A comparison of the avoided electricity rate vs the PPA rate
A comparison of the avoided rate of grid electricity vs the levelized cost of solar energy
The yearly avoided cost due to the electricity produced by the solar installation
The cumulative economic benefit of the system over its lifetime
The year by year benefit of the system taking into account all revenues and expenses
The Debt Interest Payment is the interest only portion of the debt payment and is used to offset the federal taxes of the solar installation. This is analogous to how mortgage interest is deductible from personal income taxes.
PPA Payments is the total amount paid for the electricity purchased from the solar system under the power purchase agreement. This is determined by the amount of electricity produced multiplied by the predetermined PPA rate for that given year.
Total Lifetime Benefit is the sum of the Net Economics line in the Cash Flow Projections table. This aggregates the economic benefits of solar from a cash-flow perspective (as opposed to net income which is an accounting measure). This is the true bottom line of the solar installation.
Net Income is a line item which shows the accounting profit/loss for a given year. Due to non-cash items such as depreciation, this will differ from the actual cash flow benefit.
EBT stands for Earnings Before Taxes and is an accounting subtotal line.
LCOE stands for Levelized Cost of Energy and is a metric that represents the lifetime average cost of electricity produced by a solar installation, taking into account all revenues and costs. This provides a benchmark to compare against when analyzing the economic benefits of solar vs other sources of electricity.
LCOE = lifetime costs / lifetime electricity produced
https://en.wikipedia.org/wiki/Cost_of_electricity_by_source#Levelized_cost_of_electricity
NPV stands for Net Present Value and represents the value of future cash flows in today’s value by discounting them at the appropriate rate. This allows for the analysis of projects that have long term cash flows and time horizons. Positive NPV numbers indicate a good economic investment, while negative NPV indicate a project’s economics are less than optimal.
http://www.investopedia.com/terms/n/npv.asp
IRR stands for Internal Rate of Return and is the standard way of measuring the returns from solar projects. IRR is used mainly because it accounts for the varying levels of revenues, incentives, and expenses from year to year and provides an effective annualized rate. Typically, the higher the IRR value is indicates a more favorable project for investment.
http://www.investopedia.com/terms/i/irr.asp
Federal Taxes refers to the taxes paid on net revenues from the solar installation including avoided costs and state incentive programs.
Operating expenses refers to all of the expenses required for the solar installation to function to specification. This includes regular maintenance, emergency repairs, scheduled equipment replacement, and insurance coverage.
The total avoided cost of electricity that is provided by the solar installation. This is due to offsetting energy that would otherwise have been purchased from the utility. The rate at which each kWh of solar offsets grid purchased electricity can vary from a simple one-to-one ratio to more complicated mechanisms depending on tariff structure and local regulations.
This represents the total upfront cost of the solar installation. Typically, these costs will include the modules, inverters, racking, balance of system (BOS), labor, permitting, utility interconnection fees, and profit and overhead costs of a solar system.
MACRS stands for Modified Accelerated Cost Recovery System and is a method of depreciating assets. Solar projects are long term infrastructure assets that are allowed to use a 5-year accelerated depreciation schedule.
SEIA Depreciation Overview:
http://www.seia.org/policy/finance-tax/depreciation-solar-energy-property-macrs
IRS MACRS Depreciation:
https://www.irs.gov/publications/p946/ch04.htm
IRS MACRS Depreciation Schedules:
For taxable entities, the federal tax rate refers to the income tax that institutions need to pay. This is used to compute the dollar benefit of the various tax incentives that solar projects are eligible for.
Bonus depreciation is an incentive which allows a taxpayer to make an additional deduction of the cost of qualifying property in the year in which it is put into service. Currently the bonus depreciation is scheduled as: 2017: 50%; 2018: 40%; 2019: 30%, 2020 and beyond: 0%.Under 50% bonus depreciation, in the first year of service, institutions could elect to depreciate 50% of the basis while the remaining 50% is depreciated under the normal MACRS schedule.
SEIA Depreciation Overview:
http://www.seia.org/policy/finance-tax/depreciation-solar-energy-property-macrs
The depreciation basis is the percentage of the total system cost that can be depreciated after taking into account the basis reduction due to the ITC. For example, if the ITC is 30% of the system cost, then the depreciation basis will be reduced by half of the ITC amount (15%) for a final basis of 85%.
For solar installations that claim the ITC, the depreciable basis of the asset is reduced by half of the ITC amount. Current tax rules state that this reduction is 50%.
ITC stands for Investment Tax Credit. The tax credit is a dollar-for-dollar reduction in the income taxes that a person or company would otherwise pay the federal government. Currently, the solar ITC is 30% of the basis that is invested in solar project construction through 2019. The ITC then steps down to 26 percent in 2020 and 22 percent in 2021. After 2021, the tax credit will be 10%.
NOTE: Due to the tax-exempt status of municipalities, K-12 school districts, state agencies, public colleges and universities, and not-for-profit organizations, these entities are not eligible to claim the federal ITC as a dollar-for-dollar reduction against the cost of the solar PV system, as a taxable entity would be.
SEIA ITC Overview:
http://www.seia.org/policy/finance-tax/solar-investment-tax-credit
Department of Energy ITC Overview:
https://energy.gov/savings/business-energy-investment-tax-credit-itc
IRS Forms and Information:
The Investment Tax Credit (ITC) Basis refers to the portion of the solar installation cost that is eligible to receive the investment tax credit in dollars per watt. This includes the hard cost of equipment, materials, and parts directly related to the functioning of the installation. It also includes certain soft costs such as developer fees, permitting costs, engineering and design fees, and certain construction period interest.
IRS information for the Investment Tax Credit
The net present value (NPV) discount rate is the rate applied to future cash flows to convert them to present day numbers.
NPV Help Section
This is the standard inflation assumption by which various operating expenses are escalated year over year. The default is 2%.
Solar panel efficiency decreases over time and this is referred to as degradation. The degradation rate depends largely on module technology, weather and quality of materials, however the industry standard rate is around 0.5%/year. Panels in moderate climates such as the northern United States had degradation rates as low as 0.2% per year. But the rate could be as high as 1% in more extreme climates.
NREL Degradation Study:
A solar inverter converts DC current from solar PV panel to AC current that can be used by a local electrical network. Most inverters come with a life-expectancy of approximately 10 years, which is much shorter than the life of the panels themselves (25-30 years). As a result, most inverters need replacement after about 10-15 years of service and replacement costs range $0.08-$0.15/W depending on the specific inverters chosen and size of the overall system.
Operations and Maintenance (O&M) encompasses all of the activities that will ensure maximum generation from the system throughout its life, including routine maintenance, minor part replacement, and emergency repairs. Depending on the level of coverage, the cost of O&M is usually in the $10-$25/kW/year range.
NREL Analysis of O&M Costs:
All solar projects will require insurance and typically cover general liability insurance and property insurance, environmental risk insurance, business interruption insurance and so forth. Depending on the size and other characteristics of the project, insurance for solar projects typically falls in the $10-$20/kW/year range.
SREC stands for Solar Renewable Energy Credits and they are available in certain states that have set up a Renewable Portfolio Standard and created a marketplace for entities to trade these credits. Utilities can purchase SRECs to meet their renewable energy obligations. SRECs trade on the open market and their value fluctuates over time. SREC programs are typically for a 10-15 year period. A solar installation typically generates one SREC for every 1000 kWh of electricity produced, but may differ depending on local regulatory policy.
SREC Trade has up to date market data on current SREC prices in different states:
The total amount of incentives received through State programs. Numerous states and utilities have incentive programs to accelerate the adoption of solar. These can come in the form of upfront cash incentives, production based payments, or solar renewable energy credits.
A useful resource to search for incentive programs by region is the Database of State Incentives for Renewables & Efficiency (DSIRE).
Operating leases will typically have a buyout amount specified for the end of the lease term.
This is the term of the operating lease agreement in years.
Operating lease providers often charge additional closing costs. Please enter the total amount of those costs here.
Under an operating lease, the customer will pay fixed payments to the investor. This can be in the form of monthly, quarterly, or yearly payments. Please enter the total annual payment for this field.
Annual payments for a 7-year solar operating lease typically fall between 9-12% of the total installation cost, though this may vary depending on specific project details and capital provider.
If the PPA has buyout provisions it will also specify that the system can be purchased at those times for the greater of a specified amount or fair market value (FMV). The specified amounts in the buyout schedule are derived from discounting future cash flows from the investor’s point of view. The various items that are taken into account include PPA revenue, incentives, ITC recapture, depreciation, operating expenses, debt service, and taxes. The calculation of the buyout amount is sensitive to the assumptions used and can vary widely by investor.
PPAs will often allow the customer to buyout or purchase the system at certain predefined times during the life of the agreement, typically after the tax benefit period which is in the first six years. For example, a 25 year PPA contract may specify that the customer can purchase the system from the investor in years 7, 15, and 20, allowing them to convert to a direct ownership model early.
PPA term is the length of the PPA contract. PPA terms typically range from 15 – 25 years.
PPAs will often have an escalator which applies to the Year 1 PPA rate. This allows the price of electricity from the solar installation to increase over time in a predefined schedule. Typically this escalator will be lower than the expected inflation in electricity rates, and is usually in the range of 1% – 2%.
PPA rate is the price in Year 1 for electricity purchased under the PPA. This is often at a 10%+ discount to the utility rate or avoided rate currently paid by the host site, which results in immediate savings as well as a hedge against future energy costs.
Debt interest rate is the annualized interest rate charged on the outstanding balance. Public markets can provide debt at interest rates as low as 3% – 3.5% while private lenders may be in the 6% – 10% range depending on credit quality and term length.
This is the length of the debt agreement in number of years. For solar installations certain lenders offer long duration debt ranging up to 20 years.
Raising capital via debt often incurs various transaction and closing costs. Please enter the total amount of those costs here.
This is the amount of capital that is borrowed either publicly or privately to fund the installation of the solar system.
This is an estimate of the inflation at which the electricity rate will increase.
The Energy Information Administration provides historical electricity price data broken down by state and end user type. This type of data can be used to compute a historical benchmark for the expected inflation in energy prices.
https://www.eia.gov/outlooks/steo/report/electricity.cfm
This is the avoided cost rate of the solar electricity that will be produced. The simplest case is net metering, where every kilowatt-hour (kWh) produced from the solar installation offsets a kWh from the utility bill at the full retail rate. In this situation it is appropriate to use the current utility rate as the electricity rate. In certain situations due to specific tariff structures or regulatory policies, solar energy cannot be offset on a one-to-one basis and a different rate applies.
Please enter the total expected life of the system. Solar panels have 25 year warranties and systems that are currently being installed are expected to last 30+ years.
This measures the total cost of the system you are financing. This includes the cost of solar panels, inverters, racking, installation, site development, and utility interconnection. Solar companies should be able to provide an all-in cost for all items that will be required to get the solar installation to full functionality.
NREL Report for Solar PV Costs:
https://data.nrel.gov/submissions/73
Tracking the Sun: Pricing and Design Trends for Distributed Photovoltaic Systems in the United States https://emp.lbl.gov/sites/default/files/tracking_the_sun_2019_report.pdf
*If you have not yet received a proposal from a solar company indicating total installed system cost, use the following resources to obtain a preliminary cost estimate. Please note that these resources may denote system cost in $/watt.
Please enter the amount of electricity that will be generated in the first year of the solar installation. This information is usually provided by the solar developer or installer by using industry standard modeling tools.
If an estimate has not been provided or if you would like to run your own scenarios, the NREL PVWatts tool allows users to easily estimate the production of hypothetical systems based on their geographic location:
Please enter the size of the proposed solar installation in watts (watts DC). Typically, the capacity of your solar energy system to produce electricity is described in DC. The number of panels times the panel wattage equals your system’s DC capacity: i.e. 20 panels x 320 watts each = 6,400 watts DC. Please note that if you’re receiving proposals from solar companies, this may be provided in kilowatts (kW) or megawatts (MW).
(Please choose the taxable status of your entity.)
Certain types of entities are tax exempt, including:
IRS Resources for Tax-Exempt Organizations
http://www.irs.gov/charities-non-profits/types-of-tax-exempt-organizations
Direct ownership: Institutions, municipalities, foundations, endowments, and non-profits, and commercial enterprise can purchase their solar systems using cash. In this case, they are eligible to receive 100% of the electricity savings, all available rebates and incentives, and can claim greenhouse gas emission reductions for the system.
Debt Financing: Debt Financing uses debt to enable entities to purchase a solar system outright and enjoy all the benefits of solar directly; however, some of the initial capital cost is offset by borrowing money in exchange for long term payments. A wide variety of loan or bond offerings are available with different monthly payment amounts, interest rates, lengths, credit requirements, and security mechanisms.
Power Purchase Agreement: In a Power Purchase Agreement (PPA), entities enter into an agreement to purchase electricity from a third party investor who owns and operates the solar installation. The investor is responsible for all operations and risks of the system for a term between 15-25 years. Usually, the PPA rate paid by the customer is less than the current electricity cost ($/kWh).
Operating Lease: The Operating Lease is a third-party-owned financing structure for taxable entities where the investor leases the equipment to the customer. The customer pays scheduled lease payments to the investor for 7-10 years, after which the system is bought out at fair market value.
SEIA Third Party Financing Overview
http://www.seia.org/policy/finance-tax/third-party-financing
Clean Energy States Alliance Financing Overview
http://www.cesa.org/assets/2015-Files/Homeowners-Guide-to-Solar-Financing.pdf
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