Financing

Because of the still high initial cost of solar power systems and the need to support the policies that encourage the rapid deployment of solar energy in California, there is a growing need for compelling and well-understood financing models. Examples of these include:

1. Self financing
2. Institutional financing
3. Lease-to-own/purchasing
4. Power Purchase Agreements

The two largest objections for decision makers to purchase solar power systems are the high initial costs of PV systems and the relatively long payback periods of eight to twelve years. This section describes the challenges and opportunities of developing appropriate financing models for solar PV systems that increase the number of customers who can afford such systems.

Objective

SolarTech’s objective in this area is to encourage and develop new and appropriate financing and economic models and resources that enable larger numbers of prospective customers to be able to afford solar power.

Problem Statement/Opportunity

The costs to construct and operate any type of power plant break down into three primary areas:

• Initial construction costs of the plant,
• Costs of ongoing operation and maintenance, and
• Costs of mothballing the plant and cleaning up the plant site.

When considering all three of these elements, solar power plants are among the cheapest to operate over the full timeframe of their lifecycle. However, the costs of solar power plants are heavily front-end loaded as the following illustrates:

• Initial construction costs are high per kWh generated.
• Costs of operation and maintenance are minimal since the fuel is free (“the sun rises every day”).
• Costs of mothballing the plant are also minimal since the bulk of the materials (silicon, glass, aluminum, and steel) are readily recyclable.

Contrast this situation with the costs of typical “legacy” power plants such as coal or natural gas plants, which are highly back-end loaded as the following illustrates:

• Initial construction costs are low per kWh generated.
• Ongoing operation costs are recurring and escalate over time as stocks of fossil fuel supplies are gradually depleted and prices rise due to market volatility.
• Mothballing costs are enormous, especially when you include the estimated billions of dollars in societal costs to combat, reverse, and clean up climate change and global warming.

Because of the great difference in front-end vs. back-end economic costs for solar vs. fossil fuel power plants, it is often cheaper to construct new fossil fuel plants even though they are widely recognized as having significant long term negative consequences. Likewise, it is difficult for many potential customers for solar power to afford the steep up-front costs (whether for their homes or businesses or utilities), despite the widely recognized long term benefits of solar power plants.

Clearly, one of the best ways out of this dilemma is by providing innovative, new financing tools to offset the initial costs of solar power and to make solar more affordable to larger communities of people. This is the problem and opportunity to which SolarTech devotes itself in this area.
Example of One Type of Innovative Financing Model
One such innovative funding model that overcomes many of the initial price and payback issues of solar power is the Power Purchase Agreement (PPA). PPA’s provide a key opportunity for advancing solar, but are one of the least understood options for developing large renewable energy projects.

There are two parties to a PPA: the Power Purchaser, typically the tenant of the facility where the PV systems are installed, and the Power Provider, the owner of the PV system generating electricity.

In a PPA, the Purchaser enters a long-term contract, typically 20 to 25 years, to buy electricity from the Provider’s grid-connected PV system. The price the Purchaser pays is negotiated with the Provider and may be based on a number of customer choices, including a fixed price per kWh with an annual percentage escalator, a discount on the commodity price/tariff, or a blend of these two models that provides a “guarantee” and/or a “step-up” in pricing after a predetermined period of time.

PPA’s are becoming increasingly attractive for solar deployment because of the benefits they provide for both the Purchaser and Provider.

Benefits for the Purchaser

PPA’s create financial and environmental benefits for the Purchaser. The most enticing advantages are that no capital outlay is required, and a predictable price for electricity is guaranteed for the duration of the contract. Other benefits can be built-in savings, profit-sharing, reduced carbon footprint and, depending on how the PPA is negotiated, participation in the environmental attributes, utility rebates, and tax credits.

Benefits for the Provider

PPA’s generate meaningful financial returns for investors who fund the equipment, installation, and maintenance of solar systems. The Provider benefits from a targeted internal rate of return to substantiate an investment that takes advantage of federal tax credits, accelerated equipment depreciation, and utility rebates. A specific investment fund is generally established to finance a single project, or a portfolio of projects, using both debt and equity financing to maximize the fund’s objectives and returns.

Development of a PPA financing model for a solar power plant involves assessing many complex factors. These include determining and measuring Purchaser usage patterns including demand usage and matching that to solar generation characteristics. In addition, the subtleties of site geography, climate patterns, sun angles, shading, and equipment have a significant impact on PV production. The decision for investors to fund projects relies on ample data and a complete understanding of the technical, structural, regulatory, and financial aspects of the proposed PV systems.

Summary of Recommendations

The preceding example illustrates the complexities of financing solar power projects. SolarTech proposes to simplify these complexities by undertaking the following efforts:

• Work with members and Providers (financing organizations) to develop appropriate financing models that will lower the initial costs of solar systems for consumers while simultaneously creating economic opportunity for Providers.
• Develop an online marketplace that will enable Purchasers and Providers to quickly locate and develop “matches” for financing specific, individual projects.
• Provide a resource center of financing resources and models for consumers who are considering purchase of a solar power system to use.
• Work with local jurisdictions and legislators and with the California Solar Initiative to develop public policies that support and encourage innovative financing vehicles for large-scale solar power projects.