How solar pv can work for you

Solar Powered: Part 2 of 4

Solar pv panels on a house in Germany.

This is the second article from the series on how to choose the best solar pv system and financing.

How much do you really spend on energy?

How your day to day decisions affect the climate is hard to access and measure. How your day to day decisions impact your finances is significant, direct and CAN be measured precisely. Our focus will now be on money, YOUR money.

If you are connected to the grid, each month you pay a bill for the consumed energy. The prices might be more or less volatile, but long term they tend to increase. As long as you consume energy from the grid, you will to pay for it.

Let’s asses how much money you really spend on energy, starting with electricity. Each month you send money to a utility company for your electricity bill. Then, there is the energy used for heating water, to keep your place warm or cool (space heating and/or cooling) and heat used for cooking. Finally, there is transportation. The fuel you buy to drive a car.

Add the amount of your electric bill, natural gas/propane bill, and estimate the money you pay for gasoline/petrol. Here is an example:

electricity 100

natural gas 150

car fuel 200

total per month 450

Now, multiply this by 12, for annual expenses. Then by 20, for 20 years:

450 x 12 = 5,400

5,400x 12 = 108,000

This is the amount leaking out of your pocket, assuming energy prices would be fixed. Let’s assume energy prices increase by 2% each year and the amount out of your pocket just jumped to 131,205.

Now do the math for your home or your business. Did you expect that result? Now imagine never having to pay for energy again. What would you do with that money? Pay off the mortgage? Go for holiday? Expand your business? Start a business?

It IS possible. Even with today’s technology. Solar panels can generate electricity to power, heat, and cool your house and provide energy to drive your electric car. Now, imagine generating more energy than you consume and selling the surplus. Provided you have enough space for the panels and enough sunshine, you could become a solar farmer and live off the solar energy.

Converting liabilities into assets

In general, the process of going solar described here is about converting liabilities into assets. You showed yourself you have the money for energy already. You already spend it every month. A utility bill is a liability. A drain in your pocket. You pay each month to stay in the game. It doesn’t move you forward, and each year you pay more as grid energy gets more and more expensive.

Here is an alternative: a solar pv generation system with financing solutions that fit your needs. A solar pv system that is installed to meet your energy consumption and the value of that investment is repaid over time, instead of one upfront payment. This allows you to substitute your monthly utility payments with repayment of the solar pv. Instead of electricity bill, you are paying off your system. And just like a car note, there will be a final payment. After that, you have completely free energy!

By investing into your own energy source, you can have free energy. Energy itself doesn’t cost you anything. Sunshine is free. Having paid for the equipment, you have assets and each month they generate value: energy that can be used or sold.

What is the best time to go solar? Should I wait for the solar prices to go down?

The best time to install solar and stop paying a utility bill was, quite frankly, yesterday. The second best time is now. It is true that solar panels are a lot like microchips. They get more efficient and cheaper each year. So, yes, buying panels 5 years from now would probably result in a lower price. But, you can go solar right now, with no upfront cost, and reducing your monthly bill. Is it worth paying the ever increasing costs of grid energy for the next 5 years?

OK, You convinced me. But what are my financing options?

There are several financing solutions for solar. The main differences, other than costs, are ownership of pv systems during the financing and related operating risks, including insurance and maintenance.

Financing solutions are generally classified in two categories:

• traditional financing

• project finance

Traditional financing

Think of how you would finance a car, tv, or a house. It can be through bank loans or lease agreements. In general, the person or business buying the pv system owns it from installation and is responsible for all operating risks, just like with a car loan.

The most significant difference is that solar systems are revenue generating assets. They generate energy that can either be sold to the grid or offset with your own energy use. Because of that, the entire operation can be cash positive. Loan payments can be lower than your energy bill from savings or revenues from selling energy. The banks are willing to accept smaller equity (even 0% in some cases) and a lower interest rate, provided there is a good business plan in place that explains all the risks and benefits of a solar installation project. Benefits of traditional financing include:

• positive cash flow due to substituting energy bill payments with lower loan or lease payments

• low financing costs

• full control over entire solar system

Project finance

Instead of buying a pv system, there is also the possibility of buying solar energy from a rooftop installation. A third-party company buys, installs, and operates a solar pv system installed on your rooftop. You enter into a Power Purchase Agreement (PPA) with the third-party solar developer. The entirety of the financing is provided by the developer and does not affect you or your credit.

Because you only purchase solar energy, the operator owns the system and covers all the risks. He is responsible for the installation, commissioning and potential warranty claims. This option can be more expensive than a bank loan, because there is another party involved that does it for profit.

The price of energy delivered under the PPA is competitive with current grid electricity and can be agreed upon for a long term basis. The PPA constitutes a performance guarantee for the owner, because the payment is made only for actually delivered energy. Benefits of a PPA include:

• positive cash flow due to predictable and attractive energy prices for own consumption

• security and reliability as the pv system is owned and operated by an external company and you pay only for the energy delivered

• no influence on your credit limit or you a balance sheet of your company– as assets and liabilities related to pv system are owned by external company

Renting out your rooftop or land

A specific example of project finance would be renting out your rooftop or land. It can be the easiest, but not always the most profitable, way for a property owner to benefit from solar energy. The pv system is owned, operated and financed by a solar company. The property owner agrees to a rental amount and is not concerned at all about the systems, energy production or selling of energy. Benefits for the property owner include:

• positive cash flow due to long term stable revenues from renting roof space

• security and reliability as the pv system is owned and operated by an external company

This solution is highly recommended if you have low energy consumption on the property and a lot of free space. In cases where there is significant energy consumption, it is better to use solar energy first before buying electricity from the grid. The price of grid energy will certainty go up in the future and will be volatile whereas solar energy price can be contractually agreed upon for the long term basis.

Joint-venture

Another example of project finance would be a joint-venture, where you participate in the operations and profits of the project delivering energy back to you. You can, for example, take care of the planning, engineering and permitting of the project and leave financing of the installation to a joint-venture partner. This way, you make sure the project meets your exact requirements. On the other hand, you don’t have to be financially involved in the installation part. You can develop an entire, ready-to-build project and it can be sold to the third party investors, before the installation. Benefits of a joint-venture include:

• positive cash flow due to immediate revenues from selling investment project

• positive cash flow due to long term stable revenues from renting roof space

• positive cash flow due to predictable and attractive energy prices for own consumption

• security and reliability as the pv system is owned and operated by an external company

• no influence on credit limit or balance sheet — as assets and liabilities related to pv system are owned by external company

Crowd-funding and peer-to-peer financing

If you are thinking about a joint-venture, you may also want to take crowd-funding and peer-to-peer loans into consideration. In general, you develop a solar project, but instead of making a deal with a single, usually corporate partner, you enter into an agreement with many co-investors. This might be an interesting possibility to minimize the financing costs, as you cut out the middleman: the financial institutions.

The specific, project best solution has to be determined by taking the following into consideration: tax regulations, available solar incentives, your energy consumption and credit standing. In each case, there is an opportunity to benefit from the specific nature of solar systems; they are revenue generating assets. This should result in minimizing cash expenditure and financing cost.

How can you tell if solar makes sense for you?

The key driving forces to the economics of solar are:

• energy prices

• installation costs

• amount of sunshine available

For a particular location, the amount of sunshine per year is constant. So what makes or breaks a solar deal? The relation of grid energy prices to solar installation costs. In very simple terms: the cost of solar energy generated mostly consists of the installation costs spread over time. Divide the cost of a system by the total amount of energy it will generate over its lifetime. That number is the unit cost of solar energy. The relation between the unit cost of solar energy and grid electricity is what matters.

Using Malta (a small island country in Europe, south of Italy) as an example (prices in EUR):

the grid electricity price 0.16/kWh.

1kWp of a pv system costs 2,300 and generates about 33,000 kWh of electricity over 20 years.

The unit cost is 2,300 / 33,000 kWh = 0.07 /kWh. More than 2 time cheaper than the grid electricity.

The same principle applies to off grid systems. Calculate the unit cost of solar energy and compare to the unit cost of electricity you currently consume. If you use a diesel generator for example, calculate the costs of fuel and maintenance.

Solar incentives

There are two kinds of solar incentives, or support programs, for solar. Ones that subsidize the installation costs and ones that encourage you to sell excess solar energy back to the grid at an attractive price.

Solar grants

All kinds of grant programs and/or tax credits exist for installing a solar system. The program terms and conditions define which costs are eligible for refund and who is eligible to receive the money (you, a solar company, a bank). The key word here is “eligible” costs. Depending on how the program is defined, there might be a limited number of “eligible” products or “eligible” installers qualified to install the systems. If the competition and supply side is limited, it could result in increased system prices.

These kinds of programs support the installation of the system, meaning the installation and connecting of the system was enough to receive public money, regardless of what happens to the system afterward, meaning it might be working very efficiently or not at all.

Generation support

Other kinds of support promotes efficient generation. It can be a Feed-in Tariff (FIT) or green certificates mechanism. In general, under that kind of scheme, every owner of a solar pv system connected to the grid, would receive money for energy delivered to the grid. These programs pay only for energy actually delivered to the grid, promoting efficient, quality systems. The owners are free to install any system they want by any company they choose so it promotes competition. For these reasons, FITs in particular, are considered the best support tool for solar energy.

By having an FIT in place for a fixed period of time, 15 or 20 years for example, you can easily obtain financing for your entire solar project because the financing party knows there will be revenue for repayment.

Sometimes FIT schemes offer different options. For example: full export of energy from the pv system or offsetting its own consumption.

Full export — pv system is connected to the grid, 100% of the energy is directly injected into the grid at FIT prices.

Offsetting — the meter measures when energy is imported from or exported to the grid. FIT pricing is applied to energy exported to the grid. Energy imported is charged at the current price. This scheme allows offset of your own consumption first.

When considering a system that will generate energy for the next 20 years, the second option (restate this option) allows you to achieve more stable energy costs. The prices of grid energy will rise in the future. FIT is fixed, so in a few years time, FIT will be lower than grid energy prices. So by offsetting your own consumption, your system can soon become more profitable than the FIT.

There is also a specific form of a FIT called a net-metering mechanism. Net-metering allows you to generate solar energy and supply any surplus back to the grid. The energy delivered to the grid is offset with the energy you consumed from the grid, during the night, for example. You and the utility company settle the net balance only. If you supplied more to the grid, you are paid by the utility company. In general, net-metering schemes don’t offer fixed prices for a long term period. They use current market prices and current tariffs, but it’s reasonable to expect energy prices to go up, not down, in the following years.

About me

https://www.linkedin.com/in/michalbacia/

Creator of Online Project Tracker. Web app solving problems with communication and data inconsistency issues when managing construction and O&M projects. http://www.hienergypeople.com/online-project-tracker/


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