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Solar Overview

The most common use of solar technology is photovoltaic panels. Photovoltaic technology turns solar radiation into direct current (DC), which is then processed through an inverter box turning the direct current into alternating current (AC). The alternating current then has several options - it can be used directly on-site storing any extra energy in a battery, or more frequently it is connected to the utility grid incorporating a device which meters the amount of electricity produced. Photovoltaic systems operate at optimal levels when South-facing and with access to clear unobstructed sunlight. The general rule of thumb with photovoltaic systems is that electricity production is approximately 8-10 Watts DC per square foot of solar panel. Before considering a roof mounted system it is important to ensure that the proposed roof is able to support the additional weight.

A primary concern with solar relates to the apparent high cost of purchasing, installing, and maintaining the PV system. However, the reason this price seems so large is because people are often unaware of the available federal and state incentive programs and financing options.

Financing Options: Cash Purchase

This option is the most straight forward with the solar system purchased outright. This financing option allows for the direct benefit of federal and state incentives, and it is estimated that 30-50% of the upfront cost of a solar installation can be offset. After paying the upfront cost the owner will continue to benefit from available incentives, additionally most photovoltaic panels come with a 25-year warranty (incentives discussed in further detail below). By avoiding expenses and interest rates from third party companies there are greater potential long-term savings. The disadvantage of cash purchases is the upfront capital costs as well as the lifecycle costs associated with operations and maintenance.

Power Purchase Agreement (PPA)

This option involves a “host” organization providing unused ground or roof space where the PPA provider can install solar panels. The PPA provider then assumes all of the upfront capital costs and life cycle costs of the solar installation as well as all of the benefits from incentives. Then a contractual agreement is drawn between the two parties determining a fixed rate per kilowatt-hour. These contracts generally lasts 15-20 years and at the end of the contract the host can choose to purchase the system at a reduced rate, enter into another contract, or have the installation removed. This seems to be the most cost effective option because the host avoids all upfront costs and operation costs while still paying less for electricity than would be paid to the utility provider. The downside however is that the project must be large enough that the PPA provider will agree to the installation. Depending on the PPA provider the required minimum size of the installation will vary anywhere from 30kW-100kW.

Solar Leases

This option applies to residential or very small commercial installations, similar to PPA agreements it eliminates the upfront capital costs. A solar lease agreement differs from a PPA because instead of purchasing electricity from a third party, the owner is leasing the solar equipment over a certain period of time. The terms of lease agreements can differ depending on the provider of the solar equipment, but generally the cost of the lease payment plus the reduced electric bill should be less than the old electric bill.

Federal Incentives

• The primary federal solar incentive is a 30% Investment Tax Credit (ITC) meaning that 30% of the upfront cost of the system is paid for.
• The second Federal incentive offered is MACRS 5-year accelerated depreciation allowing depreciation of the solar system at a faster rate than usual.

State Incentives

Solar incentive programs differ from state to state; some states may not offer any incentive programs, but in the states where they are provided they are offered in some form of the following:

• Rebates, Grants, and Buy-downs: This incentive comes in the form of a direct cash payment based on the DC Watt rating of the PV system. These incentives typically have some sort of a maximum. For example, a typical government incentive might offer $0.60 per Watt DC for a 15 kW system. This means the government pays the owner a $9,000 (15,000W x $.60) one time rebate payment. However if a maximum is in place at $5,000, the most the owner could receive is $5,000 no matter how large the system. Both Federal and State government can potentially consider rebates as taxable income depending on the structure of the rebate.
• Performance Based Incentives (PBIs): Performance Based Incentives pay over the entire lifecycle of the solar panels rather than a single upfront payment. The incentive pays a certain amount (around $0.15-$0.40) per kilowatt-hour produced; usually this is in addition to a net metering benefit (utility provided retail credit for the electricity generated by the renewable source). The risk associated with this incentive is that anytime the system breaks down or is not functioning properly money is lost. Generally if the system functions properly money earned from PBIs should be greater than rebates or grants. Profit generated from PBIs may be considered taxable income depending on terms of the incentive and the state.
• Feed In Tariffs (FITs): Similar to PBIs, Feed in Tariffs pay per kWh introduced to the grid, however Feed in Tariffs receive no net metering benefit. This means the owner of the system will receive a greater incentive per kWh (around $.40-$.80) but will still have to pay the utility company for every kWh it consumes. For example, if the feed in tariff were $.50/kWh and the price per kWh from the utility was $.12/kWh the owner of the system would only be profiting $.38/kWh. Typically the owner of the system enters into a 10, 15, or 20-year agreement at a fixed rate per kWh. With such long term agreements it is important to consider that electricity prices will likely increase in years to come making profits from FITs smaller and smaller.
• Tax Abatements: Sales tax exemption and property tax exemption are the most common abatements offered in state incentive programs. Sales tax exemption helps in reducing the upfront cost of the system making it more attractive to potential system owners. Property tax exemptions are in place to prevent existing property taxes from increasing due to the value added from the solar system. Depending on the state there may be additional tax abatements that are not mentioned here.
• Solar Renewable Energy Credits (SRECs): A SREC is a governmental-based currency that reflects the environmental benefits associated with electricity produced from solar panels. SRECs become valuable when state governments mandate that a certain percentage of the electricity from the utility comes from renewable sources. This is called a Renewable Portfolio Standard (RPS) and structures what is referred to as the compliance market. The government will implement a ceiling price on how much the SRECs can be sold for. A ceiling price is equal to the Alternate Compliance Payment (ACP), which is the penalty to energy providers who don’t comply with the RPS. There is usually a floor price as well that guarantees SREC producers will receive a minimum amount from the utility company. It is common for smaller-scale solar operations to hire an aggregator or middleman to bundle the SRECs with other SRECs from smaller operations and sell them to the utility companies for a small commission. Aggregators have experience and connections within the energy market allowing them to sell SRECs at a higher price than a small independent seller. Some states may conduct all business on an open market system whereas others will operate entirely on an auction basis. It is important to understand how the local market works when weighing the various incentive options.

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Renewable Energy Certificates (RECs)

If on-site renewable energy applications are not feasible, Renewable Energy Certificates provide a means to purchase off-site renewable energy. Renewable Energy Certificates represent the non-power related attributes of the energy. These attributes are the environmental and social benefits associated with the generation of clean renewable energy. One REC represents 1 mega-watt hour of energy produced from a renewable source. RECs are sold on a voluntary market meaning companies purchase them because they want to be responsible and offset their carbon footprint, rather than a compliance market where companies are forced to purchase renewable energy through government regulations. The price range for RECs will vary depending on the region of the country, but generally they cost between $.01-$.20/kWh. The RECs only represent the positive environmental benefits, not the energy itself; therefore in addition to the $.01-$.20/kWh, energy from the utility company still must be purchased. RECs can be purchased with the intention to off-set a facility’s total energy usage or a smaller percentage of the total usage.

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