, 35% $1.55/W Rebate D-10-Basic / $2.20/W Rebate TOU-D-1, 36% DR-Coastal-Basic / $1.90/W Rebate DR-SES, 28% Rate I / Rate II TOU, $2.80/W Rebate (net) 75% 25% State Tax Credit SRECs: 48¢/1yr, 30¢/12yrs, 10¢/12yrs RS / RT, 58% $1.55/W Rebate RES / R-TOUD, 60% 35% State Tax Credit

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 36

Residential Rates of Return PG&E

$74

550

PV System Size & Rating 3 kW CEC

$28K

$17K

Pre-Tax Annual Return 9.9%

PG&E

$258

1100

6 kW CEC

$55K

$33K

19.5%

PG&E

$499

1650

9 kW CEC

$81K

$48K

24.6%

SCE

$81

550

3 kW CEC

$28K

$16K

12.8%

SCE

$219

1100

6 kW CEC

$55K

$30K

18.3%

SCE

$373

1650

9 kW CEC

$81K

$43K

21.1%

SDG&E

$97

550

3 kW CEC

$28K

$16K

13.5%

SDG&E

$460

1650

9 kW CEC

$81K

$45K

23.5%

NY - ConEd

$152

800

5 kW STC

$41K

$14K

23.0%

NJ - JCPL

$130

800

5 kW STC

$41K

$24K

17.9%

NC - Progress

$80

800

5 kW STC

$41K

$22K

6.8%

CT - UI

$183

800

5 kW PTC

$44K

$31K

9.9%

AZ - APS

$89

800

5 kW STC

$41K

$20K

8.7%

HI - HECO

$164

800

5 kW STC

$41K

$26K

13.4%

CO - Xcel

$70

800

5 kW STC

$41K

$17K

1.4%

Utility

Pre-Solar Bill

kWh Usage per Month

© 2009 OnGrid Solar, All Rights Reserved.

System Gross Cost

Final Net Cost w/ Tax Benefits & Rebate

Economics of PV Overview - 39

Rate of Return Analysis

Residential Pre-Tax Conversion

Means: Compare the interest rate yield on the solar investment with other investments.

!

!

Compound Annual Rate of Return (CARR)

!

!

Comparable to stocks (~8% over last 80 years)

!

Must adjust for “pre-tax” conditions

!

Convert all costs & benefits to pretax value as appropriate " "

Initial capital cost is not increased This is the “principal”

All other values get inflated by tax bracket: PreTax =

!

Example: Tax Rate = 50% (unrealistic, but easy) After-tax savings = $100

PreTax = ! © 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 37

AfterTax 1" TaxRate

AfterTax $100 $100 $100 = =! = = $100 * 2 = $200 1" TaxRate 1" 50% 1" .50 .50

More realistically $100 after-tax => $140-$160 pre-tax

Questions?Economics of PV Overview - 38

© 2009 OnGrid Solar, All Rights Reserved.

!

Residential Rates of Return

Cash Flow

PG&E

$74

550

PV System Size & Rating 3 kW CEC

$28K

$17K

Pre-Tax Annual Return 9.9%

PG&E

$258

1100

6 kW CEC

$55K

$33K

19.5%

PG&E

$499

Utility

Pre-Solar Bill

kWh Usage per Month

System Gross Cost

Final Net Cost w/ Tax Benefits & Rebate

1650

9 kW CEC

$81K

$48K

24.6%

SCE

$81

550

3 kW CEC

$28K

$16K

12.8%

SCE

$219

1100

6 kW CEC

$55K

$30K

18.3%

SCE

$373

1650

9 kW CEC

$81K

$43K

21.1%

SDG&E

$97

550

3 kW CEC

$28K

$16K

13.5%

SDG&E

$460

1650

9 kW CEC

$81K

$45K

23.5%

NY - ConEd

$152

800

5 kW STC

$41K

$14K

23.0%

NJ - JCPL

$130

800

5 kW STC

$41K

$24K

17.9%

NC - Progress

$80

800

5 kW STC

$41K

$22K

6.8%

CT - UI

$183

800

5 kW PTC

$44K

$31K

AZ - APS

$89

800

5 kW STC

$41K

$20K

8.7%

HI - HECO

$164

800

5 kW STC

$41K

$26K

13.4%

CO - Xcel

$70

800

5 kW STC

$41K

$17K

1.4%

© 2009 OnGrid Solar, All Rights Reserved.

Compares the savings on the utility bill with the cost of financing the system ! At today’s rates (~5-8%) and including rebate benefits, cash flow is often positive immediately !

Cost of borrowing is less than savings on electric bill " Stabilizes long term utility costs "

9.9%

Economics of PV Overview - 39

© 2009 OnGrid Solar, All Rights Reserved.

Cash Flow !

! !

!

Residential Cash Flow

Residential system offsetting a large bill

PG&E

$74

550

PV System Size & Rating 3 kW CEC

PG&E

$258

1100

6 kW CEC

$33K

$100/mo

$123/mo

PG&E

$499

1650

9 kW CEC

$48K

$259/mo

$319/mo

SCE

$81

550

3 kW CEC

$16K

$5/mo

$5/mo

SCE

$219

1100

6 kW CEC

$30K

$76/mo

$93/mo

SCE

$373

1650

9 kW CEC

$43K

$164/mo

$201/mo

SDG&E

$97

550

3 kW CEC

$16K

$9/mo

$10/mo

SDG&E

$460

1650

9 kW CEC

$45K

$223/mo

$274/mo

NY - ConEd

$152

800

5 kW STC

$14K

$66/mo

NJ - JCPL

$130

800

5 kW STC

$24K

$137/mo

$74/mo

NC - Progress

$80

800

5 kW STC

$22K

$-18/mo

$-51/mo

CT - UI

$183

800

5 kW PTC

$31K

$-21/mo

$-22/mo

AZ - APS

$89

800

5 kW STC

$20K

$-20/mo

$-24/mo

HI - HECO

$164

800

5 kW STC

$26K

$23/mo

$15/mo

CO - Xcel

$70

800

5 kW STC

$17K

$-37/mo

$-50/mo

Utility

8% 20 year loan Many Systems are cash positive from Year 0 Spike is Inverter Replacement Cost

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 40

Economics of PV Overview - 41

Pre-Solar Bill

kWh Usage per Month

© 2009 OnGrid Solar, All Rights Reserved.

Amount Financed $17K

Net Monthly Cash Flow Cash Flow Compared to 7.5% 30In Fifth yr Loan in First Year Year $-11/mo $-15/mo

$69/mo

Economics of PV Overview - 42

Residential Cash Flow Pre-Solar Bill

kWh Usage per Month

PG&E

$74

550

PV System Size & Rating 3 kW CEC

PG&E

$258

1100

6 kW CEC

$33K

$100/mo

$123/mo

PG&E

$499

1650

9 kW CEC

$48K

$259/mo

$319/mo

SCE

$81

550

3 kW CEC

$16K

$5/mo

$5/mo

SCE

$219

1100

6 kW CEC

$30K

$76/mo

$93/mo

SCE

$373

1650

9 kW CEC

$43K

$164/mo

$201/mo

SDG&E

$97

550

3 kW CEC

$16K

$9/mo

$10/mo

SDG&E

$460

1650

9 kW CEC

$45K

$223/mo

$274/mo

NY - ConEd

$152

800

5 kW STC

$14K

$66/mo

$69/mo

NJ - JCPL

$130

800

5 kW STC

$24K

$137/mo

$74/mo

NC - Progress

$80

800

5 kW STC

$22K

$-18/mo

$-51/mo

CT - UI

$183

800

5 kW PTC

$31K

$-21/mo

$-22/mo

AZ - APS

$89

800

5 kW STC

$20K

$-20/mo

$-24/mo

HI - HECO

$164

800

5 kW STC

$26K

$23/mo

$15/mo

CO - Xcel

$70

800

5 kW STC

$17K

$-37/mo

$-50/mo

Utility

Amount Financed $17K

© 2009 OnGrid Solar, All Rights Reserved.

Net Monthly Cash Flow Cash Flow Compared to 7.5% 30In Fifth yr Loan in First Year Year $-11/mo $-15/mo

Economics of PV Overview - 42

Need NJ # w/o RECs included

Residential Equity Increase Utility

Pre-Solar Bill

kWh Usage per Month

PV System Size & Rating

Final Net Cost w/ Tax Benefits & Rebate

Annual Savings

Appraisal Equity / Resale Increase in First Year $13K

PG&E

$74

550

3 kW CEC

$17K

$672

PG&E

$258

1100

6 kW CEC

$33K

$2,755

$55K

PG&E

$499

1650

9 kW CEC

$48K

$5,357

$107K

SCE

$81

550

3 kW CEC

$16K

$803

$16K

SCE

$219

1100

6 kW CEC

$30K

$2,328

$47K

SCE

$373

1650

9 kW CEC

$43K

$4,009

$80K

SDG&E

$97

550

3 kW CEC

$16K

$881

$18K

SDG&E

$460

1650

9 kW CEC

$45K

$4,803

$96K

NY - ConEd

$152

800

5 kW STC

$14K

$1,429

$29K

NJ - JCPL

$130

800

5 kW STC

$24K

$2,774

$19K

NC - Progress

$80

800

5 kW STC

$22K

$589

$12K

CT - UI

$183

800

5 kW PTC

$31K

$1,360

$27K

AZ - APS

$89

800

5 kW STC

$20K

$784

$16K

HI - HECO

$164

800

5 kW STC

$26K

$1,395

$28K

CO - Xcel

$70

800

5 kW STC

$17K

$445

$9K

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 46

Increase in Appraisal Valuation !

Solar electric systems add value to homes by: "

!

!

The Rational !

Reducing/eliminating electric energy operating costs

Nevin in the Appraisal Journal states: ‘The increase in appraisal value for a home is about twenty (20) times the annual reduction in operating costs due to energy efficiency measures.’ Electric bill savings: $1,000 per year = Increased appraisal value: $20,000

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 43

The $1,000 not spent on electricity, is available to be spent on an equity loan payment… … at no net change in the cost of living.

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 44

Need NJ # w/o RECs included

Residential Equity Increase

20:1 Ratio Utility

Based on 5% after tax cost of money ! Typical long term mortgage average rates (8.3% before tax) !

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 45

Pre-Solar Bill

kWh Usage per Month

PV System Size & Rating

Final Net Cost w/ Tax Benefits & Rebate

Most systems are new (< 5 years old) ! A few comparables & documented cases

Appraisal Equity / Resale Increase in First Year $13K

PG&E

$74

550

3 kW CEC

$17K

$672

PG&E

$258

1100

6 kW CEC

$33K

$2,755

$55K

PG&E

$499

1650

9 kW CEC

$48K

$5,357

$107K

SCE

$81

550

3 kW CEC

$16K

$803

$16K

SCE

$219

1100

6 kW CEC

$30K

$2,328

$47K

SCE

$373

1650

9 kW CEC

$43K

$4,009

$80K

SDG&E

$97

550

3 kW CEC

$16K

$881

$18K

SDG&E

$460

1650

9 kW CEC

$45K

$4,803

$96K

NY - ConEd

$152

800

5 kW STC

$14K

$1,429

$29K

NJ - JCPL

$130

800

5 kW STC

$24K

$2,774

$19K

NC - Progress

$80

800

5 kW STC

$22K

$589

$12K

CT - UI

$183

800

5 kW PTC

$31K

$1,360

$27K

AZ - APS

$89

800

5 kW STC

$20K

$784

$16K

HI - HECO

$164

800

5 kW STC

$26K

$1,395

$28K

CO - Xcel

$70

800

5 kW STC

$17K

$445

$9K

© 2009 OnGrid Solar, All Rights Reserved.

Just a Few Examples in the Marketplace !

Annual Savings

Economics of PV Overview - 46

Biases !

It has to look good too

Anecdotes for 4 customers " Need comprehensive a study and more evidence " NREL - Shea Homes small study www.nrel.gov/docs/fy04osti/35912.pdf "

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 47

© Sharp Solar

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 48

If It’s Weird…

Sales / Proposal Tools !

Home grown / proprietary company tools

!

QuickQuotes

!

CPF Tools

!

The OnGrid Tool

©Alan Wood © 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 49

© 2009 OnGrid Solar, All Rights Reserved.

QuickQuotes

Home Grown/Proprietary Most companies have something ! Most control & customizable ! Must be maintained

!

!

Electric Rates Rebate, PBI, REC & other incentive info " Tax incentive info " Module & inverter info

!

Accuracy & completeness

!

"

! !

Questions? Economics of PV Overview - 51

Designed to produce high quality, credible quotes in a simple, easy-to-use, streamlined process Web Based (requires internet connection)

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 52

The OnGrid Tool

Product of Clean Power Finance "

Has some offline capabilities

Based on Clean Power Estimator engine Provides customizable residential & commercial analysis & quotes

CPF Tools !

Makers of the Clean Power Estimator

http://www.clean-power.com/quickquotes/products.aspx

"

© 2009 OnGrid Solar, All Rights Reserved.

Product of Clean Power Research "

"

!

Economics of PV Overview - 50

!

http://www.cpftools.com

Newer tool on the market ! Web Based (requires internet connection) ! Provides customizable quotes

Sales Tool Quickly Identify & Screen Leads " Organizes Client Info "

!

!

Design Tool "

Size Systems Optimally

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

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 53

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 54

Proves the Payback: Financial Analysis Methods

Calculates Cost & Performance System Costs & Cost Adders Calculates Price, Prepares Quotes

!

System Performance " "

Data from shading devices: 1-touch upload Site performance variables Tilt, Orientation, Dust, Mismatch, Wire # PTC & Inverter Efficiency #

!

Choice of Electric Rates & inflation rates

!

Estimates TOU kWh Performance and $ savings

© 2009 OnGrid Solar, All Rights Reserved.

Annual Savings

Incentives (Rebate, PBI, Tax Credits, etc)

!

Annual Savings Before and After Payback

$10,000

Simple Payback ! Total Lifecycle Payback ! Rate of Return analysis ! Cash Flow when financing ! Increase in Appraisal Valuation ! Provides spreadsheet of numbers for proof Power Purchase Agreements Grant Applications !

Economics of PV Overview - 55

Calculates Environmental Benefit

© 2009 OnGrid Solar, All Rights Reserved.

$8,000

$6,000

$4,000

$2,000

$-

0

1

2

3

4

5

6

7

8

9

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Annual Savings Before Payback Year Payback Year (Occurs at 9.7 Years) Annual Savings After Payback

$14,000 $12,000 $10,000 $8,000 Annual Savings

"

$12,000

$6,000 $4,000 $2,000 $$(2,000)

1

3

5

7

9

11

13 Years

15

17

19

21

23

25

$(4,000) $(6,000)

$250,000 $200,000

Resale Value

!

$150,000 $100,000 $50,000 $Years 1 3 5 7 9 11 13 15 17 19 21 23 25 Effective Resale Value (lesser of 20x annual or remaining 25yr savings) 20 times Annual Savings Remaining savings within 25 years

Economics of PV Overview - 56

Enviro: Trees Planted

CO2 offset ! NOx, SOx, Particulates reduction ! Equivalent Miles not driven / Cars taken off the road ! Effective Acres of Trees Planted !

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 57

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 58

Adopt An Ice Shelf

Enviro: Coal

(coming soon)

(coming soon)

An 8kW PV System offsets over 10,000 lbs of coal per year That’s 500 20 lb reusable canvas shopping bags full of coal not being dug-up, shipped, burned & polluting the air each year!

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 59

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 60

OnGrid Tool Proposal Outputs

OnGrid Tool Outputs

Quotation & Contract for a Renewable Energy Power System

OnGrid Solar

Salesperson: Andy Black Phone: (408) 428-0808 Email: [email protected]

4175 Renaissance Dr #4 San Jose, CA 95134 Contractor's License Number: Cont. Lic. # Contractor's License Type: Cont Lic Type

Your Logo Here

July 4, 2006

P.S. State incentives will decline at the Client:

Site Address: 117 So Mary Ave, #30 Sunnyvale, CA 94087

Mr. Sunny Customer and Ms. Happy Buyer

!

!

!

Customize with your logo, salesperson’s name & contact info, colors Choose from Short, Medium, and Long Proposals " Varying levels of detail & language Custom page ordering & page selection "

!

!

Solar User Inc.

Sales Docs Auto-Prepared: Contract/Quote " CSI 2 & 3 Step Applications " 3rd Party Authorization " Interconnection Agreements

(408) 111 1111H, 222 2222C, (408) 333 3333x333W INFORMATION AUTHORIZATION TO:(408) RECEIVE CUSTOMER [email protected] OR ACT ON A CUSTOMER'S BEHALF

PROJECT DESCRIPTION and MAJOR COMPONENTS:

!

Free support for full customization

!

Data entered once Accuracy & Time Savings

Generator Rating: =# of inverters * Inverter Rating Inverter Rating =# of inverters * Inverter Rating * Inverter CEC efficiency It is possible that the inverter rating might be the nameplate rating, rather than the CEC rating. For example, the IG3000 might be 3000W instead of 2700W.

! PG&E ! SoCalGas !System SCE Size (kW DC, ! SDG&E STC) 12.272 kW

A 10.2 kW PV System, with turn-key installation at customer's site address stated above. System Size (kW AC, CEC) THIS IS A LEGALLY BINDING CONTRACT _ READ IT CAREFULLY Pacifictype: GasComposite and Electric DISTRIBUTION Mounting roof. Company (Please Print or Type) Billing

Module STC rating: 208W

Customer-Generator Installed Systemowner Price including Sales Tax & Shipping (before Rebate) Business Customer Center

$ TITLE (IF APPLICABLE Estimated Buy-Down Program Rebate at $2.60/W** $ to be paid to the installer have the following mailing address$ Contract Price (Customer) Net to Customer

NAME

RESIDENTIAL AND SMALL COMMERCIALMr. SOLAR WIND SunnyOR Customer NAME OF CUSTOMERFACILITIES OF RECORD ELECTRIC GENERATING OF 3 SMA America SB3800U (240V) inverters. 10 KILOWATTS OR LESS 117 So rating: Mary 3800W Ave, #30 Sunnyvale Inverter each

of

MAILING ADDRESS

CITY

REFERENCE

91,433 (26,572) 64,861

Schedule: Current Payment Acct No. ______________________ CA 94087 , and do appoint Approximate Date Event (%)hereby Amount

DECLARATIONS

California Energy Commission Standard Components:

10.220 kW

System Pricing Details

Major System Components: INTERCONNECTION AGREEMENT FOR Mr. Sunny Customer 59 NET Sharp Corporation ND-208U1 modules. ENERGY METERING FOR

I,

"

Focus on your customer’s interests

SUBMITTED TO THE FOLLOWING.

Mailing Address: 117 So Mary Ave, #30 Please check allSunnyvale, that apply:CA 94087

of

NAME OF THIRD PARTY

Racking and mounting components per Uniform Building Code AC and DC disconnects per National Electric Code and Utility Sacramento Wiring, conduit, and overcurrent protection per National Electric Code CITY Roofing sealant or flashings as needed

Mr. Sunny Customer

STATE ZIP Initial Deposit (10% or $1,000) $ Upon ordering of materials (49%) $ Ninth St. MS-45to the jobsite (40%) $ Upon 1516 delivery of materials MAILING ADDRESS $ $ CA 95814 Upon("Customer-Generator") municipal building/electrical inspection* (10%) $ and Pacific STATE ZIPGas and Total Sale Price**: $

1,000 July 17, 2006 44,717 July 31, 2006 36,573 October 23, 2006 9,143 November 6, 2006 91,433

Electric Company, also referred to as “Utility”, referred to collectively as "Parties" and individually as "Party," to act aswith, my agent consultant (Agent) forthe theprovisions listed account(s) and in the categories indicated below: consistent and and in order to effectuate, of Sections 2827 and 2827.7 of the California Public Utilities Time(“E-NET”), for Completion: Code and Pacific Gas and Electric Company’s electric rate Schedule E-NET enter into this “Interconnection ACCOUNTS INCLUDEDComponents: IN THIS AUTHORIZATION: The work to be performed by Contractor pursuant to this Agreement shall be commenced Agreement forAdditional Net Energy Metering For Residential and Small Commercial Solar or Wind Electric Generating Facilities within ________ days from this date or approximately on: October 23, 2006 shall be substantially completed within 14 days or approximately on: November 6, 2006 of 10 or Less” (“Agreement”)1. This Agreement applies to theand Customer-Generator’s generating 1. Kilowatts 117 So Mary Ave, #30 Sunnyvale Utilfacilities Acct # identified below with the specified characteristics and generatingCITY capacity, and does not allow interconnection or NUMBER SERVICE ADDRESS SERVICE ACCOUNT Monitoring: Construction Commencement Schedule: operation of facilities different than described. Accordingly, the Parties agree asoffollows: Commencement work shall be defined as Standard monitor/display builtthose into inverter 2.

SERVICE ADDRESS

1.

CITY

X Delivery of material to site, or SERVICE ACCOUNT NUMBER ____ __________________________________________________________

DESCRIPTION OF CUSTOMER-GENERATOR’S SOLAR OR WIND ELECTRIC GENERATING Standard Labor:

3. FACILITY Design(“Facility”) system and secure basic building or electrical permit Contractor's failure to substantially commence work without lawful excuse, within twenty (Architectural, planning commission or other reviews are extra) CITY (20) days from the date specified above is ACCOUNT a violation of the Contractors License Law. SERVICE ADDRESS SERVICE NUMBER Install specified system in good workman like manner Complete and submit utility interconnection documents Additional Contract Provisions: (For more than three accounts, please list additional accounts on a separate sheet and attaceh it to this form) building, electrical and utility inspections All payments are due Net 10 days. 1% interest per month carrying charge. Project Coordinate Identification Number: __________________________ 1. 2. *System Completion occurs upon building or electrical inspectors permit signoff. Utility (Utility Log Number) inspection authority typically occurs 4 to 14 days after permitmust signoff. INFORMATION, ACTS AND authorization provides to the Agent. The Agent thereafter Additional Work:FUNCTIONS AUTHORIZED-This 3. **Installeraccount(s) will refund rebate customer within 3 days of receiptorfrom the State provide specific written instructions/requests (e-mail is acceptable) about the particular beforetoany information is released 4. Quoted price includes electric utility fees, but not permit fees

Interconnected Equipment: action is taken. In certain instances, the requested act or function may result in5. cost to you, the customer. Requests forrequired information may Energy Commission. This PV system includes a\the 5-year warranty by the California be limited to the most recent 12 month period. Table 1.ALLOWANCES: - List of generating equipment interconnecting with Pacific Gas and Electric Company’s Distribution

following items or specific prices as behalf indicated included in the contract price as acts allowances. SystemThe with, or without, an inverter. (For those generators interconnecting without an inverter, in “N/A” I (Customer) authorize my Agent to act on my toare perform the following specific and functions (initial allwrite applicable boxes): The contract price shall be adjusted based upon actual amounts rather than estimated amounts herein:

>

in the right three If an inverter is shared by more than one generator, write “shared” on the same line _X_ none or columns. (1) _____________________________________________ and receive billing records, billing history and all meter usage data used for bill caclulation fo all of my account(s), as specified herein, (2)Request ________________________________________________________ as that1. generator under the manufacturer column and do not enter the inverter rating. Attach list of additional (3)regarding ________________________________________________________ utiltiy services furnished by the Utility1. equipment if applicable.) quotation is valid forof14 days from the above date, quoted schedule is valid for 3 days. 2. This Request and price receive copies correspondence in connection with my account(s) concerning (initial all that apply):

>

Salesperson Signature:

Date:

Type of Generator Generator Manufacturer for Inverter Inverter Rating > a. Verification of rate, date of rate change, and related information; the customer to purchase the goods and services outlinedused above, this document for Supply 2 and Installation (Solar / IfWind / b.decides Rating Inverter with Model shall become part of the Agreement(watts) >of a Renewable Contracts and Service Energy Power System Agreements; which specifies additional terms and boilerplate consumer rights as part of a Home Improvement Contract. Hybrid) (watts) Generator or Number c. Previous or proposed issuance of adjustments/credits; 1

Solar

d.

Customer Acceptance Signature:

Other previously issued or unresolved/disputed billing adjustments (to be signed when customer decides to purchase)

11,400 W

SMA America

SB3800U (240V)

Date:

10,773 W

3. Request investigation of my utility bill(s).

2

-

W

-

4. Request special metering, and the right to access interval usage and other metering data onmy account(s).

W

5. Request rate analysis. 6. Request rate are changes. Additional forms available upon request by telephoning 415-972-5676 or on PG&E’s website at http://www.pge.com/gen). 7. Request and receive verification of balances on my accounts(s) anddiscontinuance notices.

1

1

The 2Utility will provide standard customer information without charge up to two times in a 12 month period per service account. After two requests in a year, I undertstand I may be The inverter rating equals: (the CECthis efficiency for each installed inverter) TIMES (the nameplate rating, responsible for charges that may be incurred to process request.

in kW, of each inverter). The CEC efficiency is obtained on the CEC website at http://www.consumerenergycenter.org/erprebate/eligible_inverters.html as listed on the date the application is reviewed. Enter the total of all inverter ratings for multiple inverter installations in the Table

Revised 1/11/00 above.

Page 1 of 2

Page 1 of 9 Form 79-854 Tariffs and Compliance Revised November 6, 2003 Effective January 1, 2003 Advice 2373-E-B

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 61

© 2009 OnGrid Solar, All Rights Reserved.

Rates & Incentives !

Pre-programmed w/ many electric rates & incentive programs:

Scenario Options !

Commercial, Residential, Government & Non-Profit " Any Rate Structure " Any Incentive: Rebate, PBI, REC, Tax Credits & Depreciation " Any Insolation Location !

Commercial, Residential, Agricultural

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 63

User Customizable to Any Situation: "

Cal: PG&E, SCE, SDG&E " Munis: LADWP, IID, Anaheim, Pasadena, Burbank, Riverside, Glendale, Turlock, SMUD, Palo Alto, SVP " West: AZ, CO, HI " East: NC, NJ, CT " “User Defined” for all others "

!

Excel-based: Fast, Portable, non-web

© 2009 OnGrid Solar, All Rights Reserved.

Use OnGrid Credibility With Your Customers ! ! !

! ! ! ! ! ! !

8+ years of study of Solar Financial Analysis & Finance Peer Reviewed Papers (10+) & Published Articles (10+) Classes coast to coast (dozens) at PEC, CCSE, SLI, SEI, NCSC, NESEA Conergy, AEE, & Solar Depot dealer events, etc Linked on CSI GoSolarCalifornia website 400+ subscribing users in Cal. & U.S. SEI Graduate, now instructor M.S. Electrical Engineering Marketing Certificate with emphasis in Finance Newspaper, Radio & TV appearances & interviews

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 65

Economics of PV Overview - 62

Economics of PV Overview - 64

Results with OnGrid !

Faster, Easier, More Accurate Selling

!

Credible Financial Analysis "

!

More Effective Selling

Faster & Easier Paperwork Completion = More Sales Closed, Less Effort

Free Demo Available - License Agreement © 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 66

OnGrid:

Financial Analysis Summary

!

Always Up-to-date Rates, Incentives, etc

!

Free Training & Support Web Conferencing

Goal: ! Demonstrate that Solar Electric Systems can be an attractive financial investment

"

Learn Tool, ask Financial Analysis Questions

New Version 4_0 coming soon ! Low Cost: $50/mo per user (2 user minimum) !

"

!

Doesn’t require expensive ‘lead acceptance’ or other logo on your website to get low price

!

No Risk - Money-Back guarantee

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 67

Oh, it’s kinda nice environmentally & socially too…

© 2009 OnGrid Solar, All Rights Reserved.

Conclusion !

Economics of PV Overview - 68

Learn More

An Attractive & Legal investment…

!

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

Payback Basics & Residential - Saturday # Commercial Economics, PPAs, & Leases # Sales & Marketing # Slides from past classes #

" © 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 69

Thanks !

ASES

!

Conergy "

!

Free demos of the OnGrid Tool

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 70

Andy Black Solar Financial Analysis & Sales Software

Jyl Safier & Jaymie Fuentes

(408) 428-0808 [email protected] www.ongrid.net - Tools, Articles & Papers available

You for coming!

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 71

© 2009 OnGrid Solar, All Rights Reserved.

Economics of PV Overview - 72

Payback and other Financial Tests for Solar Electric Systems By Andy Black

Solar electric systems can be a good financial investment for California homeowners with good sun (little shade) on a south, southwest, or westfacing roof, if they have a $100 a month or larger electric bill. The larger the bill, the better the investment pays off. The returns are attractive for businesses too. Rates of return from 9% to 14% are common. If financed, the loan cost is usually less than the monthly utility bill savings. And if the home is sold, the solar system should increase the resale value by more than the system’s installed cost. The above claims are big, so rigorous treatment and critical analyses from several angles including Compound Annual Rate of Return, Cash Flow, Lifecycle Payback and Resale Value need to be considered to do a fair assessment. It is helpful to compare the solar investment to other investments on an even basis. IN THIS ARTICLE:  Why solar pays off, including incentive programs that help for both residential and commercial solar applications  How to test the economic value in the ways listed above

WHY DOES SOLAR PAY OFF NOW? High electric rates, Time-Of-Use metering, and government incentives have contributed to the financial viability of solar electricity. The key element for these analyses is the savings on the electric utility bill generated by the solar system. A properly sized, designed and installed solar system can easily eliminate almost all of the total annual electric bill. There are usually only minor monthly minimum charges remaining. RATE STRUCTURES: High Electricity Rates and California’s tiered rate system (with top rates of 35¢/kWh) penalizes residential customers with high electric usage. The surcharges in the three top tiers (see Fig. 1) for residential customers are among the most important factors in the

With Net Metering on an Annual Basis, full retail value is

California Electric Rates: 30 Years

16 14 12 10 cents per 8 kWh 6 4 2 0 1970

Cents per kWh

25¢

$114/mo

1990

2000

Residential Tiered Usage With Solar

35¢

25¢

15¢

1980

Electricity is billed to customers on either a flat-rate schedule (PG&E E1 rates), where electricity costs the customer the same any time of the day, or on a Time of Use (TOU) schedule, (PG&E E6, E7

30¢

$225/mo

Small Bus

credited when excess electricity is produced and “sold” back to the utility (to a maximum credit of fully offsetting the annual electric bill). Much of this excess usually occurs during summer daytime hours. This credit gets used up over the winter and at night and can be held on account for up to a year. The utility ends up looking like a 100% efficient battery that can store energy for up to a year at no loss or penalty.

30¢

20¢

Residential

Fig. 2. Rates have gone up an average of 6.7% per year for 30 years. Source: CPUC “Electric Rate Compendium” Nov. 2001. This article assumes inflation will be 5% going forward.

Residential Tiered Usage Before Solar

35¢

20¢ 15¢ 10¢

10¢

$57/mo

5¢

Net Usage

Usage

Tier 5

0¢

Tier 4

Tier 5

Tier 4

Tier 2

Tier 3

Tier 1

0¢

Tier 3

$44/mo bill at top of Tier 1

Tier 2

5¢

Tier 1

Cents per kWh

payback. Utility rates have also increased steadily at about 6.7% per year for 30 years (Fig. 2), and 5.4% over the last 22 years. Because state law prohibits changes to the rates for Tier 1 and Tier 2, all the increase must be borne in Tiers 3, 4 and 5. This means that if the average rate goes up 10%, but Tier 1 and 2 can’t change, Tier 3 and up must increase approximately 50%. When this happened on January 1st, 2006, it came as a big shock to large users. To be very conservative, 5% utility rate inflation across all tiers is used in the analyses that follow. For comparison, the Consumer Price Index has increase 3.5% per year since 1980.

Production

Fig. 1. Tiered rate pricing penalizes large users most with a marginal electricity cost up to 35¢/kWh. Solar offsets highest tier usage first, making the solar customer look like a small user with a marginal cost as low as 11¢/kWh. The graphic on the left indicates which tier a user is in for a given monthly electric bill in San Jose, CA. On the right, how much is offset by solar ($266 out of $360). NorCal Solar Energy Resource Guide --- September 2006

1

Residential Time-of-Use Peak Pricing Periods Midnight - 6am 6am - Noon

Sunday Monday Tuesday Wednesday Thursday Friday Saturday Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak

Noon - 6pm 6pm - Midnight

Off-Peak Peak Peak Off-Peak Off-Peak Off-Peak

Peak Off-Peak

Peak Off-Peak

Off-Peak Peak Off-Peak Off-Peak

Fig. 3. Simplified example of Time-of-Use peak and off-peak periods under the old PG&E E7 rate structure

Residential "E6" Time-of-Use Pricing Periods Midnight - 6am 6am - 10am

Sunday Monday TuesdayWednesdayThursday Friday Saturday Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak

10am - 1pm

Off-Peak Part-Peak Part-Peak Part-Peak Part-Peak Part-Peak Off-Peak

1pm - 7pm

Off-Peak

Peak

Peak

Peak

Peak

Peak

Off-Peak

7pm - 9pm Part-Peak Part-Peak Part-Peak Part-Peak Part-Peak Part-Peak Part-Peak 9pm - Midnight Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak

Fig. 4. PG&E E6 Time-of-Use rate structure showing more complicated peak, part-peak and off-peak periods or E9), where the cost depends on the time of day and year. The PG&E E6 schedule (the only broadly practical TOU rate for solar as of May 1, 2006, has peak rates (before the Tier surcharges are applied) during summer weekday afternoons of 21¢/kWh and offpeak rates at most other times at a cost of 9-11¢/kWh. The surcharges for Tier 3, 4 & 5 apply to all residential rates, including the E6 TOU rate. So on the E6 rate schedule, peak rates for the largest users will be 44¢/kWh. A solar customer on the E6 rate would get this amount of credit for any excess production during the peak time period. Fig. 3 shows a simplified example of Time-of-Use pricing periods for the old E7 rate (no longer available). The E6 rate periods shown in Fig. 4 are significantly more complicated, adding part-peak pricing and weekend periods. On May 1, 2006, the relatively simple PG&E E7 rate structure was closed to new customers (existing customers were grandfathered in), and the E6 rate schedule was created in its place. E6 added a part-peak pricing period, and more accurately defined when peak, part-peak, and off-peak occurred, shifting the peak period one hour later to better match real system data. Combining Net Metering with TOU allows a solar customer to “sell” power back to the utility during peak periods at the high rate, and buy back during off-peak hours. The customer gets credited or charged for the value of the electricity when it is bought or sold. The utility then looks like a 200% efficient battery because most solar electricity is produced during peak hours, and most is consumed in a residence during part-peak and off-peak hours. The customer gets more value for the same kWh produced, and therefore needs a smaller solar system to offset their electric bill. This works especially well if the customer can mount their solar array facing southwest or south at an angle near 25 degrees up from horizontal (equal to a 6:12 roof). Slopes from 5 to 40 degrees and southeast and west arrays work nearly as well. Southwest is preferred because it maximizes afternoon peak generation at a high value. This orientation also better matches the utilities peak load profile. Note: it is generally not economically feasible to tilt a solar array away from parallel with the roofs surface to optimize performance, because the gain in savings is not worth the additional cost. The elimination of E7 and the creation of the E6 rate caused a relative collapse of the pricing differential between peak and off-

peak rates. Under E7, the rate differential was about 20¢/kWh. Under E6, the differential is about 11¢/kWh. This reduction in differential significantly reduces the time period multiplier benefit from a solar system, however, this change affects much more than just solar owners. Time-of-Use rates are a powerful tool for the utility to motivate customers to voluntarily use less power during predictable times of shortage, such as weekday summer afternoons, when business are open and using lots of air conditioning. The greater the differential between peak and off-peak, the more motivated the user will be (solar or not) to conserve during peak pricing periods. As of August 2006, protests relating to the elimination of E7 have been filed, and it is the author’s belief that it is logical and likely that a widening of the spread between peak and off-peak will occur in whichever time-of-use rate schedule is made available. This will benefit all solar customers served under it, and enhance the results discussed in this article. For the writing of this article, the analysis assumes only the E6 rate is available at its current rates.

INCENTIVES: There are several Government Incentive programs to promote solar. The California Energy Commission (CEC) Emerging Renewables Rebate Program (referred to here as the CEC Rebate Program) cuts final cost 30% to 35% for most systems in PG&E, SCE and SDG&E utility territories. This program doesn’t apply to municipal utilities, but some have their own programs – see www.dsireusa.org to find these programs. The CEC program pays a rebate of $2.60 (as of September 2006) per rated AC watt of system output for systems up to 30 kW in size, upon installation of a compliant system. Affordable Housing projects get a 2 5 % higher level of rebate. Please see www.consumerenergycenter.com/erprebate for more information and for reservation forms, or call the CEC at (800) 555-7794. This rebate is intended to decline by 20¢ per watt every six months on January 1 and July 1. The funding situation is uncertain, but it appears that there will be enough funds to last the program through 2006 until the new California Solar Initiative (CSI) begins. To use the CEC Rebate Program, one needs to submit a complete reservation request before the rebate level drops. From the time of approval, the project has 9 months to install the system (18 months if new construction).

NorCal Solar Energy Resource Guide --- September 2006

2

For systems over 30 kW in size, each of the public utilities provides an incentive under the Self Generation Incentive Program (SGIP). This program has a current rebate level of $2.50 per rated watt. For more information, see www.sgip-ca.com. This program ends this year, and will be replaced by the CSI next year.

some cases, the CEC has issued 1099 tax forms to recipients of the rebate. Simply receiving such a form may not require payment of taxes. Please check with a qualified tax attorney or advisor when making these important decisions. This information comes from:

There is an alternate CEC incentive program called the “Pilot Performance-Based Incentive Program” (PBI Program). Under this program, a solar system owner is paid an incentive based on the production of the system in kWh. For more information, visit: www.energy.ca.gov/renewables/performance_based. This program will also be replaced by the CSI in 2007.

It was suggested in previous writings of this article, that the installer should accept the rebate on the customer’s behalf, in part because it may eliminate the rebate tax liability. The author has been informed that this is not true, and that tax is due when value is received (Source: Ryan Wiser, Lawrence Berkeley National Laboratory), unless specifically exempted (as may be the case with Sect 136). There are a couple of other reasons why it is still better for the consumer to have the installer accept the rebate as part of payment for the project: less cash is required during the project, and the consumer has greater leverage over the installer should they do a substandard job (if the consumer or inspector doesn’t sign off on the job, the rebate is withheld). It is a little less attractive for the installer because it hurts their cash flow, but there is essentially no risk the CEC won’t pay assuming the installer completes the job and satisfies the inspector. It doesn’t impact the installer’s tax return because it is part of the job’s revenue, which is already subject to taxation, minus their expenses.

The California Solar Initiative (CSI) is the new 10-year, $3.2 billion program starting in January 2007. The CSI is a. Under this program, systems are again divided into two groups based on size, with 100 kW being the dividing point. Residential and Commercial (for-profit) systems under 100 kW will receive a rebate of $2.50 per rated watt. Non-profit and government owned systems will get a rebate of $3.25 per rated watt. Large systems, those over 100 kW, will be paid a Performance Based Incentive (PBI). The incentive will be 39¢/kWh for each kWh produced during the first 5 years for commercial, for-profit systems, and 50¢/kWh for non-profit and government systems. The incentives will decline periodically as installation milestones are reached, ultimately being almost completely phased out after 3,000 MW of solar is installed over the estimated 10-year period. A goal of the new CSI program is to create a performance based incentive that ensures the best systems are being rewarded the most. The rating and rebate of the smaller (under 100 kW) systems will take into account expected performance based on tilt, orientation, and shading. The author favors Performance Based Incentives, but believes the market would be most efficient at setting the appropriate incentive level via an auction system. An auction system would reward only the best systems that needed the least incentive, encourage continuous cost reductions, stretch the incentive money supplied by the public to the furthest extent possible, and create maximum long term stimulation and stability for the PV industry who could be certain that the incentive program money would last the length of the program period. For more information on this “PBI Auction” concept, please see www.ongrid.net/papers/PBIViaAuctionSWCph.pdf The CSI only provides incentives for PV systems installed in the investor owned utility territories (IOU) of PG&E, SCE, and SDG&E. California state Senate Bill 1 (SB-1), which was passed in August 2006, compliments the CSI, and requires the creation of incentive programs in the many municipal utility territories by 2008. Administration of the CSI program is likely to shift from the CEC to another entity, possibly the utility serving the territory, or a third party administrator. These and other details are being finalized in the last few months of 2006. More details will become available at: www.cpuc.ca.gov/static/energy/solar Tax treatment of the incentives depends on the type of customer, and possibly on the type of incentive. Contrary to what was written in previous versions of this article, it now appears that there may be significant grounds under which individual (residential) taxpayers could claim that the rebate payment is non-taxable. Section 136 of the IRS Code specifies that rebates paid by utilities, directly or indirectly, for energy efficiency (PV systems appear to be included) are tax-exempt. An important question is whether the CEC as the payer qualifies as “indirect” because it is using public benefits funds collected by the utilities from ratepayers. The IRS has not ruled on this. This grey area may provide a rebate recipient enough confidence to claim it and wait for the IRS to prove otherwise. One thing is sure, if this exemption is not claimed and tax is paid on the rebate, the IRS is not likely to rush to find you to refund it, if they do decided to make a ruling. As of now, the author knows of no intention by the IRS to make a ruling, so it’s likely to remain grey. In

www.millionsolarroofs.org/articles/static/1/binaries/GouchoeASES.pdf

An unanswered question is the tax treatment of the PBI payments. Since these payments will be received by the system owner after the installation, rather than as a rebate at the time of installation, they are not likely to be exempt under IRS Section 136, and may not be exempt under any other section. Therefore, they are probably taxable, which makes them less attractive to the consumer. Note: The information in this article regarding taxes, tax credits and depreciation is meant to make the reader aware of these benefits, risks and potential expenses, and help avoid overblown claims by aggressive salespeople. It is not tax advice, and the author is not a qualified tax professional. Please seek professional advice from a qualified tax advisor to check the applicability and eligibility before claiming any tax benefits or exemptions. Tax treatment for rebates for commercial systems will be discussed after the tax credit and depreciation benefit section. Of course, municipal and non-profit entities do not have to worry about these tax issues, as they are generally tax-exempt. Tax incentives include tax credits and depreciation. The Federal Investment Tax Credit for Residential is 30% of net system cost, capped at $2,000. It is a one-time credit, but may be carried forward (and possibly back) if not completely useable in the system installation tax year. It only applies for systems that are installed in 2006 and 2007. It is likely to be extended past its current 2007 expiration date. Check back for updates. Also, the IRS hasn’t produced the form required for claiming this credit for individual filers. The Federal Investment Tax Credit for Commercial and Business owned systems is 30% of net system cost with no cap. This applies for systems that are installed in 2006 and 2007. After 2007, if not extended, the tax credit will revert to the previous level of 10%. The IRS current federal form is 3468 available at www.irs.gov/formspubs. In the past, this credit could be carried forward 15 or back 3 years. It’s not clear if this has changed. Home-based businesses typically can qualify for this tax credit as well. Because the credit applies on both individual (residential) and business tax returns, but is capped on residential, it needs to be properly apportioned on each return to ensure the right credit is claimed. Home-based businesses are typically apportioned based on percentage of square footage attributed exclusively to the business. To figure the credit, one typically applies the percentages to the two separate calculations then sums the results.

NorCal Solar Energy Resource Guide --- September 2006

3

Before Solar Electric Bill $ $ $ $

100 201 360 360

Solar System Size & Cost

kWh Usage per Month

PV System Size (CEC Rating)

Gross Cost

680 1030 1500 1500

3.0 kW 6.0 kW 9.0 kW 6.0 kW

$28.4K $55.4K $81.1K $55.4K

Results, Savings, & Benefits Net Monthly Cash Flow Compared to 7.5% 30-yr Loan in First in Fifth Year Year

Final Net Pre-Tax Appraisal New State Cost w/ Compound Equity / Electric Rebate $2K Fed Annual Resale Bill @ Tax Rate of Increase in With $2.60/W Credit Return First Year Solar $7.8K $15.6K $23.4K $15.6K

$19.1K $38.3K $56.2K $38.3K

9.2% 11.6% 14.4% 16.5%

$16.2K $41.6K $76.9K $60.4K

$27/mo $16/mo $22/mo $97/mo

$-23/mo $-8/mo $55/mo $71/mo

$-9/mo $31/mo $127/mo $128/mo

Total Savings Over 25 Years $34K $89K $166K $131K

Table 1. Example residential systems and their financial costs and benefits It may also be possible to apply the federal tax credit against the alternative minimum tax. See a tax advisor to apply it to a particular situation. California offered a State Income Tax Credit thru the end of 2005. This is now expired, and a bill renewing it died last January in the CA legislature. Those in states who enjoy tax credits should be aware, that if they itemize their federal tax deductions, a state tax credit isn’t worth its full face value. When itemizing, state taxes are deductible off federal income. Reducing state taxes by the state tax credit means that federal taxable income will go up. In effect, federal income tax is being paid on the value of the state tax credit. For most people, a state tax credit is worth about 75% of its face value. Business owned systems may also be eligible for MACRS 5-year Accelerated Depreciation using IRS federal form 4562. Homebased business systems may also qualify for partial depreciation. The depreciable basis amount is the tax credit basis, minus one-half the federal tax credit amount (85% in the case of the current 30% tax credit, 95% in the case of the original 10% tax credit). Paying federal tax on the rebate for businesses appears to be a choice and the solar industry has “educated” the public illustrating both scenarios. It isn’t, however, a free lunch. If one chooses to make the rebate tax-free, they can claim the tax credit based only on the “after-rebate” amount of the system cost. If they pay tax on the rebate, then they can claim the credit on the full cost of the system. While it might seem obvious to avoid the rebate tax, while the federal tax credit is at 30%, it is actually financially more attractive to claim the rebate as taxable, pay the tax, then claim a higher basis for each of the federal tax credit and depreciation. If the tax credit drops back to 10%, then the reverse is true. California state depreciation is split between “Corporate” and “Non-Corporate” businesses. Non-Corporate businesses use the same MACRS 5-year accelerated depreciation. Corporate businesses use a standard 12-year straight-lin depreciation schedule for their state taxes. It should be noted that some or all of a solar system may be deducted using IRS Section 179, if available. This allows a taxpayer to deduct in the first year, approximately $108,000 of otherwise depreciable property. Of course, this only applies to solar if the Sect 179 benefit isn’t already being used for other depreciable items.

Installed system costs have generally declined 5%-7% per year due to manufacturing economies of scale, installation efficiencies, new products, and competition. However this trend has recently reversed because of growing worldwide interest in solar, a rapidly expanding market and a shortage of silicon & solar panels. Installed system costs are likely to be stable or rising for the next couple of years, then may begin to decline again. Renewable Energy Credits (RECs, also known as Green Tags) are a new and growing way to extract value from a solar energy system. RECs represent the bundle of legal rights to the green part of each kWh produced by a solar system. This green part can be sold for a value, which generates additional revenue for the seller. California system owners can now sell their RECs. A market is being established and the price of solar RECs is expected to be between 2¢/kWh and 20¢/kWh in contracts ranging from 1 to 20 years. See www.green-e.org for more information about RECs and the buying or selling thereof. It’s not yet clear if or how the RECs from systems receiving CSI incentives will be owned, valued, or restricted. One should take care to consider whether they really want to sell the RECs their system generates. By selling them, they lose the right to claim they are using any of the clean green energy generated by the system. That right would belong to the new REC owner. The system owner could claim they are a host for the generation, but not a user. The distinction is important in order to prevent double counting of the RECs, which is important to maintaining their value.

HOW IS THE SOLAR PAYOFF PROVEN? Independent tests of the financial viability of solar energy include:  Rate of Return similar to growth and high yield investments  Payback in a reasonable time  Total Lifecycle Payback  Net increase in property value with respect to system cost  Positive cash flow when financing the project with equity

This information will be evolving as the CSI & IRS rules and forms get created. The author maintains an updated version of this article at: www.ongrid.net/papers/PaybackOnSolarSERG.pdf.

RATE OF RETURN: Compound Annual Rate of Return on an investment is another term for interest rate, which is a way of comparing one investment to another. For example, a savings account might pay 1% interest, and the long-term stock market has paid about 11%. The author chose 10% as the test point for solar, because that is among the higher of long term average returns from common, readily accessible, higher yielding investments such as stocks and bonds.

A source for information on all state and federal incentive programs around the country is available at the DSIRE project: www.dsireusa.org. In addition, the Solar Energy Industries Association has put together a “Guide to Federal Tax Incentives for Solar Energy”, available for free at www.seia.org.

In order to compare solar to other investments, all investments should be placed on the same side of the tax equation. Since most investments are taxable (i.e. stocks, savings interest, etc.), it is most meaningful to convert solar savings to its taxable equivalent (i.e. PreTax value).

Customers in higher income tax brackets see comparatively more value because residential electricity expenses are paid with after-tax dollars – they aren’t tax deductible. More on this in the “proof” section of this article.

AfterTax dollars are worth more to a taxpayer than the same number of PreTax dollars, because PreTax dollars are subject to taxation. Therefore, an AfterTax dollar saved (with solar) is worth more than $1 on a PreTax basis, by an amount proportional to the

NorCal Solar Energy Resource Guide --- September 2006

4

Investment Type

Investment Amount

Savings Stocks Solar – 5.5 kW

$30,000 $30,000 $30,000

Interest Earned or Net Electric Bill Savings $300 (at 1% rate) $3,300 (at 11% rate) $2,069 (1st year)

After-Tax Value the First Year $188 $2,069 $2,069

After-Tax Value the Eighth Year $188 $2,069 $2,960

Payback including inflation 160 years 14.5 years 12.9 years

Table 2. Payback Investment Comparisons. Solar savings grows due to inflation, so payback is faster.

Pr eTax =

AfterTax (1− TaxRate)

Once the value of the savings, maintenance costs and other amounts are properly adjusted to their pre-tax values, they can be inserted into a 25-year financial timeline (the warranted life of most € solar electric/PV modules) representing the cash flows for each year to calculate the Compound Annual Rate of Return. This allows the accurate inclusion of all relevant cost and benefit components. The initial capital cost is the only amount that doesn’t get adjusted. That amount is the net system up front cost (total out of pocket), and is unaffected by the taxation or lack thereof of future savings in the utility bill. Consider it the same as principal that is invested anywhere. The principal is not taxed upon its departure or return. Tax savings and consequences, inverter replacement, maintenance, and other significant financial events can be included at their appropriate places on the timeline. Inflation and module degradation are also easily included. Then total cash flow for each year in the analysis can be summed. Using the Internal Rate of Return (IRR) tool in a spreadsheet, one can find the Compound Annual (interest) Rate of Return (CARR) for the investment. One should note that there is a significant and very important difference between Compound Annual Rate of Return (CARR) and average return or total return divided by the number of years an investment is held. Average return does not factor in compounding of interest, and may make an investment look more attractive than it really is. This article uses CARR for all items under consideration (solar, stocks, savings, etc). The difference becomes more visible the longer the time horizon. A brief example: Suppose an investment doubles every year. Its CARR would be 100% because you get 100% increase each year on your investment. No matter how long you hold it, its CARR is 100% because you need to compound for the number of years it’s held. Alternatively, if you were to look at the “average rate of return”, over 1 year, it would still be 100%. However, if you held it 3 years, your investment would be 800% of the original, or a total return of 800% (100%>200%>400%>800%). The average annual return would be 800%/3years-100% or 167%, which looks great, but isn’t representative, because it isn’t factoring in the compounding. This faulty method of analysis is highlighted here because unfortunately there are several faulty solar analyses and sales presentations being given to the public that use averaging, rather than compounding. Please see Table 1 for several examples showing Compound Annual Rates of Return. These cases are for full service residential system installations in San Jose, California, using typical installed system costs on a simple composition shingle roof. Assumptions for Table 1:  Pre-Solar Bill: electric bill before solar using PG&E E1 Flat Residential Rates  Post-Solar Bill: electric bill with solar using PG&E E6 Time-ofUse Residential Rates  System AC Size refers to the CEC AC power rating, which includes some (but not all) loss factors. The analyses here-in include the CEC’s and additional loss factors to give a

conservative estimate of production (1,630 kWh/yr per kW of CEC AC rating) for use in calculating the Post-Solar Electric Bill  Final Net Cost refers to the total net cash out of pocket including total of installed system costs, permitting, sales tax, PG&E fees, the federal tax credit for residential.  Assumes the customer is in the 28% federal and 9.3% state tax bracket and is eligible for the Federal Tax Credit. Electric rate inflation is 5.0%. Module degradation is 0.5% per year. System maintenance cost is 0.25% of gross system cost per year, adjusted for inflation. Inverter replacement costing $700/kW occurs in year 15. An alternative tool to evaluate/verify solar financial results is the Clean Power Estimator: www.consumerenergycenter.org/renewable/estimator

PAYBACK: What about calculating the payback? Payback is a simple but crude tool for comparing investments. Solar is an inflation-protected investment but many others are not. This improves the payback for solar (electric rates double every 13 years at 5.4% historical inflation). To properly calculate the solar payback, it is necessary to add in the inflation adjusted savings of each successive year until payback has been achieved. Savings in the latter years is larger than savings in the first years, so the payback is faster than simply dividing the cost by the savings. Payback analysis on an after-tax basis does not reflect the true value of the saved utility expense, because after-tax savings are worth more on a pre-tax basis. However, trying to do payback using the pre-tax value gives an unrealistically optimistic view of when “payback” has occurred. The examples in Table 2 show how long paybacks on other investments really are, when taken on an aftertax basis. There are numerous other flaws in using payback for a residential long-term investment; it does not properly include the tax savings and consequences, it does not account for maintenance or inverter replacement expenses, and it makes it difficult to compare to other investments such as stocks, savings, etc. because of inflation and other factors. TOTAL LIFECYCLE PAYBACK: $9,000

Annual Savings Before and After Payback

$8,000 $7,000

Annual Savings

taxation rate. To find the PreTax value, the following equation can be used to adjust each AfterTax amount, where TaxRate is the net total effective income tax rate:

$6,000 $5,000 $4,000

Total Lifecycle Savings is several times larger

$3,000

Initial Cost paid back in 10 years

$2,000 $1,000 $-

0

1

2

3

4

5

6

7

8

9

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Year Annual Savings Before Payback Payback Year (Occurs at 10.4 Years) Annual Savings After Payback

Fig. 5. Simple Payback vs. Total Lifecycle Payback. Total 25 year Lifecycle Savings is several times the initial cost represented by the savings up until year 10. Year 15 shows diminished savings in that one year due to inverter replacement.

NorCal Solar Energy Resource Guide --- September 2006

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INCREASE IN PROPERTY VALUE: Solar electric systems increase property value by decreasing utility operating costs. According to the Appraisal Journal (Nevin, Rick et al, “Evidence of Rational Market Valuations for Home Energy Efficiency,” Oct 1998, (available at various locations on-line, and at www.ongrid.net/AppraisalJournalPVValue10.98.pdf), a home’s value is increased by $20,000 for every $1,000 reduction in annual operating costs from energy efficiency. The rationale is that the money from the reduction in operating costs can be spent on a larger mortgage with no net change in monthly cost of ownership. Nevin states that historic mortgage costs have an after-tax effective interest rate of about 5%. If $1,000 of reduced operating costs is put towards debt service at 5%, it can support an additional $20,000 of debt. To the borrower, total monthly cost of home ownership is identical. Instead of paying the utility, the homeowner pays the bank, but their total cost doesn’t change. Please see the column labeled “Appraisal Equity Increase” in Table 1 for examples of the increase in home value. In some cases, a solar system can increase home value by more than its cost to install. This effectively reduces the payback period to 0 years if the owner chose or needed to sell the property immediately. It could even lead to a profit on resale. There are two limits to the increase in resale value over system net installed cost. First, why should a homeowner pay in total more for a home with a solar system, when they could buy a non-solar home, and solarize it for less money? Yet this happens with other remodels. Decks, on average across the nation, return 104% of their cost upon resale. However, in certain markets like San Francisco and Boston, decks add more than 215% of their value upon resale (Alfano, Sal, “2003 Cost vs. Value Report”, Remodeling Online – www.remodeling.hw.net downloaded March 5, 2004). Other types of remodels like kitchens and bathrooms had similar results related to geography. So it makes sense that in certain geographies where the sun shines brightly and the electric rates are high, solar would return more than its installed cost, while in other states with less sun and lower rates, the return might be much lower, with a national average comparable to other types of remodel. Table 3 lists projected resale value of various solar systems, compared with nationwide averages for some other home improvements. The increase in property value to date is currently theoretical. A very high fraction of the grid-tied solar electric systems in California Home Improvement Type Solar 3 kW Solar 6 kW Solar 9 kW Deck Addition Bathroom Remodel Window Replacement Kitchen Remodel

Investment Amount / Net System Cost $19.1K $38.3K $56.2K $6.3K $10.1K $9.6K $44K

Resale Value Increase $16.2K $41.6K $76.9K $6.7K $9.1K $8.2K $33K

% Return 85% 109% 137% 104% 89% 85% 75%

Table 3. Resale value comparisons of various home improvements

were installed since the start of the state’s Power Crises and the Deregulation fiasco in 2001. Most of these homes have not been sold, so there are no broad studies of comparable resale values available. However, some evidence is beginning to emerge that there are significant jumps in resale value being realized by some solar home sellers. The author is aware of 4 anecdotal cases, in which the sellers believe they got all of their cost as a premium, and have or plan to install a PV system on their new home. The NREL (National Renewable Energy Laboratory) study Comparative Analysis of Homebuyer Response to New Zero Energy Homes, (www.nrel.gov/docs/fy04osti/35912.pdf), August 2004, by Farhar showed that 15 Shea Zero Energy Homes with 2.4 kW PV systems in San Diego increased in value faster than 12 comparable conventional homes in a nearby community. On average, the Shea homes increased in value $40,000 more than the conventional homes, at a higher rate of appreciation, and with a shorter length of ownership. This boost in resale value even outstrips the estimates shown in Table 1 and Table 3. It is likely that many factors were involved, and this sample size is not statistically significant. However, it is at least, not negative evidence. It is also interesting to note that PV systems will appreciate over time, rather than depreciate as they age. The appreciation comes from the increasing annual savings the system will yield as electric rates and bill savings rise. All the calculations in this article assume electric rate inflation will be 5%. If so, the PV system will save 5% more value each successive year, and thus gain from the 20:1 multiplier effect. The resale value will then increase 5% per year compounded. This cannot continue forever, as the increase in resale value runs into the second limit, which relates to the remaining life left in the system. For these analyses, the system is assumed to be worthless at the end of 25 years. This is probably very conservative, since the panels are warranted to be working at least 80% of their new performance. So if the system is worthless at the end of 25 years, the only value the system has as it nears that time, are the remaining savings it can generate before the end of the 25th year. Fig. 6 shows both the increasing value due to increasing annual savings and the remaining value limitation that takes over at approximately year 11. If the system does have additional resale value, so much the better. Still, the skeptical homebuyer might question the above assertions in light of the lack of hard evidence. Perhaps the best evidence to present would be a stack of old bills showing usage and cost before solar, and a stack of new bills showing a substantial savings. The question might be posed, “What are a continuous, if not growing, Resale Increases buyer?” That sort stream of these savings worth toValue the prospective of evidence can’t easily beDue ignored. Of course, other By factors will Over Time To Solar Until Limited Remaining System Lifetime Savings $140,000

Resale Value / Remaining Savings

Comparing the savings of a solar electric system over 25 years of operation to its initial cost is a better way of looking at payback, because it more fairly values the savings due to the compounding effect of electric rate inflation. Because of this effect, the savings in the later years is much greater than the savings in the first few years. Typical systems give back 1.5 to 3 times their initial cost. See Table 1 for several examples and Fig. 5 for an illustration. One drawback to this analysis is it fails to account for the time value of money. A dollar saved in the future isn’t worth as much as a dollar saved today, so that a total lifecycle payback isn’t worth quite as much as it might initially appear. The better methods of comparing solar as an investment are the Compound Annual Rate of Return, Increase in Property Value, and Cash Flow.

$120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $1

3

5

7

9 11 13 15 17 Year Resale Value Increase

19

21

23

25

Remaining System Lifetime Savings

Fig 6. Resale value increases over time because savings get larger each year. Total remaining lifetime savings in the system declines annually, putting a limit on the increase in resale value after year 11

NorCal Solar Energy Resource Guide --- September 2006

6

weigh heavily in the value. How attractive is the home? A tidy, attractive installation should add all of the value shown above, but like a spa, some prospective buyers may not care or value it, while others may love it. As an additional benefit, solar systems installed between January 1, 1999 and January 1, 2010, are exempt from triggering Property Tax reassessments (California Taxation Code, section 73). CASH FLOW: FINANCING vs. BUYING ON CREDIT: Two ways to look at using loans to finance a solar project include:  Making the purchase more affordable to a larger audience  Making a smart investment using borrowed money, the repayment of which (principal and interest) are less than the savings on the electric bill due to the investment Buying on credit eliminates the large capital outlay for a solar system, making the purchase achievable to more consumers. The key determinant is how large a monthly payment the bank will approve for the borrower. This use of credit can expand the solar market, but isn’t useful as a financial test to demonstrate the economic viability. Financing the cost of a solar project as an investment through

borrowing yields savings on the electric bill. However borrowing has a cost. If the cost of borrowing is lower than the savings, then the project is Cash Positive. This result depends on the interest rate and payment terms for the loan, the tax bracket of the borrower if the loan is deductible, and inflation increasing the savings over time. Home Equity loans are excellent sources of funds because interest rates on real estate secured loans are relatively low, payment terms can be long, and the interest is generally deductible. The net cost of these loans is often less than the savings on the electric bill. This effectively reduces the cost of ownership to less than $0 per month. It actually pays the owner, creating a positive cash flow from day one. With a fixed interest rate loan, as electric rates rise, the equation gets more cash positive over time, even when the interest deduction decreases. Fig. 7 shows an example where the net monthly expense of a system (loan + new utility bill) is less than the original pre-solar utility bill each year for 20 years, until the loan is paid off. Then the savings get really big! Refer to Table 1 for several examples showing the initial monthly cash flow assuming 100% financing of a solar system’s Final Net Cost using a 7.5% 30-year loan. The monthly cash flow becomes more positive each year due to the 5% inflation in electricity prices. This inflation increases the savings due to the solar system. The large spike at year 15 is the replacement cost of the inverter. It causes a one time negative cash flow for that year. However, when the total savings are accumulated as in Fig. 8, the dip is negligible compared to the savings to date, and especially to the savings yet to come.

CONCLUSION: It is important to compare the solar investment to other investments on an even basis. Rigorous treatment and critical analyses from several angles including Compound Annual Rate of Return, Cash Flow, and Resale Value need to be considered to do a fair assessment. Solar will make economic sense for many, but only a hard look at the numbers will tell. The reader is encouraged to check it out. Run the numbers, get evaluations and proposals from solar providers, and take them to a CPA to check them out. The sidebar gives additional thoughts to make sure the presentations stand up to the light of day!

Fig. 7. Effect of a solar system financed over 20 years showing a cash positive result from the first day of ownership. $60,000

"Accumulated Net Savings" with Loan plus New Bill

$50,000

Copyright 2006, Andy Black. All rights reserved. This information changes periodically. The author maintains an updated version of this article at: www.ongrid.net/papers/PaybackOnSolarSERG.pdf. For more info on solar payback, analysis tools, upcoming classes, and other papers and articles, see www.ongrid.net. Andy Black is a Solar Financial Consultant and owner of OnGrid Solar Energy Systems, maker of the OnGrid Solar Sales Tool, specializing in the financial aspects of solar electric systems. He is on the Advisory Board of the NorCal Solar Association, and is a board member of the American Solar Energy Society. He can be contacted at (408) 428-0808 or [email protected] for questions about the payback on solar.

$40,000

$30,000

$20,000

$10,000

$-

Accumulated Savings 1

2

3

4

5

6

7

8

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Year

Fig. 8. Accumulated net savings of solar system financed over 20 years, including all costs, thus showing pure cash profit. NorCal Solar Energy Resource Guide --- September 2006

7

The OnGrid Solar Financial Analysis & Sales Tool Simplify Solar Sales: Qualify and Close in

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Their internal rate of return

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

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

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System’s total lifecycle payback and savings

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Their increased resale value

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Use customer data to paint them a picture. Example Output*:

Cash Flow:

Cash Flow:

Net Annual Savings When Financed

Utility Bill w/o Solar at 5% rate escalation

Annual Savings

Annual Costs: Solar with Loan vs. No Solar

Loan cost, Maintenance, Inverter Replacement, & new small electric bill

Net Annual Savings

Lifecycle Payback:

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Annual Savings Before & After Payback

Resale Value Over Time Resale Value

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Site Visit

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FREE Demo / Examples: www.ongrid.net/payback  2008 OnGrid Solar

The OnGrid Solar Financial Analysis & Sales Tool for Commercial & Residential PV Sales A Time-Saving, Comprehensive Tool for Solar Sales Helps Create & Close More Sales Proves Payback for the Customer

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Calculates TOU Value with Shading Prepares Rebate & Utility Docs Easily

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Identify and Screen Hot Leads, guide them successfully thru the entire sales process

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Fill out Closing Sales Paperwork and Documents (including CSI) with the touch of a button Size PV systems based on customer needs, incentive programs and site data

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Upload shading device data for accurate Time-of-Use value analysis

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Demonstrate the financial benefits of a solar electric system to your customer with customized calculations. Tailor and brand your printouts. Use them for direct presentations as your sales materials.   

PV System Size & Production Current & Future Electric Bills Cost, Rebate & Tax breakdowns

  

Financing & Cash Flow Resale Calculations & Graphics Rate of Return Calculations

The OnGrid Tool is offered on a subscription basis and is updated frequently with current Rate Schedules, Incentive, Tax and Product information, and periodically with new tool features and benefits. Download the free demo. Then, contact Andy Black at [email protected] or (866) 966-5577 to start closing more sales.

(866) 966-5577 FREE Demo / Examples: www.ongrid.net/payback  2008 OnGrid Solar Net Annual Savings

Andy Black, CEO Solar Financial Consultant (408) 428-0808 [email protected] www.ongrid.net

Sell PV Systems More Effectively Economics is the strongest driver in selling PV systems. Residential & Commercial PV systems can have very good economics. Example Residential Results: PreSolar Bill $100 $254 $457

kWh System per AC Size Month 665 1150 1700

3.0 kW 6.0 kW 9.0 kW

System Gross Cost $28K $55K $81K

Final Net Pre-Tax Cost w/ Tax Annual Benefits & Return Rebate $20K 11.4% $39K 15.3% $58K 18.1%

Appraisal Equity Increase

Lifecycle Payback Ratio

$20K $57K $102K

221% 314% 383%

Prove it to your customers with independent 3rd party resources to boost your credibility. The OnGrid Solar website has: Upcoming Classes:

www.ongrid.net/classes.html

Payback, Economics & Financing of Solar Systems: Understand the variables and ways to maximize the economics, then learn 5 ways to prove the financial results for Residential, Commercial & Non-Profit customers. The Commercial class includes Lease & PPA financing. Sales & Marketing for PV Systems: Learn OnGrid’s secrets to success in building a powerful and effective sales organization & marketing strategies for residential customers.

Articles & Papers:

www.ongrid.net/papers

Use OnGrid published and peer-reviewed articles to enhance your credibility with customers, and help them understand for themselves why solar is attractive (Please use articles unedited and including attribution. Contact OnGrid at 408 428 0808 if you’d like to use excerpts).

Tools:

www.ongrid.net/payback The OnGrid Solar Financial Analysis & Sales Tool is a powerful design, quoting, proposal, and forms tool that will save you tremendous time and improve your closing ratio, helping you make more sales and money with less time and effort.

Try a FREE demo and see examples of the output at: www.ongrid.net/payback ! 2008 OnGrid Solar

1.6.08

“Economics of Solar: Making The Financial Case”

Andy Black Solar Financial Analyst (408) 428 0808x1 [email protected]

Abstract: This class helps PV dealers, installers, and salespeople make the best and most accurate financial case to their customers to help them make more sales and open more eyes to the value of solar systems. Andy Black will provide an overview of solar electric (PV) system costs and approximate savings for residential systems. He will provide detailed information on state & federal incentives available and how to apply and use them. These include rebates, performance based incentives, and tax credits. He will explain the choices for electric rate structures and the advantages of each relative to building load profile, system design, and site specifics (shading, orientation, etc). Andy will discuss the various methods of performing financial analyses in conjunction with the savings realized. Financial analysis methods presented will include Simple Payback, Total Lifecycle Payback, Internal Rate of Return (IRR), Cash Flow analysis, and Appraisal Resale Value. Interactive examples of residential sites will be provided, including discussion of the salient differences and advantages of each method. The assumptions and variables that affect each analysis will also be presented including inflation, maintenance expenses, and interest rates. An overview of the various tools available on the market for assisting the dealer, installer or salesperson in making the case and the sale to a customer will conclude with an in depth look at the OnGrid Tool that Andy created for use by the industry. If time allows, group exercises using OnGrid will be available to try cases and see how a powerful presentation can be created. All students will receive a copy of the demo version of the OnGrid Tool (licensing agreement will be required). Focused on residential, serves as a prerequisite for “Commercial Solar Economics & Financing with PPAs and Leases.”

Biography: Andy Black is a Solar Financial Analyst and the owner of OnGrid Solar. OnGrid Solar provides financial analysis and sales education & software to solar installers to help them make a strong sales case for solar electricity to their customers. Andy has more than a dozen years of design, consulting, teaching, sales, and research experience in solar. He specializes in demonstrating the financial payback of solar electricity systems. He is a former NABCEP certified solar installer. Andy Black is a recent member of the Board of Directors of the American Solar Energy Society and served as Chapters Representative. He is also a member of the Advisory Board of the Northern California Solar Energy Association. Andy’s formal education includes a Bachelor’s in Electrical Engineering from Penn State University, a Master’s in Electrical Engineering from University of Southern California, and a Marketing Certificate at the University of California. His training in solar electricity includes Solar Energy International’s intensive photovoltaic coursework and more than a dozen specialty courses in solar electric and related fields. He presents regularly on the financial analysis of solar electricity to audiences nationwide. Andy is also the groundskeeper and servant for a cat at his home in San Jose, CA. Contact Info:

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

Acronyms Used In Sales, Marketing & Economics Classes AC: Alternating Current (standard AC wall power) ACEEE: American Council for an Energy Efficient Economy: www.aceee.org AMT: Alternative Minimum Tax ASES: American Solar Energy Society CA: California CAD: Computer Aided Design CalSEIA: California Solar Energy Industries Assn CARR: Compound Annual Rate of Return CCSE: California Center for Sustainable Energy CEC AC: The California Energy Commission AC (Alternating Current) Power Rating CEC: California Energy Commission CEO: Chief Executive Officer CFO: Chief Financial Officer CHEERS: California Home Energy Efficiency Rating System CL&P: Connecticut Light & Power COO: Chief Operating Officer CO2: Carbon Dioxide CoSEIA: Colorado Solar Energy Industries Assn CPI: Consumer Price Index CPUC: California Public Utilities Commission CRES: Colorado Renewable Energy Society CRM: Customer Relationship Management CSI: California Solar Initiative DC: Direct Current (what comes out of PV modules) DER: Distributed Energy Resource/Renewable DGR: Distributed Generation Resource DSIRE: Database for State Incentives for Renewable Energy: www.dsireusa.org DWR: Department of Water Resources EPBB: Expected Performance Based Buydown EPBI: Expected Performance Based Incentive FASB: Financial Accounting Standards Board FICA: Social Security Payroll Tax FMV: Fair Market Value FIT: Feed-In Tariff HELOC: Home Equity Line of Credit HERS: Home Energy Rating System IDR: Interval Data Recording (meter) IID: Imperial Irrigation District IRR: Internal Rate of Return IRS: Internal Revenue Service ISO: Independent System Operator ITC: Investment Tax Credit JCP&L: Jersey Central Power & Light kWh: kilowatt-hour

Andy Black OnGrid Solar Solar Financial Analyst (408) 428 0808 [email protected]

LADWP: Los Angeles Department of Water & Power LBL: Lawrence Berkeley Laboratories MACRS: Modified Accelerated Cost Recovery System NABCEP: North American Board of Certified Energy Practitioners NCSC: North Carolina Solar Center NESEA: North-East Sustainable Energy Association NJCEP: New Jersey Clean Energy Partnership NLP: Neuro-Linguistic Programming NOL: Net Operating Loss NOx: Nitrous Oxides NREL: National Renewable Energy Laboratory NSHP: New Solar Homes Partnership PBI: Performance Based Incentive PEC: PG&E’s Pacific Energy Center PG&E: Pacific Gas & Electric PPA: Power Purchase Agreement PSE&G: Public Service Electric & Gas (NJ) PTC: PVUSA Test Conditions PUC: See CPUC PV: Photovoltaics (Solar Electricity) PVUSA: PV for Utility Scale Applications REC: Renewable Energy Certificate/Credit ROI: Return On Investment ROR: Rate of Return SB1: CA Senate Bill 1, the law that created the CSI SCE: Southern California Edison SDG&E: San Diego Gas & Electric SDREO: San Diego Regional Energy Office (now called CCSE) SEI: Solar Energy International SLI: Solar Living Institute SMUD: Sacramento Municipal Utility District SOx: Sulfur Oxides S-REC, sREC: Solar Renewable Energy Certificate STC DC: Standard Test Conditions DC (Direct Current) rating STC: Standard Test Conditions SVP: Silicon Valley Power SWOT: Strengths, Weaknesses, Opportunities, Threats TOU: Time Of Use TRC: Tradable Renewable Certificate (= sREC = REC = Green Tag) UI: United Illuminating Co. (CT) URG: Utility Retained Generation WIIFM: What’s In It For Me