Wednesday, April 22, 2020

Earth Day 2020, 50 years of Hind sight

It is the 50th Earth Day and the world is generally locked down while we deal with the Coronavirus pandemic -- and how best to ramp back up the world economy.
50th Earth Day. April 22 2020
The pandemic is a serious and sobering aspect to the fun and excitement to an otherwise interesting and informative day of rallies, speeches waterway cleanups and more...

Worldwide we are going on 3M positive COVID19 cases and nearing 200,000 deaths. The US, never to be outdone in anything that seems competitive, has 32% of the cases and more than 25% of the deaths. Deaths in New York and New Jersey just passed 15,000 and 5,000 respectively. New England deaths exceed all other countries. It is hard to imagine this given that the virus had to cross the Pacific (to the west coast) or travel to Europe and then cross the pond to New England. The US has only 4.2% of the world's population, yet 25% of the worlds deaths, and rising. How can that be?

COVID19 Positive Cases and Deaths
           As of April 22, 2020
       Cases  %/World
World 2,621,436 100.0%
 deaths 182,989 7.0%
7.0%   %/World
US 837,719 32.0%
 deaths 46,771 25.6%
Deaths% 5.6%

COVID has had a big toll on health and live and a wicked toll on the world's economies. There some linings, and some of them silver, from this pandemic – currently and on the other side of it. Let’s think of a couple while we address what the other side of COVID might look like. First, if you think that we will ever get back to “normal”, you probably haven’t thought it through a lot.
Pollution. The massive slowdown in the world economy has allowed the earth to take a breather. There are wonderful satellite views of China, Europe and the US, before and after pictures. Business as usual shows clouds of pollution followed by a few weeks of complete economic shutdown, and pristine-looking skies. Wow! There are similar pictures everywhere. Denver. LA, New York. The clear canals of Venice with fish and dolphin. 

Pollution contributes to hundreds of millions of ailments every year, and to millions and millions of deaths. Let's say 6 to 10 million people die each year because of air pollution. (See for example, this Forbes article in 2018.) Note that the infographic shows about 2.1M in the USA. Maybe the slowdown in the first quarter of 2020 will result in 1M people saved related to air pollution? 
Once people get a taste of clean air, they tend not to want to return to smog and pollution.
A Whole New Economy. The world economy will never be the same. For several reasons. First, what we came to think of as "normal" was never normal. We have undertaken to consume all the world's fossil fuels in a few short centuries. We are fully beginning to realize the full costs of non-sustainable systems, the business-as-usual economy was never normal.
Earth Overshoot day is a concept that is especially relevant to the first Earth Day in 1970. The resources we took and consumed from the earth -- although maybe not sustainable and renewable -- were fully supplied by the 1 planet we inhabit. That is, the 3.7B world population in 1970, staying with the same consumption patters, could live on the earth without depleting her resources. Think of this earth carrying capacity like you do a annual budget, it would be nice if the annual income lasted all year. But the population has more than doubled to 7.7B, and overall consumption has nearly doubled. Right now, the carrying capacity of Earth is exhausted about the end of July, only 57% of the way through the year! That's 43% deficit spending for the rest of the year. To consume 43% more than the earth's annual carrying capacity, we deplete resources like trees, fish and more.
But, in 2020, the earth has gotten a bit of a breather. Overshoot day will improve dramatically!
The economy will change. There will never be a "new normal". People have gotten a taste of teleworking. It's going to be hard to force people back into the offices that require an hour commute each way. Travel will take some time to come back, and business travel will never be the same. Stadium events will take some time to come back. Students have fully embraced online learning, and they will never fully go back.
Consumption of fossil fuels are down at least 30% during the closed economy, but consumption may only bounce back half when the economy slowly starts to churn back.
This might be the jump start that we all needed to step up a move toward sustainability. Assuming a 15% jump back, we would need to reduce our carbon footprint by 3% each and every year to have a 40% (overall) reduction by 2030, a 66% reduction by 2040, and near zero by 2050. Good news, we can easily move to 100% renewables by that time. (See Stanford Roadmap to 100% Renewable Energy by 2050 by country and also by major city.) And we can profitably move to 100% renewables if we include the health and death costs of fossil fuels.
Hind sight is 2020. Every year since the turn of century as been in the hottest 20 some years, with many years breaking all time records. In fact, many months have hit monthly record highs, especially since 2015 (an El Nino year). January 2020 was hottest on record, and the oceans have never been hotter. Remember that carbon dioxide (CO2) persists in the environment for about 100 years from the time we introduce it by burning fossil fuels. As CO2 zooms from about 320ppm a hundred years ago to 415ppm now, the green house gasses will result in atmospheric heating for a century!
Our linear economy was never "normal", for this reason, and many others no one should consider using the term "new normal" on the other side of the COVID recession. Hopefully, with 2020, we will have a new respect for science and scientists.
Let's leverage this tragedy of COVID to make a real difference in our trajectory of the future.
May every day be an Earth Day.

Friday, April 10, 2020

SolarInvest2020: Residential Quick Take on Doing Good

Residential Solar can be a good investment. Good Savings.
[UPDATE: 30% Investment Tax Credit on renewables in the IRA Act. See our Blog post here. This makes all the financial discussions below much more profitable. Also, higher inflation and higher power inflation.]
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% marginal income tax level. (Marginal tax rate is on the next $1 of income or savings, not the average income which have no taxes at the lowest levels.) At 30% marginal tax rate, you would need $1.30 to have an extra $1 to spend on your power bill if power costs 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: Blog:

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.

[UPDATE: 30% Investment Tax Credit on renewables in the IRA Act 2022. See our Blog post here. This makes all the financial discussions below much more profitable. Also, higher inflation and higher power inflation.]
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
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: Blog:

* Update: As of January 2021 the ITC has been extended at 26% for 2021 and 2022. See Discussion at SEIA.
[UPDATE: 30% Investment Tax Credit on renewables in the IRA Act 2022. See our Blog post here. This makes all the financial discussions below much more profitable. Also, higher inflation and higher power inflation.]

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

Business/Commercial Solar can be crazy profitable.

[UPDATE: 30% Investment Tax Credit on renewables in the IRA Act 2022. See our Blog post here. This makes all the financial discussions below much more profitable. Also, higher inflation and higher power inflation.]

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.
* Update: As of January 2021 the ITC has been extended at 26% for 2021 and 2022. See Discussion at SEIA.

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 marginal 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 marginal 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).

* Update: As of January 2021 the ITC has been extended at 26% for 2021 and 2022. See Discussion at SEIA.

*[UPDATE: 30% Investment Tax Credit on renewables in the IRA Act 2022. See our Blog post here. This makes all the financial discussions below much more profitable. Also, higher inflation and higher power inflation.]

Strategic Business Planning Company website: Blog: