Thoughts on Solar

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:

• City Council Agenda for tomorrow’s meeting to be held in Council Chambers at 6:00 p.m.
  
• Staff report to the Council containing their description of the proposed FiT.

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.

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.

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.

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:

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:

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.

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

Another 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.

By 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.

In Part 1 of this series on financing commercial solar power systems we explored the basics - cash purchases and commercial loans.  Now in Part 2 we move on to examine the pros and cons of solar leasing arrangements and Power Purchase Agreements (PPA’s).

Leasing

An option that has gained significant traction in the past few years are leases.  (Indeed, it is the explosion of solar leasing in the residential market that has fueled the growth of major players like SolarCity and Verengo.)  But leases can come with unexpected traps for the unwary and a commercial customer needs to look closely at the details before signing on to a lease agreement for a commercial solar power system.

In a solar lease arrangement the right to use the solar power system is transferred from the owner, referred to as the lessor, to the lessee.  From an accounting perspective, all leases are either considered a capital lease (or finance lease) or an operating lease. Generally speaking, “capital leases are considered equivalent to a purchase, while operating leases cover the use of an asset for a period of time.”

When leases are applied to solar power systems, other important considerations apply.

Capital Leases

Under accounting standards, a capital lease is defined as “a lease that transfers substantially all the benefits and risks of ownership to the lessee.”

Therefore, with a capital lease, as with a cash purchase or loan, the solar client is treated as the owner of the system and receives the benefits of ownership: utility rebates and tax incentives (if applicable).  The capital lease is often for a longer term – the basic criteria is that the lease must run for at least 75 percent of the estimated economic life of the system – that is, between 15 and 19 years or longer.

The longer term can keep payments lower, but because the solar client lessee receives the rebate and tax incentives, the capital lease might carry a higher interest rate than does an operating lease.  At the end of the term, the lessee can typically purchase the system at below market cost, perhaps for as little as a nominal one dollar.

Operating Leases

In contrast, with an operating lease the solar client lessee does not effectively own the system and the lessor retains the utility rebate and the tax incentives.  Rather, the lessee is simply acquiring the right to use the system for a limited time in exchange for periodic rental payments.  Typically an operating lease will be for a shorter period of time, and potentially at a lower interest rate.  However, at the end of the lease term the lessee either has the system removed by the lessor, enters into a new lease arrangement, or must purchase the system for fair market value.

Power Purchase Agreements

A related, but different vehicle for making use of a solar power system is a Power Purchase Agreement or PPA.  As with an operating lease, the solar client under a PPA does not own the system.  Rather, they purchase the electricity that the system produces from the system owner.  (Presumably at a price lower than what they would be paying their utility for the same quantity of energy.)

Since the solar client under a PPA only pays for the energy actually produced by the system, the system owner has a greater incentive to maintain the system at peak efficiency and the solar client may receive more of the “benefit of their bargain” under a PPA than they would under an operating lease.

PPA’s typically contain “escalator clauses” by which the price paid per kilowatt hour generated may increase over time.  As long as PPA costs increase more slowly than do utility rate increases, the solar client’s savings will grow over time.  However, it is possible under a PPA to actually end up paying more for energy to the system owner than the client would have to the local utility.  (Indeed, this possibility is what gave rise to a class action lawsuit against Sunrun.)

Federal Trade Commission Concerns

The Federal Trade Commission (FTC) is the federal agency charged with regulating false or deceptive marketing claims, and solar leasing options can surprisingly lead to unwanted scrutiny from the FTC.  The FTC’s concern is  “double counting” - multiple entities taking credit for the same environmental benefit.  This sort of double counting can occur when a company hosts a solar power system, but does not own it.

The FTC provides this as an illustrative example:

A toy manufacturer places solar panels on the roof of its plant to generate power, and advertises that its plant is “100% solar-powered.” The manufacturer, however, sells renewable energy certificates based on the renewable attributes of all the power it generates. Even if the manufacturer uses the electricity generated by the solar panels, it has, by selling renewable energy certificates, transferred the right to characterize that electricity as renewable. The manufacturer’s claim is therefore deceptive. It also would be deceptive for this manufacturer to advertise that it “hosts” a renewable power facility because reasonable consumers likely interpret this claim to mean that the manufacturer uses renewable energy. It would not be deceptive, however, for the manufacturer to advertise, “We generate renewable energy, but sell all of it to others.”

Deceptive claims are actionable under the FTC’s mandate and offending companies could be subject to enforcement actions and fines.  Under either an operating lease or a PPA (though likely not under a capital lease unless the Renewable Energy Credits (RECs) associated with the system are assigned to the utility), the solar client does not own the solar power system and any claim to be “solar-powered” or “using green energy” would be deceptive under the FTC’s guidance.

The series concludes with Part 3 - Commercial PACE and Crowd Funding.

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