06/18/13

  04:14:00 pm, by Jim Jenal - Founder & CEO   , 1852 words  
Categories: GWP, Feed-in Tariff, Ranting

Trouble in Glendale City - Someone Needs to Throw a FiT

Glendale’s proposed Feed-in Tariff combines all of the fee expenses associated with its Big Brother in Los Angeles with a payment rate that is just a fraction of what would be paid by LADWP.  What could possibly go wrong?

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

Public? What Public?

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

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

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

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

Comparable Fees? You Betcha!

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

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

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

Comparable Prices? Not so Much!

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

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

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

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

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

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

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

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

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

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

GWP FiT pricing example

 

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

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

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

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

How does this compare in terms of actual amounts paid?

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

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

Payment, year 1 under GWP FiT

 

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

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

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

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

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

What’s the Point?

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

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

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

 Permalink

06/17/13

  05:24:00 pm, by Jim Jenal - Founder & CEO   , 128 words  
Categories: All About Solar Power, GWP, Feed-in Tariff

GWP Releases FiT Details - the Day Before the Vote!

We have just learned that Glendale Water & Power has released the details of its proposed Feed-in Tariff program - one day before the City Council is expected to vote on it!  We will post our thoughts tomorrow, but in the meantime, here are some links for interested readers:

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

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

06/16/13

  07:19:00 am, by Jim Jenal - Founder & CEO   , 199 words  
Categories: All About Solar Power, Solar News

Solar Impulse Takes Washington!

Solar Impulse arrived in the Nation’s capital at fifteen minutes past midnight this morning, landing without incident on runway 19L at Dulles International Airport, thereby completing its transcontinental journey that began in San Francisco on May 3 with stops in Phoenix, Dallas, St. Louis, and Cincinnati.  The historic mission will conclude next month with a flight to New York City.

Solar Impulse on the ground in DC

 

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

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

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

06/15/13

  08:25:00 am, by Jim Jenal - Founder & CEO   , 184 words  
Categories: All About Solar Power, Solar News

Solar Impulse - DC Here We Come!

Solar Impulse - the record-shattering, solar-powered airplane - has departed Cincinnati’s Lunken airport, headed for a landing around midnight local time at Dulles airport in Washington, D.C.  A full schedule of public events are slated for the plane and its crew in D.C. - including a meeting with Energy Secretary Moniz - all intended to raise awareness of the amazing capacity of solar power to change how we think about what is possible.

Here’s their proposed flight plan for today:

Solar Impulse Flight Plan

 

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

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

Flight profile for Solar Impulse flight to DC

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

06/14/13

  07:08:00 am, by Jim Jenal - Founder & CEO   , 851 words  
Categories: Solar Economics, AB 811/PACE/LACEP Funding, Commercial Solar, Non-profit solar

Financing Commercial Solar: Part 3 - PACE, Crowd Funding and Limitations

In Part 1 of this series on financing commercial solar power systems we explored the basics - cash purchases and commercial loans. Part 2 examined the pros and cons of solar leasing arrangements and Power Purchase Agreements (PPA’s). Today we conclude the series by looking at a couple of more novel approaches: Commercial PACE and Crowd Funding, as well as some overall financing limitations.


Commercial PACE

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

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

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

Crowd Funding

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

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

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

Financing Limitations

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

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

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

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

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


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

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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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