Solar Southwest Florida

I just read an article published today on the Harvard Business Review blog that misses the point about businesses, specifically banks and other financial institutions, engaging in sustainable building practices. The article focuses on how companies should be less focused on environmental sustainability and more focused on financial sustainability given the nation’s disfavorable attitude toward banks today.

What the article fails to regognize is that sustainable building, when done right, is financially responsible and sustainable! Green building techniques have returns on investment associated with them, and some can be extremely favorable, especially when combined with utility and government incentives. Banks often operate on razor-thin margins and invest in financial instruments that have paltry returns when compared to sustainable building efforts that have similar risk and terms. Energy saving measures undertaken at the time of construction are also a hedge against rising utility costs (operating expeneses). In addition to immediate tax advantages like credits, corporations also benefit from accelerated depreciation on many green building upgrades.

The authors suggest that banks have a role to play in environmental stewerdship in the respect that they should make loans for customers to build green. Suggesting that the bank itself shouldn’t be built with energy savings in mind while encouraging it to loan money for customers’ sustainability projects doesn’t make sense.

I wholeheartedly agree that the banking industry as a whole has lost the trust of the American people, and that many are probably attempting to engage in sustainable building efforts as a marketing tool (greenwashing). However, failing to recognize sustainable building as a financially sound investment pursuit does a disservice to financial institutions that are doing the right thing for both the environment and their shareholders.

Florida House Bill 0277 (2013) has passed both the House and Senate unanimously. This bill makes official the de facto standard used by county property appraisers that excludes renewable energy (i.e. solar energy, wind energy) systems from assessed property values. This exclusion was inadvertently removed from law during a previous congress in 2008. Various attempts have been made to reenact the exemption, with no success until now.

According to the Florida Solar Energy Industries Association, “The bill implements a constitutional ballot initiative approved in the 2008 general election by Florida voters, which prohibits adding the value of certain home improvements specific to the installation and operation of a renewable energy source device and increasing the level of wind resistance protection to the assessed value of residential property. ”

I’ve been hyper-critical about the do-nothing Florida legislature in the past, but this appears to be a long-overdue victory for the Florida solar energy industry. I’ll give credit to them for finally getting it done. While the real impact of the new law will be minimal, at least it provides some peace of mind for those thinking of installing solar energy systems.

The exemption technically covers new solar energy installations completed after January 1, 2013, but based on the last 4-5 years of de facto exclusions, it is unlikely that any property appraisers will have an appetite to assess systems installed prior to this date. The broad definition covers most solar energy property including on-grid and off-grid (battery backup) solar electric systems, solar pool heaters, solar water heaters, solar attic fans, solar tubular skylights, and associated solar energy equipment.

House Bill 0277 is on the Governor’s desk for signature. Governor Scott is expected to sign it.

The Senate bill summary page can be found here: http://www.flsenate.gov/Session/Bill/2013/277

The full text of the bill can be read here: http://www.flsenate.gov/Session/Bill/2013/0277/BillText/er/PDF

As expected, Cape Coral passed the Public Service Tax measure on April 29, 2013. The tax impacts every utility electric customer in the City. The more you use electricity, the more tax you pay.

As I noted in my earlier post, solar energy producers can avoid tax on every kilowatt-hour they reduce or produce with solar energy.

The City of Cape Coral released an online calculator that has a few deficiencies. Most importantly to me is that the calculator ignores solar producing customers using LCEC’s netmetering program (both commercial and residential). If you are a small commercial (non-demand charge) or residential customer with solar electric panels and you have a netmetered account, you pay different rates than standard utility customers. As a result, your tax calculation is different. The City’s calculator only shows large commercial (demand charge) rates, and not small commercial rates.

The good news is that there isn’t much tax difference for netmetered customers, who often pay lower rates than those who don’t produce solar energy. In fact, many residential netmetered customers fall below the 500 kWh tax threshold, so they will pay no tax except tax on the customer charge, or $1.35. Netmetered customers with an energy surplus in any month will also pay just $1.35!

I felt obligated to produce a better calculator that could be used by most commercial and residential netmetered customers who are producing solar energy. This calculator should match Cape Coral’s calculator for residential customers without solar electricity.

If the calculator does not appear below, you may access it directly at: http://szumlanski.com/PST/

Assumptions and Disclaimers: This calculator is based on the 7% Public Service Tax as approved on April 29, 2013 and utility rates are accurate as of May 1, 2013 to the best of my knowledge. SolarSouthwestFlorida and it’s author are not responsible for and errors or omissions in this calculator.  Please use with caution. Results are for approximate reference only. Rounding errors may exist. The City of Cape Coral’s office calculator can be accessed by clicking here.

I thought April 15 would be a great day to talk about the tax benefits of solar electricity. However, I’m not really going to talk about the massive 30% tax credit you can take on a solar electric (solar photovoltaic or PV) system. I want to talk about the tax implications of the stream of income that follows an investment in solar energy.

The return you get on a solar energy investment isn’t usually dollars back in your pocket or bank account in the traditional sense of investing. Your return is the reduced electricity bills you will see for the next 40 years (yes, solar energy systems will still produce energy well after their 25 year warranties!) The beauty of this return on investment is that it comes tax-free!

Investment Return Required Compared to $1,000 Solar Investment Return

Right now you are paying your electricity bill with after-tax income. If you want to compare the solar investment return with other investment alternatives, you have to consider the taxes you would pay on those alternatives. For example, let’s say you have the choice to invest some amount of money that will reduce your electric bill by $1,000 in the first year and you are comparing this to a stock investment of the same amount that you expect to provide capital gains in one year. At 15% capital gains tax, your stock investment would have to return $1,176.47 to be equivalent. If you are lucky enough to be in the new 20% capital gains bracket, the comparable stock investment would need to return $1,250.00.

If you are comparing a solar investment to an alternative investment that will be taxed at your regular marginal income tax rate, the comparable investment return may need to be even higher – $1,655.63 if you are in the new 39.6% income tax bracket!

Note: There is a new medicare tax on investment income that is ignored from these examples, making solar even more attractive in relation.

Another way to look at this is to figure out how much more you would have to invest in an alternative to get the same after-tax return as solar energy. Using the top tax bracket as an example, you would have to invest 65.6% more to get the same after-tax return in dollar terms!

This is just the tip of the iceberg. As time goes on, solar electricity will presumably offset a larger dollar amount on your electricity bill as electricity rates increase. Therefore, your comparable investment return would need to continue to grow to keep pace. Also, presumably your income will continue to increase, putting you into higher tax brackets, further increasing the required comparable investment return. Finally, most American’s believe that today’s tax rates are not likely to remain as low as they are.

There are very few tax-free investment alternatives out there. Traditional tax-free investments like municipal bonds often provide paltry returns or significant risk (many states and municipalities are in financial trouble). Solar electricity is a tax-free investment that is very low risk and just gets better as inflation and higher taxes take hold.

Did I mention that you get a 30% tax credit in the tax year in which you install a solar electric system?

FPL Solar Rebate Demand High, Supply Low

FPL made an important and appreciated change to their solar rebate program for this round of funding. They said they would take applications after the funds were exhausted to put applicants on a standby list, as many customers do not go through with installations. I was surprised to see that the standby list was limited, and applications were eventually rejected.

That really does not make sense, unless FPL does not really want to know how many people want rebates but cannot get one. Wouldn’t it make sense to take all applications in the order received? That way we could gauge demand and adjust the rebate amount accordingly to maximize the installed capacity with the limited rebate funds! Why cut off accepting applications at all?!

While it looks like we were able to secure several rebates for Fafco Solar’s customers this time around, the system is still frustratingly broken. I am certain that so many more people would go solar if the rebate program was fixed and the rebate amount was more in line with demand for rebate funds.

Business PV funding was still available, with $715,000 still out there as of 9:00 am. I find that interesting, indicating that commercial PV installations aren’t seeing the same feverish demand for rebate funds. That’s strange because business customers are typically making decisions on an ROI basis, and the ROI for a business can be sensational with the rebate funds.

As expected, plenty of rebate money is still available for residential and commercial solar water heating, and funding will likely be available for months.

FPL will open up the next round of solar rebate applications on October 16, 2012 at 8:30 am. Rebate applicants will need a licensed solar contractor to install their system, and are advised to contact Fafco Solar urgently to get an evaluation, conditional contract, and in the queue for a rebate application submission.

The total funding for this round of rebates is $9 million.

FPL took one of FlaSEIA’s recommendations and is allowing applications to go through once the available funds are exhausted. If successful applicants do not pursue an installation, the next applicant will be offered a rebate approval. That’s a step in the right direction for the beleaguered rebate program.

As if FPL’s solar rebate program didn’t run out of funds fast enough the last time around, Tampa Electric’s Solar Photovoltaic allotment of rebates evaporated in one minute – less time than FPL applicants found themselves having to secure a lucrative rebate. TECO’s solar rebate program, which released funds this morning at 10 am, was expected to run out of funds on the first day like the FPL program, but this is a record time for rebates to be snatched up.

This is NOT a “first-come, first served” application process like the utility companies would have you believe. It is basically a lottery, but a lottery that can legally be rigged by companies who have figured out the technology required to get a leg up when the rebate application system goes live.

The process is senseless. The utilities are hoodwinking the public. The real goal is not to “help utility customers get into solar energy.” If it were, the rebate amounts would be sensible, and the programs would benefit a broader customer base than the lucky few who get a windfall rebate approval.

The next round of funding is coming for FPL customers in Southwest Florida. If you live in Naples, Fort Myers, Bonita Springs, or any of FPL’s SWFL service area, I highly advise that you contact your solar dealer urgently and try your hand at getting a solar rebate. The rebate could pay for half of your system, and the Federal Tax Credit can cover a big chunk of what’s left. You need to act NOW!

P.S. Fafco Solar is a good choice for a licensed local solar dealer!    (239) 574-1500.

License: CVC56701

What was once true has become a myth. In years past, it didn’t make much sense to install solar panels (solar electric/photovoltaic modules) from a financial standpoint without generous subsidies, rebates, and incentives. The payback period was too long for most investors (see my article on the folly of the payback metric here). Except for those lucky enough to access a rebate, the numbers just didn’t make sense.

Solar Panel Price Plummet. Source: Solarbuzz

In case you haven’t heard, solar panels have plummeted in price. We’re talking about a >75% drop in wholesale and retail prices in the last three years. Total installed costs have been cut in half. Meanwhile, electricity rates continue to rise. It’s the perfect storm for making solar panel installations feasible without most subsidies.

I say “most subsidies” because there is an incentive that exists today that is still important to make most installations financially attractive. The Federal Investment Tax Credit is essentially a 30% rebate on the total installed cost of a solar energy system. This incentive is in place until the end of 2016, and covers both individual and corporate taxpayers. If you have taxable income, you can access the tax credit! What’s interesting about this tax credit is that it pays for itself in terms of the government’s investment. In fact, a recent study concludes that the government gets a 10% return on its investment from the tax credit.

In Florida there is no state rebate available. Other states have eliminated subsidies or only offer very nominal incentives. Florida utilities have very limited rebate programs that are either inconsequential in the grand scheme of the price of a system or are so limited in funding that your chance of obtaining the rebate is slim-to-none. But that’s OK!

A big area of discussion at Solar Power International 2012 in Orlando this month was the disappearing subsidies, and how the solar industry needs to move away from requiring handouts. Indeed, the solar industry has grown substantially in the past few years despite disappearing subsidies. The plummeting price of the product we offer is an obvious key. As keynote speaker, former President Bill Clinton said, we in the industry need to tell our story. This is the story – solar is now financially attractive without [most] rebates, incentives, and subsidies!

Florida “suffers” from a lack of incentives that are still seen in other states. Those states, like California, New Jersey, Arizona, and New York, have seen a meteoric rise in solar panel installations. Florida has lagged the industry significantly. Admittedly, the local solar industry has done a poor job of getting the word out. It’s time to put forth an effort to tell the public our story and get the solar industry in Florida back on track. Let’s compete for our rightful title, The Sunshine State!

The most complex financial analyses that solar dealers need to perform are for grid-interactive solar electric systems. The number of variables makes an accurate and reliable analysis difficult to provide to potential customers (investors). However, there are plenty of models out there to give us an idea of the realistic investment returns a system owner can expect. Some are simplistic, while others are tremendously sophisticated. The key is to ensure that the inputs are realistic and accurate.

The first kind of analysis, the one that most people ask for, is the payback. Many people, myself included, are critical of this metric, primarily because it is not intended to measure the type of investment profile provided by a solar energy system, and the result is not particularly useful unless put into context. Unless you are comparing this metric to another investment option with similar costs, term, and risk, the results can be misleading. In addition, the concept only works for investments where there is a single cash outlay at the beginning of the investment with a simple stream of cash returns. You cannot calculate the payback for a system that is financed with no money down, because there is no single initial cash outlay.

What is the payback on a 10-year CD? The answer is 10 years – the stream of cash flows from annual coupons will never come close to paying back the initial investment. The investment is only paid back when the principle value is returned at the end of the term.

Many people gladly invest in CDs with 10 year payback periods, but balk at the thought of a solar energy investment with a 7 year payback. The context is not the same, and it illustrates why payback is not a reasonable metric to use, at least on its own, in deciding whether to invest in a solar electric system. Many solar models available will provide a payback period in number of years and months, and I don’t understand why.

The more important factor in deciding whether to invest is the return-on-investment (ROI) as commonly measured by the internal rate-of-return (IRR). Alternatively, if the cost of capital for the investor is well known, the net present value (NPV) can be used to compare investments or determine whether to accept the investment. The NPV is the dollar value at which IRR equals zero. The higher the NPV, the better in comparing investment alternatives. Void of alternative investments, a positive NPV project should be pursued, depending on risk and investment horizon.  Similarly, the higher the IRR, the better, and as long as the IRR is higher than the cost of capital, the project is “profitable.”

That’s all a bunch of finance-speak I picked up in school. We need to break it down to what the average homeowner is likely to experience in terms of the investment value. We need to make many assumptions and determine reasonable ranges so that we can see how each variable impacts the investment decision (sensitivity analysis). The assumptions we make include:

• The cost of utility electricity in the future.
• Rebate and incentive amounts and time of receipt.
• Degradation of solar module performance.
• Future maintenance costs.
• Future tax rates.
• Cost of capital on variable rate financing.
• Inflation rates.
• Salvage value.
• Future utility regulation/deregulation.
• Cost or benefit of waiting to make investment.

What we know for certain is:

• The price being offered for the installation of the system.
• The cost of utility electricity today.
• Individual tax rates today.
• Cost of capital on fixed rate financing.

What we have a fairly good idea about:

• The average cost of utility electricity the system can be expected to offset initially.
• The warranty on the system components.
• The longevity of the system.

Obviously there are a lot of factors at play. We can use historical data to narrow the risk in making assumptions. However, we also need to look at the future possibilities that cannot be determined by the past alone. For example, what do you expect your tax rate to be in 15 years? If you expect to be making more money and enter a higher marginal tax bracket, the cost of paying for electricity with after-tax income becomes greater, and reducing your utility electric bill would be very smart. If you are entering a period of fixed or reduced income, you may lose out on some of the tax benefits, but you may also be subject to higher risk of inflation and escalating utility electric rates, making the stability of low or no electricity bills very attractive.

A solar financial analysis will give you a good idea of what to expect from an investment in a solar electric system. Just like any investment analysis, assumptions are made and there is a degree of risk involved. Fortunately, many of the factors make the investment less risky than alternatives, and a good case can be made for solar electricity more often than not. When looking at this type of investment consider your current situation, your future scenarios, and the comparative risk of a solar investment. Don’t use payback as a deciding factor without putting it into context. Use return-on-investment as a comparative metric versus other investment alternatives with similar risk profiles and time horizons.

Regardless of what you decide, know that a solar electric system will provide a reliable source of energy production to offset you utility usage, which is the same thing as saying you will have a reliable after-tax stream of income for the next 25+ years!

As a financial analyst by education, I’m surprised at how few posts I’ve made on the investment returns of solar energy products. Residential solar energy systems provide a return on investment that rival investments of similar risk. One factor that is often left out of financial analyses is the impact of personal income taxes, not from the perspective of tax credits, but from the perspective of electricity costs. Let me explain…

When you pay for your utility bill each month, you are probably paying with money from your checking account. This is money upon which you have presumably paid taxes, or will pay taxes. Let’s say your utility bill is $160 this month. Let’s also assume that your marginal tax rate (the rate you pay on your next dollar of earnings) is 20%. How much did you have to earn to pay the $160 utility bill?

$160 / (1-20%) = $200

Let’s assume that you install solar panels that produces enough energy to reduce your electricity bill by $160 this month. You will have “earned” $160, and no taxes are due! Why is this important?

We often compare the investment in solar energy systems with other investments with similar risk profiles. For example, a stock may provide a dividend yield, but that investment income is taxable. We should be looking at pre-tax rather than after-tax cash flows. You would have to earn a $200 dividend to equal a $160 cash savings on your utility bill!

This fact is usually left out of the financial analysis performed when evaluating a solar energy system’s investment performance. Most financial models are too simplistic, understandably so, because there are already a multitude of factors that go into the analysis making it quite complex and sensitive to a few key variables. Moreover, changing and unpredictable tax rates and structures over the 25+ year lifetime of a solar energy system make taxation a difficult and risky factor to include in the analysis. However, savvy investors know that taxation plays a large part in investment planning, and can be an important decision-making factor.

If you are in a higher tax bracket, expect to be in a higher bracket in the future, or expect tax rates to increase, the savings are amplified and the decision to invest in a solar energy system is that much easier!

Last Thursday FPL took applications for the remaining 2012 solar rebate funds. As expected, funding ran out quickly… as in under two minutes!

My employer had quite a few rebate applicants lined up for solar electric systems. I decided before the rebate website went live that I wouldn’t post the results or my reaction in a knee-jerk manner. While I was angry and disappointed, I wasn’t surprised. Now that the dust has settled, I can respond effectively.

We did secure rebates for some of our customers, but any process that rewards rebate applicants for being able to type fast is just silly. I have criticized the process and the program before, but now I am more convinced than ever that it needs revamping. Its not good for consumers or contractors, and it fails to effectively reach the stated goal of increasing adoption of distributed solar energy in Florida.

I’ve recommended a lottery approach in the past, but that is hardly fair either. I truly believe that the only way to fix the program is to significantly reduce the rebate amount (per watt), or the maximum rebate per customer.

Florida has a sad history of overly-generous solar rebates with unintended consequences. The press from these botched programs feeds two beliefs that are severely damaging to the industry:

1. Solar electricity is only viable with a state or utility rebate. While free money certainly helps, the unintended consequence is that few people are willing to go solar, or even contemplate an investment in solar if the handout is not available. With prices so much lower than just a year or two ago, this is no longer the case!

2. Rebates are not guaranteed. This is the sad result of the Florida Legislature’s failure to fully fund an incentive program that was passed into law and was clearly intended to be funded. The FPL rebate is “guaranteed” to the extent that you follow through with some basic obligations, and to its credit the company has been lenient and helpful toward rebate applicants and contractors.

I applaud FPL’s willingness to implement a solar incentive program. I wish they would make it so much better by reducing the rebate amount, allowing more consumers to participate, helping contractors develop a sustainable industry, and maximizing the amount of installed distributed solar energy with the limited availability of rebate funding.

FPL has announced that the remaining 2012 solar rebate funding will be released on May 3, 2012 for solar photovoltaic (electric) and solar water heating systems.

If you want any chance of getting in on the best solar rebate in Florida history, you need to act NOW. Call your favorite solar contractor (hopefully Fafco Solar) and they will walk you through the application process. Because the rebates are highly competitive and the amount available will be very limited, it is likely that the funding will run out in the first 10 minutes. The online application process requires advance planning and detailed information about the system you intend to install.

FPL Solar Rebates can cover over 30% of the cost of a solar electric installation up to $20,000 for residential and $50,000 for commercial systems. Paired with a 30% Federal Tax Credit and the lowest component costs in history, the total installed cost of a solar energy system has never been lower.

For those of you who don’t know, the largest utility in Southwest Florida, FPL, is giving away money – lots of money! If you ever had an interest in solar panels, NOW is the time to act. There is money available for solar electric systems and solar water heating systems, and combined with record low prices on solar panels, this is an amazing opportunity. The program is a huge success, but I want to talk about how FPL can improve the Solar Rebate Program, especially the rebate for solar electric panels.

FPL is offering $2 per watt of installed system rating with a residential limit of $20,000 (for a 10 kilowatt system). Smaller systems qualify for the same $2 per watt rebate amount. Most homeowners install around 5kW and receive a $10,000 rebate. How can this be improved? REDUCE the rebate amount!

What?! Huh?! No – don’t say that!!! You’re in the solar business!

Stay with me here as I explain. The first round of rebate funding ran out in under 15 minutes. That’s how much demand there was. That’s how unbelievable this deal is. That’s great, but there are some serious downsides to the program as it stands:

• Only 310 lucky people received a rebate reservation in the first round of funding.
• The first-come first-served system isn’t really fair – it benefits mainly people who can type their application fast on the FPL website. With this level of demand, a lottery would be a more fair distribution of funds. (Note: a lottery could have negative consequences for solar dealers who would not be able to predict future business.)
• Solar contractors must race to get all of their sold systems installed in a 90 day window to have the rebate paid, then there is almost no work for the next 9 months. Who is going to buy solar without a rebate if they know one is right around the corner. This makes it very difficult for qualified solar installers to stay in business and employee people year-round.

If the rebate program can “sell out” in under 15 minutes to 310 customers, how long would it take to sell out at $1 per watt? 50 cents? 25 cents? How many more people would install systems?

If FPL’s goal is truly to get more installed solar capacity in Florida, they would get the best bang for their buck by reducing the rebate amount to maximize the amount of solar electricity installed! Under the current scenario, FPL actually reduces the amount of solar energy installed in Florida, and essentially controls the market. They can predict quite well how much solar will be installed in a given year, and maybe that is their intention. The math is quite simple – if they devote half of the $15.5M annual program budget to photovoltaics, somewhere around 3.75 megawatts per year would be installed and interconnected to the utility.

Imagine the impact if the rebate amount were reduced. I’m willing to bet that if the rebate amount were cut to 50 cents per watt, 1/4 of the current amount, that four times the number of systems would be installed, especially if the installation window were increased to 9-12 months. This would help bring much more solar power to the utility’s system, and would keep solar dealers humming along installing systems year-round, employing more people and creating a greener future for everyone in Florida.

What is FPL’s motivation? What constraints exist from the Public Service Commission approved program? I don’t know all of the answers, but I’d sure like to hear from FPL about my proposal!