Friday, April 10, 2020

SolarInvest2020: Residential Quick Take on Doing Good


Residential Solar can be a good investment. Good Savings.
Anyone thinking of putting solar on a residential property will obviously be friendly to doing a good deed for the environment, but would also like to understand the financial implications. There are subtleties to the analysis that are critical to appreciate the full benefits of setting up a solar power system to replace your residential utility power. We have become accustomed to renting power as a way of life. There’s a paradigm shift needed to appreciate owning your own power system and saving on a monthly power bill. Hall has a detailed article Residential Solar is Good, but Commercial Solar can be Crazy Profitable! that you will want to read as you think further about the financial analysis for a specific solar project, especially a business project. Here are the key points for a residential solar system.
Profitable. Solar can be profitable for a homeowner to purchase, but there are additional considerations that usually make the decision even better than it might appear at first glance.
Solar Investment Tax Credit (ITC). The ITC reduces income taxes by 26% of the system price, so you only pay 84% of the price of the system. This ITC goes down to zero (0%) by 2022.
Easy Loan Option. A homeowner will usually have several loan options available, including using a home equity line of credit (HELOC) or financing affiliated with the solar company. (Lease options are also available from some installers, and may be a good option for a homeowner with lower credit and low house equity.)
Positive Cash Flows. Household budget should be cash positive compared to power bills. Frequently, loan options include interest-only for a year until the ITC is realized (and applied to the loan). What would have gone to the IRS in taxes is applied to the solar system, and what would have gone to the power company goes to pay off the loan for the power system you own.
Annual Return. The savings each year could easily be 7% return each year on the net investment.
Avoid Utility Power Price Increases. If the power company increased rates by 1% (or 2%) a year, the real savings from the solar system could be 8% (or 9%).
Sunk Operating Costs. This is not a normal financial analysis, so different perspective is helpful. If the residence is being used, then the electricity to operate it is needed. The money is already being committed to rent a little bit of the power plant from the utility power indefinitely. Or, you could buy your own power system. You could pay less in loan payments than what the power bill would have been and then have free power for decades thereafter. Committed, or sunk operating costs, is one aspect of the buy-solar decision that takes a little perspective adjustment to fully appreciate, but savings is another.
After-tax Savings. After-tax savings is a beautiful thing, especially if it is recurring every month. You pay the power bill in after-tax dollars. So every dollar saved on your budget for electricity is better than a dollar increase in your salary. Consider a 30% effective income tax level. (Effective tax rate is on margin – like a $1 raise – not average, which might be 15%-20%.), At 30% effective tax rate, you would need $1.30 to have an extra $1 to spend on your power bill if it went up next year by $1. There are other deductions, plus your employer has expenses and deductions, so costs to your employer would be $1.50 or more for you to have an extra $1 raise for your power bill, which would leave you with the same discretionary income as the past year. Savings related to power is pure discretionary income, spend it anywhere you want… You just got a raise!
Net Metered. The usual way to go solar on residential is to connect to the utility power with net metering, a measured meter that takes your solar power as you produce it and gives you back the power when you need it. If you over produce at the end of the year, the power company typically rebates you – but usually at a rather paltry rate – for your extra power. Therefore, you would typically size the system to your (anticipated) needs, and not much more.
Batteries. If you want to have your own power when the grid is down, you will want to get batteries. Battery prices and technology, like the Tesla PowerWall, is really starting to hit critical mass. Batteries can also be eligible for the 26% investment tax credit.
Solar System is an Asset. The basic accounting for a solar paid for by a loan might look like this. Buy a $30,000 solar system (an asset) by borrowing $30,000 on your HELOC (a loan). If you didn’t think the system was worth $30,000 (because of the power it produces for decades), you probably wouldn’t have bought it. But, you get an investment tax credit of 26% in 2020 so the actual system cost (after eliminated income taxes of $7,800) is only $22,200. You can go on vacation with the $7,800 or apply it to the loan. However, this is a performing asset that produces power for decades, long after the loan is paid.
What if You Sell the Home? With the home producing its own electricity, the operating costs are reduced by the power savings. The money that would have gone to the power company can now easy be applied to the purchase price of the home (and to a mortgage). The value of the house goes up, typically by the net cost of the solar system or more. Even when the solar loan is paid off, the value to property is the ongoing power savings being produced (maybe 10 to 20 times the annual power savings).
What if You Rent the House? Renting the house is rather simple, simply include the value of the utility power in the rent. The renter should have been budgeting monthly operations (as should you in considering a tenant), so the money for power would be shifted into rent. The portion of rent associated with power might be lower than what the power bill would have been, and electric cost from the solar system might be fixed without matching the price increases that would have occurred from the utility. Win-win.
Environmental Savings. The environmental savings are tied to the utility power you are replacing. Check your energy mix from your favorite (only) power utility. US-wide the 2019 electric mix was NatGas (38.4%), Coal (23.5%), nuclear (19.7%), hydro/thermal (6.6%) and wind 7.3%. Solar was up from 1.8% to 2.6% of electricity power by the end of 2019. Fossil fuels produce huge pollution and greenhouse gases. Probably as important is the massive amounts of water used in operating fossil fuel and nuclear power plants.
Doing Good. Most of the people who have gone solar did so for altruistic reasons, they simply wanted to be kinder to the planet and do their part to make things better. Lucky for us now, the technology has gotten much better and the prices have dropped to the point that solar is simply a good financial decision as well. Now we can do financially well by doing good.

Strategic Business Planning Company website: SBPlan.com Blog: SustainZine.com


SolarInvest2020: Solar Profitability Calculations: Residential and Commercial

As people hunker down at home, and spend time doing all those fix-up items that have been waiting for years, they should also consider working through the details of adding solar.
First, of course, do those energy efficiency tricks that cost very little: smart thermostats, caulk windows and cracks, and improve your insulation. Your favorite power company will do an energy audit so you can get a check list of things to do. The typical building can save 15% to 25% on simple and cheap energy savings. Monitor usage, because the biggest culprit may be humans with bad energy usage habits. Insulation in the attic could have a 3 to 4 year payback and reduce your electric bill by 15 to 25%. Now with the lower energy usage, you should consider adding Solar.
Solar can be a Good investment in many cases, like Residential. But it can be a Crazy Profitable investment for Businesses. The renewable investment tax credits (ITCs) drop down again at the end of 2020, so now is a great time to think about it.
Residential Solar
SBP has done several detailed financial calculators for analyzing both residential and commercials solar projects. Here are articles discussing both:
  1. Quick Take on  Residential Solar: Solar Invest 2020: Do Good and Save Money Too
  2. Full Financial Analysis: SolarInvest2020: Residential Solar is Good, but Commercial Solar can be Crazy Profitable!
Commercial Solar
Commercial
Every situation is a little (or a lot) different. A solar system is specifically designed for the building and the location (average sun hours, etc.). As discussed in the second article, not all systems and warranties are created equal.

About BizMan (Elmer Hall) & Strategic Business Planning Company. Elmer Hall has a Doctorate in International Business Administration and is an adjunct Professor of Business. He is President of Strategic Business Planning Company, a company that does business plans, especially plans that focus on intellectual property and sustainability. Look for Hall’s Perpetual Innovation™ line of books for innovators and inventors. Website: SBPlan.com Blog: SustainZine.com

SolarInvest2020: Residential Solar is Good, but Commercial Solar can be Crazy Profitable!


Business/Commercial Solar can be crazy profitable.
Consistently three-fourths or more of people surveyed believe that renewable energy – especially solar – is good and that we should do more solar on the buildings where the sun shines consistently. But is doing the good thing of going solar a good financial investment?
Solar for residential can be a very good investment, but for businesses, solar can be crazy profitable. One reason it is such a good investment is the safety of producing your own power. If the home or business is to be used, you are already committing to the electric power to operate it. So, the decision to go solar is more like an own-verses-rent analysis: do you want to own your own power generation, or rent power indefinitely. You still need power either way.
In every case, even for the power utilities, the federal government offers a Solar Investment Tax Credit (ITC). Instead of paying taxes to the IRS, you save the amount of the investment tax credit. The ITC for 2019 was 30% of the qualifying investment which has been a wonderful incentive to install renewable power including solar, wind and qualifying battery backup. The ITC dropped down by 4% in 2020 to 26%; it drops again by 4% in 2021. After 2021, the ITC drops off a cliff, to 10% for businesses and zero (0%) for residential. Some states have renewable incentives as well, so the analysis might be even better than the profitability for residential and businesses described here.

Residential, a Good Investment

For residential, a $30,000 system would have an investment tax credit of $7,800, meaning that the net investment is only $22,200 once the tax benefits have been realized. Savings each year might be about $1,560 ($130/mo) or 7% of the net investment. Stated differently, the savings that you do not pay the power company could be 7% or more of the net investment each year, assuming the power company does not raise rates. If the power company raises rates 1% per year, on average, the savings would be more like 8%+ per year. However, the solar investment is actually a better investment than the 7% to 8% return might imply.
The really big difference between buying a solar system to produce your own power and other things you might buy, say a car, is savings vs spending. As long as the house is being used, you (or your renter) are committed to paying for power. So, you are already committed to spending $130 to $200 per month, you simply wait for the bills to come in. If you could have a loan (for maybe 15 years), the payment would be less than what the power bill would have been; you would be cash positive compared to the utility power option that we have come to expect. Some loan packages for solar include interest only initially, let the homeowner apply the tax credit to the principle, and them pay off the loan in regular payment for 10 or more years; every month would likely be cash positive compared to utility power. Of course, once the loan (or home equity line of credit) is payed off, the power generated is free for decades.
Savings has another paradox. Going out and buying a car for $30,000 on loan, gives you a monthly payment of maybe $677 per month (4 years, 4%) or $8,265 each year. You use after-tax income to pay car loan payments, so your disposable income reduces by almost $700 per month for four years. If your effective income tax rate is 23% (not average tax rate), you would need an additional $200 before taxes, for about $900 per month in gross income to cover the car payments.
One more point on the car example. The net asset value is what you can sell it for, after you pay off the loan. For several years, you will owe more on the car than you can sell it for. After the loan is payed off in 4 years (or more), the vehicle will probably be worth only about $10,000, just a third of what you paid. In the solar example, the house is cheaper to operate because of the free power generated, so it is reasonable to expect that the house will appreciate by more than the price of the solar system. Mortgage lenders account for the increase in purchasing power of the buyer because of improved operating costs. (TIP. When considering buying a house, call the utilities and ask about the operating costs associated with electric, water and gas.)
These same concepts apply as well to businesses, but with additional possible tax benefits.

Solar Example in 2020 for Business, Crazy Profitable

Let’s work an example for a business that owns their building and is considering a $100,000 solar investment that would save about $7,200 per year in utility power charges (a straight-forward case that does not have something called Demand charges). Assume that this is a limited liability (LLC) or S corporation where the effective tax rate for the shareholders is 33%, and all profits and losses pass through to the shareholders for tax purposes.

First there’s the $26,000, 26%, tax credit that reduces the tax liabilities, dollar for dollar. This is $26,000 that you simply do not pay out to the IRS. Then there’s the possibility of 100% depreciation of an asset in the first year, so the $28,710 tax shield is based on the reduction in net income based on depreciation. (The tax shield is equal to the tax rate times the amount of depreciation; the asset bases is reduced by half of the ITC, or 33% of $87k.) Therefore, the actual investment is only about 45% of the solar system costs once all the tax benefits of the investment are realized. If the power savings are $7,200 yearly (assuming no increases in power costs), then there’s 15.9% return on net investment each year. Simple payback is about 6 years! Net Present Value (NPV) of the investment is $72k, almost double the net investment. (A positive NPV means that you get your money back, in present value terms, and then some.)
That is crazy profitable for a long-term investment. It is especially profitable when considering that the business is already committing to paying for utility power indefinitely. So, taking a loan for 10 to 15 years could result in loan payments that are lower than what the payments would be for utility power, especially when considering that the power company raises rates (you should figure at least the rate of CPI inflation). At 2% power inflation, the NPV of the investment jumps to $105k, and a massive profitability index of 3.33. (The profitability index is often the best measure for comparing investment alternatives because it is a multiple of the present value of the returns based on the size of the investment – in this case, the size of the net investment. Anything greater than 1.0 is a positive investment.)

Solar is a Different Kind of Investment

There are three major points, however, that make this different from most typical investment analyses. (Four, really, if you were to discuss the environmental savings, but that’s another discussion.) First, the money you’re spending is committed money for power as long as the business is open and operating. Taking a loan to buy the solar system might prove to be cash positive indefinitely. Take $100,000 loan; pay interest only of $4,500 (4.5%) for first year or two until you realize the tax benefits of the solar ITC and depreciation; apply the tax savings to the loan; and then make payments on the loan for 8 years. The loan payments should be several hundred dollars less per year than what you would have paid in electric bills, especially as the cost of power from the utility company increase over time. Once the loan is paid off, the value of the power that you generate for yourself is pure profit!
Speaking of profit, here is the second point. Every dollar you reduce your power bill is savings, which is better than profits – profits are taxable. Things like smart thermostats, insulation, weather stripping, adjusting habits/processes, etc. might result in reducing the power bill by 5% to 25% with little or no out-of-pocket costs. That could result in a perpetuity of savings. If the firm’s cost of capital is, let’s say 8%, then the present value of the perpetuity of savings of $1,200 per year ($100/mo) would be $15,000 in present value terms ($1,200 / .08). Plus, being more energy efficient means that a smaller solar system is required when going solar. (But, 2% power inflation makes the PV of the perpetuity up to $60k present value.)
An even more interesting concept related to energy savings is looking at the sales volume required to equal the $7,200 savings annually. If the firm has a 10% profit margin, the required sales to cover the power bill is $72,000 per year (once the loan is payed off). In the current loan example, cash flows (savings really) are positive every year and go up based on power inflation. When the loan is payed off in year 11 you start to realize huge savings.
By the way, someone buying this property would pay more for the business because it comes with “free” electricity. A Lawrence-Berkley study found that some properties would appreciate by as much as 20 times the annual electric savings. Therefore, the property might be worth about $144k more based on 20 times the $7,200 annual savings. Since the net investment after taxes in this example is about $45k, the property could appreciate almost $100k more than the net solar investment. That’s a property appreciation of about 2.2 times the net investment.
The last point is related to structure, or infrastructure. If the fixture or structure is necessary to put up solar, then some or all the structure might be subject to the renewable investment tax credit. Let’s add an additional $100,000 investment in carport/canopy to support the solar panels.  You talk with your favorite accountant and she agrees that the entire structure qualifies for the investment tax credit. That’s an additional $26,000 in tax credits to help pay for the solar system; these tax credits are only possible if you do the solar system. This reduces the net investment for the solar system from about $45k to about $19k. Payback is now less than 3 years; on a system that should still be producing power 30 to 40 years from now.

Solar: From Good to Great

Solar is a good investment for people and organizations that pay no taxes at all. Good for the environment, but not necessarily a great investment. Still, the investment is with money that you were already spending anyway, so that’s cool. The 26% Solar ITC improves the investment substantially for anyone who pays taxes. For businesses that are high tax brackets, solar can be a great investment, possibly even crazy profitable.
In many states and other countries, there are additional incentives for renewable energy. California and many New England states have a price on carbon, so there’s extra money to be made by selling Renewable Energy Credits (RECs). Most companies now report on their sustainability initiatives to investors. Being more socially responsible can be good public relations and great publicity. Doing good – like reducing your carbon footprint and helping to improve the world’s situation – is very rewarding all by itself. With renewable energy, it can be very profitable to do good. Even better!
Notes. There are a couple key points to keep in mind. You may want to produce only the power that you expect to use, the power utility typically pays only a small rebate per kilowatt hour if you overproduce beyond what you use. The business example shows 100% depreciation in the first year that some small businesses might be able to realize; the IRS has a 5-year accounting life for solar assets. Each state may have different incentives (or roadblocks) from the state Public Service Commission (PSC). Some solar companies offer a lease option which might be a good alternative is some situations. Not all solar companies and solar systems are created equal, nor are the warranties. Look for full warranty over at least 25 years for everything including parts and labor. Different solar panels have different depletion rates ranging from a tiny 0.25% to a high of about 0.60% per year (resulting in an estimated 92% to 80% efficiency by the 30th year, respectively).


Strategic Business Planning Company website: SBPlan.com Blog: SustainZine.com



Friday, March 27, 2020

Solar 2020 and Sustainability: Looking for the Silver Lining


Kelly Pickerel, Editor in Chief of Solar Power World magazine was cautiously optimistic in January when discussing the impact of US Import tariffs on the Solar industry and still solar installations were up 14% during 2019. She hoped that an even year, 2020, would bode well for solar. She concluded her opening letter by the editor in the January 2020 Trends in Solar edition of SPW: “Superstitious or not, I’m crossing my fingers for a calm, prosperous year in solar. Knock on wood.”
Wow! Nobody could have envisioned the coronavirus pandemic and its impact on all industries including solar. But, the environment is taking a breather: Environment Wins with Reduced Human Activity.
During the Great Recession, Hall (2010) argued that a massive opportunity was lost by not by not focusing on sustainability related projects and human capital (education). He argued for spending more on specific infrastructure: especially energy efficiency and renewables. He liked projects that would pay back for decades while reducing our collective human footprint. Federal bailout funding should target, long-term, sustainable projects. The destructive innovation associated with recessions should allow industries (and companies) to fail if they are not sustainable.
Make no doubt about it, the COVID Recession will be unlike anything we have ever seen before. It’s like putting parts of the economy in a self-induced coma, while waiting out the passage of the virus. However, waking up exactly where we left off is probably not going to happen. So, what’s the best way to move forward, and why not try to leverage this sudden break in the world’s business-as-usual routine into more permanent action on becoming more sustainable.
Look for SustainZine blogs and articles on video meetings, teleschool, online university and telecommuting. We suddenly have reduced our carbon footprint worldwide by what, 20%. Not the way we would have liked to launch such a massive initiative, but let’s work with the deflection we are given.
People are now at home more than ever, let’s get them to start monitoring their carbon footprint. How much are they saving by working, schooling and entertaining at home. Imagine someone reducing their carbon footprint by 35% in one week? for several weeks? Wouldn’t it be nice measure that savings and celebrate the win!? Wouldn’t it be nice to keep measuring the reduction in carbon footprint and continue to make incremental moves?
The savings associated with remote work are huge. Once workers who can work remotely get the chance to do so, the genie will be out of the bottle. The savings are massive: employer, employee and environment. The reduction in carbon footprint immense. Measuring and monitoring the savings will justify the future workforce to frequently work remotely.
For the homeowner, first would be energy efficiency, like insulation. Start with an energy audit.
Then, with the reduced power usage, most homes should move to renewable energy (solar).
Once we see and visualize the gains, it could become habit forming. Let’s keep our collective fingers crossed.
See upcoming articles by Hall about the crazy profitable proposition for businesses to go solar, and for homeowners to feel good and save money by going solar.
Mother Earth is our one and only habitable planet. It’s time we started taking better care of her. Maybe the coronavirus pandemic will be a wake-up call about how serious we all need to be about the health of our planet?
References
Hall, E. (2010). Lessons of recessions: Sustainability education and jobs may be the answer. Journal of Sustainability and Green Management. Jacksonville, FL: Academic and Business Research Institute. Retrieved from: http://www.aabri.com/manuscripts/10659.pdf


Saturday, March 21, 2020

Environment wins with reduced human activity

There's a silver lining, of sorts, in the reduced human activity related to the coronavirus shutdown. Nice visuals from space and discussion here:

https://truththeory.com/2020/03/19/in-the-midst-of-a-tragic-human-pandemic-the-environment-is-flourishing/

Move from lots of pollution to a beautiful clean sky. Very ugly way to get there, but the earth is getting a breather from the humans torturing the land and sky.

Tuesday, March 3, 2020

Amazon? Lungs of the world? Sinking feeling?

I got into this debate, related to Global Warming, on the "Amazon is sometimes referred to as the Lungs of the world."
Here's a very readable discussion in Newsweek on how much oxygen comes from the Amazon: https://www.newsweek.com/how-much-oxygen-amazon-rain-forest-1456274
Much like Global Freezing, I don't know that I have ever heard/seen an actual scientist say this, but the Lungs of the World is still a pretty well circulated myth. Some times it says 20% of the oxygen in the world is produced by the Amazon Rain Forest. Actually, this is probably true, however the rainforest consumes most of the oxygen it produces. Plants (decomposition) consume it, animals in the forest, not so much so. Oxygen in the atmosphere is about 21% (20.95%, actually). And that's not going to change much, even if the Amazon was burned to the ground... Carbon Dioxide (CO2) on the other hand, that's not so pretty.
There's massive amounts of carbon stored in the trees and peat. That would all get moved from a stored state into the active environment (air and ocean). Same as chopping down 500 year-old native trees and burning them without replanting the same. Same as digging up coal that took 500m years to form and burning it (except that there's no way to return the coal in coal back to the sync from whence it came).
So, when the amazon is converted to grassland and ranching, the original carbon store is released into the atmosphere and the ability to store carbon (sync) is broken. Yes, grass is green, but it does a horrible job related to carbon sequestering compared to trees. Plus cows have a habit of belching and farting that releases a wicked amount of methane (32 to 64 times as potent a greenhouse gas as CO2).
Of course, there horrific impact on the environment. You could easily call this a crime against humanity and against the environment when native populations are killed and displaced and the rainforest with all it inhabitants of plants and animals are killed and destroyed forever.
National Geographic talks about the same issue, but follows on to discuss biodiversity: Why the Amazon doesn’t really produce 20% of the world’s oxygen: Of the many important reasons to worry about the thousands of fires raging in the world’s largest rainforest, oxygen supply is not one of them.

Tuesday, February 4, 2020

EV on SB2020


EVs, aka Electric Vehicles, were the big winners of the Super Bowl 2020. Everybody had an electric car for the occasion. Audi and even a new EV version of the gas-guzzling Hummer.
Imagine the king of EVs, Tesla, jumping $130 per share on Super Monday! TSLA popped 20% up to almost $800 per share, nearing a $150B market cap firmly – 3 times the value of GM. Then on Super Tuesday, Tesla jumps another $100 to reach over $900 (to $164B market cap). Arguably, there are a few extra factors making Tesla’s stock pop: an upgrade and short squeeze. Maybe a little overpriced?
Tesla has a market share of about 1.5%, so… it does have room to run. But only if you believe that we have reached an inflection point where a shift to most or all cars will be electric. Fortunately, the charging stations are now pretty will established.
But, the average age of cars on the road today are 11 years old. Even if we move to 50% EV in 10 years, it will take decades for half of the cars on the road to be electric. Longer, of course, for trucks because they are just now starting to ship.
Still, the trend toward EVs is definitive. Everyone has a few. Some auto manufactures are no longer introducing new gas or diesel models.
You would think that the drop of oil prices (down to $50 for WTI) this week on the corona virus scare might be a boost to gas models?
Related to market cap, remember that Tesla bought sister company Solar City so it does solar systems and battery banks (PowerWall). Tesla GigaFactories crank out batteries (with partner Panasonic). With the cost of batteries dropping, both EV and storage become more and more affordable. The big thing to look for in battery technology is the move to safer and/or more powerful technology. Big break throughs in battery tech – cheaper, better, lighter – will be game changing. Tesla stands to win in every case, old lithium or new whatever.
I could not bring myself to buy Tesla stock at $200 in June; over $900 is nose-bleed levels today. But, it does suggest a momentum shift to EVs in our future.