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Solar Development’s To-Do List

solar-playlist

In Chip and Dan Heath’s new book, Decisive: How to Make Better Choices in Life and Work , they discuss the concept of a Playlist as a way to generate ideas and widen our frame for better decision making. A Playlist is a list of things that have been effective before in other situations and provides a reminder of what options we have and helps us to think more broadly.

One of the chief problems with our decision making process is our tendency to consider too few options and to engage in EITHER/OR thinking. We don’t consider different approaches. Either the project works or it doesn’t.

This does NOT mean you can turn a Zombie Project into a good project but often a project that is on the line can be moved to the positive side of the ledger.

My thoughts on a Solar Project Playlist:

Solar Project Playlist:

  • Reduce installed cost
  • Negotiate better panel, inverter, racking prices
  • Negotiate better labor costs
  • Reduce finance costs
  • Negotiate with lawyer for reduced rate
  • Use pre-made contract templates
  • Reduce developer fees
  • Increase output of array
  • Increase Array-to-Inverter ratio
  • Adjust tilt angle
  • Resize system
  • Make sure depreciation is being used
  • Bundle with efficiency services
  • Bundle with retail electric supply
  • PACE financing
  • New Market Tax Credits
  • Adjust PPA escalator
  • Adjust PPA price
  • Adjust PPA Term
  • Adjust PPA buyout options
  • Examine state and local incentives closely
  • Group multiple projects together for economies of scale
  • Credit enhancers
  • Loan guarantees

None of these things is a silver bullet, but having a consistent list of options to walk through we are able to think more broadly about the project and perhaps think of things we hadn’t been considering.

What things would you add to this list?

Original Article on Tipping Point Renewable Energy

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Understanding Net Present Value

net-present-value

One of the keys to developing successful solar projects is to understand how to measure and communicate value. We need to frame the value conversation with our customers.

Several days ago we talked about how payback is not a good measurement for conveying the value of solar to a customer.

We covered how using the simple payback method is not effective with projects that have very long useful lives. It overemphasizes the short term and does not convey the total long term value of the system.

Two better ways to consider the value of a solar project:

IRR and NPV

IRR= Internal Rate of Return

NPV= Net Present Value

IRR and NPV are two measurements that are very often used in capital budgeting to measure and compare the profitability of investments. They are terms that take the total return on investment into consideration.

We will spend today discussing what NPV is and how it works.

Net Present Value

Simple Version:

NPV is a way to assess whether the cash flow of a project is positive while taking into account the time value of money. In its simplest form it means that a dollar today, is worth more than a dollar tomorrow.

Why?

Because of three factors:

  • Opportunity Cost- what you couldn’t do with that money, like invest it.
  • Inflation- that dollar will have less purchasing power tomorrow.
  • Risk- are you really going to get that dollar tomorrow?

So NPV is a way of factoring the time value of money into project cash flows in the future.

In general if a project has a positive NPV that means it will make money over the time analyzed and is a “good investment”. So we want to see a positive NPV on our solar projects.

Deeper Explanation

Let’s first understand what present value means.

Pretend you are presented with these two options:

  1. Someone offers you $100 today.
  2. Someone offers you $100 one year from now.

Which would you choose? As a sensible person you’d pick Option 1.

If you received $100 today, you can invest it, and in a year from now you might have $105 if your investment has a return of 5%.

In addition, inflation would steal part of your $100, so in a year from now, the same bill might buy you only $97 worth of products. We prefer to get money sooner rather than later, so you’d need some form of compensation to get the money later.

So Present Value is the value today of an amount of money in the future.

How about this choice:

  1. Someone offers you $100 today.
  2. Someone offers you $105 one year from today.

You get options like this often in everyday life, like the option to pay upfront for a year instead of making monthly payments.

So, which option would you choose? Basically, you are offered a 5% return that needs to reimburse you for the loss of investment (i.e. you can’t do anything else with $100), the risk involved (will you actually get the $105 in a year from now?), and the expected rate of inflation.

These factors, opportunity cost, inflation and risk are used to set something called the Discount Rate. The Discount Rate is key in calculating NPV and can change the calculation dramatically based on the discount rate chosen. (Note: Working with your customer to understand their Discount Rate is important)

Let’s assume you could put the money in the bank and would receive 3% interest. Inflation is currently rather low, let’s say 1%. The person is creditworthy so the risk of not getting paid is extremely low. With your 3% investment, you’d have $103 in a year. Given 1% inflation, the $103 would be worth only $101.97.

So if you’d take the $100 today, you’d have 101.97 in a year. Option 2 would be favorable, as you would get $105.

The NET portion of the term simply refers to all the cash flows over the term of the project. If you apply the Discount Rate to ever years cash flow and add them all together you get the Net Present Value.

To Sum Up:

  • Net Present Value is a way to value an investment that takes into account the time factor of money.
  • The Discount rate used has a tremendous impact on NPV
  • A positive NPV means that the project is worth considering
  • A negative NPV means the project will loose money
  • NPV is a good way to screen projects but is not a great tool for prioritizing projects because a the size of the project will impact the NPV
  • Engage your customer in a discussion of what the right discount rate to use.
  • The higher the discount rate the lower the NPV

Helpful Links:

How to Calculate Net Present Value 

How to Use Excel Formulas to Calculate NPV

Bonus:

David Roberts at Grist has an excellent piece on how setting a discount rate has tremendous impact on modeling climate change economics.

Original Article on Tipping Point Renewable Energy

Solar: The Great Payback?

payback-board

The most common question I hear when discussing the value of solar is to ask:

“What’s the Payback Period?”

Don’t answer this question!!

The payback period does have some advantages in that it is a simple thing to calculate and is intuitive. However it is a lousy method for valuing things that have a long useful life, like solar energy. And once the transaction becomes focused on payback period it is hard to get it back to better financial metrics.

Which would you choose:

 

Option #1:

Invested: $12

Returned each year: $4

Payback Period: 3 Years

Useful Life: 5 years

 

Option #2:

Invested: $12

Returned each year: $3

Payback Period: 4 Years

Useful Life: 10 years

If we only use payback period we would choose Option 1. But is that the better choice? Option 1 returns $20 on our $12 investment while Option 2 returns $30 on our $12 investment.

Which is better? Payback period gives us no way to figure it out.

As the useful life increases, payback period becomes an even more distorted lens.

This is why as a Solar Developer you want to stay away from payback period as a discussion. I learned this the hard way. Time after time of marching into a customer’s office and presenting the payback period as the first metric we looked at. Then I would spend the rest of the conversation trying to align them back to long term value. The horse is out of the barn already and the lens for viewing the transaction is in place.

There are much better ways to help your customer put a value on a solar system. If you are developing 3rd party ownership projects your investors will value projects in a very different way also.

Next time we will discuss Net Present Value and Internal Rate of Return as approaches that are much more aligned with showing the true value of solar.

Original Article on Tipping Point Renewable Energy

Why Solar Needs Snowden

edward-snowden

So before this turns into a debate about patriot vs. traitor let’s just say that he was someone who exposed information that only a few people knew.

So why does this matter for solar? Because of an economic principle called quality uncertainty. This was first publicized in a Nobel Prize winning paper called

“The Market for Lemons: Quality Uncertainty and the Market Mechanism”, written by George Ackerlof.

In this famous paper he discussed information asymmetry, which is a situation where the seller knows much more than the buyer.

This creates an imbalance of power in transactions which can cause the transactions to go awry, a kind of market failure.

It is this issue that gave rise to the phrase “Buyer Beware”

“The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.”- George Akerlof.

A recent GTM  article highlights a recent example of this. These issues are few and far between and represent   The Tragedy of the Exception in which one bad apple can spoil the bunch.  (Not to be confused with  Tragedy of the Commons which those of us in sustainability normally worry about).

 

The implication for solar is clear. Solar projects, at all stages have a degree of complexity that the average buyer most likely does not understand. There are all sorts of ways to play on information asymmetry in this market. And it doesn’t only apply to the end customer. It can apply to equipment manufacturers, financiers, developers and installers.

How good is the panel?  How much are the transaction fees for this deal? Can you really install for that price or are there a bunch of change orders right around the corner? Are we really going to be able to find an off-taker for those SREC’s? Is the production estimate done by industry best practices? These are all cases where information asymmetry can become an issue.

And as Akerlof makes clear this is not only a problem on the individual transactions, it becomes a market problem. If you can’t tell who is above board then every transaction becomes riskier. In this case bad actors can drive good actors out of the market.

So back to the provocative headline…The more that we educate every level of participants in the solar market and the more transparent we make the buying process the stronger the marker becomes as a whole.

I’m glad to see things like Mercatus Single Point of Truth, TruSolar’s uniform credit screening, Energy Sage’s consumer research and Principal Solar Institute’s PSI ratings. These can all serve useful purposes,  in the same way the used car industry has Kelly Blue Book, Edmunds.com and Carfax these are all ways to decrease information asymmetry.

We will spend more time in the future on some of the services listed above as well as how individual players can reduce their exposure to information asymmetry.

Original Article on Tipping Point Renewable Energy

Bankability in Solar Project Development

bankability-solar

Nothing can doom a solar project faster than selecting non bankable equipment. Bring up a 3rd tier manufacturer and it’s like pissing in the punch bowl at the financier’s party.

The term bankability is used very often in the solar industry and in solar project deevelopment. In general the idea is that if a panel, inverter or EPC is bankable then it is able to be financed.

The concept is that a bankable piece of equipment comes from a high quality manufacturer who makes a good product and, this is critical, will be around long enough to stand by the warranties provided.

However in reality it is a very vague term. Bankable by whom? Every investor has their own idea of bankability. Large banks are very proprietary about this information.

For newer panel or inverter manufacturers not being bankable can be a very large hurdle to overcome.

In addition “bankable” solar companies have been falling by the wayside.  Just using the letter S we get: Suntech, Satcon, Schott, Shuco. All once bankable, not so much now.

So does the term have any real relevance? Is it still valid?

One of the only available lists of bankable modules is kept by Bloomberg New Energy Finance.

Their PV Module Maker Tiering System is available to subscribers. But in an interesting document they describe their system for how they tier PV module manufacturers.

“‘Bankability’ – whether projects using the solar products are likely to be offered non-recourse debt financing by banks – is the key criterion for tiering”

— BNEF

So far so good but what is bankability?

 

“Tier 1 module manufacturers are those which have provided products to three different projects, which have been financed non-recourse by three different (non development) banks, in the past two years. These deals must be tracked by our database, ie the project location, size, developer, bank financier and module maker must be in the public domain.”

— BNEF

BNEF goes on to indicate however, that this isn’t a recommendation, and that module manufacturers are “advised against spending much energy pursuing it”.

Another piece of public data on the tiers comes from Pike Research (now Navigant). 

 

(Source: Pike Research)

(Source: Pike Research)

One clear trend we see in bankability is increased testing and certification. This is helpful because it brings a bit more transparency to the process. UL Certification is the basic starting point but UL is offering more and more testing options for panel manufacturers.  The Renewable Energy Test Center (RETC), Intertek and PV Evolution Labs are all offering additional test for modules that either the financier or manufacturer can authorize. For a lot of information about this growing market GTM did run an excellent series of articles on solar panel testing. GTM also had article earlier this year about increasing inverter scrutiny from a bankability perspective.

So we see three approaches here to determining bankability: recent fundings from BNEF, company practices, from Navigant and finally module quality from a host of providers.

Even with all of this there is no telling in advance who your financier considers bankable.

I recommend that you discuss this very early with your finance partners. Often they will ask you what your total cost to install is but nothing else in the early stages. I find it can save a lot of headache if you also quickly describe the Panel, Inverter and Racking manufacturer you used to arrive at those numbers. In addition discussing the EPC is useful at this point.

Another approach if you want to have providers that are not banakble by the financier is to get some sort of wrap insurance for the project.  We can explore that in much more detail in the future.

By starting this early we have been able to get certain products and providers, who were not on the original list of bankability, vetted and then able to be approved by the financier.

Bottom line: Bankability is critical but opaque and confusing. Start early in the process with your financier, use available testing information and look to a wrap if all else fails.

Original Article on Tipping Point Renewable Energy

Hacking Fracking

hacking-fracking

Spin…we all do it. But some of it, well it goes too far.  I’m a solar developer. I want to stay out of it but we have to have more transparency and honesty in our energy debates.

So….

A recent study from the University of Texas found high levels of contaminants in private water wells near a number of Texas gas operations.

“Contamination occurred more often and in greater amounts when water wells were closer to gas wells, scientists said. Water wells outside gas-producing areas showed no such problems.

Researchers could not pinpoint the sources, but they ruled out the upward movement of fluids injected deep underground in hydraulic fracturing, or fracking.

Possible causes they cited include soil disturbance from gas drilling, failures of casings meant to keep gas and production fluids out of aquifers, and surface-level mismanagement of gas drilling wastes.”

— Dallas Morning News

So we have high levels of heavy metals in water linked definitively close to gas drilling operations. The exact cause is unknown but where there is gas drilling there are heavy metals.

Surely this is not a positive story for the gas industry? Right?

The headline:

“Study: Well contamination near gas drilling sites not from fracking”

The fracking debate is a complex one. There are clearly strong economic and policy advantages for the US. There are also clearly environmental concerns and all the facts are not in. But the spin doesn’t help anyone…or does it?

Original Article on Tipping Point Renewable Energy