Thoughts on Solar

Our Four-Part Series on Comparing Commercial Solar Bids concludes today with Part 4: Comparing Return on Investment (ROI) and Levelized Cost of Energy (LCOE). (You can read our earlier installments here: Part One: Comparing Solar Modules; Part Two: Comparing Solar Inverters; and Part Three: Your Utility Savings Analysis.)

ROI

We learned in Part Three what should be contained in a Utility Savings Analysis - power and energy production over the system lifetime, savings in Year 1, and savings over the subsequent years as a function of guesstimated utility cost increases over time.  Given the energy saving starting in Year 1, the cost of the system, any Operations & Maintenance costs, the anticipated rebate from the utility, and the tax benefits anticipated for the system, your prospective solar contractor should map out for you the cash flows associated with your system.

The O&M piece is worth pausing on for a moment as the system design will play a major role in estimating what your annual O&M costs will be.  It is true that for the most part, solar power systems require little or no maintenance.  Indeed, the solar modules will most likely still be producing plenty of power long after everyone associated with the project is long gone!  (NREL has solar modules that have been producing power for forty years with no sign of stopping and the modules being manufactured today - at least from the top tier manufacturers - are of much higher quality than what was available in the 1970’s.)

The inverter(s), however, are another story.  There is a reason that central inverters and string inverters come with relatively short warranties - typically five years standard for central inverters and ten years for string inverters - and that reason is heat.  Since large inverters process very large amounts of power they also generate a lot of heat and that ultimately takes its toll on the electronics.  If you add in adverse environmental conditions - high humidity, dust, the occasional rodent, etc., and sooner or later that inverter will fail.  A proper ROI analysis will factor in the cost of inverter replacement over the lifetime of the project.  If the included warranty is ten years, then inverter costs should appear every ten years.  If the warranty is five, then replacement costs should be included every five.

Conversely, one of the main selling features of microinverters in the commercial marketplace is the length of the warranty provided.  At a full twenty-five years, that means that inverter replacement is covered over the modeled lifetime of the system.  (Of course, offering a warranty and being able to honor that warranty are two different things and there are few inverter companies that have been around for twenty-five years.)  If you can reduce or eliminate inverter replacement costs, that will have a significant impact on O&M costs over the lifetime of the system.

Other O&M items include system monitoring (if not included in the purchase price), security (if conditions warrant), and cleaning (a very nominal expense).

For commercial systems the O&M expense is often modeled as a percentage of the purchase price per year, rather than discrete payments representing replacement events.  In this way the O&M expenditure is actually more like a set-aside for a maintenance fund to be used as needed over time.  It should accumulate to at least the value of inverter replacement within the inverter warranty period.

The other wildcard element in this analysis involves calculating the cash value of any received tax benefits.  While we don’t provide tax advice (and accountants shouldn’t be designing solar power systems, either!), we can say that aspects of tax benefits to be considered are: the 30% federal investment tax credit, plus state and federal depreciation, the latter elements being a function of the tax rate of the system owner who will try to utilize the benefits.  Of course, if the client is a non-profit, there will be no tax benefits to consider - the primary reason why the payback on solar for non-profits is so much longer.

The final piece - the rebate from the utility - should be factored in either as a lump-sum payment if the rebate is an EPBB rebate, or in annual payments over time (typically five years worth) if it is a PBI rebate.  In California, these will be based on the output from the CSI rebate calculator, and those calculations should be made available.

Put all of that together over time and you have a series of cash flows, positive and negative, from which an Internal Rate of Return can be calculated and, more importantly, the payback period determined.  Keep in mind, however, that this calculation is dependent in part upon assumptions about utility rate changes which, while possibly quite accurate in the short term, become increasingly speculative over time.  Still, if the calculation is done in a manner where the assumptions are properly identified, the ROI calculation should provide a reasonable means of comparing competing bids as to relative value.

Levelized Cost of Energy

While it is common in the solar industry to express the cost of the system in dollars/Watt, that is a misleading statistic at best since it masks variables affecting real world performance.  A far better metric - and one that your installer should be able to provide you - is the cost per kWh for the energy that will be produced by the system over its anticipated lifetime.

The calculation is actually quite simple - determine the total out-of-pocket costs for the system owner over the system’s lifetime (including purchase price less rebate and tax credits, plus all O&M costs) and divide it by the total amount of energy to be produced (allowing for the system’s performance degradation over time).

We prefer this number because it reflects the real world performance and it allows for direct comparisons against the client’s previous costs for energy. Indeed, we typically find costs per kWh in the 8-10¢ range compared to utility costs of 15-25¢ starting in Year 1. But because the energy cost for the solar power system is fixed over its entire lifetime versus the cost of energy from the utility which is constantly rising (even if we don’t know how fast), the comparison is quite compelling.

LCOE: Comparing System to Utility Cost

Note that by applying an agreed upon (or at least disclosed) rate for utility increases, a graphical comparison over time can be produced – but the underlying LCOE is not at all dependent upon future utility rate changes.  This gives the client the ability to compare multiple proposal against a true value proposition – how much will the energy from the proposed system cost?  From a financial perspective, this is the best comparison point that we have been able to identify.  A potential solar contractor who balks at providing this should, you guessed it, be scratched from your list!

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

UPDATE x2 11/8 - Solar City’s Jonathan Bass adds his perspective on our reporting about Solar City - see his response in the comments.

UPDATE  9/30 - We just heard from Jonathan Bass at SolarCity.  Details at the end.
(Still no word from Galkos!)

Editor’s Note: We have now done an updated analysis showing the same data from 2012.  You can read our 2012 Outliers & Oddities here.

In the first two installments in this series (Part 1 and Part 2) we looked at the most recent data from the California Solar Initiative (CSI) covering the first half of 2011 in SCE’s service area. Using that data we identified trends in cost, equipment and system efficiency.  Along the way, we stumbled upon some Outliers and Oddities in the data that left us puzzled and disturbed.  In this post we name names, specifically Galkos Construction (aka GCI Energy) and SolarCity.

Before we explain to you why they are featured in this post, we would remind our readers of the Solar Bill of Rights created by the Solar Energy Industry Association (SEIA) in the Fall of 2009.  We wrote at some length about the Bill of Rights when it was introduced, but we want to highlight now what then we termed to be, “the most important right of all:”

8. Americans have the right, and should expect, the highest ethical treatment from the solar industry.

Beyond a shadow of a doubt, this is the most important Solar Right of all if we are to build an industry that is respected and trusted by consumers throughout this country. This should almost go without saying - and yet, saying it, and living it, is extremely important.

In our view, if we become aware of situations that don’t live up to that Right, we have an obligation to point them out so that our potential clients can make the most informed decisions possible. 
In honor of that principle we present today’s post.

Outliers: Galkos Construction

In looking at the data, from time-to-time a data point would jump right off the screen.  For example, examining all of the residential projects in our data - both “completed” and “pending” but excluding “delisted” - we find that the average installation cost in CSI Rating AC Watts is $8.43/Watt (in DC or nameplate Watts that average becomes $6.99).  As we noted in Part 1, that number has decreased over time and also decreases as system size increases.  Still, given that the residential sector (as designated in the CSI data) only consists of systems between 1 and 10 kW, you wouldn’t really expect significant price variation between installers over a six month period.

But you would be wrong.

Who Charges What?

Here is a chart of the Cost per Watt for the largest installation companies in the SCE service area (you can click on the chart to see it full size):

First, let us give credit where it is due.  The low end outlier is HelioPower, Inc., at $6.56/Watt, and they did it with an efficiency factor of 87% - second best of anyone on that chart. Nice.

But who is that way off in left field?  Coming in at a staggering $13.32/Watt - a full $1.40 higher than their nearest competitor and more than twice what HelioPower is charging - is Galkos Construction, Inc., also known as GCI Energy, out of Huntington Beach.  For that money, they must surely be offering only the most efficient and sophisticated technology, right?  Not so much.  To the contrary, the average installation efficiency for Galkos is only 84.9% - the second worst on the chart and well below the average of 86.11%.  In fact, 99% of the time Galkos appears to use Sharp panels - not exactly an exotic solar panel brand - and in particular the Sharp ND-224UC1 panel (66.5%). A quick Google search reveals that the Sharp ND-224UC1 can be purchased, at retail, for $2.65/Watt or less.  Given that Galkos handled 400 projects in this data set, it is hard to believe that their price for all of their equipment, particularly the Sharp panels, would not be heavily discounted.

Quality Counts

Quality, of course, is important, and the data does not reveal - though the Internet hints at - the quality of installations from Galkos.  Here is how the company describes its own product offerings (from the “Services” page of their website):

Solar by GCI [Galkos Construction, Inc.] Energy
GCI Energy is the largest solar company in Southern California with over 30,000 customers. So you get the most knowledgeable professionals, excellent customer service and a better price.

GCI Energy solar offers the highest efficiency solar panels on the market - those manufactured by Sharp. With Sharp Solar Panels, GCI Energy can tailor a solar panel installation to your specific needs and lifestyle, so you get maximum performance without a maximum investment.
(Emphasis added.)

Does Galkos actually have 30,000 solar customers?  Certainly not (nobody does).  Are they providing “a better price"?  It is not clear what their standard of comparison might be - but their price is not better than any of their major competitors in that chart.  And of course, the statement does not define what they mean by “the highest efficiency solar panels on the market,” but it seems unlikely that Sharp would make that claim.  Here’s one chart that concludes that they couldn’t (note the efficiency of the SunPower and Sanyo panels first, then search for Sharp).

All we can say in response is, caveat emptor.

Oddities - SolarCity

Now we turn to the Oddities section of this post.  Unlike the outliers, which were always of interest to us, we were not looking for the oddity we report here - it literally just jumped out at us.

Sold versus Leased

Question: What is the difference in reported cost between systems sold directly to the end customer and those that are leased (i.e., have a third-party owner in CSI parlance)?

The initial difference that we stumbled upon was so startling that we knew we needed to narrow our focus and control for as many variables as possible to isolate that one factor.  To achieve that end we restricted the data to those residential systems (i.e., between 1 and 10 kW) that were “pending” in the CSI/SCE data (thus, the newest proposed systems in the data which, based on our Part 1 analysis should mean the lowest cost systems). That way our project sample would be as homogenous as possible, eliminating cost variations based on system size and timing.

Given those restrictions, the top 5 installation companies in which the system is owned by a third party are: Verengo (482 systems), SolarCity (468), American Solar Direct (124), Sungevity (99), and HelioPower (63).  Of those five, only two also have direct sales projects pending: Verengo (7) and SolarCity (9).  Let’s see how they compare:

What is going on here?  For Verengo, as the number of systems increases - which it does in going from sold systems to leased systems - their cost per Watt decreases - which is what we would expect.  But not so for SolarCity - even though they are leasing 50 times as many systems as they are selling, their cost for the leased systems went up - way up - as in up by $3.12/Watt!

(One possible explanation for this discrepancy would be that SolarCity uses much more expensive equipment in their leased systems than they do in the ones that are sold.  But they don’t.  On their sold systems, SolarCity always selected a Fronius inverter and their panel choices were split among Yingli (56%), Kyocera (33%) and Sharp (11%).  On their leased systems, SolarCity selected Fronius inverters 98% of the time and again split their panel choices among Yingli (68%), Kyocera (28%), and BP (3%)  with the remaining 1% scattered among Suntech, Sharp and Sanyo.  In other words, there is no significant difference in SolarCity’s equipment choices between sold and leased systems.)

Why Does this Matter?

Why does this significant cost differential matter, you might ask?  After all, customers aren’t paying that price - they are paying on a lease so the “cost” of the system doesn’t matter to them, all they care about are their lease payments.  True enough - unlike the case with our Outlier above, the end customer is not the victim here.

Recall, however, that for systems that are leased, the third-party owner - presumably SolarCity and its investors in this case - receives both the rebates and the tax benefits associated with the installation.  While the rebates are independent of the system cost (they are paid based on CSI Watts), not so for the tax benefits.  Commercial operators   (even though these are residential installations they are treated as commercial projects for tax purposes) are entitled to both a 30% tax credit as well as accelerated depreciation based on the cost of the system.

For the 468 systems that SolarCity is leasing, their total cost is $24,261,735 to install 2,412 kW.  If those installations were billed out at the $6.94/Watt they are charging for their sold systems, the installed cost would be $16,739,280 - a difference of $7,524,037.  At 30% for the federal tax credit, taxpayers are giving SolarCity an extra $2,257,211 - just from six months worth of installs in only the SCE service area.

Wow!

In the words of the 70’s pop song, How long has this been going on?

How Long Indeed

We decided to find out.

Although all of our analyses up until now in this series have been restricted to the first half of 2011, the actual data set contains entries from the inception of the CSI program.  Thus we can look at all of SolarCity’s installs going back to 2007 and compare them as we did for the 1H2011 pending installs above.  We will use the First Completed date to group these by year and analyze only “installed” - and not “pending” applications.  Here’s the data:

The answer would appear to be, almost from the beginning!  Back in 2007, Solar city sold ten times as many systems as it leased.  By 2008 the ratio was down to 4-1 and ever since then leasing has been SolarCity’s predominant business strategy with the ratio of leased to sold now standing at nearly 16-1 in 2011.

Bottom Line

What, then, is the cumulative impact to SolarCity’s bottom line from this trend throughout California?  We aren’t in a position to calculate the depreciation benefits (since that is a function of the system owner’s tax bracket) but we can readily calculate the added value derived from the 30% federal tax credit due to this increased cost per Watt.

Here is our plot of the cumulative effect of those year-by-year increases:

After a slow start in 2007-08, SolarCity’s “model” really took off and has garnered the company an extra $3,000,000+ each year since 2009 (and, of course, 2011 is not yet over) for a total excess accumulation of $10,619,000.  Depending on the investors’ tax bracket, the depreciation could be worth nearly as much as the tax credit.

Double Wow!

UPDATE 9/30 - We have now heard from SolarCity

We just heard from Jonathan Bass, Director of Communications at SolarCity who took exception with our report, although he did concede that he could see how we could have reached the conclusions we published in light of the CSI data.  We encouraged him to please send us a written response in as much detail as he chose and we would publish it in its entirety.  While he agreed that SolarCity would be publishing its response, he did not commit to publishing the information here.

In any event, when we hear more we will update this post again.

What’s Next?

No doubt there is more that we could do with these revelations - but wouldn’t it be better for those with actual oversight obligations to examine this data as closely as we have and to take appropriate action?

As always, we welcome your comments - and if we hear from any of the folks named in this series we will be sure to update the appropriate post.

A recent article in USA Today/CNBC online asks the question, “Does the solar industry have a PR problem?"  Yes, concludes the article, and that bad press is well justified because “solar technology is not quite ready for prime time".  Well, if the USA Today article is any indication, the solar industry clearly does have a PR problem, but it is not because of any failure in existing technology.  The failure, rather, is in media reporting that allows interested parties to speak as experts who denigrate existing solutions, without ever bothering to disclose the expert’s inherent conflict of interest, or even to report on the facts as they pertain to actual solar clients.

There can be little doubt that those of us who believe in the benefits of solar power systems have done a poor job of informing the public about the value of solar today.  (This blog, and the writings of folks like Tor “SolarFred” Valenza notwithstanding, there is a great deal of work to be done on this front.)  So it is hard to argue with the general proposition that solar has a PR problem - as in not nearly enough PR to counter the spin coming from the naysayers and the apologists for the status quo.

But the article takes a different tack.  It quotes at length from someone named Jim Nelson, the CEO of solar start-up Solar3D, to explain why solar has earned its bad rap:

The problem, says Nelson, is that solar is generally still not price competitive with fossil fuels for energy generation, says Nelson [sic]. Paradoxically, government efforts to subsidize the purchase of solar panels actually slow down the adoption of innovation that should ultimately make renewable energy more affordable.

By encouraging consumers to buy immature and inferior solar technology right now, government subsidies risk locking people into solar systems that are inefficient, expensive, and may or may not ultimately pay off to the consumer. “They’re encouraging people to use things that don’t work,” he says.

At current kilowatt-per-hour rates, solar energy costs about 4 times more than power drawn from the grid, says Nelson.

Wow.  Lots of troublesome statements in that blockquote.  Let’s break this down and see what’s what.

First off - what do people actually pay for electricity from their utility versus from a solar power system?  In Run on Sun’s southern California service area, the actual loaded cost of electricity ranges from $0.15 to $0.29/kWh.  For a commercial solar client, the cost per kWh - after allowing for rebates, tax incentives and O&M costs - is around $0.11/kWh.  These are the real world costs and benefits for clients adding solar right now.  For a 50 kW commercial installation, that translates into payback occurring between years 4 and 5 with an internal rate of return over the 25 year lifetime of the system of 17% or more.  Moreover, every year the client’s savings will grow as the cost of electricity from the utility continues to rise while the cost for electricity from their solar power system remains constant.

Second - solar today is far from something that doesn’t work.  To the contrary, solar power systems work day in and day out with minimal maintenance beyond occasionally directing a hose at the panels to clean them off.  True, inverters will likely need to be replaced about halfway into the 25 year lifetime of the system (although newer designs like the Enphase M215 micro-inverter are now pushing inverter lifetime far beyond older products) but that cost is part of the O&M cost considered above.  While solar panels will degrade over time, modern panels are warrantied to produce 80% of their rated power after 25 years and even older designs are still operating just fine after 40 years.  What other major asset can a business owner purchase that will pay for itself within five years, require minimal maintenance over its entire lifetime, and still be working well after 25 years?  Oh, and save the business owner many times over the initial investment during those 25 years?

Too bad more things “don’t work” as well as a solar power system.

Finally, what is Mr. Nelson’s perspective on all of this?  The article describes his company as a “solar manufacturer” but manufacturers typically have products for sale.  Touring the Solar3D website reveals lots of PR, but no products.  Rather, Mr. Nelson’s company, “Solar3D, Inc. is developing a breakthrough 3-dimensional solar cell technology to maximize the conversion of sunlight into electricity."  The key phrase being, “is developing".

Now we are all for more efficient solar technologies being developed into real-world products that we can put on roofs. We sincerely wish Mr. Nelson well in his efforts to bring ever better products to market.  But it is just silly to tell the solar-buying public that present technology is “immature” and “doesn’t work” when Gigawatts of installed solar power systems prove just the opposite.  And it is sloppy journalism to quote him without revealing his true position in the industry.

(Editor’s Note: Part 1 of this series - Understanding Your Bill can be found here.)

Commercial solar power systems are economical now - and in the first part of our series we explained how understanding your bill is the key to understanding what is currently driving your costs and how much you will be able to save.

Now we turn to the next step in preparing to install a commercial solar power system - understanding the applicable rebates and tax incentives.  We have written at great length before about these topics, including a blog post summarizing the year-end state of all solar power rebates in the Run on Sun service area and our solar tax incentives page provides great detail into this topic for all types of system owners - commercial, residential and non-profit.  In this post we will analyze just those rebates and incentives that are applicable to commercial solar power installations.

PBI vs EPBB Rebates for Commercial Solar Power Systems

Rebates for commercial solar power systems come in two flavors - Performance Based Incentives (PBI) and Expected Performance-Based Buydown (EPBB) - but PBI rebates are by far the more common for commercial systems above 30 kW.  EPBB rebates are lump-sum payments made based on the expected performance of the system.  The rebate rate is denoted in dollars per Watt based on the calculated AC Watts for the system.  EPBB rebates are nice for the consumer as the money is paid as soon as the system is approved, but for larger systems, they represent too much upfront risk for the utility.  Since there is usually no requirement to monitor the performance of the system, the utility ends up putting out its money with little guarantee of reaping the expected benefit.

PBI rebates, on the other hand, are paid out over five years based on the actual performance of the solar power system as verified by monitoring devices attached to the system inverter(s).  PBI rebates are denoted in cents per kilowatt hour generated.  Since the utility only pays for power actually provided, rebate dollars are guaranteed of providing the bargained for benefit. However, because of the need to provide the utility with verified performance data, PBI rebates increase the Operations & Maintenance expense of a commercial solar power system - at least for the five years of the rebate.  On the other hand, if your system is well maintained and conservatively designed, you may actually receive more in rebate payments than originally projected.

Each utility will have a threshold system size beyond which the system owner must take a PBI rebate.

Regional Rebate Amounts for Commercial Solar Power Systems

Of late there has been a great deal of turmoil among the local municipal utilities regarding their rebates.  This has lead to uncertainty and delays.  As of this writing, here is the landscape for commercial solar rebates in the Run on Sun service area:

This means that as of this writing, only SCE and PWP are paying rebates on commercial solar power systems greater than 30 kW. While LADWP is expected to come back online this summer, in what form remains to be seen.

We believe that these suspensions have come about because the lobby for commercial solar rebates is small and too often silent.  Of course, when no public discussion occurs before the decision is made to suspend rebates - as happened in both Glendale and Burbank - it is pretty hard to organize solar supporters.  Indeed, in Los Angeles, where the plans to severely limit solar rebates were publicly debated, the solar community came out in numbers to argue for those rebates - which resulted in LADWP only suspending their program for a comparatively short time.

The conclusion in inescapable - until there is a statewide feed-in tariff at a reasonable rate that offers predictability along with economic viability, the market for commercial solar in this state will continue to be subject to the caprice of unaccountable bureaucrats.

Tax Incentives for Commercial Solar Power Systems

While the news regarding rebates remains murky, the news on the tax front is - at least for this year - very good.

One caveat before we begin - while we believe this information to be accurate as of the date that it is written, you must always consult with your tax professional as to the applicability of these incentives to your tax situation.  Accountants shouldn’t design solar power systems and we don’t give tax advice.

Commercial solar power systems qualify for a federal Investment Tax Credit of a full 30% on the direct cost of the system.  (By “direct cost” we mean those costs directly associated with installing the solar power system.  The applicability of the Credit to indirect costs - such as deciding to re-roof your building before adding solar - must be decided on a case-by-case basis - see why that tax pro gets paid the big bucks?)  That Credit can be taken over two years and is a substantial incentive if you have the tax liability to offset.  Fortunately for systems that are put in service in 2011, commercial solar power system owners can elect to receive a Grant directly from the Treasury for the full 30%, regardless of their tax appetite.  Moreover, that Grant is paid out typically within 60 days of project completion, as opposed to being credited in the next tax payment cycle.  This provision in the tax code is subject to expiration at the end of this year, and there is no telling whether a more conservative Congress will renew it.  (The tax Credit, however, continues through 2016.)

Commercial solar power systems also qualify for accelerated depreciation.  For the past several years, that was a five year period with 50% in Year 1 and the remaining 50% divided evenly over the next four years.  (California offers a similar depreciation schedule.)  However, once again 2011 is special.  This year alone, that depreciation is 100% in Year 1, meaning that system owners may realize more of their savings sooner.

Collectively, rebates and tax incentives can reduce the cost of a commercial solar power system by 50% or more.  When combined with the savings from the energy generated, it is easy to see why a commercial solar power system is one of the best investments a building or business owner can make.

Up Next - Part 3 of Our Series: Understanding Your Bid for a Commercial Solar Power System