06/12/13

  08:45:00 am, by Jim Jenal - Founder & CEO   , 788 words  
Categories: Solar Economics, Solar Rebates, Solar Tax Incentives, Commercial Solar, Non-profit solar

Financing Commercial Solar: Part 1 - The Basics

Installing a solar power system is a major investment, and part of what determines your return on that investment is how the system is financed.  In this three-part excerpt from our upcoming book, Commercial Solar: Step-by-Step, we explain the most common methods for financing a small to medium-sized commercial solar power system.


In recent years a great deal of creativity (some would say perhaps too much creativity) has been brought to bear on the subject of how to finance solar systems resulting in the introduction of myriad financing schemes from the terribly simple (straight cash purchase) to the terribly complex (e.g., flips and swaps) - and as the amount of money at stake grows, the more complex the schemes become.

Fortunately or unfortunately, in the realm of small to mid-sized commercial solar systems, the options are more limited and include cash purchases, loans, various types of leases, Power Purchase Agreements (PPA’s) and a handful of more novel approaches.  In Part 1 today, we will look at the pros and cons of cash purchases and loans. Part 2 will explore leases and PPA and Part 3 will conclude with a handful of novel approaches and overall limitations.

Cash or Self-Financed Purchases

The simplest financing method is the cash purchase – simple, that is, if you have the cash on hand and it isn’t needed elsewhere.

When a company self-finances through a cash purchase, they own the system outright and receive the rebate payment from the utility and all of the tax benefits. For those entities with the cash on hand, a cash purchase may be the best possible option since, unlike all of the other methods available, there is no added cost to the price of the system.  Instead, a solar power system that is purchased outright should be looked at in terms of its opportunity cost. That is, what advantage/disadvantage does the solar investment provide compared to where the same capital could have otherwise been invested.

These days, with interest rates at historic lows, capital invested in traditional savings instruments - savings accounts or certificates of deposit (CD’s) - provide safety, but returns in the 1-2% range - not terribly attractive.  On the other hand, investments with higher returns - individual stocks or stock funds - come with substantial risk, as the crash of 2008 painfully reminded us.

As a result, a solar power system - with next to no risk and an IRR of 12-19% - compares quite favorably. Put most simply, a safer investment will provide a far, far worse rate of return whereas an investment with a higher yield will be far, far riskier.

When viewed through such a lens, a solar power system becomes a very attractive investment indeed.  In fact, when analyzed in that fashion, investing in solar even makes sense as a way of employing endowment funds designated for the maintenance of non-profit organizations like private schools and churches.

Loans

Unfortunately, not every entity that would like to add solar is in a position to self-finance.  For those who must seek other financing sources, a conventional loan is the obvious alternative — if it is available.  While interest rates remain at historic lows, many banks are historically reluctant to make loans at all, let alone for “exotic” projects like solar power installations.  Or if they are willing to consider it at all, they may impose onerous terms or prohibitively restrictive conditions that keep solar loans more of a theoretical option than a practical one.

Bankers are focused on collateral and cash flow considerations, with solar being strong on the latter but notoriously weak on the former.  Normally a loan for an equipment acquisition could be collateralized by the equipment itself — if you don’t pay on your car loan, for example, the bank simply repossess the car.  But repossessing a solar power system is a complicated project and, unlike a used car which has a known resale value, the resale value of used solar equipment is uncertain, at best.

On the other hand,  solar power systems significantly enhance the cash flow situation of the loan customer since the combination of remnant electric bill and loan payment will be substantially less than the old electric bill, with that difference only improving over time.

In the end, it comes down to a question of the banker’s comfort level with solar.  Does the reduced risk that the customer will default thanks to the improved cash-flow prospects outweigh the downside increased risk of poor or no collateral?  Some banks are starting to emerge with a specialized practice in solar loans but for the moment, loans for small to mid-sized commercial solar projects remain painfully hard to come by.

The series continues with Part 2: Leases and PPAs.


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

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06/10/13

  09:24:00 am, by Jim Jenal - Founder & CEO   , 293 words  
Categories: All About Solar Power, Solar News, SCE, Safety

Swan SONGS, Solar Spikes

San Onofre Nuclear Generating Station

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

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

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

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

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

Renewable power production, June 7, 2013

Source: CALISO

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

06/08/13

  09:11:00 am, by Jim Jenal - Founder & CEO   , 415 words  
Categories: GWP Rebates, GWP

GWP Reveals Rate Increase Specifics - Ouch!

Glendale Water and Power has started holding public workshops on its proposed rate increase - though still remaining mum about their mandated Feed-in Tariff program.  Here’s an update.

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

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

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

GWP's proposed rate increase 2013What is going on here?

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

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

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

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

06/07/13

  07:12:00 am, by Jim Jenal - Founder & CEO   , 745 words  
Categories: All About Solar Power, Solar News, LADWP Rebates, LADWP, Commercial Solar, Non-profit solar

LA Non-Profits Bid Solar Goodbye - UPDATE

UPDATE - We just learned that the Board hearing to discuss changes to the Solar Incentive Program has been rescheduled to Wednesday, June 19th at 9:00 a.m.  (Still at DWP HQ on Hope Street in downtown LA.)  We will not be able to attend due to a prior commitment with the USC Solar Decathlon team.  Anyone who does attend, feel free to pass on our thoughts below to the Board.


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

Schools and churches in LA may soon be shut out of solar

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

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

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

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

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

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

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

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

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

Surely that cannot be the desired outcome.

06/06/13

  07:43:00 am, by Jim Jenal - Founder & CEO   , 261 words  
Categories: All About Solar Power, Solar Decathlon - 2013

fluxHome Sneak Peek!

Run on Sun is working with the USC Solar Decathlon Team as a solar advisor and we took our second trip to the construction site since the project got underway.  Here’s a quick update on their progress so far.

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

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

flexHome underway

 

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

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

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

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

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Jim Jenal is the Founder & CEO of Run on Sun, Pasadena's premier installer and integrator of top-of-the-line solar power installations.
Run on Sun also offers solar consulting services, working with consumers, utilities, and municipalities to help them make solar power affordable and reliable.

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