“Introduction to PV Financing”
Solar Living Institute: April 20, 2008, Los Angeles, CA,
9am-5pm
Contact: Solar Living Institute: www.solarliving.org, 707 744 2017 to register
Check-in (15 minutes before listed start time)
Introductions
Overview of Basic Financing Principals
Residential Conventional Financing
Break, Q & A, Networking
PACE & State Loan Programs
~12:00
Lunch, Q & A, Networking (~30 minutes if possible)
Lease Basics and Commercial Leases
Break, Q & A
PPA Basics and Commercial PPAs
Residential Leases & PPAs
~4:30
Formal Conclusion, Break, Q & A
We must be out by 5:00 (add’l questions outside)
Diligence:
Heights by great men reached and kept were not obtained by sudden flight, but
they, while their companions slept, were toiling upward in the night.
- Henry Wadsworth Longfellow
Andy Black
Solar Financial Analyst
(408) 428 0808x1
andy@ongrid.net
“Introduction to PV Financing”
Solar Living Institute: April 20, 2008, Los Angeles, CA,
9am-5pm
Contact: Solar Living Institute: www.solarliving.org, 707 744 2017 to register
Abstract:
This rigorous workshop is designed to help residential & commercial systems integrators (dealers,
installers, and salespeople) understand the basics of solar system finance. The class will cover the
various forms and format of financing systems, including PACE, Leases, PPAs, and traditional
lending. It will help the solar professional make the financial case for PV systems on a cash-flow
basis.
This class includes:
! Conventional Financing
! PACE and State Loan programs
! Leases: Understanding the major types, how and when they are used
! PPAs: Understanding the basics, subtleties, complexities, risks, and opportunities
! A short list of financing, legal, tax, and accounting providers who specialize in solar
All students will receive one-month free use of the OnGrid Tool (licensing agreement required) to try
additional scenarios.
Biography:
Andy Black is a Solar Financial Analyst and the founder 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 and the initiator of the
NABCEP Technical Sales Certification.
Andy Black is a recent member of the Board of Directors of the American Solar Energy Society and
served as Chapters Representative. He is a member of the Board of Directors of the California Solar
Energy Industries Association. 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
andy@ongrid.net
www.ongrid.net
Andy Black
Solar Financial Analyst
(408) 428 0808x1
andy@ongrid.net
Andy Black
Presented at:
Solar Power International Conferences ASES Solar Conferences
Solar Energy International Solar Living Institute
California Center for Sustainable Energy
Updated: Fall 2011
INTRODUCTION TO
SOLAR FINANCING
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 2
Quick Survey - Who’s Here?
!
Existing integrators / dealer / installers
"Managers & Owners
!
Salesperson for integrator / dealer / installer
!New or hopeful integrators / dealers / installers
!New or hopeful salespeople
!
Government / Utilities
!
Customers / consumers / end users
!Manufacturers
!
Others?
! Who’s taken the Residential/Basic Payback Class?
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 3
Quick Survey -
Your Goals for Today?
!
Learn about economics for general knowledge
!Want to use economics for selling / grow
business
!
Want to learn about / have the
OnGrid Tool
!Want to increase your knowledge to develop
your own tool
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 4
Quick Survey -
Area(s) of Interest?
!
Came to learn specifically about:
"Residential Conventional Financing
"Residential Lease & PPA Financing
"Commercial Lease Financing
"Commercial PPA Financing
"Use PPAs in selling
"
Create new PPA offering to market
!Other interests?
!
Networking list?
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 5
Instructor Background
!
M.S. Electrical Engineering
!SEI graduate
!
NABCEP Certified Solar PV Installer Emeritus
!Involved with Solar since 1991
!
Studying, writing, & presenting about Solar
Financial Issues since 2000
!
Solar Salesperson 2001-2006
!Now a
Solar Financial Analyst &
Creator of the “
OnGrid Tool
” solar sales software
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 6
Handout Resource List
Resources available at
www.ongrid.net
!
Articles & papers on solar “Payback”
!Upcoming classes & events
"
Sales & Marketing for Solar
!Slides from past classes
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 7
Decorum
!
Questions: Please focus on Solar Economics &
Payback
!
Good environment:
" Cell phones to fun mode " Side conversations: Yes or No?
" Questions & Comments or just Questions? " Please help each other
!
Site Logistics & Breaks
" Facilities
" Lunch & 2 breaks: Networking
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 8
Agenda
!
Overview of Basic Financing Principals
!Residential Conventional Financing with
Unsecured Loans & Home Equity
!
PACE & State Loan Programs
!Lease Basics & Commercial Leases
!PPA Basics & Commercial PPAs
!Residential Leases & PPAs
Questions preferred at points marked:
" Please focus on Financing & Economics
Questions? Questions?
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 9
Basic Financing Principals
!
Several ways to finance
!
Financing enables sales to those who can’t or
won’t buy with their own cash
!
Good customer credit important (lately, critical)
!Financing makes sense when the project basic
economics are favorable (good IRR)
Questions? Questions?
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 10
Ways to Finance Solar
!
PPA
!Lease
!Loan
!Cash
!
Bringing the financing keeps you in control
(as much as you can in this market!)
+Reduced Customer Risk
- Benefits Shared with more Parties
- Increased Cost to Some Consumers
+More Sales Control
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 11
Sales Benefits of Financing
! Offering Financing keeps salesperson in control of
the sale
" If the customer is out looking for financing, you’ve
lost control of the sale.
" If you offer it, you can continue to control the sale.
! Creates more purchasing options, more chances at a
close
! Can use to overcome objections
! Gets salesperson closer to decision maker & their
real thinking
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 12
Commercial Selling Realities
! Only 3% of all commercial quotes turn to sale
" Most quotes are made to private companies
# Can’t make >5 year commitment
" Salesperson doesn’t know tax & accounting issues # Talks w/ building manager, facilities, etc
# Afraid to talk to CFO, Controller, CEO, Outside
Auditor & Banker
! Typically only large public companies can go long
(10-12 yrs) - even they hesitate 18-20 years
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 13
Common Characteristics
!
Lower interest rate environment helps
!Can improve initial customer cash flow
!Requires good end-customer credit
"
Stricter credit environment hurts
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 14
“Good” or “Strong”
Credit
!
Three C’s of Credit:
"
Credit scores & reports (Dun & Bradstreet)
"Collateral
"
Capacity or Cash Flow
!Residential: FICO score
!
Commercial: Investment Grade or Near IG
">5 years in business
"
>$50 million revenue
"
Positive trends (increasing revenue & profits)
# Hard to find recently
"
Standard ratios (cash flow, etc)
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 15
Risks in Solar Finance
! Compare to Real Estate
Add more from http://www.mayerbrown.com/public_docs/03-09-10_Green_Energy_Projects_Webinar.pdf
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 16
Requires Good IRR
!
The basic economics must be attractive
!What about non-profits & gov’t facilities?
"
Economics are generally weak – no ITC
"Use 3
rdParty Financing (PPAs mostly)
"Need good IRR if analyzed as commercial
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 17
Residential Rates
of Return
Utility Pre-Solar Bill kWh Usage per Month PV System Size & Rating System Gross CostFinal Net Cost w/ Tax Benefits & Rebate Pre-Tax Annual Return Lifecycle Payback Ratio Years To Payback TX--Oncor $87 800 kWh 5 kW STC $27K $12K 6.2% 1.2x 22.1 LA--EntergyLA $81 800 kWh 5 kW STC $27K $10K 18.9% 1.5x 19.3 CO--Xcel $87 800 kWh 5 kW STC $27K $16K 6.6% 1.1x 22.8 NM--SPS $72 800 kWh 5 kW STC $27K $8K 9.1% 1.4x 21.7 MO--KCP&L $85 800 kWh 5 kW STC $27K $12K 7.8% 1.2x 21.9 WI--WEPCO $111 800 kWh 5 kW STC $27K $17K 12.7% 2.0x 15.4 MA--NSTAR $130 800 kWh 5 kW STC $27K $16K 19.1% 2.4x 8.4 CT--UI $171 800 kWh 5 kW PTC $30K $15K 14.1% 2.3x 11.6 NY--ConEd $163 800 kWh 5 kW STC $27K $10K 28.1% 4.0x 7 NJ--JCP&L $132 800 kWh 5 kW STC $27K $19K 9.4% 1.5x 19.2 MD--BGE $112 800 kWh 5 kW STC $27K $18K 5.5% 1.0x 24.6 NC--Progress $83 800 kWh 5 kW STC $27K $10K 18.0% 1.7x 17.9 GA--GaPwr $101 800 kWh 5 kW STC $27K $12K 15.5% 1.6x 18.7 FL--FPL $83 800 kWh 5 kW STC $27K $19K 3.4% 0.9x >25 AZ--APS $103 800 kWh 5 kW STC $27K $15K 11.7% 1.8x 16.4 CA--PG&E $86 550 kWh 3 kW CEC $21K $14K 12.2% 1.8x 16.5 CA--PG&E $447 1,650 kWh 9 kW CEC $56K $37K 24.3% 3.9x 7.5 HI--HECO $272 800 kWh 5 kW STC $27K $16K 31.5% 4.9x 6.1
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 18
Commercially Attractive?
! IRR must exceed a hurdle rate
" > “Risk Free Rate” + ~1-2%
= Risk Free Rate + Sum of Risks
# Source: Photon International, Aug 2007, p114
! “Risk Free” interest rates:
" 1 Year LIBOR ~ 0.9% As of 10/5/2011
" Treasury: 10yr = 1.9%, 30yr = 2.9% As of 10/5/2011
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 19
Commercial Rates
of Return
Utility Pre-Solar Bill kWh Usage per Month PV System Size & Rating System Gross CostFinal Net Cost w/ Tax Benefits &
Rebate After-Tax Annual Return TX--Oncor $850 10,000 kWh 50 kW STC $250K $52K 4.5% LA--Cleco $1,176 10,000 kWh 50 kW CEC $287K $97K 2.3% CO--Xcel $976 10,000 kWh 50 kW STC $250K $87K 0.9% NM--PNM $1,148 10,000 kWh 50 kW STC $250K $16K 7.1% MO--KCP&L-G $1,330 10,000 kWh 50 kW STC $250K $91K 2.6% WI--WPSC $1,213 10,000 kWh 50 kW STC $250K $88K 0.9% MA--NatlGrid $1,479 10,000 kWh 50 kW STC $250K $86K 10.9% CT--UI $2,017 10,000 kWh 50 kW PTC $276K $98K 5.4% NY--LIPA $1,848 10,000 kWh 50 kW STC $250K $36K 14.4% NJ--JCP&L $1,060 10,000 kWh 50 kW STC $250K $87K 2.0% MD--BGE $1,229 10,000 kWh 50 kW STC $250K $73K 5.5% NC--Duke $1,500 10,000 kWh 50 kW STC $250K $33K 13.1% GA--GaPwr $1,635 10,000 kWh 50 kW STC $250K $34K 12.8% FL--FPL $1,075 10,000 kWh 50 kW STC $250K $92K 2.1% AZ--APS $1,060 10,000 kWh 50 kW STC $250K $33K 9.6% CA--PG&E $354 2,000 kWh 10 kW CEC $62K $20K 5.6% CA--PG&E $1,732 10,000 kWh 50 kW CEC $287K $87K 6.5% HI--HECO $3,198 10,000 kWh 50 kW STC $250K $34K 25.6%
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 20
Residential Conventional
Financing with Unsecured
Loans & Home Equity
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 21
Cash Flow with Loan
!
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
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 22
Residential
Conventional Financing
!
Unsecured Loan
"
Addison Avenue FCU: 5.25%, 5 year, $5-50K
(SunPower only)
!
Real Estate Secured Loan
"Lowest interest rates (usually)
"Tax deductible interest
"
HUD EEMs - Energy Efficiency Mortgages
"“Home Equity Loans” & “Home Equity Line
of Credit” (HELOC)
# E.g. New Resources Bank
!
Peer-to-Peer Lending
" LendingClub & Prosper© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 23
Cash Flow
! Residential system
offsetting a large bill
! 8% 20 year loan
! Many Systems are
cash positive from Year 0
! Spike is Inverter
Replacement Cost
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 24
Solar Mortgage
!
Like buying vs. renting, but better
!House costs more up front
"
Pays off over time
!Solar costs less up front
"
Pays off immediately & over time
!Protects against inflation
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 25
Cash Flow Analysis
!
Calculate net cash required to buy
"This is the amount to be financed
!Calculate monthly loan payments
"
Based on loan rate, term & amount
!Subtract tax savings if loan interest is tax
deductible. This is net monthly loan cost.
!Compare net loan cost to after tax value of
net electric bill savings (incl. maintenance)
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 26
How Much To Borrow?
! How much should customer borrow?
! Alt. 1: Net Cost after Rebate & Grants?
" Once ITC is received, have cash sitting around
" Inefficient & expensive
! Alt. 2: Net Cost after All Incentives (including tax
credits, depreciation, PBIs, etc.)?
" Requires a bridge loan until tax benefits & PBIs are
received
" Optimistically low monthly loan cost
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 27
Alt. 3: “Smart Financing”
! Efficient pay-down of principal using tax benefits when
received (using Line Of Credit - business or home equity)
! Find ‘payment’ amount that pays off evenly over term
" Lower payments than amortizing full “after-rebate amount”
" Higher payments than only amortizing the net “after-rebate,
after-tax-benefits amount”
! No cash out of pocket waiting for ITC
" Doesn’t require ‘bridge loan’
" Realistic presentation of customer costs
! No excess interest paid on “un-used” money
" Doesn’t weaken sales presentation
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 28
Commercial Cash Flow Options
! Alt 1: High Cost Loan:
Starting Principal = “Gross - Rebate”
! Alt 2: Optimistic* Loan:
Starting Principal = “Gross - Rebate - ITC - Depreciation” *Customer needs bridge
loan until tax savings realized Net Costs w/ Solar with High Cost Loan Utility Costs w/ o Solar
Net Costs w/ Solar with Optimistic Loan
Utility Costs w/ o Solar
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 29
Smart Financed
Commercial Cash Flow
Net Annual Savings / Cost
Utility Bill w/o Solar New Net Cost: Loan, New Bill, Maintenance, etc.
! Alt 3: “Smart Financed” Loan Timeline ! No bridge loan needed ! Not optimistic -
fair to the customer
! Assumes customer
will be efficient w/ tax benefits
! Interest Tax Benefit
Drops so Net Cost Rises
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 30
“Smart Financing” Timeline
LOAN: Year:
0 1 2 3 4 5 6 7 8 9 10 11
Loan Balance 70,182 45,816 36,723 30,165 25,045 19,515 14,996 11,594 7,919 3,951
Payment (monthly) (356) (356) (356) (356) (356) (356) (356) (356) (356) (356)
Paid Interest (portion of payment) (356) (305) (245) (201) (167) (130) (100) (77) (53) (26)
Unpaid Interest (added to loan principal) (112)
Tax Deduction Benefit (monthly) 205 134 107 88 73 57 44 34 23 12
Net Monthly Loan Cost (150) (222) (248) (267) (282) (298) (312) (322) (332) (344)
Net Tax Benefit Received (put towards paying down
the next year's principal) 25,714 8,493 5,230 3,267 3,267 1,814 336 336 336 336 336 336
Net Annual Electric Bill before Solar (with tax effects & including Lifestyle changes, but not Energy Efficiency)
2,388 2,507 2,632 2,764 2,902 3,047 3,199 3,359 3,527 3,704 3,889 4,083
New Net Annual Energy Cost (with tax effects, including new electric bill, maintenance, inverter
replacement) 755 800 847 897 950 1,006 1,065 1,127 1,193 1,262 1,336 1,414
Net New Annual Cost (Loan plus New Net Energy
Cost) 2,560 3,459 3,825 4,105 4,337 4,587 4,805 4,986 5,181 5,391 1,336 1,414
Cash Flow (annual) (Old less New Net Costs) (172) (952) (1,193) (1,341) (1,435) (1,540) (1,605) (1,627) (1,654) (1,687) 2,553 2,670
Cash Flow (monthly) (14) (79) (99) (112) (120) (128) (134) (136) (138) (141) 213 222
ACCUMULATED LOAN CASH FLOW: (172) (1,124) (2,317) (3,658) (5,094) (6,633) (8,239) (9,865) (11,519) (13,206) (10,653) (7,983)
.
.
LOAN: Year: 0 1 2 3 4 5 6 7 8 9 10 11 Loan Balance 70,182 45,816 36,723 30,165 25,045 19,515 14,996 11,594 7,919 3,951 Payment (monthly) (356) (356) (356) (356) (356) (356) (356) (356) (356) (356) Paid Interest (portion of payment) (356) (305) (245) (201) (167) (130) (100) (77) (53) (26) Unpaid Interest (added to loan principal) (112)Tax Deduction Benefit (monthly) 205 134 107 88 73 57 44 34 23 12 Net Monthly Loan Cost (150) (222) (248) (267) (282) (298) (312) (322) (332) (344) Net Tax Benefit Received (put towards paying down
the next year's principal) 25,714 8,493 5,230 3,267 3,267 1,814 336 336 336 336 336 336 Net Annual Electric Bill before Solar (with tax effects
& including Lifestyle changes, but not Energy
Efficiency) 2,388 2,507 2,632 2,764 2,902 3,047 3,199 3,359 3,527 3,704 3,889 4,083 New Net Annual Energy Cost (with tax effects,
including new electric bill, maintenance, inverter replacement)
755 800 847 897 950 1,006 1,065 1,127 1,193 1,262 1,336 1,414 Net New Annual Cost (Loan plus New Net Energy
Cost) 2,560 3,459 3,825 4,105 4,337 4,587 4,805 4,986 5,181 5,391 1,336 1,414 Cash Flow (annual) (Old less New Net Costs) (172) (952) (1,193) (1,341) (1,435) (1,540) (1,605) (1,627) (1,654) (1,687) 2,553 2,670 Cash Flow (monthly) (14) (79) (99) (112) (120) (128) (134) (136) (138) (141) 213 222 ACCUMULATED LOAN CASH FLOW: (172) (1,124) (2,317) (3,658) (5,094) (6,633) (8,239) (9,865) (11,519)(13,206) (10,653) (7,983)
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 31
“Smart Financing” Timeline
LOAN: Year:
0 1 2 3 4 5 6 7 8 9 10 11
Loan Balance 70,182 45,816 36,723 30,165 25,045 19,515 14,996 11,594 7,919 3,951
Payment (monthly) (356) (356) (356) (356) (356) (356) (356) (356) (356) (356)
Paid Interest (portion of payment) (356) (305) (245) (201) (167) (130) (100) (77) (53) (26)
Unpaid Interest (added to loan principal) (112)
Tax Deduction Benefit (monthly) 205 134 107 88 73 57 44 34 23 12
Net Monthly Loan Cost (150) (222) (248) (267) (282) (298) (312) (322) (332) (344)
Net Tax Benefit Received (put towards paying down
the next year's principal) 25,714 8,493 5,230 3,267 3,267 1,814 336 336 336 336 336 336
Net Annual Electric Bill before Solar (with tax effects & including Lifestyle changes, but not Energy Efficiency)
2,388 2,507 2,632 2,764 2,902 3,047 3,199 3,359 3,527 3,704 3,889 4,083
New Net Annual Energy Cost (with tax effects, including new electric bill, maintenance, inverter
replacement) 755 800 847 897 950 1,006 1,065 1,127 1,193 1,262 1,336 1,414
Net New Annual Cost (Loan plus New Net Energy
Cost) 2,560 3,459 3,825 4,105 4,337 4,587 4,805 4,986 5,181 5,391 1,336 1,414
Cash Flow (annual) (Old less New Net Costs) (172) (952) (1,193) (1,341) (1,435) (1,540) (1,605) (1,627) (1,654) (1,687) 2,553 2,670
Cash Flow (monthly) (14) (79) (99) (112) (120) (128) (134) (136) (138) (141) 213 222
ACCUMULATED LOAN CASH FLOW: (172) (1,124) (2,317) (3,658) (5,094) (6,633) (8,239) (9,865) (11,519) (13,206) (10,653) (7,983)
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 32
Utility Pre-Solar Bill kWh Usage per Month PV System Size & Rating Amount Financed
Net Monthly Cash Flow Compared to 8% 10-yr Loan in First Year
Cash Flow In Fifth Year
TX--Oncor $850 10,000 kWh 50 kW STC $52K $-160/mo $-279/mo
LA--Cleco $1,176 10,000 kWh 50 kW CEC $97K $-359/mo $-672/mo
CO--Xcel $976 10,000 kWh 50 kW STC $87K $-418/mo $-655/mo
NM--PNM $1,148 10,000 kWh 50 kW STC $16K $-13/mo $-292/mo
MO--KCP&L-G $1,330 10,000 kWh 50 kW STC $91K $-349/mo $-608/mo
WI--WPSC $1,213 10,000 kWh 50 kW STC $88K $-373/mo $-653/mo
MA--NatlGrid $1,479 10,000 kWh 50 kW STC $86K $531/mo $217/mo
CT--UI $2,017 10,000 kWh 50 kW PTC $98K $-207/mo $-491/mo
NY--LIPA $1,848 10,000 kWh 50 kW STC $36K $250/mo $128/mo
NJ--JCP&L $1,060 10,000 kWh 50 kW STC $87K $-94/mo $-512/mo
MD--BGE $1,229 10,000 kWh 50 kW STC $73K $45/mo $-294/mo
NC--Duke $1,500 10,000 kWh 50 kW STC $33K $492/mo $122/mo
GA--GaPwr $1,635 10,000 kWh 50 kW STC $34K $446/mo $97/mo
FL--FPL $1,075 10,000 kWh 50 kW STC $92K $-388/mo $-641/mo
AZ--APS $1,060 10,000 kWh 50 kW STC $33K $143/mo $-33/mo
CA--PG&E $354 2,000 kWh 10 kW CEC $20K $-43/mo $-102/mo
CA--PG&E $1,732 10,000 kWh 50 kW CEC $87K $-110/mo $-415/mo
Commercial
Cash Flow
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 33
Smart Financed
Residential Cash Flow
! 4 kW residential system ! 8% 20 year “Smart Financed” Loan ! No bridge loan needed
Utility Bill w/o Solar New Net Cost: Loan, New
Bill, Maintenance, etc.
Net Annual Savings / Cost
Examples
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 34
Residential
Cash Flow
Utility Pre-Solar Bill kWh Usage per Month PV System Size & Rating Net Amount FinancedNet Monthly Cash Flow Compared to 7.5% 30-yr Loan in First Year
Cash Flow In Fifth Year
TX--Oncor $87 800 kWh 5 kW STC $12K $-11/mo $-17/mo
LA--EntergyLA $81 800 kWh 5 kW STC $10K $28/mo $-4/mo
CO--Xcel $87 800 kWh 5 kW STC $16K $-13/mo $-23/mo
NM--SPS $72 800 kWh 5 kW STC $8K $-6/mo $-30/mo
MO--KCP&L $85 800 kWh 5 kW STC $12K $-4/mo $-12/mo
WI--WEPCO $111 800 kWh 5 kW STC $17K $23/mo $15/mo
MA--NSTAR $130 800 kWh 5 kW STC $16K $91/mo $75/mo
CT--UI $171 800 kWh 5 kW PTC $15K $32/mo $26/mo
NY--ConEd $163 800 kWh 5 kW STC $10K $78/mo $68/mo
NJ--JCP&L $132 800 kWh 5 kW STC $19K $18/mo $-11/mo
MD--BGE $112 800 kWh 5 kW STC $18K $-10/mo $-36/mo
NC--Progress $83 800 kWh 5 kW STC $10K $27/mo $4/mo
GA--GaPwr $101 800 kWh 5 kW STC $12K $23/mo $-3/mo
FL--FPL $83 800 kWh 5 kW STC $19K $-39/mo $-49/mo
AZ--APS $103 800 kWh 5 kW STC $15K $16/mo $7/mo
CA--PG&E $86 550 kWh 3 kW CEC $14K $14/mo $5/mo
CA--PG&E $447 1,650 kWh 9 kW CEC $37K $238/mo $235/mo
HI--HECO $272 800 kWh 5 kW STC $16K $151/mo $143/mo
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 35
Cumulative Cash Flow
Examples
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 36
Agenda
!
Overview of Basic Financing Principals
!Residential Conventional Financing with
Unsecured Loans & Home Equity
!
PACE & State/Utility Loan Programs
!Lease Basics & Commercial Leases
!PPA Basics & Commercial PPAs
!Residential Leases & PPAs
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 37
Property Assessed Clean
Energy (PACE) Financing
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 38
PACE / Community
Financing Programs
! PACE: Property Assessed Clean Energy
! PV system financing thru property tax assessment
" Paid by increased property tax liability
" Liability attached to the property, not the individual
" Transferrable to future owners
# Removes concerns about resale value
# Possible issue regarding ITC recapture vs. increased
resale value within first 5 years
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 39 © 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 40
PACE / Community Financing
Programs (Berkeley FIRST, AB811)
!
PACE early attempts:
" 20 year, fixed interest rates, tax deductible interest
# Berkeley FIRST: ~7.75%
" Early/special locations: Palm Desert CA, Santa Fe,
Albuquerque, Austin, Babylon NY, Sonoma CA ! Interest nationwide - U.S. D.O.E. PACE Initiative
! Listed in DSIRE: http://www.dsireusa.org
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 41
PACE Status
!
Currently stalled almost everywhere
"FHFA currently blocking PACE activities
!Federal legislation introduced to allow PACE
to continue
!
… Stay Tuned. Follow & support at:
" PaceNow.org
" The DSIRE database: www.dsireusa.org " VoteSolar.org
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 42
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 43
NJ - PSE&G Utility Loan Program
!
Typically 40-60% of system value
!Residential: 6.5%, 10 year term
! SREC Value >=$.40/kWh
!
Non-Residential: 11.3%, 15 year term
" SREC Value >=$.33-$.36/kWh
!
Repayment via either:
"
SRECs at or above minimum value
"Cash
"
Can change once per year
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 44
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 45
Example State Loan Programs
!
Texas
Schools, Local Government, State
Government, Hospitals
"
3%, Must have ~10 year average term
!Oregon: All Sectors
"
$20K to $20 Million, 5-15 year terms
!For loans in other states see the DSIRE
database: www.dsireusa.org
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 46
Agenda
!
Overview of Basic Financing Principals
!Residential Conventional Financing with
Unsecured Loans & Home Equity
!
PACE & State/Utility Loan Programs
!Lease Basics & Commercial Leases
!PPA Basics & Commercial PPAs
!Residential Leases & PPAs
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 47
3
rdParty Financing of
Solar Projects
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 48
Sales Tip
! Failure to “sign” is not likely due to price
! Suggest don’t even quote a system price
" Only quote a monthly payment
! Ask if they are, or will become subject to AMT if
they go solar
" If so, only consider Lease or PPA
" And only discuss monthly payments
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 49
3
rdParty Financing
Options For Solar
!
Leases
- Ways of paying for ownership and/or useover time, having tax and/or cash flow benefits during term, usually with intention of purchasing or renewing at the end
" Renting system with intent to purchase, while allowing transfer of tax benefits
!
PPAs
-
Power Purchase Agreements
-Paying for just the energy if/when delivered with possible intent to purchase
Disclaimer: I’m not a CPA or lawyer, and am not providing tax advice. Seek qualified professional help
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 50
Leases
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 51
Returns for Lessors
!
Was in ~6%-9% range before financial crisis,
now in the low- to mid-teens
!
Less money now available, so higher returns
for those willing to deal
!
Requires:
"
Lessees with best credit
"Limited project risk
"
Low transaction costs via standard terms and
“conforming” projects
CHECK W/ Baker & Dave Clamage
Check examples for Typical cases too
Ask for real examples
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 52
Leases
!
Several Types:
"
Finance / Capital Lease
"True / Tax / Operating Lease
"Tax-Exempt Lease Purchase
!Thanks:
" Gene Beck, EnviroTech Financial
" Baker Davenport, Davenport Group
" Scott Young, Sentry Financial
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 53
What is a Lease
!
Finance contract between 2 parties
"Lessor & Lessee
"
Vendor connects the 2 parties
!Looks like either a loan or a rental
!Ability to transfer ownership benefits
"
For Tax or Accounting purposes
!Specified term & payment
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 54
Widely Used
!
Solar Leases similar to other asset leases
!Well established market
"
80% of companies and gov’t agencies use
leasing, rather than owning, for at least some
of their equipment
"
Some companies only use leasing, rather than
purchasing
!
Lessor = Owner of system
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 55
Lease “Flow” & Parties
Lessee
Lessor
Vendor
Purchase Payment PV SystemInitial “sales” interaction Info on leasing resources
Use of System
Lease Payments
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 56
Benefits of a Lease
! Terms more flexible than a purchase
! Allows for 100% financing
" Covering freight, maintenance, fees, …
# Which might not be allowed in a loan
! Doesn’t tie up capital and/or effectively stretches
line of credit
" Currently considered “Off Balance Sheet”
" Keeps bank line of credit free
! Solves AMT problems
! Can include Energy Efficiency measures
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 57
AMT - Alternative Minimum Tax
! Corporate AMT occurs for business with large “tax
preferenced” items
" Depletion, state income tax, real estate tax, non-solar
Tax Credits, Accelerated Depreciation
! Some businesses are or will become subject to
AMT if they go solar due to: " MACRS Depreciation
" Note: Solar ITC no longer causes AMT problem
! Tax Equity Investors (banks) not usually affected
by AMT, so have a tax “appetite” and can offer investment $ to get tax benefits others can’t use
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 58
Lease vs. Loan
Bank Loan/Line of Credit Leasing Interest
Rates
Floating interest rates, but effectively lower
Fixed rate with Fixed payments
Terms Usually 2-3 years, Often year-to-year Up to 10 years
Opportunity Costs
Reduces Bank
Line of Credit None
Upfront Payment
Typically 20% to 30%
customer equity required 0% (100% financed)
Financial
Reporting On balance sheet as debt
Some are off-balance sheet Total Cost Less than Lease unless tax limitation (More risk to lessor) More than Loan
*courtesy Conergy Commercial Financing presentation by Baker Davenport & Tim Pedersen, Rockwell Financial Group
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 59
Lease vs Loan Cost:
! Loan/Cash: 100% Principal
" + Interest (or Time Value of Money if Cash Purchase)
" - ITC (30% if available)
" - Depr (~30% if available)
" = Net cost = 45-50% depending on interest rates
! Lease: Total payments ~= 60% of principal
(interest cost included), but no ITC or Depreciation, therefore total cost is 60% net
! The difference in net costs is the Lessor’s profit
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 60
Lease Term Set By:
!
Price of project - larger is better
!Credit of customer
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 61
Finance / Capital Lease
!
Same as bank loan
!
Fully amortizing or with balloons
!Lessee gets tax credit & depreciation
!Interest is deductible
!
Most commonly utilized for energy projects
"Not useful for solar projects needing to
transfer tax benefits to Tax Equity Investor
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 62
Capital Lease Typical Terms
! 5 year, $100-150K
! 7 year, $500K
! Over 8yrs will have a longer amortization period,
but with a 7 year due date
" Banks don’t lend over 7 yrs unsecured
# Ie. w/o cash, real estate, or marketable securities
! 8 year, $1MM, 5-7 year due date (7 w/ balloon)
! 10 year typical max, 7 year due date
! Limits: Longer = higher risk
! Easiest lease to create wrt due diligence
" Typically 2 page agreement plus boilerplate
CHECK W/ Gene & Dave Clamage
Check examples for Typical cases too
Ask for real examples
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 63
Accounting vs. Taxes
wrt True & Operating Lease
! Two perspectives when reviewing leases
" Tax vs. Accounting
" Two different sets of books & calculations
! Accounting: must meet FASB 13 rules
" FASB - Financial Accounting Standards Board
! Tax: must meet IRS rules
! Most solar leases are
" Operating Leases for accounting purposes
" True Lease / Tax Leases for tax purposes
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 64
Operating Lease
(Accounting Perspective)
! Rental contract w/ fixed terms & conditions
! Lower effective interest rate than capital lease
" Lessor gets depreciation & tax credits
" Payments ~40% lower for solar than capital lease
! Lessee expenses monthly payments
! Lease considered “off balance sheet”
" Likely changing due to proposed FASB revisions
" Will need to be disclosed in footnotes or considered
a Finance Lease
! This is the typical accounting treatment of a True
Lease / Tax Lease
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 65
True Lease / Tax Lease
(Tax Perspective)
! Rental contract w/ fixed terms & conditions
! Lessee expenses monthly payments
! Available to non-profits & gov’t entities
" Can do, but no transfer of tax benefits " Use Tax Exempt Lease Purchase
! This is the one used for solar projects suffering
from AMT limits on tax benefits
! This is how Operating Leases are treated from Tax
perspective
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 66
True / Operating / Tax Lease
Typical Terms
! E.g.: $500K+, 80kW+ system (as of 5/23/09)
! Preferred: $3MM, 500kW+ system
" 5-7-10yrs on strong credit for smaller projects
" ~10-15yrs on very strong credit & larger projects
# Credit requirements have gone up in 2009
! End of lease:
" Purchase equipment at Fair Market Value (more later)
" Extend lease for add’l 12-60 months at fixed rental rate
# Repeat indefinitely or sell
" Return equipment to Lessor in good condition
CHECK W/ Gene & Dave Clamage
Check examples for Typical cases too
Ask for real examples
Get examples of Common lease paperwork and processing costs
To set up a deal
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 67
Operating Lease Docs
! More difficult, more due diligence than Capital Lease,
Less than PPA
! 8-15 pages basic lease:
" 5% custom language, 95% boilerplate
" Roof lease
" Waivers
" Terminal Value Schedule & Purchase
" Master Lease, Equipment Schedule
" + other docs
" = total of ~15-30 pages
CHECK W/ Gene & Dave Clamage
Check examples for Typical cases too
Ask for real examples
Get examples of Common lease paperwork and processing costs
To set up a deal
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 68
Cash Benefits of
True & Operating Leases
!
Lessor offers lower monthly cost of solar
system to end user because of enjoyed tax
benefits
!
Lessor gets lower taxes
!
Lessee gets lower cost PV system (lower
payments)
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 69
Loan
Electric Bill Loan
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 70
Lease Payment
Options
Electric Bill Various Leases
~50% are Cash Positive in 2009 w/ Lease
Larger more likely to be cash positive if over 10 years
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 71
True & Operating Lease Term
!
Typically >= 6 years to get all depreciation
benefit and vest all of the tax credit
!
End of Lease options:
"
Purchase at greater of Fair Market Value
(FMV)* or predetermined price
"
Return to Lessor upon notice
"Auto-renewal for shorter term
*Critical to avoid tax violation
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 72
Purchase Options
!
Strict IRS Rules for Sale at End
!Fair Market Value (FMV)
" Best IRS clarity: Determined by independent appraiser at time of exercise
" May be okay to come to agreement among parties at time of exercise
" Should not be bargain fixed price
!
Best IRS clarity: purchase >6 years for FMV
"May be okay to have limited purchase options
at set anniversaries at FMV
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 73
Typical Lease Terms
! Lease can’t exceed 80% of life of asset
" Must have a residual value (in future 75%?)
! Lessor owns, but takes no operating risk
" Hell or high water - Lessee must pay for system
regardless of performance
" Incentive on Lessee to maintain system
! Property tax, insurance, maintenance is
responsibility of lessee
! May require tax indemnity if tax benefits aren’t
transferable to Lessor
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 74
Tax Exempt Lease Purchase
! Primarily for State & Local governments
" Includes public schools & universities
" Longer terms: 10-20 yrs by project size (>20kW)
! Current debt obligation for lessee
! Non-profits qualify for larger projects (
> $1MM)
" Must have gov’t sponsor
! Special structuring - more “complicated” lease
! “Tax Exempt” means the lessor doesn’t pay Fed tax
on income: Reduces interest ~ 300 basis points
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 75
Non-Profits w/o Gov’t Sponsors
!
Non-Profits not eligible for True / Operating
Leases
"
Can’t pass tax benefits to lessor
"
Instead - Capture via a 3rd party ownership
structure: PPA
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 76
Get Lessor, Lender or
Broker Involved Up Front
!
They can help present and sell the deal -
include them early on
!
Helps and increases sales person’s control
!Helps get the right questions asked up front
"
Speeds the sale
"
Or determines early that this is a no-go
"Determine which type is best
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 77
Financing Options For Solar
!
Leases
- Ways of paying for ownership and/oruse over time, having tax and/or cash flow benefits during term, usually with intention of purchasing or renewing at the end
!
PPAs -
Power Purchase Agreements
-Paying for just the energy if/when delivered
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 78
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 79
Power Purchase Agreement - PPA
!
A Type of Offering or Proposal
"Contract for the sale of energy (kWh)
"Not sale of a PV system
!
A financing alternative to leasing
!Recently very popular (75%+ of large)
!Thanks:
" Keith Martin, Chadbourne & Parke, LLP
" Colin Murchie, SunEdison
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 80
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 81
Parties to the Transaction
!
Agreement between
"
PPA Provider / Vendor aka “Developer”
"Off-Taker / End User of Energy
"
Building Owner (might be End User)
"System Vendor / Installer / Integrator
"3rd Party Investor / Financier (might be
installer and/or Developer)
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 82
PPA “Flow”
PPA Developer / Vendor System Vendor/Installer Occupant / Off-Taker / Energy User PPA Financier / Investor Building Owner PV System kWh Energy Monthly Energy Payments Building Access / Maintenance Permission Purchase Payment Investment Cash ROI & Tax BenefitsLender Debt & Debt Payments … multiple off-takers
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 83
Party Responsibilities
! Developer (might also be installer) oversees:
" Construction
" Operation & maintenance of equipment
" End User & Investor relationships & payments
" Execute the 80-100 ‘To Do’ items
! End-User
" Receives energy from system
" Makes predetermined payments for energy if/as it is
produced
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 84
Financier-Developer Relationships
!
Financier is Tax Equity Investor
"Has Tax appetite
"
Doesn’t want to build or operate projects -
needs developer/operator
!
Three common structures:
"Sale-Leaseback
"
Partnership-Flip
"
Inverted Lease (aka Pass-thru Lease or
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 85
Sale-Leaseback
!
Property Sold to Tax Equity Investor &
Leased back to Developer/Operator
"
Important that this lease is back to the same
party that placed the property in service
"
Tax benefits stay w/ Tax Equity Investor
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 86
Partnership-Flip
! Tax Equity Investor & Developer/Operator are
partners with unequal ownerships
" For initial period, Tax Equity Investor owns 99%
(max) and receives 99% (ideally, not really) of benefit (tax and income) until “target” return is achieved
# Must be >5 years for full vesting of ITC
" Entering second phase, ownership “flips” so that
Developer/Operator owns up to 95%.
" Developer/Operator can buy remaining share at FMV
(or more, FMV decided at that future date)
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 87
Sale-Leaseback
Time Flexibility
! Allows “Place-In-Service” date up to 3 months
before closing Sale-Leaseback
" More time flexibility in getting financing
! To qualify, delay In-Service as needed:
" Construction completion
" Asset conveyance
# Sale to Tax Equity Investor
# Use of asset by site user
" Permits signed off
" Testing and customer signoff
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 88
Sale-Leaseback
Benefits & Drawbacks
+ 3 extra months to close financial of deal
+ 100% Tax Benefit Capture (vs. 99% minus leakage w/ partnership flip)
- No “Limited Use” property (can’t become worthless)
- 80% of useful life limit on lease term (soon 75%?) - Repurchase at end of term more expensive
- Tax Indemnity required
- Developer/Operator can’t be a non-profit
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 89
Inverted Lease
! Aka Pass-Through Lease or Master Tenant Lease
! Developer is the owner and Lessor
! Tax Equity Investor (TEI) is the Lessee
! Developer (lessor) ‘elects’ to pass ITC to TEI
! TEI (lessee) pays rent similar to what depreciation would
have been and expenses the rent (and enjoys ITC)
! TEI sells the electricity for 6-15 years
! Developer uses depreciation to offset taxable rent income
! No cost to Developer to get ownership at termination
! No explicit cash purchase price, since developer is also
builder and owner
" What is the ITC ‘basis’ & Depreciation ‘basis’?
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 90
FMV
Fair Market Value
!
Should not be bargain fixed price
!
Determined by independent appraiser at time of
exercise
" Method 1 - Cost-Based: Actual cost to build, including profit & soft costs including only eligible property*
" Method 2 - Market Based: Estimated thru comparable sales of eligible property
" Method 3 - Income Based: Discounted value of future cash flow – not considered reliable
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 91
Treasury 1603
Cost Basis Analyses
!!! "#$%&#'()*!"#$%&#'()*+!,-)**! ./--#01%)*! ./--#01%)*! 2)03#! ./--#01%)* +!4(*%56! ,%7#!")'3#! 89:!;<! 9:=9::!;<! 9::!=!9>:::!;<! ?9!@<! A6B%1)*!,%7#! C!;<! DC!;<! DC:!;<! D!@<! AE0';#6! F0%1#!B#0!
<)G! H+=!IJ! H+=!IK! H+=!IC! H+=!IL!
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 92
End-User/Off-Taker Benefits
!
No up-front costs, down payment or deposit
required
!
Lower initial energy costs
!
Potentially lower long term energy costs
!Future discounted purchase of system
!Reduced PV cost even if no tax appetite
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 93
Energy Expense Comparison
2011 2021 2031 Year
Cost Per kWh
PPA Electric Rate including contracted escalation at 3%
Utility Electric Rate including estimated escalation at 5% 15¢
14¢
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 94
Investor/Owner Benefits
!
Guaranteed stream of income from energy
sold
!
Tax benefits
!
No inflation/escalation risk
!Keep or sell Green Tags / RECs
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 95
User Energy and
Capacity Payments
!
Most are Energy Payments only: $/kWh
delivered
"
Sometimes indexed to electric or gas markets
!Some also include a “Capacity” payment
"
Fixed $/kW/month based on average
“availability” of PV equipment
"
Comparable to Demand Charges
# Depends on profile
# Recover some lost hidden value
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 96
Performance Terms
!
Performance Guarantees
"Annual & Project life
"
Actual Energy / Power delivered
"Efficiency & Availability of Equipment
!Liquidated Damages for failure to perform /
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 97
Performance Terms cont’d
!
REC / Green Tag ownership
"Usually retained by system owners
"Potentially valuable as AB32 kicks in
!Metering
"
Costs & Billing Systems
!Rights to Excess Power
"
Use of and Value
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 98 ! Inverse of Electricity Escalation
" If rates don’t rise, might cost more
! Might not get Green Tags/RECs
" Additional cost if desired
End User Risks
2011 2021 2031 Year
Cost Per kWh
PPA Electric Rate including contracted escalation at 3%
Utility Electric Rates may not rise or stay above PPA Contract Rate
15¢
14¢
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 99
Upside Down Deals?
2007 2017 2027 Year
Cost Per kWh
PPA Electric Rate including contracted escalation at 3%
Utility Electric Rates assumed to rise at 5% and eventually go above PPA Contract Rate 13¢
14¢
! Why take 10 years of guaranteed losses to maybe get 10
future years of savings (consider Time Value of Money)? ! Is the hedge worth that much?
" Chances of rates not rising at 5%?
" U.S. Average: Rates Grew 3.8% /yr from 2001-2010; 2.1%
over 20 years
" Large 2009 U.S. Natural Gas discoveries may limit escalation
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 100
2010 Average
Residential Electric Rates &
Escalation (West, partial)
Source: DOE Energy Information Administration.
2008 U.S. Average Retail Price per kWh is 9.74 Cents
Average Retail Price (Cents per Kilowatt-hour)
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 101 =! DM:! LM:! KM:! NM:! 9:M:! 9DM:! 9LM:! 9KM:! Residential 1982 !" #$ %& '" (&)* +, -./ 01 ,2 (& F#);#&!O!LPQ! ! ! !! ! ! A%#0!L!R!C>!L:Q! ! ! A%#0!S>!DPQ! ! ! ! ! !! ! ! A%#0!D>!9SMCQ! A%#0!9>!99MPQ! FTRU!D:9:! asa s asf sf asdf f f df asf a sdf 3456&7889& A%#0!C>!DKQ! A%#0!L>!DLQ! A%#0!S>!9JQ! A%#0!D>!9SQ! A%#0!9>!99Q!
• Deregulation in 1995 froze Tier 1 & 2 • AB1X during 2001 Power Crisis created Tier 3-5, which have risen 5x faster than ‘average’ rates needed to rise to compensate for Tier 1&2 • SB 695 (Kehoe) unlocks and raises Tier 1 & 2 rates 1% faster than ‘average’, up to 5% per year • Tier 3,4,5 might now drop
Residential 1970 to 2001 plus 2001 to 2010 tiers
California Electric Rates
Source: California Public Utilities Commission, EIA, PG&E "#$%&#'()*!
!DMDQ! !JMJQ! !99MKQ! !99MSQ!!
9:;8& 9:<7& 9::=& 9::<& 3456&7898&
A%#0!C>!LPQ! A%#0!L>!L9Q! A%#0!S>!DJQ! A%#0!D>!9SQ! A%#0!9>!99MCQ! Be cautions about future rate hikes – 2-3% max
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 102
Investor/Owner Risks
! System Performance
" Maintenance over 15+ years
! End-User default or vacancy of property
" Good credit end-users required
" Require host supply another site or pay term. Fee
" Lots of “due diligence” required - high transaction
costs
! Incentive Receipt Certainty
" Must have confirmation of qualification/allocation
! Project Documentation Risk
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 103
Complications - Legal & Tax
!
High initial transaction costs
"Reduced with standardization
!Building access / maintenance costs
!Repossession / aftermarket value
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 104
Complications - Terms
!
Power Contract Form:
"Selling kWh?
# At what price?
# TOU & Demand saving / costs
# Who takes remaining utility bill?
"
Simpler but vague sales presentation
"May leave lots on table in customer’s
benefit
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 105
Avoid Tax Mistakes to Ensure
Investor Access to Tax Benefits
! Tax Equity investor must have “unfettered” use of
valuable asset after deal is over
" Will panels still be valuable in 15+ years?
" Value can’t be stated now - must be set at that time
" Term can’t go over 80% of “useful life” (must not be
“Limited Use” property)
! Must be “attached” and not easily moved, but is not
Real Property – use UCC filing to secure
! Purchase Options: >= Fair Market Value (FMV)
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 106
Common Mistakes
! Rebates are taxable to Host?
" Host signs over rebate, but is stuck w/ tax liability?
! Usually no “Tax Indemnification” (unlike leases)
! Host can’t share in upside
! Host can’t be charged for electricity not received
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 107
PPA Contract Documents
!
Total: 100-200+ pages
!
Standard Off-taker Contract Segments:
"The PPA: 20-35p
# Sale of Power/Energy: Output vs. Requirements
# Metering & REC ownership
"
Installation Contract: 20-50p w/ exhibits
# Equipment Supply & Construction
"
Operations & Maintenance Agreement: 10-15p
"Site Lease gives provider rights & protections
# O&M Access; Transfer to new site owners
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 108
PPA Contract Costs
!
High (long & complicated) but dropping
rapidly for “generic” & standard
"
Basic Standard Agreements: $3K-20K
including tailoring w/ desired terms
!
Moving to pre-approved deal checklists
!SolarTech.org “Standard PPA”
"
$395; free to members
!
SEIA “PPA Template” free for members
!Per-Deal (legal) costs are now low(er):
"
Quick review (if standard & good basic
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 109
PPA Developer &
Investor Contract Documents
! Additional agreements for Developer & Investors
" LLC w/ Partnership Flip: 40p + 15p exhibits
" Purchase Agreement: 24p + 7p of “definitions”
! Covers the multi-year legal structure to allow Tax
Equity Investor to reap tax benefits as 99% initial owner, then “flips” ownership to Developer to reap long term operating benefits.
! Flips occur anywhere from Year 6 to Year 17
" Rebates/PBI, Host Payments, Tax Benefits (vesting)
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 110
Equipment Supply &
Construction Agreement
! Product Supply
! Installation terms, timeline, etc
" In-Service Date not earlier than 3 months before
closing Sale-Leaseback or not before closing Partnership Flip
! Warranty (5-10 yrs, useful terms to satisfy)
! Performance Guarantee or Warranty
" Based on independent data & measurable parameters
! Can installation be subcontracted?
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 111
PPA Deal Sizes
!
Tax Equity Investors looking for big deals
"$25-$40 million minimum
"
Keith Martin’s typical: $75-$150 million
"Desirable $100-$200 million
"
? 5 to 50MW PV systems ?
!Aggregation
"
Collect $3-$5million+ size projects
"Portfolio approach limits risk:
# Max $ per project and per customer
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 112
Aggregation
!
Collect 5 to 50 $3-$5million+ size projects
!Master Agreements: “All Deals …”
"
In by X date
"
Meet 10-12 item checklist
!
Standard checklist reduces due diligence &
legal costs per deal
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 113
PPA Typical Terms
!
$2.5Million+ (>350kW+)
!15-20-25 yr commitment
!End of term:
"
Renew PPA
"
Purchase of system
#
At greater of FMV or pre-determined price
" Pay termination & have system removed !
Significant due diligence on customer req’d
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 114
Tax Equity Investors & Lenders
" Union Bank of CA
" US Bank (U.S. Bancorp)
" Deutsche Bank " John Hancock " Rabobank " Morgan Stanley " Wells Fargo " PG&E (utility)
" National City Bank
(leaving the business?) " Bank of America " Citigroup " JP Morgan " MetLife " Credit Suisse " Google
" Other corporate coming?
! Goldman Sachs invests in PPA companies to buy
& flip for profit
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 115
NREL RE Project Finance
!
Summary & survey info on latest data on
trends in project financing
!
Quarterly reports & webcasts
!http://financere.nrel.gov/finance/
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 116
Layers of Debt
Return R isk Developer Equity Mezzanine / Subordinated Debt Tax Equity Non-Recourse Debt! Described well by Paul Schwabe in “Peeling the
Onion: The Layers of Capital Structures”
" http://financere.nrel.gov/finance/content/peeling-onion-layers-capital-structures
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 117
Money:
Costs & Returns
! Financial Returns for Tax Equity Investors:
" Was High 6% to Low Teen % after tax
" Now: ~10-12-15% for mid-large PV, declining " Shortage of money, so demanding higher returns " 1603 expiration will cause shortage of equity " Volker rule could eliminate bank TE
! Developer Equity return ~14+%
! Leverage (Debt) - Used by Some
" Increases risk & complication " Helps get cost down or returns up " Requires larger deals to make sense " Cost/Term: ~4-8%, for less than 15 years
! 1% increase in cost of capital increases cost 10%
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 118
Funding Examples
!!! V'W#$5-#'5! X#Y5! X#Y5!./$5!
)5!CZ! "#5E0'! F0/[5! "#5E0'!/'!V'W#$5#&!.)B%5)*! U\E%56!
]'*6! I9::! I:! I:! I99:! I9:! I9:+I9::!^!9:Z! U\E%56!
H!X#Y5! ID:! IN:! IL! I99:! IK! IK+ID:!^!S:Z!
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 119
Funding Sources
at Various Phases
F_)$#! F0#=,)*#! ./'$50E1(/'!XE0%'3! ./'$50E1(/'!`E$5!ab#0!
]B#0)(/'! ,_/05!A#0-! ]B#0)(/'! @%&!R!2/'3! A#0-!c)b#0! d%Be! ,/E01#$! /f!gE'&$! ! ! ! !! $ X#W#*/B#0! h,)*#$!"%$;i! ,5)05EB! V'W#$5-#'5! $ X#W#*/B#0! U\E%56j!h$;%'! %'!5_#!3)-#i! kD:Z!/f!fE**! 1/$5! $ X#Y5j! ./'$50E1(/'! A#0-!2/)'! kN:Z!/f!fE**! 1/$5!c%$!)*$/! Y0%&3#!5/! A0#)$M!T0)'5e! $ A0#)$E06! T0)'5! $ ,5)5#+2/1)*! "#Y)5#$!/0! T0)'5$! $ A)l!U\E%56! kS:=L:Z!/f! '#5!1/$5! $ X#W#*/B#0! U\E%56!kD:Z! $ X#Y5!kLCZ! $ g#&!VA.!c%f! '/5!A0#)$E06! T0)'5e! $ ,5)5#!VA.! $ X#B0#1%)(/'! $ A)l!U\E%56! kS:=L:Z!'#5! $ X#W#*/B#0! U\E%56!kD:Z! $ X#Y5!kLCZ! $ X#B0#1%)(/'! $ FmV$! $ ,"U.$! $ F/n#0!,)*#$! $ X#Y5!5/!#'&! /f!@%&!A#0-! $ X#W#*/B#0! YE6/E5!1)$_! )5!5_#!d%B!
© 2011 OnGrid Solar, All rights reserved. Intro to Solar Financing - 120
Alternative Funding Methods
!
Tax Equity only (no debt)
" Simpler – fewer parties involved
" TE cost is lower – not subordinated to debt
!
Debt & Developer Equity only (no TE)
" Debt is cheaper than Tax Equity
" Easier for smaller projects (TE not avail.) " Requires Developer to have tax appetite
!
Developer Equity only
" Simpler, flexible, but has above limitations and is capital inefficient