selling solar as a financial investment - ongrid.net ce 2016.pdf · selling solar as a financial...

Selling Solar as a Financial Investment

Michael Bishop, OnGrid

510-736-5789

[email protected]

Thank You NABCEP

Thank you Andy Black

Thank You Too!

What qualifies Michael to teach this workshop?

• In solar since 2005

• Has been on a roof

• Sole developer of respected financial modeling software since 2006

• Andy Black protégé

• Has taught for NABCEP, RISE, CALSEIA, and others

Michael is president and owner of OnGrid.

Note: Software exists to handle (almost) everything covered today

Premise 1 of 4

People are more likely to choose you if they trust you.

Premise 2 of 4

The financials play a primary role in most decisions to go solar.

Premise 3 of 4

People are more likely to go solar if they understand the financial opportunity.

Premise 4 of 4

People are more likely to understand the financial opportunity if you understand the financial opportunity.

Today we’ll basically do this…

Steps to Prepare Cash Flow

Some Basic Energy Units

Watt — unit of power

Watt-hour — unit of energy

Kilowatt (kW) = 1,000 Watts

Kilowatt hour (kWh) = 1,000 Watt-Hours

Electric Expense Exercise

On for 10 hours

$0.10 per kWh

100 W Incandescent Light Bulb

What’s the energy charge (kWh)?

40 W LED Light Bulb

What’s the energy charge (kWh)?

Image source: Solar Electric Power Co.

Customer Classes

Utilities group different types of customers into separate “classes.”

• Residential

• Commercial

• Industrial

• Agricultural

Rate Schedule

A collection of rates charged for electric services provided to a meter, along with a definition of how they’re applied.

Also known as:

Rate Structure

Tariff

Rate Components

Bundled utility rates include

different components:

• Generation

• Transmission

• Distribution

• Surcharges

Image Source: www.foresthiker.com

Tariff Book

A utility’s collection of available rate schedules.

Load Stacking (w/ residential example)

2,500 W

1,000 W

250 W

5,000 W

What’s the Total Load?

Load Stacking (small industrial)

Same Logic — Just Add Up the Loads

Small Industrial Load Curve

Chart Courtesy of Thomas Yu

Standard Electricity Service Charges


Demand Charge$ per kW

Large CommercialAgriculturalIndustrial

Energy Charge$ per kWh

ResidentialSmall CommercialLarge CommercialAgriculturalIndustrial

Fixed Charge“Meter Charge”“Customer Charge”$ per time period

ResidentialSmall CommercialLarge CommercialAgriculturalIndustrial

Energy Charge Types

Flat annual charge “Flat rate”

Seasonally-varying charge “Seasonal rate”

Marginally-varying charge “Tiered rate”

Time-varying charge “Time of Use (TOU) rate”

Time-varying and bracket-varying “Tiered TOU rate”

Tiered electric rates work like federal income taxes

Tiered Electric Rates

• Residential only (in general)

• Penalizes larger residential users

• Motivates efficiency, conservation, and PV

Tier Example — CA PG&E

17¢/kWh

base

charge

20¢/kWh

base

charge

CA IOUs — Tier Quantities Vary By Region

Time of Use Electric Rates

• Electricity cost varies depending on time of day it’s used

• Better reflects utility’s cost to deliver electricity

• Requires smarter electric meters

• Offered by many but not all utilities

• U.S. is generally moving towards time-varying pricing

Time of Use (TOU)


TOU Time Examples — CA PG&E

Residential

Commercial

TOU Time Examples — CA SCE

Residential

Commercial

TOU Time Examples — NJ PSEG

Other East Coast Examples

NY: ConEd: 10am-10pm

NJ: JCP&L: 9am-9pm

PA: MetEd, Penelec: 9am-9pm; PPL: 1pm-6pm

CT: UI: 12pm-8pm; CL&P: 1pm-9pm

Residential

Large Commercial

Mining utility bills for data

Avoiding Utility Bill PDFs

Source: DSIRE

Avoiding Utility Bill PDFs — Software

Determining System Production — Performance Models

• Sandia array model

• Single-diode model

• De Soto “5 Parameter” Module model

• PVFORM model

SolarPro Magazine:

Production Modeling for Grid-Tied PV Systems (2010)

Determining System Production — Software

Software Example: PVWatts

Determining System Production — By Hand

170 W 170 W x 90% = 153 W

153 W x 93% x 97% x 98% x 98% x 97% = 129 W

Solar production estimate (continued) — Tilt & Orientation

Exercise: An east-facing array will get more morning / afternoon sun than a west facing array.True or False: Solar panels should never be installed on the north-facing roof.

Solar production estimate (continued) — Shading

129 W x 95% = 123 W

(late 2016?)

Solar production estimate (continued) — Sunlight

123 W x 5.3 sun hours per day x 365 days per year = 238,000 kWh

“Peak Sun Hours” = equivalent noon sunlight

Recall our single-day load curve…


Load curve with solar production


Net load after solar production (what the utility sees)


Tiered Rates and Solar

Solar offsets the most expensive usage first

Should we move the customer to a time-of-use rate?

Time of Use Advantage w/ Afternoon Peak

Chart source: Pete Shoemaker, PG&E Pacific Energy Center

Switch customer to time of use?

• Non TOU to TOU

• Could increase solar kWh value

• (Could also lower fixed charge and/or demand charge)

Chart source: Pete Shoemaker, PG&E Pacific Energy Center

Net Load on Time of Use


Determining Usage Profile (when data not available)

What should we ask about?• Who’s home during peak?• What are they doing?• Air conditioning? Into the evening?• Ability/willingness to shift usage?• Solar pool heating?

• Large base-load usage favors rate switch:• Refrigeration, electronics, servers, hot tub

TOU Exercise 1

Switching a customer to a TOU rate schedule with net metering and solar (helps / hurts) their results if they use a lot of electricity during afternoon peak hours and their solar system is small compared to their usage.

Ideally, the solar system will cause their electric meter to spin (forward / backward) during most of any afternoon peak time period.

TOU Exercise 2

If electricity costs 50¢/kWh in Chicago (45 N Lat) from 7am-11am and 1¢/kWh the rest of the day from November through February, and 1¢/kWh at all times the rest of the year, the best orientation (direction, such as N, NW, etc) for a solar system to maximize value of electricity produced would be ______ and the best slope would be ______ (within 20) up from horizontal.

TOU & Daylight Savings

Noon-6pm on meter = 11am-5pm “solar time”

Net Energy Metering (NEM)

• Exported solar given retail credit

• Partially a result of utility technology limitations before 2000s

• NEM is a very important policy re: solar compensation

Source: DSIRE

Source: Wikimedia Commons

Demand Charge

• Usually applies only to large users

• On a per kW basis

• Based on highest 15-30 minute peak load average


Large CommercialAgriculturalIndustrial

How much of the demand charge is offset by solar?


Large CommercialIndustrial

Weather Fluctuations

Extreme Demand Charge Example

Wind Tunnel at Moffett Federal Airfield

2.6 MW fans / 12 MW can be turned on

If fans ran together for 15 minutes…3,000 kWh

$300 total at $0.10/kWh

Enormous utility infrastructure requirements to enable

$240,000 total at $20/kW

Fixed Charge Not Offset By Solar

Everything Is Changing

• State net metering caps are being reached

• Utilities are challenging net metering

• Rate schedules are becoming less solar friendly

Case Study: Arizona

Residential demand charge for new SRP solar customers

• SRP analysis of 190 customers who went solar since change

• State regulators are considering demand charges for UniSourceEnergy Services, and APS likely to request this summer

• 677 applications in October 2014. 333 applications in year after

• Before new rates, 75% of applications were solar leases, 25% after

Monthly Electric Expense

Before Solar $181

With Solar Under Old Rate $93

With Solar Under New Rate $122

Case Study: Nevada

• Will triple fixed charges over the next 4 years

• Will reduce net excess energy credit by 75%

• Also applied to almost 18,000 existing solar customers (no grandfathering)

Case Study: Massachusetts

• NEM cap reached

• Over 500 projects valued at $617 million awaiting construction

• MA House and Senate not reaching agreement re: NV Energy NEM cap and large project SREC cap

Case Study: California

• NEM 2.0• Non Bypassable Charges (NBCs)

~2¢ charge for every kWh of grid energy used at the site

• TOU required for new solar customers

• Only a minor financial impact in most cases

• TOU period shift towards evening (PG&E: noon to 6pm > 3pm to 8pm)

• Tier collapse

Image Source: PG&E

Value of Solar

• Net Metering alternative proposed by utilities and others

• Attempts to assign a value to each solar kWh (“buy-all sell-all”)

• IRS might treat Value of Solar payments as taxable income

• Adopted by City of Austin, and may be adopted in Minnesota

Common Utility Arguments Against Higher Solar Compensation

• Solar is less valuable because it’s an uncontrollable load

• The fast late-afternoon solar production drop off creates challenges

• Solar doesn’t help with high evening load

• Net metered customers don’t pay their share for fixed grid costs

The Duck Curve

Storage to the rescue?

Image Source: Greentech Media

“Any kind of net energy metering reform that reduces the value of solar works in favor of storage.“

- GTM Research analyst Ravi Manghani

Storage

(Chart is for illustration purposes only. Data not real / verified.)

Storage

Demand Reduction

Energy Arbitrage

Grid Frequency Regulation?Grid Voltage Regulation?Other Services?

(Chart is for illustration purposes only. Data not real / verified.)

Storage

• Currently expensive (20¢-35¢ per kWh for discharge)

• Currently limited markets (CA and PJM)

Huge potential.

Solar Production Over Time

• Typically 0.4% degradation per year

• Degradation isn’t always linear

• Degradation rate can be 1% per year or more in harsher climates• Desert• Heavy ice and snow load

See: NREL Photovoltaic Degradation Rates report

What should the utility escalation rate be?

Historical Electric Rate Escalation — 1997 to 2015

Region Residential Commercial

New England 2.40% 1.93%

Middle Atlantic 1.57% 1.05%

East North Central 2.21% 1.61%

West North Central 2.50% 2.20%

South Atlantic 2.15% 1.93%

East South Central 2.92% 2.86%

West South Central 1.81% 0.069%

Mountain 2.48% 2.26%

Pacific 2.47% 2.51%

Average 2.20% 1.78%

Data Source: U.S. Energy Information Administration

Electricity Escalation vs General U.S. Inflation

• Inflation: When the purchasing power of a dollar decreases

• Consumer Price Index (CPI) looks at a “market basket” of goods

• 2000 to 2015: 1.86% average inflation (1913 to 2015: 3.18%)

Data Source: inflationdata.com

Average Inflation / Escalation Per Year

General Inflation (2000 to 2015) 1.86%

Residential Rate Escalation (1997 to 2015) 2.20%

Commercial Rate Escalation (1997 to 2015) 1.78%

Accurate Rate Increase Projection is Impossible

• Natural gas supply?

• Coal plant shut downs?

• Electric company deregulation?

• Carbon offset requirements?

• Energy reduction per capita?

• Utility adjustments to DG?

• (And everything else)

Array Cleaning Costs

• Output decline can be over 20%

Barry Cinnamon’s 4 considerations:

• How often does it rain in your location

• Panel tilt

• Amount of wind blown dust

• Value per solar kWh

_____

Cost / effort usually not worthwhile for smaller systems, says UC San Diego report.

Maintenance Costs Over Time

Major issues: Panel or inverter failure

Minor issues: blown AC fuses, blown DC fuses, intermittent generation due to loose wiring, solar PV breakers being inadvertently turned off, and ground fault interruptions triggered by rain- or humidity-induced moisture penetrating the array’s electrical system.

Pecan Street Study: 255 homes w/ almost all PV less than 3 years old

2 major issues and 54 minor issues over the year-long study

Source: Pecan Street

Other Costs Over Time

Property Tax

• 38 states offer property tax exemptions for renewable energy

Fire/Loss Insurance

• No increase for many insurers

Determine the Gross System Cost

Determine Other Income

Incentives• Rebates

• Grants

• Performance Based Incentives

• Tax Benefits

Renewable Energy Credits

Rebates

• Up-front reduction in system cost

• Typically received 30-120 days after inspection

• Sources of Rebates:• Utility

• State

• City

• U.S. Dept. of Ag or U.S. Dept. of Interior

• Can often be taken by solar contractor

• Some rebate programs more consistent than others

• Sometimes higher rebate for non-profit and government

PV Rebates Around The Country

Image Source: DSIRE

Rebate Examples

Highest Rebates

PR PREPA $3.50 per Watt

CA Truckee $2.37 per Watt

CA Vernon $1.57 per Watt

CA PSREC $1.57 per Watt

TX Denton $1.50 per Watt

Lowest Rebates

NV Sierra Pacific $0.15 per Watt

NV Nevada Power $0.15 per Watt

NY LIPA $0.20 per Watt

CA Roseville Electric $0.24 per Watt

CO Colorado Springs $0.24 per Watt

USDA Rural Energy for America Program (REAP)

• Grants and loan guarantees

• Rural small businesses and agricultural producers

• Up to 25% of project cost

• $63 million awarded in 2015

Performance Related Incentives

• Types of Performance Related Incentives:

• PBIs – Performance Based Incentives

• SRECs – Solar Renewable Energy Certificates

• Incentives paid for actual kWh produced

• Missed production reduces incentive received

• Motivates attention on the system

• Monitoring with alerts highly recommended

Performance Based Incentives (PBIs)

• Sometimes PBI is the only option

• Sometimes PBI payment if system is over a certain size

Highest Commercial PBIs

Washington State $0.15 per kWh

CA Pasadena $0.14 per kWh

Lowest Commercial PBIs

SC SCE&G $0.01 per kWh

NV Sierra Pacific Power $0.02 per kWh

NV Nevada Power $0.02 per kWh

CO Xcel Energy $0.02 per kWh

Renewable Portfolio Standards (RPS)

• Requires utilities to “clean source” a % of energy they generate or sell

• Incremental targets that increase over time

• Over half of U.S. states have some type of RPS in place

• No two RPS programs are the same

RPS Programs Around The Country

Image Source: DSIRE

Solar Renewable Energy Credits (SRECs)

• Utilities get RECs to meet their RPS requirements

• Many programs include solar “carve outs” (SRECS)

• Functional REC markets intended to protect utility ratepayers

• Can often sell RECs to aggregators (who then sell to utilities)

• Can be difficult to get long-term contract

• Uncertainty

Solar Renewable Energy Credits

Image Source: Solarize Abingdon

SRECs Around The Country

Image Source: DSIRE

SREC Examples

Exercise: $0.40 per kWh = $____ per MWh?

Highest SRECs

Washington DC $0.48 per kWh

Massachusetts $0.26 per kWh

New Jersey $0.28 per kWh

Lowest SRECs

Pennsylvania $0.14 per kWh

Ohio $0.14 per kWh

Maryland $0.05 per kWh

Other Incentives Might Be Available

• Example: Local grants

• Example: Low Income Housing Tax Credit

• Example: Historic Rehabilitation Tax Credit

Tax Benefits

• State Tax Credits

• Federal Investment Tax Credit (ITC)

• Federal & State Depreciation (commercial)

• Only applies to taxable entities (not schools, non-profits, government)

Disclaimer: I’m not a CPA or lawyer, and am not providing tax advice. Seek qualified professional help

Tax Credit vs Tax Deduction

• Tax deduction reduces income subject to taxes

• Tax credit is a dollar-for-dollar tax reduction

• $1,000 Federal tax credit reduces tax owed by $1,000

• $1,000 Federal tax deduction reduces income by $1,000 which reduces taxes owed by $1,000 * tax rate = $1,000 * ~28% = $280

Exercise: What’s tax deduction on $1,000 income if the tax rate is 15%?

State Tax Credits

• State Tax Credits are worth about 65-80% of face value• State taxes can be deducted from federal taxes

• A state tax credit reduces state taxes, which increases federal taxes• (Effectively “federally taxed”)

• Typically have a cap

Residential Tax Credits

Source: DSIRE

Commercial Tax Credits

Source: DSIRE

State Tax Credit Examples

Highest PersonalTax Credit

Credit Percent Maximum Value

Montana 100% $500

Louisiana 50% $10,000

Hawaii 35% $5,000

Lowest Personal Tax Credit

Credit Percent Maximum Value

New Mexico 10% $9,000

Massachusetts 15% $1,000

Utah 25% $2,000

Keith MartinChadbourne & Park LLP

Federal Investment Tax Credit (ITC) — Residential

• IRS Section 25D (residential energy efficient property)

• 30% through 2019

• 26% in 2020, 22% in 2021

• No cap (unlimited)

• Can carry forward to the next year

• IRS Form 5695

Residential Federal ITC — Odds & Ends

• Received on following year’s tax return (1 year delay)• (But can reduce estimated tax payments if applicable)

• Building-integrated PV okay (can serve dual purpose)

• Must be a taxpayer residence (doesn’t need to be primary residence)

• Can divvy up amongst condominium association members

Federal Investment Tax Credit (ITC) — Commercial

• IRS Section 48(a)

• 30% through 2019

• 26% in 2020, 22% in 2021, 10% after 2021

• No cap (unlimited)

• Can carry back one year and forward 20 years

• IRS Form 3468

Commercial Federal ITC — Odds & Ends

• Can’t claim credit on related building upgrades

• Structures that hold up panels normally considered part of system if other benefits merely incidental

• Equipment must be new or substantially refurbished (80/20)

• Capital additions qualify, but not repairs

“Placed In Service”

• Must be placed in service in tax year to be on that tax year’s return

Placed in Service means:Installation completed

Taxpayer took legal title and control over project

Taxpayer has license and permits to operate

Pre-operational tests completed

Property Has Residential Use and Business Use

• Apply under both residential credit and commercial credit

• Typically based on square footage

• Advise caution here — close IRS scrutiny

Residential Rebate Taxation

IRS code section 136:

Purchase or installation of an “energy conservation measure”

Subsidy provided by public utility (directly or indirectly)

Customer doesn’t include in her gross income tax

• PV is energy conservation by precedent

• Gray area when subsidy not provided by utility

• Rebates from state or local general funds probably taxable

• Rebates that require RECs transfer are probably taxable

Rebate and ITC

Sec 136(b) - No “double benefit”• If the rebate is non-taxable, the federal ITC is on amount after rebate

• If rebate is taxable, then federal ITC is on amount before rebate

• Not much financial difference whether rebate is taxed or not

• Commercial rebate is taxable and doesn’t reduce the ITC

• Solar rebates usually not taxable at state level, but confirm w/ state or other qualified source

PBI & REC Taxation — Residential & Commercial

• PBI assumed to be taxable (would be difficult to reduce ITC basis if not)

• RECs and SRECs assumed to be taxable

• Neither affects ITC basis

Reminder: I’m not a CPA or lawyer, and am not providing tax

advice. Seek qualified professional help

Depreciation

• Depreciation = Commercial tax deduction spread over time

• Theoretically based on years asset will be used, according to the drop in asset value each year

• Asset-specific schedules are tedious, so standard schedules are used (must select a standard schedule)

• Can usually choose between two or more schedules

Federal Depreciation

• MACRS 5-Year Accelerated Depreciation

• MACRS = Modified Accelerated Cost Recovery System

• IRS Form 4562

• Can choose 12 year straight-line depreciation

• Equivalent of tax deducting system’s ‘basis’ over 5.5 years

Net Value = (System ITC basis - 1/2 ITC) * Tax Rate

Net Value = System ITC basis * 85% * Tax Rate

• Commercial only (including home businesses >50% by sqf)

• Up to 20 year carry-forward

MACRS Depreciation Schedule

Year 2018: 40% bonus

Year 2019: 30% bonus

Year 2020+: no bonus

Year Standard Schedule 50% Bonus through 2017

1 20% 60% = 20% ÷ 2 + 50%

2 32% 16% = 32% ÷ 2

3 19.2% 9.60% = 19.2% ÷ 2

4 11.52% 5.76% = 11.52% ÷ 2

5 11.52% 5.76% = 11.52% ÷ 2

6 5.76% 2.88% = 5.76% ÷ 2

Alternative Minimum Tax (AMT)

• Dual IRS tax system meant to ensure individuals and corporations pay their fare share of taxes

• If taxes paid are too low versus income, higher AMT could be due

• ITC doesn’t increase likelihood of AMT (confirm w/ CPA)

• Can apply ITC to AMT

• Federal depreciation does increase likelihood of AMT

• Can’t apply federal depreciation to AMT

State Depreciation

• Schedule differences across states

• Each state chooses whether to allow the federal depreciation’s bonus

• State depreciation is taxable income at the federal level

We Can Now Show Cash Flow

Analyzing the Cash Flow

What does the cash flow mean to your prospect?

18% Return

Is The Customer Financially Literate?

• Only 40% of American adults keep a budget and track their spending

• Only 50% of families have over 3 months' worth of expenses saved

• American consumers owe $11.52 trillion to lenders and creditors

• Under 50% of American adults have money in stocks

• “75% of American adults would like help with basic money matters and would appreciate the advice of a professional.”

Sources: www.dailyfinance.com www.money.cnn.com

What’s Their Financial Motivation?

Save money on their electric bill? Why?Eat out more often?

Start gym memberships?

Put their daughter in a better preschool?

Make a long-term financial investment? Why?Choose to only do work they love (whether it pays them or not)?

Not struggle or depend on their children in later years?

Achieve financial freedom?

Maybe they’d be excited and grateful if you engaged on their long-term wellbeing.

Goal: Save Money on Electric Bill

• Focus on short-term (~ 5 years or less)

• Bank financing or third-party ownership

• Aim to reduce their net electricity expense immediately

• Consumer perspective

Lease

• A third party owns the system and the host customer rents it for a term

• Third party receives tax benefits and other incentives

• Customer host typically receives a net discount on her monthly electric bill

• Often a lease payment escalator (~2-3%)

• Simple transaction

• Can be the best option if customer doesn’t have tax appetite

Can be problem if lessee wants to move before lease is up

• Reduces pool of interested home buyers (may become a non-issue as lease becomes more common)

• Lessor must approve new lease holder

Power Purchase Agreement (PPA)

• Like lease, except the host customer agrees to pay for each solar kWh produced (vs paying a fixed monthly amount to rent the PV system)

• Prohibited in some states, where third parties that aren’t regulated “utilities” can’t sell electricity

General Movement To Customer Ownership

Source: GTM Research U.S. Residential Solar Financing 2015-2020

Bank Financing

• Homeowner owns system and receives tax benefits and other incentives

• Conventional loan or solar-specific loan

• Solar-specific loan• Loan often assumes homeowner will make additional payment equal to ITC in 12-18

months

• Home-equity loan or second mortgage• Interest is tax deductible

• Unsecured loan

• Line of credit (LOC)• Flexibility with additional payments (e.g. when incentives are received)• Can determine appropriate lower payment in advance if homeowner intends to

make additional payments

Property Accessed Clean Energy (PACE) Financing

• Municipal governments raise PACE funds through bonds

• PACE loan is attached to property, not individual

• Pay through increased property taxes (no credit check)

• PACE loan gets passed to new property owner (so only pay for benefits while at property)

• PACE-enabling legislation in 31 states + DC (over 80% of population)

• Residential PACE market was paused in 2010 when Fannie Mae and Freddie Mac refused to back residential mortgages with PACE leans on them. Moving forward again.

• Origination fees can be as high as 7%

Close the deal here?

• Are they cash positive immediately?

• Is it time to sign an agreement?

Solar Purchase is a Long-Term Financial Investment

Tony Robbins interviewed legendary investors and wrote about it.

A recurring theme:• Don’t try to beat the market

• Be willing to ride the waves, and stay invested

• Be patient and take a long-term perspective

Cash investment in PV is a long-term (25 year) investment.

Is this the best use of their cash or bank credit?

• Do they have any other investment options?

• Can they accurately weigh their investment options?• Can they determine each option’s likely rate of return?

• Can they assess the risk of each option?

• …If they can, build rapport and enable a fast decision by meeting them at their level

• If they can’t, do you want to show them how?• Will this improve your close ratio?

• Will it increase the likelihood they refer you?

• Will you enjoy your work more?

Residential Solar as Tax-Free Investment

• Financial returns are typically considered taxable income

• Electric bill savings (money not spent) is tax free

• Convert to taxable equivalent to properly compare with taxable financial investments (just how tax-free municipal bonds are treated)

Compounding

“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”

Albert Einstein

“Compounding is the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings.”

Investopedia

Compounding

Fun Fact: UPS worker Theodore Johnson never earned more than $14,000 per year. Invested 20% of every paycheck over 50 years. How much did he have at the end?

$70 million

Note: Electric rate escalation is compounding

Year 0 1 2 3 4 5

Linear 10% 100 110 120 130 140 150

Compounded 100 110 121 133 146 161

Time Value of Money

• Would you rather have $100 now or in a year?

• $100 now or $110 next year (assuming zero risk)?

• A dollar is worth more to us now than in the future

• Why?• We can invest that dollar to have more than a dollar in the future

• General inflation makes that dollar less valuable in the future

• It just is (most of us value a dollar more now whether or not we’d invest it)

Discount Rate

• We each “discount” future dollars at a different rate

Year 0 1 2 3 4 5

Actual Income 100 100 100 100 100 100

Bob – 2% 100 98.0 96.2 94.2 92.4 90.6

Jordan – 50% 100 66.7 44.5 29.6 19.8 13.2

Bob Jordon Belfort

Net Present Value (NVP)

• If a dollar has a different value depending on when it’s received, it’s very difficult to directly compare investment cash flows

• Solution: Bring all values to a specific point in time • When? How about now?

• We can use the discount rate

Net Present Value — Example

(Which option is a better investment?)

Year 0 1 2 3 4 5

Income 100 100 100 100 100 100

Discounted 10% 100 90.91 82.64 75.13 68.30 62.09

Net Present Value 535.53

Year 0 1 2 3 4 5

Income 0 0 0 0 0 600

Discounted 307.89

Net Present Value 307.89

Why not just use NPV to compare options?

• Can’t easily compare investments with different terms.

Internal Rate of Return (IRR)

• IRR = the annual equivalent return for the project

• How much would we need to discount future income to make the project worthless (have $0 NPV)?

• The more we have to discount future income to get $0 NPV, the stronger the investment

• We call that discount rate the “internal rate of return”…because it’s internal to the project

• Why?...Why not? It’s a logical way to get a comparable metric.

Internal Rate of Return— Example

Year 0 1 2 3 4 5

Income -100 25 25 25 25 25

Discounted 8% -100 23.15 21.43 19.85 18.38 17.01

Net Present Value 0

We just need year-by-year cash flow to calculate IRR

18% Return

Does this make any sense?

I’m now going to complicate things

• IRR assumes income is immediately reinvested at same IRR rate

• The customer probably won’t apply net $ savings to more solar

• What will the customer do with savings?

Modified Internal Rate of Return (MIRR)

• Apply net savings to another investment?

• Safe investment with confident IRR?

• That investment’s IRR is the solar project’s “reinvestment rate”

• Apply that rate to all income, and compound it over the remainder of the analysis

• MIRR will be lower than IRR if reinvestment rate is lower than the solar project’s IRR

MIRR? Seriously

• This is the true annual equivalent return for the project

• This can be truly legitimately genuinely used to compare the project to other opportunities

• But asking for someone’s reinvestment rate is probably awkward• Especially when they don’t have other investment opportunities in mind

Other Investment Opportunities

• Long-term S&P 500 index: 6-7% ?

• Treasury bond: 2-3.2%

• Step-brother’s new grow operation: 0-300%

• Higher IRR generally means greater risk

• IRR is equivalent to credit card APY (for more context)

• Show them common options and help them choose the best?

Can they make a decision now?

• They know the solar project’s anticipated return (MIRR)

• They can compare it to at least two other investment opportunities

• (They don’t necessarily need to understand underlying IRR logic)

• They still need to determine the solar project’s financial risk

Risks

"I thought going solar was one of the smartest things I ever did; now I think it might be one of the stupidest things I ever did.”

- Nevada solar customer after PUC decision

Risks

• Rate structure changes

• Low electric rate escalation• Net metering changes

• Equipment failure

• Manufacturers exiting

• System performance

• Fire hazard• Water leak hazard

• Theft

• Property insurance changes

• Property tax changes• Don’t recoup investment in property sale

• What else?

Quickly: Levelized Cost of Energy (LCOE)

• Average cost per solar kWh over system life

• All future costs converted to net present value

• Typically not used in residential sales

Quickly: Return on Investment (ROI)

• Derived by dividing a year’s income by up-front capital cost

• This metric is inappropriate — don’t use

Preparing the Financial Presentation — Problems and Solutions

Problem: Too much software, not enough structure

Framework to design sales process

CRM

Remote system design

Detailed system pricing

Customization

Create financial presentation

Project management

Analytics and business optimization


Problem: Too much software, need connections to capital

CRM

Remote system design

Financing platform

Document management

Create financial presentation

Project management


Problem: Need better financial modeling, need to model solar + storage


Problem: Need better financial modeling, control, offline access


Problem: Need full control and complete flexibility, offline access

Remote Site Inspection

Michael Bishop, OnGrid 510-736-5789 [email protected]

selling solar as a financial investment - ongrid.net ce 2016.pdf · selling solar as a financial...

Documents