Introduction to solar financing1. Introduction to Solar Financing Page 1 of 112
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Introduction to Solar Financing
Document Transcript
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1. Andy Black “Introduction to Solar Financing” Solar Financial Analyst (408)
428 0808x1Solar Living Institute: April 20, 2008, Los Angeles, CA,
andy@ongrid.net9am-5pm Contact: Solar Living Institute: San Diego County Office Of
Education ENERGY PLANNING
www.solarliving.org, 707 744 2017 to register Check-in (15 minutes before
GUIDE
listed start time) Introductions Overview of Basic Financing Principals 1502 views
Residential Conventional Financing Break, Q & A, Networking PACE & State San diego county office of education
epg June 2011
Loan Programs ~12:00 Lunch, Q & A, Networking (~30 minutes if possible)
480 views
Lease Basics and Commercial Leases Break, Q & A PPA Basics and
Commercial PPAs Residential Leases & PPAs ~4:30 Formal Conclusion, 2nd Thin Film Solar Summit Europe
- March 2010
Break, Q & A We must be out by 5:00 (add’l questions outside)Diligence:
2443 views
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 Own Your Power!
Wadsworth Longfellow 1148 views
2. Andy Black “Introduction to Solar Financing” Solar Financial Analyst (408)
Volume 1 - LGU PPP Manual
428 0808x1Solar Living Institute: April 20, 2008, Los Angeles, CA,
648 views
andy@ongrid.net9am-5pm Contact: Solar Living Institute:
www.solarliving.org, 707 744 2017 to registerAbstract:This rigorous workshop
Haiti: "Open For Business"
is designed to help commercial systems integrators (dealers, installers,
2594 views
andsalespeople) understand and make the financial case for PV systems
including specifics for how tofinance them with PPAs and Leases.This class
Create solar panels Its not difficult
includes:! PPAs: Understanding the basics, subtleties, complexities, risks, and
130 views
opportunities! Leases: Understanding the major types, how and when they are
used! A short list of financing, legal, tax, and accounting providers who
Tessera brendan o’brien. sistema
specialize in solarAll students will receive a copy of the demo version of the
disco-stirling
OnGrid Tool (licensing agreement will berequired).Biography:Andy Black is a 1149 views
Solar Financial Analyst and the owner of OnGrid Solar. OnGrid Solar
US Solar Market Insight Report Q3
providesfinancial analysis and sales education & software to solar installers to
2011
help them make a strong salescase for solar electricity to their customers. Andy 790 views
http://www.slideshare.net/OnGridSolar/introduction-to-solar-financing 3/11/2013
3. Introduction to Solar Financing Page 3 of 112
has more than a dozen years of design, consulting,teaching, sales, and research 2nd Concentrated Photovoltaic
Summit USA
experience in solar. He specializes in demonstrating the financial paybackof 1809 views
solar electricity systems. He is a former NABCEP certified solar installer.Andy
Black is a recent member of the Board of Directors of the American Solar Heat Your Water From The Sun
1768 views
Energy Society andserved as Chapters Representative. He is also a member of
the Advisory Board of the NorthernCalifornia Solar Energy Association.Andy’s
formal education includes a Bachelor’s in Electrical Engineering from Penn ReportsnReports - Crystalline Solar
Photovoltaics PV Panel Systems
State University, aMaster’s in Electrical Engineering from University of
Market Shares…
Southern California, and a Marketing Certificateat the University of California. 1756 views
His training in solar electricity includes Solar Energy International’sintensive Heijunka iim ahmedabad-cleantech
1079 views
photovoltaic coursework and more than a dozen specialty courses in solar
electric and relatedfields. He presents regularly on the financial analysis of solar
electricity to audiences nationwide.Andy is also the groundskeeper and servant CSP Project Development
Conference and Expo
for a cat at his home in San Jose, CA.Contact Info: Andy Black, CEO OnGrid
615 views
Solar 4175 Renaissance Dr #4, San Jose, CA 95134 (408) 428 0808x1
andy@ongrid.net www.ongrid.net GTM/SEIA U.S. Solar Energy Trade
Balance Report 2011
3. INTRODUCTION TO Introductions & Thanks SOLAR FINANCING ! 913 views
Solar Power International ‘10 Andy Black ! Solar Electric Power Association
Solar Financial Analyst " Stuart Raper & Julia Hamm & Sales Software
Creator ! Yennie Solheim ! Andy Black, OnGrid Solar " Solar Financial
Analyst & OnGrid Tool Creator Solar Power International 2010 ! You for
coming! © 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 2
Quick Survey - Quick Survey - Who’s Here? ! Existing integrators / dealer /
installers Your Goals for Today? " Managers & Owners ! Learn about
economics for general knowledge ! Salesperson for integrator / dealer /
installer ! Want to use economics for selling / grow ! New or hopeful
integrators / dealers / installers business ! New or hopeful salespeople ! Want
to learn about / have the OnGrid Tool ! Government / Utilities ! Customers /
consumers / end users ! Want to increase your knowledge to develop !
Manufacturers your own tool ! Others? ! Who’s taken the Residential/Basic
Payback Class?© 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 3 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 4 Quick Survey - Area(s) of Interest? Instructor Background !
Came to learn specifically about: ! M.S. Electrical Engineering " Residential
Conventional Financing ! SEI graduate " Residential Lease & PPA
Financing ! NABCEP Certified Solar PV Installer Emeritus " Commercial
Lease Financing ! Involved with Solar since 1991 " Commercial PPA
Financing ! Studying, writing, & presenting about Solar " Use PPAs in selling
Financial Issues since 2000 " Create new PPA offering to market ! Solar
Salesperson 2001-2006 ! Other interests? ! Now a Solar Financial Analyst & !
Networking list? Creator of the “OnGrid Tool” solar sales software© 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 5 © 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 6
4. Handout Resource List Decorum Resources available at www.ongrid.net !
Questions: Please focus on Solar Economics & Payback ! Articles & papers on
solar “Payback” ! Good environment: ! Upcoming classes & events " Cell
phones to fun mode " Sales & Marketing for Solar " Side conversations: Yes or
No? ! Slides from past classes " Please help each other ! Free demos of the
OnGrid Tool ! Site Logistics & Breaks " Facilities " Lunch & 2 breaks:
Networking© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing -
7 © 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 8 Agenda
Basic Financing Principals ! Overview of Basic Financing Principals !
Residential Conventional Financing with ! Several ways to finance Unsecured
Loans & Home Equity ! Financing enables sales to those who can’t or ! PACE
& State Loan Programs won’t buy with their own cash ! Lease Basics &
Commercial Leases ! Good customer credit important (lately, critical) ! PPA
Basics & Commercial PPAs ! Financing makes sense when the project basic !
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4. Introduction to Solar Financing Page 4 of 112
Residential Leases & PPAs economics are favorable (good IRR) Questions
preferred at points marked: Questions? " Please focus on Financing &
Economics Questions?© 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 9 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 10 Ways to Finance Solar Sales Benefits of Financing +Reduced
Customer Risk - Benefits Shared with more Parties ! Offering Financing keeps
salesperson in control of - Cost to Consumer the sale ! PPA If the customer is
out looking for financing, you’ve +More Sales Control " ! Lease lost control of
the sale. " If you offer it, you can continue to control the sale. ! Loan ! Creates
more purchasing options, more chances at a ! Cash close ! Can use to
overcome objections ! Bringing the financing keeps you in control ! Gets
salesperson closer to decision maker & their (as much as you can in this
market!) real thinking© 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 11 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 12
5. Commercial Selling Realities Common Characteristics ! Only 3% of all
commercial quotes turn to sale ! Lower interest rate environment helps " Most
quotes are made to private companies # Can’t make >5 year commitment ! Can
improve initial customer cash flow " Salesperson doesn’t know tax &
accounting issues ! Requires good end-customer credit # Talks w/ building
manager, facilities, etc " Stricter credit environment hurts # 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 ! Gov’t,
Schools, some non-profits have long vision© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 13 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 14 “Good” or “Strong” Credit Risks in Solar
Finance ! Three C’s of Credit: " Credit scores & reports (Dun & Bradstreet) !
Compare to Real Estate " Collateral " Capacity or Cash Flow ! Residential:
FICO score ! Commercial: " >5 years in business " >$50 million revenue "
Positive trends (increasing revenue & profits) # Hard to find in 2009 & 2010 "
Standard ratios (cash flow, etc)© 2010 OnGrid Solar, All rights reserved. Intro
to Solar Financing - 15 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 16 Residential Rates of Return Requires Good IRR ! The basic
economics must be attractive ! What about non-profits & gov’t facilities? "
Economics are generally weak – no ITC " Use 3rd Party Financing (PPAs
mostly) " Need good IRR if analyzed as commercial© 2010 OnGrid Solar, All
rights reserved. Intro to Solar Financing - 17 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 18
6. Residential Rates of Return© 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 1 Commercial Rates of Return© 2010 OnGrid Solar, All
rights reserved. Intro to Solar Financing - 2
7. Commercial Rates of Return Commercially Attractive? ! IRR must exceed a
hurdle rate " > “Risk Free Rate” + ~1-2% = Risk Free Rate + Sum of Risks
(more later) # Source: Photon International, Aug 2007, p114 ! “Risk Free”
interest rates: " 1 Year LIBOR ~ 0.8% As of September 2010 " Treasury: 10yr
= 2.5%, 30yr = 3.4% As of 10/4/2010 ! ! Commercially Attractive >= 4-6%?©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 19 © 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 20 Residential
Conventional Financing ! Unsecured Loan Addison Avenue FCU: 5.25%, 5
year, $5-50K Residential Conventional " Real Estate Secured Loan Financing
with Unsecured ! " Lowest interest rates (usually) Loans & Home Equity "
Tax deductible interest " HUD EEMs - Energy Efficiency Mortgages " “Home
Equity Loans” & “Home Equity Line of Credit” (HELOC) # E.g. New
Resources Bank© 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 21 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 22 Cash Flow Cash Flow with Loan ! Residential system offsetting
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5. Introduction to Solar Financing Page 5 of 112
a large ! Compares the savings on the utility bill bill with the cost of financing
the system ! 8% 20 year loan ! At today’s rates (~5-8%) and including ! Many
Systems are rebate benefits, cash flow is often cash positive from positive
immediately Year 0 " Cost of borrowing is less than savings on ! Spike is
Inverter electric bill Replacement Cost " Stabilizes long term utility costs©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 23 © 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 24
8. Solar Mortgage Cash Flow Analysis ! Like buying vs. renting, but better !
Calculate net cash required to buy ! House costs more up front " This is the
amount to be financed " Pays off over time ! Calculate monthly loan
payments ! Solar costs less up front " Based on loan rate, term & amount "
Pays off immediately & over time ! Subtract tax savings if loan interest is tax !
Protects against inflation deductible. This is net monthly loan cost. ! Savings
grow over time ! Compare net loan cost to after tax value of net electric bill
savings (incl. maintenance)© 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 25 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 26 How Much To Borrow? Alt. 3: “Smart Financing” ! Efficient
pay-down of principal using tax benefits when ! How much should customer
borrow? received (using Line Of Credit - business or home equity) ! Alt. 1: Net
Cost after Rebate & Grants? ! Find ‘payment’ amount that pays off evenly over
term " Once ITC is received, have cash sitting around " Lower payments than
amortizing full “after-rebate amount” " Inefficient & expensive " Higher
payments than only amortizing the net “after-rebate, ! Alt. 2: Net Cost after All
Incentives (including tax after-tax-benefits amount” credits, depreciation, PBIs,
etc.)? ! No cash out of pocket waiting for ITC " Requires a bridge loan until
tax benefits & PBIs are " Doesn’t require ‘bridge loan’ received " Realistic
presentation of customer costs " Optimistically low monthly loan cost ! No
excess interest paid on “un-used” money " Doesn’t weaken sales presentation©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 27 © 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 28 Commercial
Cash Flow Commercial Cash Flow Options ! High Cost Loan: Starting
Principal = Net Costs w/ Solar Utility Costs w/! Typical “Gross - Rebate” with
High Cost Loan o Solar Commercial System Loan ! Optimistic* Loan:! X% Y
year loan $25,000 Net Annual Savings Starting Principal = $20,000 “Gross -
Rebate - ITC - Depreciation” $15,000 Utility Costs w/ $10,000 o Solar
*Customer needs Net Annual Savings $5,000 $0 1 2 3 4 5 6 7 8 9 10 11 12 13
14 15 16 17 18 19 20 21 22 23 24 25 bridge loan until tax Net Costs w/ Solar
savings realized -$5,000 Year with Optimistic Loan -$10,000© 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 29 © 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 30
9. “Smart Financing” Timeline LOAN: Year:LOAN: Loan Balance Year: . 0
70,182 1 45,816 2 36,723 3 30,165 4 25,045 5 19,515 6 14,996 0 1 2 3 4 5
6Loan Balance Payment (monthly) 70,182 45,816 36,723 30,165 25,045 (356)
19,515 (356) 7 14,996 11,594 8 (356) 7,919 9 3,951 10 (356) 11 (356) (356)
(356)Payment (monthly) Interest (portion of payment) Paid (356) (356) (356)
(356) (356) (356) (356) (305) (356) (245) (356) (356) (201) (356) (167) (130)
(100)Paid Interest (portion of payment) (356) (305) (245) (201) (167) (130)
(100) (77) (53) (26)Unpaid Interest (added to Interest (added to loan principal)
Unpaid loan principal) (112) (112) Tax Deduction Benefit (monthly)Tax
Deduction Benefit (monthly)Net Monthly Loan Cost 205 (150) 134 (222) 107
(248) 88 (267) 73 205 57 (282) (298) 134 44 (312) 34 (322) 10723 (332) 12
(344) 88 73 57 44 Net Monthly Loan CostNet Tax Benefit Received (put
towards paying down 25,714 8,493 5,230 3,267 3,267 (150) 1,814 (222) 336
336 (248) 336 336 (267)336 (282) 336 (298) (312)the next years principal) Net
Tax Benefit Received (put towards paying downNet Annual Electric Bill before
Solar (with tax effects 25,714 8,493 5,230 3,267 3,267 1,814 336& including
Lifestylenext years principal) the changes, but not Energy 2,388 2,507 2,632
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6. Introduction to Solar Financing Page 6 of 112
2,764 2,902 3,047 3,199 3,359 3,527 3,704 3,889 4,083Efficiency) Net Annual
Electric Bill before Solar (with tax effectsNew Net Annual Energy Cost (with
tax effects,including new& including Lifestyle changes, 755 electric bill,
maintenance, inverter but not Energy 800 847 897 9502,388 1,006 2,507 1,065
1,127 2,632 1,193 2,764 1,262 1,336 2,902 1,414 3,047 3,199replacement)
Efficiency)Net New Annual Cost (Loan plus New Net Energy 2,560 3,459
3,825 4,105 4,337 4,587 4,805 4,986 5,181 5,391 1,336 1,414Cost) New Net
Annual Energy Cost (with tax effects,Cash Flow (annual) (Old less new electric
bill, maintenance, inverter including New Net Costs) (172) (952) (1,193)
(1,341) (1,435) 755 (1,540) 800 (1,627) (1,605) 847 (1,654) (1,687) 897 2,553
950 2,670 1,006 1,065 replacement)Cash Flow (monthly) (14) (79) (99) (112)
(120) (128) (134) (136) (138) (141) 213 222ACCUMULATED 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) Net New Annual Cost (Loan plus New Net Energy
2,560 3,459 3,825 4,105 4,337 4,587 4,805 Cost) Cash Flow (annual) (Old less
New Net Costs) (172) (952) (1,193) (1,341) (1,435) (1,540) (1,605) Cash Flow
(monthly) (14) (79) (99) (112) (120) (128) (134) ACCUMULATED LOAN
CASH FLOW: . (172) (1,124) (2,317) (3,658) (5,094) (6,633) (8,239) © 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 3 “Smart
Financing” Timeline LOAN: Year: 0 1 2 3 4 5 6 Loan Balance 70,182 45,816
36,723 30,165 25,045 19,515 14,996 Payment (monthly) (356) (356) (356)
(356) (356) (356) (356) Paid Interest (portion of payment) (356) (305) (245)
(201) (167) (130) (100) Unpaid Interest (added to loan principal) (112) Tax
Deduction Benefit (monthly) 205 134 107 88 73 57 44 Net Monthly Loan Cost
(150) (222) (248) (267) (282) (298) (312) Net Tax Benefit Received (put
towards paying down 25,714 8,493 5,230 3,267 3,267 1,814 336 the next years
principal) Net Annual Electric Bill before Solar (with tax effects & including
Lifestyle changes, but not Energy 2,388 2,507 2,632 2,764 2,902 3,047 3,199
Efficiency) New Net Annual Energy Cost (with tax effects, including new
electric bill, maintenance, inverter 755 800 847 897 950 1,006 1,065
replacement) Net New Annual Cost (Loan plus New Net Energy 2,560 3,459
3,825 4,105 4,337 4,587 4,805 Cost) Cash Flow (annual) (Old less New Net
Costs) (172) (952) (1,193) (1,341) (1,435) (1,540) (1,605) Cash Flow (monthly)
(14) (79) (99) (112) (120) (128) (134) ACCUMULATED LOAN CASH
FLOW: (172) (1,124) (2,317) (3,658) (5,094) (6,633) (8,239) © 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 4
10. Smart Financed Commercial Cash Flow “Smart Financing” Timeline!
“Smart Financed” LOAN: Year: Loan Timeline New Net Cost: Loan, New Bill,
Maintenance, etc. LOAN: Loan Balance Year: . 0 70,182 1 45,816 2 36,723 3
30,165 4 25,045 5 19,515! No bridge loan Loan Balance Payment (monthly)
Payment (monthly) Interest (portion of payment) Paid 0 70,182 (356) 1 45,816
(356) 2 36,723 (356) 3 30,165 (356) 4 25,045 5 (356) 19,515 (356) (356) (356)
6 (356) 7 14,996 11,594 8 (356) 7,919 (305) (356) (245) (356) (356) 9 3,951 10
(356) (201) (356) 11 (356) (167) (356) (130) needed Utility Bill w/o Solar Paid
Interest (portion of payment) Unpaid Interest (added to Interest (added to loan
principal) Unpaid loan principal) Tax Deduction Benefit (monthly) Tax
Deduction Benefit (monthly) (356) (112) 205 (305) 134 (245) 107 (201) 88
(167) (130) (112) 73 205 57 (100) 134 44 (77) 34 107 (53) 23 (26) 12 88 73 57
Net Monthly Loan Cost (150) (222) (248) (267) (282) (298) (312) (322) (332)
(344)! Not optimistic - Net Monthly Loan Cost Net Tax Benefit Received (put
towards paying down the next years principal) 25,714 Net Tax Benefit
Received (put towards paying down Net Annual Electric Bill before Solar (with
tax effects 8,493 5,230 3,267 3,267 (150) 25,714 1,814 (222) 336 8,493 336
(248) 336 5,230 336 (267) 3,267 336 (282) 336 3,267 (298) 1,814 fair to the &
including Lifestylenext years principal) Efficiency) the changes, but not Energy
2,388 Net Annual Electric Bill before Solar (with tax effects 2,507 2,632 2,764
2,902 3,047 3,199 3,359 3,527 3,704 3,889 4,083 customer New Net Annual
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7. Introduction to Solar Financing Page 7 of 112
Energy Cost (with tax effects, & including Lifestyle changes, 755 not Energy
but including new electric bill, maintenance, inverter800 847 897 2,388 950
1,006 2,507 1,065 1,127 2,632 1,193 2,764 1,262 1,336 2,902 1,414 3,047
replacement) Efficiency) Net New Annual Cost (Loan plus New Net Energy
Assumes customer 2,560 3,459 3,825 4,105 4,337 4,587 4,805 4,986 5,181
5,391 1,336 1,414 Cost)! New Net Annual Energy Cost (with tax effects,
including new electric bill, maintenance, inverter 755 800 (1,627) 847 897 950
1,006 will be efficient w/ Cash Flow (annual) (Old less New Net Costs) (172)
(952) (1,193) (1,341) (1,435) (1,540) (1,605) (1,654) (1,687) 2,553 2,670
replacement) Cash Flow (monthly) (14) (79) (99) (112) (120) (128) (134) (136)
(138) (141) 213 222 tax benefits 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) Net New Annual Cost (Loan plus New Net Energy 2,560
3,459 3,825 4,105 4,337 4,587 Cost)! Interest Tax Cash Flow (annual) (Old
less New Net Costs) (172) (952) (1,193) (1,341) (1,435) (1,540) Benefit Drops
so Cash Flow (monthly) (14) (79) (99) (112) (120) (128) Net Cost Rises Net
Annual Savings / Cost ACCUMULATED LOAN CASH FLOW: . (172)
(1,124) (2,317) (3,658) (5,094) (6,633)© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 31 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 32 Commercial “Smart Financing” Timeline
Cash Flow 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 25,714 8,493 5,230 3,267 3,267 1,814 336 336 336
336 336 336 the next years principal) Net Annual Electric Bill before Solar
(with tax effects & including Lifestyle changes, but not Energy 2,388 2,507
2,632 2,764 2,902 3,047 3,199 3,359 3,527 3,704 3,889 4,083 Efficiency) New
Net Annual Energy Cost (with tax effects, including new electric bill,
maintenance, inverter 755 800 847 897 950 1,006 1,065 1,127 1,193 1,262
1,336 1,414 replacement) Net New Annual Cost (Loan plus New Net Energy
2,560 3,459 3,825 4,105 4,337 4,587 4,805 4,986 5,181 5,391 1,336 1,414
Cost) 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)© 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 33 © 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 34 Smart Financed Residential
Residential Cash Flow Utility Bill w/o Solar Cash Flow ! 4 kW New Net Cost:
Loan, New Bill, Maintenance, etc. residential system ! 8% 20 year “Smart
Financed” Loan Net Annual Savings / Cost ! No bridge loan needed© 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 35 © 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 36 Examples
11. Commercial Cash Flow© 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 5 Residential Cash Flow© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 6
12. Agenda Cumulative Cash Flow ! 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© 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 37 © 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 38Examples PACE / Community
Financing Programs ! PACE: Property Assessed Clean Energy Property
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8. Introduction to Solar Financing Page 8 of 112
Assessed Clean ! PV system financing thru property tax assessment Energy
(PACE) Financing " 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© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 39 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 40 Property Assessed Clean Energy (PACE)
PACE / Community Financing Programs (Berkeley FIRST, AB811)
www.dsireusa.org / October 2010 ME: 2010 OR: 2009 MN: 2010 NY: 2009
NH: 2010 VT: 2009 ! PACE Examples / in progress: 20 year, fixed interest
rates, tax deductible interest WI: 2009 " NV: 2009 CO: 2008 IL: 2009 OH:
2009 MD: 2009 # Berkeley FIRST: ~7.75% as of 3/2009 DC DC: 2010 " Palm
Desert CA, Santa Fe, Albuquerque, Austin, CA: 2008 VA: 2009 MO: 2010
NM: 2009 OK: 2009 NC: 2009 Babylon NY, San Diego, San Francisco TX:
2009 LA: 2009 GA: 2010 ! State level initiatives: 23 states + DC " CT, MD,
OR, TX, VT, VA, WI, … FL: 2010 authorize PACE (22 HI: Existing states
have passed " AB 811 allows all towns in CA to do same Authority legislation
and HI PACE financing authorized by the state* permits it based on " Listed in
DSIRE: http://www.dsireusa.org *The Federal Housing Financing Agency
(FHFA) issued a statement in July 2010 concerning the existing law) senior lien
status associated with most PACE programs. In response to the FHFA
statement, most local PACE programs have been suspended until further
clarification is provided. ! Interest nationwide - U.S. D.O.E. PACE Initiative ©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 42
13. Property Assessed Clean Energy (PACE) www.dsireusa.org / October 2010
ME: 2010 MN: 2010 NH: 2010 NY: 2009 OR: 2009 VT: 2009 WI: 2009 NV:
2009 OH: 2009 MD: 2009 IL: 2009 CO: 2008 DC DC: 2010 CA: 2008 VA:
2009 MO: 2010 NC: 2009 NM: 2009 OK: 2009 GA: 2010 TX: 2009 LA: 2009
23 states + DC FL: 2010 authorize PACE (22 HI: Existing states have passed
Authority legislation and HI PACE financing authorized by the state* permits it
based on*The Federal Housing Financing Agency (FHFA) issued a statement in
July 2010 concerning the existing law)senior lien status associated with most
PACE programs. In response to the FHFA statement, mostlocal PACE
programs have been suspended until further clarification is provided. State Loan
Programs for Solar Projects www.dsireusa.org / September 2010 U U U U U U
U U U U DC U U U U U U 29 states + USVI Loan Programs for Solar Projects
U.S. Virgin Islands offer loans for U Utility Incentive(s) solar projects
14. PACE Status ! Currently stalled almost everywhere " FHFA currently
blocking PACE activities State / Utility Loan Programs ! State lawsuits against
FHFA ! Legislation pending to allow PACE to continue ! … Stay Tuned.
Follow at the DSIRE database: www.dsireusa.org , VoteSolar.org© 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 43 © 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 44 State Loan Programs for
Solar Projects NJ - PSE&G Utility Loan Program www.dsireusa.org /
September 2010 U ! Residential: 6.5%, 10 year term ! Non-Residential: 11.3%,
15 year term U U U U U U U ! Typically 40-60% of system value U U DC !
Repayment via either: U U U U " SRECs (minimum value 35.0¢/kWh to 43.5¢/
U kWh based on size) U 29 states + " Cash USVI " Can change once per year
Loan Programs for Solar Projects U.S. Virgin Islands offer loans for U Utility
Incentive(s) solar projects © 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 46 Agenda Example State Loan Programs ! Texas Schools,
Local Government, State ! Overview of Basic Financing Principals
Government, Hospitals ! Residential Conventional Financing with " 3%, Must
have ~10 year average term Unsecured Loans & Home Equity ! PACE &
State/Utility Loan Programs ! Oregon: All Sectors ! Lease Basics &
Commercial Leases " $20K to $20 Million, 5-15 year terms ! PPA Basics &
Commercial PPAs ! For loans in other states see the DSIRE ! Residential
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9. Introduction to Solar Financing Page 9 of 112
Leases & PPAs database: www.dsireusa.org© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 47 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 48
15. Sales Tip ! Failure to “sign” is not likely due to price ! Suggest don’t even
quote a system price 3rd Party Financing of " Only quote a monthly payment
Solar Projects ! 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 "
Then comparable to current expense© 2010 OnGrid Solar, All rights reserved.
Intro to Solar Financing - 49 © 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 50 3rd Party Financing Options For Solar ! Leases - Ways of
paying for ownership and/or use over 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 Leases 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©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 51 © 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 52 Returns for
Lessors CHECK W/ Baker & DaveLeases Clamage Check examples for
Typical cases too ! Was in ~6%-9% range before financial crisis, Ask for real
examples ! Several Types now in the low- to mid-teens " Finance / Capital
Lease ! Less money now available, so higher returns for those willing to deal "
True / Tax / Operating Lease " Tax-Exempt Lease Purchase ! Requires: "
Lessees with best credit ! Thanks: " Gene Beck, EnviroTech Financial "
Limited project risk " Baker Davenport, Davenport Group " Low transaction
costs via standard terms and " Scott Young, Sentry Financial “conforming”
projects© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 53
© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 54
16. What is a Lease Widely Used ! Finance contract between 2 parties ! Solar
Leases similar to other asset leases " Lessor & Lessee ! Well established
market " Vendor connects the 2 parties " 80% of companies and gov’t agencies
use leasing, rather than owning, for at least some ! Looks like either a loan or a
rental of their equipment ! Ability to transfer ownership benefits " Some
companies only use leasing, rather than " For Tax or Accounting purposes
purchasing ! Specified term & payment ! Lessor = Owner of system ! Lessee
= User (“renter”) of system© 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 55 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 56 Lease “Flow” & Parties Benefits of a Lease Lessor ! Terms
more flexible than a purchase Lease Payments ! Allows for 100% financing PV
System " Covering freight, maintenance, fees, … # Which might not be
allowed in a loan Purchase Payment ! Doesn’t tie up capital and/or effectively
stretches Use of System line of credit " Considered “Off Balance Sheet” Initial
“sales” interaction Info on leasing resources " Keeps bank line of credit free
Lessee Vendor ! Solves AMT problems ! Can include Energy Efficiency
measures© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing -
57 © 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 58
Lease vs. Loan 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 business are
or will become subject to AMT if they go solar: " MACRS Depreciation on
solar can cause limitation " Solar ITC no longer causes a problem - AMT
relief ! Tax Equity Investors (banks) not usually affected by AMT, so have a
tax “appetite” and can offer *courtesy Conergy Commercial Financing
presentation by Baker investment $ to get tax benefits others can’t use
Davenport & Tim Pedersen, Rockwell Financial Group© 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 59 © 2010 OnGrid Solar, All
rights reserved. Intro to Solar Financing - 60
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10. Introduction to Solar Financing Page 10 of 112
17. Lease vs Loan Cost: Lease Term Set By: ! Loan/Cash: 100% Principal !
Price of project - larger is better " + Interest (or Time Value of Money if Cash
Purchase) ! Credit of customer " - ITC (30% if available) ! Structure of the
deal " - 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 (60% minus
~50%) difference is the Lessor’s profit© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 61 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 62 Finance / Capital Lease Capital Lease
Typical Terms ! 5 year, $100-150K ! Same as bank loan ! 7 year, $500K !
Fully amortizing or with balloons ! Over 8yrs will have a longer amortization
period, but with a 7 year due date ! Lessee gets tax credit & depreciation "
Banks don’t lend over 7 yrs unsecured ! Interest is deductible # Ie. w/o cash,
real estate, or marketable securities ! Most commonly utilized for energy
projects ! 8 year, $1MM, 5-7 year due date (7 w/ balloon) ! 10 year typical
max, 7 year due date " Not useful for solar projects needing to ! Limits: Longer
= higher risk transfer tax benefits to Tax Equity Investor ! Easiest lease to
create wrt due diligence " Typically 2 page agreement plus boilerplate© 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 63 © 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 64 Accounting vs. Taxes
Operating Lease wrt True & Operating Lease (Accounting Perspective) ! Two
perspectives when reviewing leases ! Rental contract w/ fixed terms &
conditions " Tax vs. Accounting ! Lower effective interest rate than capital
lease " Two different sets of books & calculations " Lessor gets depreciation &
tax credits ! Accounting: must meet FASB 13 rules " Payments ~40% lower
for solar than capital lease " FASB - Financial Accounting Standards Board !
Lessee expenses monthly payments ! Tax: must meet IRS rules ! Lease
considered “off balance sheet” ! Most solar leases are " Operating Leases for
accounting purposes ! This is the typical accounting treatment of an True "
True Lease / Tax Leases for tax purposes Tax / Tax Lease© 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 65 © 2010 OnGrid Solar, All
rights reserved. Intro to Solar Financing - 66
18. True Lease / Tax Lease True / Operating / Tax Lease CHEC Check (Tax
Perspective) Typical Terms Ask f ! Rental contract w/ fixed terms &
conditions ! E.g.: $500K+, 80kW+ system (as of 5/23/09) ! Lessee expenses
monthly payments ! Preferred: $3MM, 500kW+ system Get e ! Available to
non-profits & gov’t entities " 5-7-10yrs on strong credit for smaller projects To
se " ~10-15yrs on very strong credit & larger projects " Can do, but no transfer
of tax benefits # Credit requirements have gone up in 2009 " Use Tax Exempt
Lease Purchase ! End of lease: ! This is the one used for solar projects
suffering " Purchase equipment at Fair Market Value (more later) from AMT
tax benefit limits " Extend lease for add’l 12-60 months at fixed rental rate !
This is how Operating Leases are treated from Tax # Repeat indefinitely or sell
perspective " Return equipment to Lessor in good condition© 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 67 © 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 68 Cash Benefits of CHECK W/
Gene & Dave Clamage Operating Lease Docs Check examples for Typical
cases too True & Operating Leases Ask for real examples ! More difficult,
more due diligence than Capital Lease, ! Lessor offers lower monthly cost of
solar Less than PPA Get examples of Common lease because of and processing
costs system to end user paperwork enjoyed tax ! 10-15 pages basic lease:
benefits To set up a deal " 5% custom language, 95% boilerplate ! Lessor gets
lower taxes " Roof lease " Waivers ! Lessee gets lower cost PV system (lower
" Terminal Value Schedule & Purchase payments) " Master Lease, Equipment
Schedule " + other docs " = total of ~15-30 pages© 2010 OnGrid Solar, All
rights reserved. Intro to Solar Financing - 69 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 70 Loan Lease Payment Options Electric
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11. Introduction to Solar Financing Page 11 of 112
Bill Various Leases Loan Electric Bill ~50% are Cash Positive in 2009 w/
Lease Larger more likely to be cash positive if over 10 years© 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 71 © 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 72
19. True & Operating Lease Term Purchase Options: FMV ! Best IRS clarity:
purchase >6 years for FMV ! Typically >= 6 years to get all depreciation "
May be okay to have limited purchase options benefit and vest all of the tax
credit at set anniversaries at FMV " Should not be open ended option ! End of
Lease options: ! Fair Market Value (FMV) " Purchase at greater of Fair Market
Value (FMV)* or predetermined price " Best IRS clarity: Determined by
independent appraiser at time of exercise " Return to Lessor upon notice " May
be okay to come to agreement among " Auto-renewal for shorter term parties at
time of exercise *Critical to avoid tax violation " Should not be bargain fixed
price© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 73 ©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 74 Typical
Lease Terms Tax Exempt Lease Purchase ! Lease can’t exceed 80% of life of
asset ! Primarily for State & Local governments " Must have a residual value "
Includes public schools & universities ! Lessor owns, but takes no operating
risk " Longer terms: 10-20 yrs by project size (>20kW) " Hell or high water -
Lessee must pay for system ! Current debt obligation for lessee regardless of
performance " Incentive on Lessee to maintain system ! Non-profits qualify for
larger projects (> $1MM) ! Property tax, insurance, maintenance is " Must
have gov’t sponsor responsibility of lessee ! Special structuring - more
“complicated” lease ! May require tax indemnity if tax benefits aren’t ! “Tax
Exempt” means the lessor doesn’t pay Fed tax transferable to Lessor on income:
Reduces interest ~ 300 basis points© 2010 OnGrid Solar, All rights reserved.
Intro to Solar Financing - 75 © 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 76 Non-Profits w/o Gov’t Sponsors Lease Contract Costs !
Non-Profits not eligible for True / Operating ! Were long & complicated (50-60
pages and Leases $10Ks) " Can’t pass tax benefits to lessor " Now have 8-9
page standard lease agreements " Instead - Capture via a 3rd party ownership
structure: PPA ! Need a common set of terms " Current diversity of lease
names & approaches confuses & slows the sale " Increases sales cost© 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 77 © 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 78
20. Get Lessor, Lender or Financing Options For Solar Broker Involved Up
Front ! They can help present and sell the deal - ! Leases - Ways of paying for
ownership and/or include them early on use over time, having tax and/or cash
flow ! Helps and increases sales person’s control benefits during term, usually
with intention of purchasing or renewing at the end ! Helps get the right
questions asked up front " Speeds the sale ! PPAs - Power Purchase
Agreements - Paying for just the energy if/when delivered " Or determines
early that this is a no-go " Determine which type is best© 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 79 © 2010 OnGrid Solar, All
rights reserved. Intro to Solar Financing - 80 Power Purchase Agreement -
PPA ! A Type of Offering or Proposal " Contract for the sale of energy (kWh)
PPAs " 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© 2010 OnGrid Solar, All rights reserved.
Intro to Solar Financing - 81 © 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 82 3rd-Party Solar Power Purchase Agreements (PPAs)
www.dsireusa.org / July 2010 Parties to the Transaction ! Agreement between
" PPA Provider / Vendor aka “Developer” Off-Taker / End User of Energy UT:
limited to certain sectors " AZ: limited to NM: effective " Building Owner
(might be End User) certain sectors 1/1/2011 At least 17 states + PR " System
Vendor / Installer / Integrator authorize or allow 3rd-party " 3rd Party Investor /
Financier (might be solar PPAs Authorized by state or otherwise currently in
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12. Introduction to Solar Financing Page 12 of 112
use installer and/or Developer) Apparently disallowed by state or otherwise
restricted by legal barriers Status unclear or unknown Puerto Rico Note: This
map is intended to serve as an unofficial guide; it does not constitute legal
advice. Seek qualified legal expertise before making binding financial decisions
related to a 3rd-party PPA. See following slide for authority references. © 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 84
21. 3rd-Party Solar Power Purchase Agreements (PPAs) www.dsireusa.org /
July 2010 UT: limited to certain sectors AZ: limited to NM: effective certain
sectors 1/1/2011 At least 17 states + PR authorize or allow 3rd-party solar PPAs
Authorized by state or otherwise currently in use Apparently disallowed by
state or otherwise restricted by legal barriers Status unclear or unknown Puerto
Rico Note: This map is intended to serve as an unofficial guide; it does not
constitute legal advice. Seek qualified legal expertise before making binding
financial decisions related to a 3rd-party PPA. See following slide for authority
references. PPA “Flow” PPA Developer PPA Investment Cash Financier /
Vendor ROI & Tax Benefits / Investor Monthly Energy PV System Building
Access / Payments Maintenance kWh Purchase Energy Payment Permission
Building Occupant / System Owner Off-Taker / Vendor/Installer Energy User©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 10
22. PPA “Flow” PPA Developer Investment Cash PPA Financier Party
Responsibilities / Vendor ROI & Tax Benefits / Investor ! Developer (might
also be installer) oversees: Monthly " Construction Energy " Operation &
maintenance of equipment Building PV System Access / Payments
Maintenance kWh Purchase " End User & Investor relationships & payments
Energy Payment " Execute the 80-100 ‘To Do’ items ! End-User Permission "
Receives energy from system Building Occupant / System Owner " Makes
predetermined payments for energy if/as it is Off-Taker / Vendor/Installer
Energy User produced© 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 85 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 86 Financier-Developer Relationships Sale-Leaseback ! Financier
is Tax Equity Investor ! Property Sold to Tax Equity Investor & " Has Tax
appetite Leased back to Developer/Operator " Doesn’t want to build or operate
projects - " Important that this lease is back to the same needs
developer/operator party that placed the property in service ! Sale-Leaseback or
Partnership-Flip " Tax benefits stay w/ Tax Equity Investor© 2010 OnGrid
Solar, All rights reserved. Intro to Solar Financing - 87 © 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 88 Partnership-Flip Sale-
Leaseback Time Flexibility ! Tax Equity Investor & Developer/Operator are !
Allows “Place-In-Service” date up to 3 months partners with unequal
ownerships before closing Sale-Leaseback " For initial period, Tax Equity
Investor owns 99% " More time flexibility in getting financing (max) and
receives 99% of benefit (tax and income) ! To qualify, delay In-Service as
needed: until “target” return is achieved " Construction completion # Must be
>5 years for full vesting of ITC " Asset conveyance " Entering second phase,
ownership “flips” so that # Sale to Tax Equity Investor Developer/Operator
owns up to 95%. # Use of asset by site user " Developer/Operator can buy
remaining share at FMV (or more, FMV decided at that future date) " Permits
signed off " Testing and customer signoff© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 89 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 90
23. Sale-Leaseback Benefits & Drawbacks End-User/Off-Taker Benefits + 3
extra months to close financial of deal ! No up-front costs, down payment or
deposit + 100% Tax Benefit Capture (vs. 99%) required ! Lower initial energy
costs - No “Limited Use” property (can’t be removable) ! Potentially lower
long term energy costs - 80% of useful life limit on lease term ! Future discount
purchase of system - Repurchase at end of term more expensive ! Reduced PV
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13. Introduction to Solar Financing Page 13 of 112
cost even if no tax appetite - Tax Indemnity required - Developer/Operator can’t
be a non-profit© 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 91 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 92 Energy Expense Comparison Investor/Owner Benefits !
Guaranteed stream of income from energy Utility Electric Rate including
estimated escalation at 5% sold 15¢ ! Tax benefits Cost 14¢ PPA Electric Rate
including Per contracted escalation at 3% ! No inflation/escalation risk kWh !
Keep or sell Green Tags / RECs 2007 2017 2027 Year© 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 93 © 2010 OnGrid Solar, All
rights reserved. Intro to Solar Financing - 94 User Energy and Performance
Terms Capacity Payments ! Most are Energy Payments only: $/kWh !
Performance Guarantees delivered " Annual & Project life " Sometimes
indexed to electric or gas markets " Actual Energy / Power delivered ! Some
also include a “Capacity” payment " Efficiency & Availability of Equipment "
Fixed $/kW/month based on average “availability” of PV equipment !
Liquidated Damages for failure to perform / " Comparable to Demand Charges
provide power or energy # Depends on profile # Recover some lost hidden
value© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 95 ©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 96
24. Performance Terms cont’d End User Risks PPA Electric Rate including !
REC / Green Tag ownership contracted escalation at 3% 15¢ " Usually retained
by system owners Cost 14¢ Per Utility Electric Rates may not rise or stay "
Potentially valuable as AB32 kicks in kWh above PPA Contract Rate !
Metering " Costs & Billing Systems 2007 2017 2027 Year ! Rights to Excess
Power ! Inverse of Electricity Escalation " If rates don’t rise, might cost more
" Use of and Value ! Might not get Green Tags/RECs " Additional cost if
desired© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 97
© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 98 2010
Average Upside Down Deals? Residential Electric Rates & Escalation (West,
partial) 14¢ PPA Electric Rate including 2008 U.S. Average Retail Price per
kWh is 9.74 Cents Cost contracted escalation at 3% Per 13¢ kWh Utility
Electric Rates assumed to rise at 5% and eventually go above PPA Contract
Rate ! Why take 10 years of guaranteed losses to maybe get 10 2007 2017 2027
Year future years of savings (consider Time Value of Money)? ! Is the hedge
worth that much? " Chances of rates not rising at 5%? Average Retail Price
(Cents per Kilowatt-hour) " U.S. Average: Rates Grew 3.8% /yr from 2001-
2010 " Large 2009 U.S. Natural Gas discoveries may limit escalation Source:
DOE Energy Information Administration.© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 99 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 100 *+,-+."/"&01" California Electric Rates
asa s Residential 1970 to 2001 plus 2001 to 2010 tiers asf sf • Deregulation in
1995 froze Tier 1 & 2 • AB1X during 2001 Power Crisis created Tier asdf
23+4"&"5"67"&%1" Investor/Owner Risks 3-5, which have risen 5x faster than
‘average’ f 23+4"87"#01" rates needed to rise to compensate for Tier 1&2
System Performance f • SB 695 (Kehoe) unlocks and raises Tier 1 & 2 ! rates
1% faster than ‘average’, up to 5% per year " Maintenance over 15+ years •
Tier 3,4,5 might now drop )$%" df ! End-User default or vacancy of property )
&$%" 23+4"#7")8$61" Good credit end-users required !"#$%&"(&)*+,-./01,2
(& Residential asf 23+4")7"))$01" " )#$%" a *95:"#%)%" )%$%" ($%" 1982
sdf " Require host supply another site or pay term. Fee $%" Be cautions about
" Lots of “due diligence” required - high transaction &$%" future rate hikes –
#$%" 2-3% max costs !" 9:;8& 9:<7& 9::=& 9::<& 3456&7889& 23+4"67"#1"
3456&7898& 23+4"67"&01" ! Incentive Receipt Certainty 23+4"&7"#&1"
23+4"&7"&)1"Source: California Public Utilities Commission, EIA, PG&E
23+4"87");1" 23+4"#7")81" 23+4"87"#;1" 23+4"#7")81" " Must have
confirmation of qualification/allocation "#$#1" <+=3.+>?,@" ";$;1" "))$1" "))
$81"" 23+4")7"))1" 23+4")7"))$61"© 2010 OnGrid Solar, All rights reserved.
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14. Introduction to Solar Financing Page 14 of 112
Intro to Solar Financing - 101 © 2010 OnGrid Solar, All rights reserved. Intro
to Solar Financing - 102
25. 2010 Average Residential Electric Rates & Escalation (West, partial) 2008
U.S. Average Retail Price per kWh is 9.74 Cents Average Retail Price (Cents
per Kilowatt-hour) Source: DOE Energy Information Administration.© 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 11 *+,-+."/"&01"
California Electric Rates asa s Residential 1970 to 2001 plus 2001 to 2010 tiers
asf sf asdf • Deregulation in 1995 froze Tier 1 & 2 23+4"&"5"67"&%1" •
AB1X during 2001 Power Crisis created Tier 3-5, which have risen 5x faster
than ‘average’ f 23+4"87"#01" rates needed to rise to compensate for Tier 1&2
f • SB 695 (Kehoe) unlocks and raises Tier 1 & 2 rates 1% faster than
‘average’, up to 5% per year • Tier 3,4,5 might now drop )$%" df )&$%"
23+4"#7")8$61" !"#$%&"(&)*+,-./01,2(& Residential asf )#$%" a 23+4")7"))
$01" *95:"#%)%" )%$%" 1982 sdf ($%" $%" Be cautions about &$%" future
rate hikes – #$%" 2-3% max !" 9:;8& 9:<7& 9::=& 9::<& 3456&7889&
3456&7898& 23+4"67"#1" 23+4"67"&01" 23+4"&7"#&1" 23+4"&7"&)
1"Source: California Public Utilities Commission, EIA, PG&E 23+4"87");1"
23+4"87"#;1" 23+4"#7")81" 23+4"#7")81" "#$#1" <+=3.+>?,@" ";$;1" "))$1"
"))$81"" 23+4")7"))1" 23+4")7"))$61"© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 12
26. Investor Access to Tax Benefits PPA Contract Documents ! Tax Equity
investor must have “unfettered” use of ! Total: 100-200+ pages valuable asset
after deal is over ! Standard Off-taker Contract Segments: " Will panels still be
valuable in 15+ years? " The PPA: 20-35p " Value can’t be stated now - must
be set at that time # Sale of Power/Energy: Output vs. Requirements " Term
can’t go over 80% of “useful life” # Metering & REC ownership ! Must not be
“Limited Use” or “Personal” property " Installation Contract: 20-50p w/
exhibits " Must be “attached” and not easily moved - non- # Equipment Supply
& Construction penetrating systems? " Operations & Maintenance Agreement:
10-15p ! Purchase Options: Fair Market Value (FMV) only " Site Lease gives
provider rights & protections " Dates can be set, but not value # O&M Access;
Transfer to new site owners© 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 103 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 104 PPA Contract Costs PPA Developer & ! High (long &
complicated) but dropping Investor Contract Documents rapidly for “generic”
& standard ! Additional agreements for Developer & Investors " Basic
Standard Agreements: $3K-20K " LLC w/ Partnership Flip: 40p + 15p exhibits
including tailoring w/ desired terms " Purchase Agreement: 24p + 7p of
“definitions” ! Moving to pre-approved deal checklists ! Covers the multi-year
legal structure to allow Tax ! SolarTech.org “Standard PPA” Equity Investor to
reap tax benefits as 99% initial " $395, free to members owner, then “flips”
ownership to Developer to reap ! SEIA “PPA Template” free for members long
term operating benefits. ! Per-Deal (legal) costs are now low(er): ! Flips occur
anywhere from Year 6 to Year 17 " Quick review (if standard & good basic "
Rebates/PBI, Host Payments, Tax Benefits (vesting) agreements are used)©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 105 © 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 106 Equipment
Supply & Complications - Legal & Tax Construction Agreement ! Product
Supply ! Long contracts - 40-60 pages ! Installation terms, timeline, etc ! High
initial transaction costs " In-Service Date not < 3 months before closing Sale-
Leaseback or not before closing Partnership Flip " Reduced with
standardization ! Warranty (5-10 yrs, useful terms to satisfy) ! Building
access / maintenance costs ! Performance Guarantee or Warranty !
Repossession / aftermarket value " Based on independent data & measurable
parameters ! Termination tax issues? - terminal price? ! Can installation be
subcontracted? " Must be at FMV or greater for tax benefits© 2010 OnGrid
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15. Introduction to Solar Financing Page 15 of 112
Solar, All rights reserved. Intro to Solar Financing - 107 © 2010 OnGrid Solar,
All rights reserved. Intro to Solar Financing - 108
27. Complications - Terms Common Mistakes ! Power Contract Form: !
Purchase Options: Fair Market Value (FMV) only " Value can’t be stated now -
must be set in future " Selling kWh? " No declining schedules of
value/purchase price # At what price? # TOU & Demand saving / costs !
Rebates are taxable to Host? # Who takes remaining utility bill? " Host signs
over rebate, but is stuck w/ tax liability? " Simpler but vague sales
presentation ! Usually no “Tax Indemnification” (unlike leases) ! Max length
<= 80% of expected life " May leave lots on table in customer’s ! Host can’t
share in upside benefit ! Host can’t be charged for electricity not received©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 109 © 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 110 PPA Deal
Sizes Aggregation ! Tax Equity Investors looking for big deals ! Collect 5 to
50 $3-$5million+ size projects " $25-$40 million minimum ! Master
Agreements: “All Deals …” " Keith Martin’s typical: $75-$150 million " In by
X date " Desirable $100-$200 million " Meet 10-12 item checklist " ? 5 to
50MW PV systems ? ! Standard checklist reduces due diligence & !
Aggregation legal costs per deal " Collect $3-$5million+ size projects© 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 111 © 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 112 Tax Equity
Investors & Lenders Investor Returns ! Recently Active (changes frequently):
" Union Bank of CA ! Financial Returns for Tax Equity Investors " US Bank
(U.S. Bancorp) ! Was High 6% to Low Teen % after tax " Deutsche Bank "
Now? – 14-18% depends on project " John Hancock ! Much less money now
available, so " Rabobank " Morgan Stanley demanding higher returns " Wells
Fargo ! Leveraged? " National City Bank (leaving the business?) " Increases
risk & complication ! Goldman Sachs invests in PPA companies to buy " Too
small to bother? & flip for profit© 2010 OnGrid Solar, All rights reserved. Intro
to Solar Financing - 113 © 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 114
28. Cash Flows at PPA Typical Terms Various Phases MN+4,?G>"
P3."5"QG>E" CD43>E" JD=H"KL+4" MN+4,?G>" 2+4O"R,L+4" !
$2.5Million+ (>350kW+) *A,=+" *4+!B,@+" FG>=H4DI?G>" FG>=H4DI?
G>" BAG4H"2+4O" S3NT" ! 15-20-25 yr commitment BGD4I+=" $
C+W+@GN+4" $ C+W+@GN+4" $ 24+,=D4^" $ V+."Z2F"R3U" $
C+N4+I3,?G>" GU"VD>.="" XB,@+="<3=-Y" F,=A"X=-3>"3>" 94,>H"
>GH"D=3>E" $ *]Z=" ! End of term: BH,4HDN" HA+"E,O+Y" $ BH,H+"5"
24+,=D4^" $ B<:F=" Z>W+=HO+>H" [#%" QGI,@"<+_,H+=" 94,>HT" "
Renew PPA $ *G`+4"B,@+=" $ ],>-" G4"94,>H=" $ BH,H+"Z2F" $ ],>-
"QG,>"HG" " Purchase of system FG>=H4DI?G>" $ Z>W+=HG4" $
PKF<B" +>."GU"P3." 2+4O"QG,>" F,N3H,@" C+N4+I3,?G>" # At greater of
FMV or pre-determined price 2+4O" $ ],>-"QG,>" R6%"_G>D=" ,II+@+4,?
G>T" $ C+W+@GN+4" Pay termination & have system removed " $ ],>-
"QG,>" _D^GDH"I,=A" HG"_D^GDH",H" ! Significant due diligence on
customer req’d HA+"S3N"© 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 115 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 116 PPA vs. Lease Dealing with PPA Developers Electric Bill !
Greed has set in: " Not really a “partner” with installers " Not trying to save
customers money Typical PPA " Working each as hard as possible Typical
Lease ! Shop around - help your customer find the best deal " Good service
gets you the repeats and installation work© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 117 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 118 Lease vs. PPA PPA Leasing Cash
Buyer vs. Lease vs. PPA Ease for Operation, Maintenance, Return Almost No
Effort Customer Inspection ! Profit / Reward - shared among the parties
Operating Risk PPA Vendor End User " Lessee: more risk, may get more of
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16. Introduction to Solar Financing Page 16 of 112
profit than with Long Term May Be Higher, to May Be Lower, Except Upon
PPA unless the PPA willing to take more risk than Costs Compensate for Risks
Return of Equipment the bank for the same returns Costs on Removal of
Equipment, Functional Termination Usually None Verification, Return
Shipment " Cash buyer: all risk, gets all profit Opportunity None None # Uses
up working capital - opportunity cost Costs ! Energy Efficiency REC Benefits
Stays w/ PPA Vendor End User " Cash buyers & Leases can enjoy add’l
savings Cash Flow Cash Neutral or Often Negative Up-Front, Positive Savings
Positive Whole Term Over Term " Typically not part of PPA deals (directly)
Include E. Hard to sell “negawatt-hours” More Difficult Yes # Efficiency #
May be able to sell kWh for higher value w/ EE© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 119 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 120
29. Cash Flows at Various Phases 89%#41.& <-=&>&?1./& +,-./& 5,$2&67%
& 89%#41.& :%;&@#7%& !"#$%& !%()#*%& 01.$2,341.&
01.$2,341.& )"12&:%;& A-9B& )1,3%$& ! +%E%*19%& ! +%E%*19%
& ! :%#$,P& ! D%=&J:0&@-C& ! +%9%3-#41.& 1C&D,.=$&& F)#*%
$&G-$HI& 0#$"&F$H-.&-.& Q#.2& .12&,$-./& ! !OJ$& )2#2,9& 2"%&/#;%
I& ! )2#2%&>& :%#$,P& ! )GT0$& J.E%$2;%.2& KLMN& ?13#*&G%
R#2%$& Q#.2B& ! !1U%&)#*%$& ! O#.H& 1&Q#.2$& ! )2#2%&J:0& !
O#.H&?1#.&21& 01.$2,341.& ! J.E%$21& ! <60G)& :%;&?1#.&
%.=&1C&<-=& 0#9-2#*& +%9%3-#41.& :%;& ! O#.H&?1#.&
@SMN&R1.,$& #33%*%#41.B& ! +%E%*19%& R,P1,2&3#$"& ! O#.H&?
1#.& 21&R,P1,2& 2"%&A-9&© 2010 OnGrid Solar, All rights reserved.
Intro to Solar Financing - 13 Lease vs. PPA PPA Leasing Ease for Operation,
Maintenance, Return Almost No Effort Customer Inspection Operating PPA
Vendor End User Risk Long Term May Be Higher, to May Be Lower, Except
Upon Costs Compensate for Risks Return of Equipment Costs on Removal of
Equipment, Functional Usually None Termination Verification, Return
Shipment Opportunity None None Costs REC Benefits Stays w/ PPA Vendor
End User Cash Flow Cash Neutral or Often Negative Up-Front, Positive
Savings Positive Whole Term Over Term Include E. More Difficult Yes
Efficiency© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing -
14
30. Which Product Is Right? PPA Vendors / Providers Not tax restricted, Cash,
Loan, Offer PPAs to 3rd Parties (may be looking for deals): wants to own
system Finance Lease " Sun Run Generation: Residential pseudo PPA (large
initial fee) Tax restricted, deal Tax/Operating " Renewable Ventures: 250kW+
under ~$3,000,000 Leas e " Tioga Energy Tax restricted, deal Tax/Operating "
Recurrent Energy (now owed by Sharp) over ~$3,000,000 Lease, PPA " Sun
Edison: 250kW+ # Vertically integrated on many sales, installation &
ownership Tax-Exempt Lease Many others available & more coming
Government entity " Purchase, PPA Non-profit PPA Uses PPAs on their own
projects only: " SunPower (former Powerlight): 250kW+ Deal w/ Energy
Usually Not PPA Efficiency Component© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 121 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 122 PPA and/or Lease Agents PPA/Lease
Legal Services Gene Beck Baker Davenport Keith Martin Stoel Rives LLP
Davenport Finance Company EnviroTech Financial, Inc Chadbourne & Parke,
LLP stoel_rives@stoel.com bdavenport@davenportfinance.com
gbeck@etfinancial.com (202) 974-5674 (800) 88-STOEL 804-323-6061 714-
532-2731 kmartin@chadbourne.com www.etfinancial.com Wrote SEIA Fed
Tax Manual. Charles Gerni Please call only to hire, not just National Lease
Financial Services questions David J. Clamage 858-546-4888 Saulsbury Hill
Financial Edwin F. Feo Jigar Shah davidc@saulhill.com Milbank
jigarshahdc@gmail.com 303-629-8777 x102 Scott F. Young 213-892-4417,
EFeo@milbank.com (202) 250 3651 Sentry Financial Teaches at Solar Power
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17. Introduction to Solar Financing Page 17 of 112
Founded SunEdison. Now consults (801) 303-1111 International and other on
“more unconventional” PPA/ syoung@sentryfinancial.com conferences finance
deals© 2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 123 ©
2010 OnGrid Solar, All rights reserved. Intro to Solar Financing - 124
Agenda ! Overview of Basic Financing Principals ! Residential Conventional
Financing with Residential 3rd Party Unsecured Loans & Home Equity
Financing with ! PACE & State/Utility Loan Programs ! Lease Basics &
Commercial Leases PPAs & Leases ! PPA Basics & Commercial PPAs !
Residential Leases & PPAs© 2010 OnGrid Solar, All rights reserved. Intro to
Solar Financing - 125 © 2010 OnGrid Solar, All rights reserved. Intro to Solar
Financing - 126
31. Sun Run Generation SolarCity “SolarLease” Residential Pseudo PPA
Residential Pseudo Lease ! Residential Pseudo PPA ! Residential Pseudo
Lease " Deposit or “installation fee” reduces per kWh price " $0-$2.25/Watt
down " Per kWh savings w/ performance guarantee " $0 to escalating monthly
payment w/ perf. guarantee ! 20 yr term & unknowable? buyout charge at end !
Otherwise could be ~ same as SunRun: ! Very small deal size needs low “due
diligence cost” " 15 yr term & unknowable buyout charge at end " FICO
score / credit check & large deposit " Very small deal size needs low “due
diligence cost” # No risk if Deposit >25% of gross cost # FICO score / credit
check " Risk spread over many customers # Risks spread over many customers
" Much higher relative savings on Residential Tiered # Much higher relative
savings on Residential Tiered TOU rates compared to commercial rates/PPAs
TOU rates compared to commercial rates/leases " Issues: Rate escalators &
ITC Basis ! Issues: Rate escalators & ITC Basis© 2010 OnGrid Solar, All
rights reserved. Intro to Solar Financing - 127 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 128 Unknowable Buyout Charges Tools To
Analyze Deals ! IRS rules around Fair Market Value discussed earlier prevent
stating the buyout ! CEI - Competitive Energy Insight value – what could it be?
" Complements OnGrid ! No obligation to purchase " More detailed,
sophisticated, expensive ! Minimum - $0 " Helps you (or your finance partner)
take ! Maximum – less than the future new system the deal to the next step
after-incentives net cost ! OnGrid ! If provider sets it too high, customers will
walk away, must be low enough to attract© 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 129 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 130 The Economics of Stakeholders are
Linked CEI’s EconExpert Software Suite Bank / ! Universal Financial Pro
Forma Lessor Gas " For PV, Wind, CSP, Fuel Cells, CHP & other Construction
Loans Project Supplier ! Economics and Tax Benefit Monetization Finance !
Early Screening to Financial Closing Suppliers Project Tariffs ! From the
Viewpoint of Every Stakeholder Competing Developer/ Electric Equipment
O&M Suppliers Owner/ Utility Operator ! Before and After-Tax Discount Cash
Flow Tax Accelerated ! Book and Cash / Levered and Unlevered Credits
Depreciation * CEI is not a licensed legal, brokerage or accounting firm. You
are recommend to also consult licensed advisors Tax Monetization© 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 131 © 2010
OnGrid Solar, All rights reserved. Intro to Solar Financing - 132
32. Competitive Energy The OnGrid Tool Insight, Inc. ! Sales Tool !
Specializing in: TM " Quickly Identify & Screen Leads " Energy Project
Ownership and Asset " Organizes Client Info Management " Financing !
Design Tool " Business and Contract Development " Size Systems Optimally
Steve Provol, President ! Proves the Payback www.CEInsight.com !
Automatically Creates Quotes & Proposals (858) 566 0221 ! Prepares
Documents & Paperwork SProvol@CEInsight.com© 2010 OnGrid Solar, All
rights reserved. Intro to Solar Financing - 133 © 2010 OnGrid Solar, All rights
reserved. Intro to Solar Financing - 134 OnGrid Calculates Rates & Incentives
Cost & Performance ! Commercial, Residential, Agricultural ! West: CA, AZ,
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