Stanford Journalism Student Interview

Stacie Chan, a Stanford graduate student in Journalism, recently interviewed me for a school project. The article she wrote was posted to the Journalism school's web site. It's always interesting "to see how others see you," as Robert Burns wrote, and Stacie's article gives me that chance.

I'll be Presenting "Solar for All" on July 8

I will be presenting my "Solar for All proposal" to a large audience for the first time on July 8, 2009 from 7-8 PM. The event is part of the Silicon Valley Photovoltaic Society (SVPVS) speaker series.

Location: the G. E. Pake Auditorium at Palo Alto Research Center (PARC, formerly Xerox PARC), 3333 Coyote Hill Road, Palo Alto, CA 94304

I hope any of my readers who are in the area will attend.

The 8-page Word document describing "Solar For All" is online here.

How Much Does a Solar System Increase the Value of a Home?

Many solar companies cite an article from 1998 when they tell you how much solar will increase the value of your home. The reference is The Appraisal Journal: http://www.icfi.com/Markets/Community_Development/doc_files/apj1098.pdf

You may wonder why companies cite this 11 year old article rather than something more current. The basic answer is that solar companies like the result that the author of the article derived. (They won't point out that the article was actually about energy-efficient homes, not homes with solar systems.) Solar companies will typically say "The value of your home goes up by $20 for every $1 of annual energy production by your solar system." Many solar companies use this formula to tell potential buyers that the solar system will increase their home's value by far more than the system's price.

This defies all logic. Let's illustrate this with an example.

Suppose there are two identical homes on a street in Anytown, USA. Each has a fair market value of $500,000. One homeowner purchases a solar system for $18,000. He is told by the solar company that the system will reduce the home's annual energy bill by $1,800. So far, so good. But then the solar company says, citing the Appraisal Journal article, that the solar system will increase the value of the home by $36,000 (i.e., 20 x $1,800). The other homeowner does not buy a solar PV system.

Let's further suppose that the day after the solar system is turned on, both homeowners put their houses on the market. The non-solar homeowner prices his at $500,000 and the solar homeowner lists hers for $536,000. Dozens of buyers come and look at each home. Some want to live in a solar home and some don't. If those who want to live in a solar home (or their real estate agents) perform any amount of due dilligence, they will quickly learn that they can buy the non-solar home for $500,000 and spend $18,000 to add solar to it. Therefore, it would be foolish for them to pay an $18,000 premium for the solar home because this far exceeds the cost of adding solar to the non-solar home.

Furthermore, it is generally expected that brand new solar systems will cost less with each passing year. If that is the case, then the value of an installed (used) solar system will decline each year simply because the cost of an equivalent new system will be less each year. In addition, solar systems have a finite useful life in the range of 20-40 years. Let's say that 30 years is the appropriate useful life. If we want to know what a used solar system will be worth in 5 years, we have to estimate the price of a NEW system five year from now and then reduce the value of the USED system by 5/30ths to account for the fact that the system we purchased in 2009 has used up 5/30ths of its useful life.

Under the theory espoused in The Appraisal Journal article, the difference in value between the solar home and the non-solar home will increase year after year if the price of energy rises over time. This produces the nonsensical result of predicting that the solar system has the greatest market value in its final year as a functioning piece of apparatus! That's just plain nuts!

In reality, if solar equipment prices stay constant or decline in the future, the market value of a solar system is highest on the day it is installed and will decline gradually until it reaches zero when the equipment reaches the end of its useful life. This is exactly the kind of reduction in value over time that we would expect from any long-lived asset whose value is based on its practical utility rather than fashion or trendiness, such as an automobile.

Beware of any solar company that tells you that a solar system will increase the value of your home by more than the system's initial net cost. They either have not thought very deeply about the subject or they are trying to manipulate you. Why would you want to spend your hard-earned dollars with a company for which either of those statements is true?

If you'd like a copy of a spreadsheet that supports the arguments in this posting, send me a note at bkarney [at] comcast [dot] net.

Solar for All -- Including Renters

I've recently developed a proposal that I call "Solar for All." It would make it possible for condo owners and renters to own or lease solar PV just as homeowners can.

On May 8 I met with Assemblyman Paul Fong and Monica Smith from his staff last week and they both seemed quite interested.

I would greatly appreciate feedback on my proposal. The 8-page Word document describing "Solar For All" is online here.

In a nutshell, the idea is to use "virtual net metering" to allow the solar panels to be located on a solar farm rather than on the building where the energy is used. However, the solar farm is not owned by your local utility company: the panels are owned by a for-profit company and leased to the family whose bill is being offset.

Rinsing Panels Isn't Enough, It Seems

This week was the 2nd anniversary of my solar system being online. Though I've rinsed off my panels every 6-8 weeks, I noticed that production was dropping. In Year 1 the system generated 3029 kWh and in Year 2 only 2796. That's a 7.7% difference.

On Thursday I cleaned my panels using dishwashing liquid in warm water. I used a 12' pole and window washing pad (sort of like a mop) so I could do this from a 5' step ladder without climbing on the roof. After washing each panel the pad was black, and the water in the bucket quickly turned black as well. Those panels were DIRTY, despite having been rinsed off more frequently than most solar vendors say you need to. (By the way, my roof is pitched at about 20 degrees, which is pretty normal for this area.) The whole job took about 30 minutes for my 12 panel system.

My SolarGuard monitoring reported an 8% increase in output on Friday. Weather was nearly identical (and perfect) on both days, so I think the entire amount of increase was due to the washing, not weather or temperature.

If I can maintain this enhanced production, it will generate about $50-70/year in extra energy.

You can buy the pole and pad at a home improvement store for about $40 and it will pay for itself in less than a year.

"Green Energy" Programs Gaining Traction

The National Renewable Energy Laboratory (NREL) at the Department of Energy (DOE) has released a new report on the success of various "green energy" programs around the country. The URL is http://www.nrel.gov/news/press/2009/679.html

Green energy programs typically charge ratepayers a slight premium for electricity that is certified as being 80% or 100% derived from non-greenhouse gas producing sources. Usually these are wind energy programs, but some include solar, geothermal, and biofuel sources of generation.

• Austin, TX leads the category for "most green energy" with 724 million kilowatt hours/year.
• Palo Alto, CA leads the "highest participation" ranking with 21% of residential consumers participating.
• Exel Energy in Colorado and Minnesota has the most total participants: 71,571, but is followed closely by two Oregon electricity providers: Portland General Electric and Pacificorp with 69,258 and 67,252 participating accounts respectively.
• Edmond, OK leads in terms of percent of total load sold to residential participants at 6.4%.

It's interesting to note that the 3 cities listed above are all homes to major universities: University of Texas, Stanford University, and the University of Central Oklahoma (the 3rd largest university in Oklahoma).

Green power typically costs about 1-2 cents/kwh more than non-green, but in 2008 due to spikes in the price of fossil fuels, green power actually cost 1 cent/kwh less for customers of Edmond Electric and OG&E Electric Services.

Roadmap for Pricing Greenhouse Gasses in California

At yesterday's SolarTech meeting I heard a presentation by Sue Kateley of CalSEIA about possible expansion of Feed-in Tariffs (FIT) in California.

One proposal currently on the table calls for explicitly pricing the greenhouse gas emissions of fossil fuel generation plants and providing a bonus payment, or "adder" to forms of generation that produce few or no GHG. The slide Sue showed had these proposed prices per metric ton of CO2 equivalent:

2012...$10.18/ton
2015...$23.76/ton
2020...$42.46/ton

As I understand the math, solar would be compared to modern combined cycle natural gas powerplants, which I believe generate roughly 1 ton of CO2 per 2000 kWh. If that conversion is correct, then the "solar adder" would be:

2012...$0.005/kWh (half a cent)
2015...$0.012
2020..$0.021

The proposals also call for a time of delivery adder which values energy generated during times of peak demand more highly than energy delivered during off-peak hours and day.

These proposed prices are not high enough to create a utility scale solar gold rush right now, but if the credit squeeze comes to an end in 2009, I do think there is the possibility of a rapid reacceleration of "big solar" funded by insurance companies and pension funds who want long term investments that are not tied to the up and down cycles of the stock market.

Tax Law Change Could Help 150,000 US Churches and Non-Profits Go Solar

Here's a copy of a proposal I've sent to my representative in Congress, Anna Eshoo. If you like it, please copy it and send it to your representative too.

Opportunity
1) Congress could enable 100,000 churches and 50,000 small non-profit organizations to put solar panels on their roofs in 2009-11 by a minor and temporary change to existing tax law.
2) The example these churches and non-profits set is likely to inspire hundreds of thousands of homeowners to add solar to their homes, thereby stimulating the economy and helping the environment.

Current Situation / Problem Statement
Federal incentives for solar photovoltaic (PV) systems are tax incentives. This puts churches and other non-profit entities that want to get rooftop solar at a terrible disadvantage – they have no taxes to offset.

The solar industry and Wall Street have partially addressed this problem by creating Power Purchase Agreements (PPAs). With a PPA, an investment firm buys, owns, and maintains the solar system on the roof of a non-profit in exchange for a long-term contract to sell all the power from the system to the non-profit. PPAs effectively and legally move the 30% investment tax credit (ITC) and depreciation of the solar assets from the non-profit “host customer” to the for-profit PPA provider.

However, the PPAs are not being offered for the small solar systems – the size most churches and non-profits need -- because the administrative overhead of selling and setting up a PPA is essentially the same no matter how large or small the system is. The very few PPA providers who have ever tried providing quotes for systems smaller than 30 kW found that the offers are not being accepted and have withdrawn from this market segment. As a result, there is no financially viable way for most churches and other small non-profits to install solar PV without paying for them using cash or borrowed funds.

Potential Solution / Tax Roadblock
For solar systems in the 5-30 kW range ($25,000 - $180,000 after incentives), many individuals have adequate capital to fund and own a solar system on a non-profit’s roof. In California, such an investor could earn a modest after tax return of 3-7% if two impediments in the tax code were removed. The first issue is the passive activity loss limitation which prevents most taxpayers from using the depreciation of their solar system to offset ordinary earned income. The second is the difficulty of passing the active participation tests. (If a taxpayer passes one of these tests, he or he can treat passive income as active).

Requested Change in Law

1. For a limited period (such as tax years 2009-2011)
2. For a limited class of renewable energy investments (such as solar PV and solar thermal)
3. For a limited group of eligible projects (such as 501(c) non-profit entities)
4. For a limited group of taxpayers (such as filers with AGIs less than $400,000 if married filing jointly or $200,000 if single)
5. Amend the passive loss rules to allow passive losses from leases and power purchase agreements to offset active income, not just passive income.

Example
Suppose that Jane and John Smith want to help their church go solar by purchasing a solar system that will be installed on the church’s roof. They want to recoup their investment by entering into a 15-year PPA with their church. Assume the Smiths have “modified adjusted gross income” of $155,000.

Under current law, if they invest $80,000 to buy a 10 kW solar system (a fairly typical size) they would be able to claim $48,000 of depreciation as a passive loss in the first year of ownership[1]. However, because their income exceeds the Passive Loss Allowance Limit of $150,000, they could not offset any of their non-passive income with this passive loss. Therefore, they will not be able to use this loss from a tax standpoint until the solar system’s revenues exceed its expenses many years in the future. The fact that the tax benefits cannot be harvested early in the ownership period makes this an unattractive investment for them.

Example with Change in Law
The Smiths would see things quite differently if they could benefit from the depreciation immediately. The investment would be quite attractive, and the Smiths would be willing to invest in solar for their church even though the overall IRR is modest. From their perspective, it would be like buying a bond or annuity but with an added environmental benefit. The church would benefit by getting 15 years of renewable energy with no upfront investment. The example set by the church would probably inspire many parishioners to purchase solar for their own homes who would not otherwise have done so.

Argument from Precedent
Current tax law already recognizes that some taxpayers should be able to use passive losses to offset some amount of non-passive income. That’s the whole purpose of the passive activity loss allowance, which allows taxpayers with modified AGI of $100,000 or less to offset up to $25,000 of passive losses against non-passive income. The proposal expands the existing rule to investments in renewable energy.

Scale of the Opportunity
Suppose 100,000 churches and non-profits entered into solar PPAs, with an average system size of 10 kW and price of $80,000 (before incentives). That’s one million kilowatts or 1,000 megawatts – about 600 times what Google has put on the roof of its headquarters in Mountain View. The amount of private investment leveraged would be $8 billion. These figures do not include the impact from homeowners who purchase solar systems because they were inspired by their church’s example, but their purchases could add a 3x multiplier or more.

Current tax law already allows these tax benefits to be achieved, but only by large investors who have shunned this particular market segment. The proposal opens up a new path for capital to flow to churches and small non-profits – money from parishioners who are wealthy enough to want to help their parish and their planet, but not so wealthy that they would ever consider an outright donation of solar. There are millions of Americans who fit that description.

Having a 2 or 3 year time limit on this program would spur all parties to move quickly. This sense of urgency would stimulate the economy and hasten the end of the recession.

___
[1] 5 Year MACRS with 50% stimulus depreciation allows them to depreciate 60% of their investment in Year 1.

3-year Graph of PG&E Residential Rates

The graph below shows how electricity rates have changed for each of the 5 tiers in PG&E's normal residential rate plan, which is called the E-1 rate. After holding fairly constant throughout 2007 and early 2008, the top 3 tiers rose rather dramatically starting on October 1, 2008. On 9/30/08, the day before the rates jumped, you could have bought a kWh of "Tier 5" electricity for $.359. Today, less than six months later, the price is $.441. That's 23% higher, and during most of that period the cost of oil and natural gas have been trending strongly downwards! I wish this kind of information was being more widely reported.

Local Electricity Prices Rise Again

PG&E raised its rates substantially on March 1, 2009.

For the standard E-1 residential rate plan, the new rates are:
Tier 5... $.44/kwh (up 7.4%)
Tier 4... $.38/kwh (up 6.9%)
Tier 3... $.26/kwh (up 5.1%)
Tier 2... $.13/kwh (unchanged)
Tier 1... $.12/kwh (unchanged)

Tiny changes were made to the E-6 and E-7 time of use rate plans usedby most solar homeowners.

For small businesses on the A-1 rate plan, rates increased 7.2% to $.179/kwh. For larger businesses on the A-10 non-FTA rate plan, the rate went up a whopping 13.5% to $.158/kwh.

PG&E's complete rate history for the last 10+ years can be found online at http://www.pge.com/mybusiness/myaccount/rates/ (By the way, few utilities make historical rate information as easy to find as PG&E does.)

Solar for your Church or Favorite Non-Profit

One of my new projects is to develop tools and templates to help not-for-profit organizations like churches and charities that own their own buildings go solar.

Non-profits with large enough electrical bills and enough roof space can already go solar for no money down with a Power Purchase Agreement (PPA). This form of solar financing is available from some sources for projects as small as 20 kW, though more frequently a minimum of 50 kW is required. (20 kW of solar would cost a non-profit about $110,000 after incentives in California.)

However, I'm not aware of any provider who offers PPAs to churches and charities who need less than 20 kW. That's the niche I'm trying to fill. If you'd like to offer suggestions or know more, please leave a comment on this entry.