PV VALUE™ User Manual v. 1.0 - North Texas Renewable Energy
Contents
1. 13 INTERNAL REVENUE CODE SECTIONS RELATING TO SOLAR 17 January 31 2012 PV VALUE USER MANUAL V 1 0 1 ABBREVIATIONS amp DEFINITIONS Solar Nomenclature Watt A unit of power defined as voltage x current kW Kilowatt 1000 watts kWh Kilowatt hour 1000 watts for an hour PV Photovoltaic AC Alternating Current DC Direct Current TOF Tilt and Orientation Factor STC Standard Test Condition Financial Nomenclature CAGR Compound annual growth rate DR Discount rate IRR Internal rate of return MIRR Modified internal rate of return MPB Modified payback NPV Net present value SPB Simple payback WACC Weighted average cost of capital 2 VALUATION ISSUES FACING DISTRIBUTED PV Assigning a reasonable valuation for an existing installed Solar Electric Photovoltaic PV System is important for the distributed PV industry as it continues its transition from the innovation stage through early adoption and eventually to mainstream use 100 75 50 Jeus JJe N 25 Innovators Early Early Late Laggards 2 5 Adopters Majority Majority 16 13 5 34 34 Rogers bell curve showing the adoption rate for technological innovations Distributed PV in the US is currently believed to be in the Innovators stage Image Credit Wikipedia org diffusion of innovations With the consequences of the recent over valuation issue in the rea2. rr 3 3 2 DIEFERENT TYPE Oi DI AL yeu ee EEE ee qaqapas uu anan nana 3 3 3 TILT amp ORIENTATION FACITOR aaa asaaasasaasasaasasaasasanasasaaqanasaaqasaaasqaasasasqasaaaasasasaaasasa 3 3 4 FADEN u u aaaytananayayasaq uwayuayanaywawayayayayuswaqhananaayaqqunqauqaayaakanayaaq kaa aan sss sa s s ss 4 3 5 DESIGN PERMITTING amp INSTALLATION 5 3 6 CALCULATING FUTURE ENERGY PRODUCTION 5 3 7 MODULE DEGRADA THON u u u u u uu S sasa sasspss 6 3 8 UTILITI RATE ESCALATION PERCENT G u 5 OOE 6 3 9 DC INTI A q J uu e EEEE E EEE ee TEE 7 3 10 OPERATION amp MAINTENANCE EXPENSES a 7 sA S LV A CE V ACUE AAAA ARSAN 8 3 12 VALUATION MODEL FOR THE INCOME APPROACH 8 4 EXCEL SPREADSHEET INSTRUCTIONS 9 4 1 ANAL OPD TAL eee eee ee ee ee ee 55 ee cee sss 9 RESOURCES AND REFERENCE 5 ssscsccesesesarereesaieseieaseanereietoiesarserreis aon een een ua 10 APPENDIX ccccavsoaveasnateaaesessssuenssaapsnevagsoanenaesnanesonsmasnsieasanepatanenssanatesubanonbesnenssaeanedsonsssenssansieaanoentas 12 OTHER FINANCIAL ANALYSIS METHODS USED FOR SOLAR PV
3. If a system performance test has not been performed within the past 12 months and or a digital shading analysis is not available and the value of the system is critical both should be performed by a trained and certified solar PV installer who works for a properly licensed contractor Currently there are two organizations that certify installers The North American Board of Certified Energy Practitioners NABCEP has over 1600 certified solar PV installers nationwide NOTE NABCEP currently has 2 different certifications for the PV industry Solar PV Installer and PV Technical Sales Professional www nabcep org Underwriters Laboratory UL which certifies electricians through their UL University personal certification program www uluniversity us January 31 2012 PV VALUE USER MANUAL V 1 0 3 CALCULATING THE FUTURE ENERGY PRODUCTION 3 1 GRID TIED SOLAR ELECTRIC PV SYSTEM BASICS First a word of caution PV Systems can operate at lethal voltages approaching 600 volts or more and should only be accessed by qualified personnel such as a trained and certified solar PV installer who works for a properly licensed contractor A grid tied PV system without battery backup usually consists of one or more modules which may be wired together in series or parallel to form an array which is then connected to an inverter The modules convert sunlight energy into DC voltage which must then be converted by a power con
4. 30 years must also be used against the scrap value the end result adds very little to the valuation and therefore is not included in the model 3 12 VALUATION MODEL FOR THE INCOME APPROACH 2010 Solar Power Electric The method of valuation for the income approach uses the present value of the future energy production from PVWatts This is accomplished using the following formula for each year over the remaining life of the project Exwn me DeGrate Urate UESCyate E DisCyate O amp Myr16 Discrate Exwn Annual Energy Output kWh Deg ate Module Degradation rate Uate Current Utility Rate kWh UEsC ate Utility Escalation Rate Disc ate Discount Rate O amp Myr16 O amp M Expenses for year 16 The degradation rate is calculated starting in the first year the utility rate escalation and the discount rate are calculated starting in the first month of year 2 and the O amp M expenses are calculated for year 16 only If the appraisal is made in year 15 and beyond an option comes up asking the user whether the inverter has been replaced If it has been replaced before the 15 year warranty period the appraisal range of value estimate will be higher If it has not been replaced within the 15 year warranty period the O amp M amount will then be discounted for the remaining warranty lifetime of the panels which will result in a lower appraisal range of value estimate For example if
5. accounted for This is done automatically by PV VALUE USER MANUAL V 1 0 January 31 2012 selecting either the residential or commercial averages as reported within PVWatts and clicking on the Current Utility Reported Electricity Rate The current utility rate in kWh for the state the PV system is located in will be updated The residential and commercial utility escalation rates can also be selected and are calculated using a CAGR equation for the years between 1990 and the current year As there are over 330 electric utilities nationwide and rates vary within each state there is a user defined inputs option for kWh and utility escalation rates that will override the PVWatts and EIA specific data if the rate is not current If a user defined utility escalation rate is used it is important to make that calculation as a CAGR before using as input to the model and not as an average annual growth rate O amp M expenses The O amp M expenses are automatically calculated based on the PV system size in watts using inverter amp labor pricing data If a different value is anticipated then a user defined input is available Select the checkbox and input the new value in W and this will override the automatic calculation Most module warranty terms will be for 25 years However there are some manufacturers that offer a 30 year term Select the term of the module warranty from the drop down box and input the PV syst
6. for the difference between the standard temperature coefficient used in PV WATTS of 0 05 C and the lower temperature coefficient of the specific thin film module If the thin film modules are flush mounted then a separate calculation for increased module temperatures would also need to be made Currently there is no standard way to do this with PVWatts Net metering is worth mentioning though it is not included in the valuation tool If the utility offers net metering and the customer has a signed net metering agreement in place then any excess energy which is produced but not used at the time can be distributed to the utility for later use When production is lower than the customer s usage or non existent such as at night the excess energy previously distributed to the utility is used first and credit is given ona kWh per kWh basis 3 7 MODULE DEGRADATION It is well known within the solar industry that modules degrade with age starting from the first day of production Although improvements have been made in the manufacturing process over the years recent research by NREL Jordan and Kurtz 2011 Osterwald et al 2006 demonstrate that the energy output of higher quality crystalline silicon modules degrade at rates of 0 1 to 0 9 per year and currently for some thin film modules the rate of yearly degradation can be 1 or more Although this may not have a large effect on the first year of energy production when calc
7. org 11 January 31 2012 PV VALUE USER MANUAL V 1 0 APPENDIX 12 January 31 2012 PV VALUE USER MANUAL V 1 0 OTHER FINANCIAL ANALYSIS METHODS USED FOR SOLAR PV January 31 2012 PV VALUE USER MANUAL V 1 0 NET PRESENT VALUE The net present value is the sum of all positive and negative cash flows which are discounted to the present value The Present Value discussed earlier is what is used for the NPV calculation For the netting effect the negative initial cash flow is based on the prospective PV system purchaser s true cost once all tax credits treasury grant rebates depreciation bonus depreciation taxes on rebate and loss of utility energy bill tax deductions for commercial businesses are factored in In order to calculate the initial cost a basic understanding of Internal Revenue Code sections 25D 48 and other sections that directly relate is necessary Excerpts from the Internal Revenue Code as related to solar are presented in the next section of the appendix INTERNAL RATE OF RETURN An internal rate of return IRR calculation is related to the NPV calculation where the NPV equals zero and the discount rate at that point becomes the IRR In general it is assumed that when comparing projects of equal duration and risk the project with the highest IRR should be chosen Caution should be used with comparing a PV project to other investment opportunities based solely on the IRR as a project with
8. the extent of the amount excluded under subsection a for any subsidy which was provided with respect to such expenditure The adjusted basis of any property shall be reduced by the amount excluded under subsection a which was provided with respect to such property Energy conservation measure In general for purposes of this section the term energy conservation measure means any installation or modification primarily designed to reduce consumption of electricity or natural gas or to improve the management of energy demand with respect to a dwelling unit The term dwelling unit has the meaning given such term by section 280A f 1 The term public utility means a person engaged in the sale of electricity or natural gas to residential commercial or industrial customers for use by such customers For purposes of the preceding sentence the term person includes the Federal Government a State or local government or any political subdivision thereof or any instrumentality of any of the foregoing Exception This section shall not apply to any payment to or from a qualified cogeneration facility or qualifying small power production facility pursuant to section 210 of the Public Utility Regulatory Policy Act of 1978 See IRS PLR2010350003 for more clarity Note Private letter rulings only apply to the taxpayer that requested the ruling and are not to be applied to or relied on by other taxpayers Section 280A d 1 Use as
9. would be 95 Data by Solmetric SunEye www solmetric com Solar Access Graph with minimal visible shading 3 right at sunrise and sunset Most of the shading in this photo is due to mature trees which were not on the surveyed property The graphs are relatively easy to read with only half the months shown due to the overlapping nature of the spring and fall equinox This photo was taken in December just after 12pm solar time Photo Credit Solar Power Electric 2 Data by Solmetric SunEye www solmetric com Solar Access Graph with shade starting at 1 30pm in the summer and 2pm in the winter and continuing through the rest of the day The potential solar insolation in this example is reduced by nearly 30 This will have a major impact on the potential energy production and must be accounted for in the valuation model This photo was taken in March just after 8 00am solar time Photo Credit Solar Power Electric Solar Access Graph with minor shade in the winter months until 8 30am and again in the early afternoon between 3 30 and 4 00pm solar time This is a panoramic shade graph taken with the Wiley Asset Shade Tool Photo Credit Solar Power Electric January 31 2012 PV VALUE USER MANUAL V 1 0 3 5 DESIGN PERMITTING amp INSTALLATION The proper design legal permitting code compliant installation and commissioning of a PV system by a properly trained licensed and certified co
10. 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 4 od http www eia doe gov cneaf electricity epa average price state xls http www eia gov electricity monthly excel epmxlfileS 6 b xls January 31 2012 PV VALUE USER MANUAL V 1 0 Average retail rates of electricity for FL from the EIA website shown in kWh Rates shown are through 2010 Timeframe Residential Commercial 20 YR CAGR 1 99 1 95 10 YR CAGR 4 01 4 60 5 YRCAGR 3 67 3 73 20 10 amp 5 year compound annual growth rate CAGR or escalation rate of retail rates in FL calculated from the EIA website data As shown in the previous table electric utility rates for this location in Florida have risen more over the past 5 to 10 years and knowing that the percent of rate escalation will have a measurable impact on the present value of the future energy production since we are performing a valuation based on 25 or 30 years of future energy production it is generally not an acceptable practice to take the shorter term averages and extrapolate out for the long term A more conservative approach is to take at least the 20 year growth rate and apply it to the kWh production estimate each year for years 1 through 25 or 30 In the valuation tool the 1990 state average electricity rate and the most recent electricity rate as reported by the EIA are used in determining the Compound Annual Growth Rate CAGR For example t
11. 2 axis tracks east to west and also changes the tilt angle to where the direct component of the solar irradiance is perpendicular to the array at all times Array tilt if left unchecked this will be calculated as the local latitude The user must check the box and input the actual module tilt to get an accurate calculation if the module tilt is known If the module is mounted flat with no tilt check the box and make sure the array tilt is set to 0 0 Array azimuth this is defaulted to 180 or true south Input the azimuth angle that the array faces In some cases the module will be a few degrees off of south so knowing the azimuth angle is important Click outside of the yellow cells and then click on Calculate PV Production This will call PV Watts using the Perez 2002 model through the SAM interface You should now see kWh Produced Year for the PV system Discount rate The discount rate calculation defaults to the current 30 year fixed rate 60 day commitment from Fannie Mae as the WACC along with a basis point calculation that accounts for an investment rate of return for the risk that is assumed through purchasing the income stream An option to use a 15 year fixed rate or a custom rate is available If the magenta cell states rate is out of date click on update FNM rate and the discount rate will be automatically updated Utility rates Under remaining inputs the electricity rate data needs to be
12. 5 500 00 for the replacement cycle before the present value calculation is performed Since the cost is incurred later and will be paid for with inflated dollars the future O amp M expenses may be discounted using the chosen discount rate The model is built to use the range of O amp M costs expressed in cents per watt in the above table If the user has other information on these costs there is an option to override the default values Note Current estimates for O amp M expenses are expected to drop in the next few years as the Department of Energy s SunShot goals are met with a goal of reducing the installed cost of solar energy systems by about 75 3 11 SALVAGE VALUE The value of the components at the end of 25 or 30 years the standard module warranty period is similar to other rapidly advancing technologies which have reached the end of their warranty period and although the PV system may continue to produce energy at a reduced rate for 40 years a bonus for the system owner at that time electrical codes efficiencies and manufacturing practices will have changed over the years These factors combined with an expired warranty could render the technology obsolete Currently there is no existing reliable secondary market in place that can assign a value to mass produced 25 year old modules and inverters In its absence a scrap value of the components metals could be used Since a present value calculation over 25 or
13. PV Value User Manual v 1 0 Jamie L Johnson Solar Power Electric Geoffrey T Klise Sandia National Laboratories 1 31 2012 SAND2012 0682P Sandia National Laboratories is a multi program laboratory managed and operated by Sandia Corporation a wholly owned subsidiary of Lockheed Martin Corporation for the U S Department of Energy s National Nuclear Security Administration under contract DE AC04 94AL85000 U S DEPARTMENT OF aiaga WA S Sandia SOLAR National POWER Laboratories ELECTRIC January 31 2012 PV WALUE USER MANUAL V 1 0 Executive Summary This user manual describes the methods used to develop a model for appraising the value of a photovoltaic PV system installed on residential and commercial properties This model follows the Income Capitalization Approach used by appraisers to determine the value of a PV system as a function of the potential energy produced over the system s lifetime Instructions on how to properly input values into the spreadsheet tool are presented along with a detailed description of each parameter PV Value is intended for use by real estate appraisers mortgage underwriters credit analysts real property assessors insurance claims adjusters and PV industry sales staff This user manual references version 1 0 of the Photovoltaic Energy Valuation Model PV Value with a copyright date of December 29 2011 Please check back to http pv sandia gov pvvalu
14. a large initial negative cash flow in the first year may produce a lower IRR compared to a project with a small initial negative cash flow However the project with the large initial negative cash flow may have a higher NPV upon reaching the end of its life cycle and therefore a higher return in the number of dollars on capital invested There are issues associated with using IRR with a PV project IRR assumes that the positive cash flow will be reinvested immediately at the IRR This is often not the case since there is rarely another project with a comparable IRR waiting to be started on a monthly or annual basis Another issue is that with multiple negative cash flows during a project life such as with an inverter replacement cost during year 16 the IRR may return multiple values based on the negative and positive cash flows Due to this a modified internal rate of return might be a better approach for PV projects If a high IRR is the sole reason for choosing to invest in a PV project compared to investment vehicles with a low rate of return such as a certificate of deposit then another look at the other financial analysis methods mentioned here may be warranted MODIFIED INTERNAL RATE OF RETURN The modified internal rate of return MIRR is just that a modified version of the IRR which resolves two of the issues mentioned previously regarding the IRR as it relates to PV projects The first assumption is the potential for multiple rates of r
15. and it will pass the solar radiation data into the PVWatts calculator for determining the first year energy production This version improves accuracy compared to Version 1 due to its ability to provide data which is measured closer to location of the array A third version of PVWatts is available within NREL s System Advisor Model SAM and is used in the valuation model spreadsheet The main difference in this version is the use of the Perez et al 2002 10 kilometer satellite data which can be accessed from NREL s Solar Power Prospector In order to call PVWatts within a spreadsheet NREL s Developer Network web service is used to pass input values from the spreadsheet and return outputs such as first year energy production and electricity rates Currently the web service 1 http rredc nrel gov solar calculators PVWATTS version1 2 htto www nrel gov rredc pvwatts version2 html 3 http maps nrel gov node 10 January 31 2012 PV VALUE USER MANUAL V 1 0 provided by NREL only uses PVWatts with the 10 kilometer satellite data The results from PVWatts are considered for the purposes of this valuation tool a fairly accurate estimate for crystalline silicon modules which currently make up the majority of installed residential and commercial solar electric systems For systems using thin film modules which have a different temperature coefficient factor a calculation would need to be made to account
16. ated data are orange 4 1 ANALYSIS TAB Starting out with the solar resource calculation you will see seven user input cells that will need to be defined in order to calculate the number of kWh s produced per year The inputs are as follows Zip code Where the PV system is located System size in watts This is calculated at STC A 5 06kW array would be input as 5060 watts Derate Factor The model defaults to 0 77 which is the same as the PVWatts standard derate However if direct shading is observed or if the value is critical then it is recommended that a custom derate factor with a digital shading analysis be performed by a certified PV installer who is properly licensed There is a space in the spreadsheet that allows entry of a Commissioning Report number which will change the derate factor to a user input override cell Entering this number into the spreadsheet verifies that a certified PV installer inspected the system to provide a custom derate factor Module degradation rate This is defaulted to 0 5 and reflects a 0 5 annual degradation rate more common for crystalline systems For thin film PV see the above section on appropriate degradation rates Array type The choices are fixed 1 axis or 2 axis Most PV installations are fixed and will not track the sun If a tracker is encountered then the number of axis will need to be selected 1 axis is typically east to west with the tilt angle fixed
17. ation SARASOTA BRADENTON FL Optimal Tilt 27 Azimuth 174 Insolation 1939 kWh m Station ID 722115 Latitude N 27 38 Longitude W 82 55 kWh m2 90 100 1939 75 99 1919 95 1842 90 1745 85 1648 80 1551 75 1454 70 1357 65 1260 60 1163 55 1066 50 969 60 90 105 120 135 150 165 180 195 210 225 240 255 270 Azimuth 2008 Solmetric Corporation Using the above graph of annual insolation for Sarasota FL an array installed with a tilt angle of 22 6 5 12 pitch and an azimuth of 90 east facing would experience a loss of nearly 11 of the available solar insolation resulting in a TOF of 89 3 4 SHADING Shading can be a critical factor in determining the potential energy output and may greatly affect the amount of solar insolation that the system receives A proper digital shading analysis including a sun graph showing any shading obstructions should have been performed by the installing contractor before beginning the design and installation process and should have been provided to the original system purchaser In the following examples using the Solmetric Suneye 210 digital shade analysis model the TOF was set to 100 in order to determine the total effect of any shade obstructions Shading is referenced as a percent of total solar insolation available so if 5 shading is observed then the percent of the total solar insolation available
18. ative cash flows are involved then the MIRR may be more appropriate FINANCIAL MODEL SUMMARY Some things simply can t be quantified into a financial model such as when a business owner chooses to install a PV system so they can advertise that they are a green business and most or all of their electricity needs are met with PV or when a homeowner installs a PV system in order to be the first home on their street to generate electricity from the sun There are other considerations such as what happens if the utility rates go up faster than the long term growth rates If this happens then several of the financial models presented may underestimate the value or financial return to the PV system owner No financial model is perfect and each model presented here does contain flaws However when presented together a more accurate picture will emerge and allow a prospective PV system purchaser to make better informed decisions 16 January 31 2012 PV VALUE USER MANUAL V 1 0 INTERNAL REVENUE CODE SECTIONS RELATING TO SOLAR January 31 2012 PV VALUE USER MANUAL V 1 0 Brief excerpts of the IRS notice s or IRC sections are shown although readers are encouraged to visit the IRS website and read each section thoroughly in order to determine how each section applies to their individual situation The following is not to be construed as tax advice readers are advised to consult with their own legal and tax professionals NOTE A
19. ctober 21 25 1985 North American Board of Certified Energy Practitioners NABCEP www nabcep org NREL s Renewable Energy Project Finance Tracking Initiative REFTI by Michael Mendelsohn SFA https financere nrel gov finance REFTI January 31 2012 PV VALUE USER MANUAL V 1 0 NREL Solar Prospector http maps nrel gov node 10 Osterwald C R J Adelstein J A del Cueto B Kroposki D Trudell and T Moriarty 2006 Comparison of Degradation Rates of Individual Modules Held at Maximum Power Report number NREL PR 520 39844 Presented at the 2006 IEEE 4 World Conference on Photovoltaic Energy Conversion May 7 12 Waikoloa HI Perez R P Ineichen K Moore M Kmiecik C Chain R George and F Vignola 2002 A new operational model for satellite derived irradiances description and validation Solar Energy 73 307 317 PV Value Photovoltaic Energy Valuation Model v 1 0 http pv sandia gov pvvalue PVWatts Version 1 http rredc nrel gov solar calculators PVWATTS version1 PVWatts Version 2 http mapserve3 nrel gov PVWatts Viewer index html Solmetric Suneye 210 Users Guide 2010 by Solmetric Corporation www solmetric com Tilt amp Orientation Factor Graph by Solmetric Corporation http www solmetric com annualinsolation us html Underwriters Laboratory UL University www uluniversity us Wiley ASSET Shade Tool www we llc com ASSET html Wikipedia Financial references www wikipedia
20. determine a replacement value If the PV installation is recent then the replacement cost can sometimes be higher than the original PV installation net cost which could be due to the ending of a PV rebate program a decline in the rebate amount or the PV system owner qualifying for a rebate on the original PV system due to incentive program rules they may not be able to qualify for a second rebate on a replacement PV system It is also important to note that in many cases PV installations are done before the end of the year in order for the prospective PV system owner to lighten their tax burden through the use of the 30 federal tax credit state tax credits and accelerated bonus depreciation for commercial systems If a replacement PV system is needed the PV system owner may no longer be in the same tax situation and may not be able to utilize the tax write off 2 4 INCOME CAPITALIZATION APPROACH The income approach is based on the idea that the value of a property is equal to the capitalized value of the net income stream generated by that property Applying this approach to PV looks at what one may be willing to pay today for the opportunity to receive future cash flows using a discounted cash flow model This model needs to adequately consider the present value of projected future energy production along with estimated operation and maintenance costs that are anticipated to occur during the solar module power production warranty t
21. ditioning unit inverter to the same AC voltage that is required at the point of use Solar PV systems are most often found mounted on a rooftop and may also occasionally be mounted on a ground rack or solar canopy They are installed so that ideally the modules are tilted near the local latitude and if in the northern hemisphere oriented towards true south To achieve the maximum potential annual energy production the modules also need to have unshaded access to the sun during the peak solar insolation or peak sun hours time of 9am to 3pm solar time It is important to note that two otherwise similar solar PV systems of equal size and cost that are installed at a different tilt and orientation from each other and which also have different amounts of shading will not necessarily produce equal amounts of energy and in some cases may have dramatically different annual energy production figures 3 2 DIFFERENT TYPES OF SOLAR The two photographs shown here outline some of the differences between solar PV and solar thermal Typically a home will have either one or the other though sometimes both solar PV and solar thermal will be present SS The example shown in the above photo is of a grid tied solar electric PV system PV module sizes vary and it is difficult to estimate the total system size in watts just by casual observation This PV array consists of 11 PV modules rated at 230 watts STC each Photo Credit Solar Power Electr
22. e for newer versions of the spreadsheet tool A new release is anticipated on or before September 1 2012 Any questions or comments can be directed to Geoff Klise gklise sandia gov and Jamie Johnson johnson spefl com This project represents the results of a collaborative effort between Solar Power Electric and Sandia National Laboratories that was made possible through funding provided by the U S Department of Energy s Office of Energy Efficiency and Renewable Energy This valuation tool will reduce non balance of system BOS market barriers to PV by reducing uncertainty about the value of a PV system Acceptance and use of this tool by the real estate industry will contribute to the overall penetration of PV systems across the U S January 31 2012 PV WVALUE USER MANUAL V 1 0 Contents 1 ABBREVIATIONS amp DEFINITIONS 1 2 VALUATION ISSUES FACING DISTRIBUTED PV 1 2 1 APPRAISALVALUATION METHODS i hee ten ene eee ee ee eee ee eee 1 2 2 SALES COMPARISON 2 aad 2 8 A Gg Senne ene ee ee 1 2 3 COST APP ROA Fierin 2 2 4 INCOME CAPITALIZA TON APPROACH u ia u u u EEEE EEEE EENES 2 3 CALCULATING THE FUTURE ENERGY PRODUCTIONN 3 3 1 GRID TIED SOLAR ELECTRIC PV SYSTEM BASICS
23. em age in years If the age of the system is 15 years or greater there is an option to select if the inverter has been replaced If it has not been replaced then the eventual inverter replacement expense must be accounted for in the calculation Lease to purchase There is an option to look at a Lease to Purchase where the value can be calculated for the remaining energy in years after the lease is bought out based on the module warranty period This option does not currently account for the purchase price of the PV system It is anticipated that a future version will have a more robust calculation for this scenario After all of the user defined data cells have been input correctly the present value of the expected lifetime energy production will be calculated as the Appraisal Range of Value Estimate 10 About the Authors Jamie L Johnson is the General Manager of Solar Power Electric a FL state certified unlimited electrical contractor He holds both NABCEP Certifications for Solar PV Installer and PV Technical Sales Professional Mr Johnson has over 15 years of experience in the financial services sector beginning his career with the IRS and then spending over a decade working in the mortgage banking and asset management industry Geoffrey T Klise is a staff member at Sandia National Laboratories in the Earth Systems Analysis Department His research area involves providing system level analysis technique
24. en be considerably longer than the SPB timeframe However it should be a more accurate presentation of the prospective PV system purchaser s recoupment of their actual investment Prospective PV system purchasers may find that the cost to replace an old technology inverter near the end of the PV systems life cycle in a small number of cases may not make sense and in fact it may make more sense financially to upgrade the entire PV system at that time using current technology as it is likely that efficiencies will have improved costs will have come down and life cycle timeframes will most likely have been extended RETURN ON INVESTMENT Return on investment or ROI is a return calculated in percentage terms on the total investment It can be calculated over a single annual period or annualized over multiple years Sometimes it is also used in a more unconventional sense to show the total return over an investment timeframe This unconventional use can be somewhat meaningless to an investor For example if the total ROI is 50 that may sound like a great 15 January 31 2012 PV VALUE USER MANUAL V 1 0 investment However if that total return is over a 30 year timeframe and has not been annualized then that may not be considered by some as a great ROI ROI calculations are difficult to perform accurately when multiple positive or negative cash flows are involved during an annual time period In the scenario where multiple positive or neg
25. eturn due to multiple positive and negative cash flows and second is the assumption that all positive cash flows will be reinvested at the stated IRR For example in the case of a business that has a PV system installed with net metering the positive cash flows may be in the form of a lowered utility bill which frees up cash flow to invest within the business Rarely is the cash flow reinvested at the same rate of return as the IRR and in some cases the cash flow may simply be paid out to the business owner as a return of capital and reinvested in low risk low rate of return investments 14 January 31 2012 PV VALUE USER MANUAL V 1 0 In the modified version it is assumed that positive cash flows will be reinvested at a chosen fixed rate of return which is less than the MIRR and negative cash flows are discounted to present value using the WACC thereby producing a single rate of return which may more closely resemble purchaser s financial situation SIMPLE PAYBACK The simple payback SPB is often used within the PV sales industry to calculate the time it takes for the purchaser of a PV system to recoup their original investment This method of analysis has limitations that must be understood before being relied upon Simple payback is just that it does not include a discounted cash flow model nor does not take into account risk lost opportunity costs O amp M expenses or module degradation The assumed electricity cost per kWh
26. f the future solar energy kWh production That production can be accurately estimated using an equation that takes into account 1 The average hourly solar radiation received at a specific location which is based on up to 30 years of measured data 2 The hourly measured temperature for the same location 3 The tilt and orientation factor TOF with respect to optimal 4 Shading factor expressed as a fraction of total solar resource ie 95 would be shown as 0 95 5 And normal losses experienced in the conversion of DC to AC which are expressed as a derate factor There is a web based program called PVWatts that can estimate the future solar energy production using a similar analysis model The algorithm was initially developed by Sandia National Laboratories as PVFORM Menicucci 1985 and is now maintained by the National Renewable Energy Laboratory NREL and available online in two different versions Version 1 provides data from major cities throughout the U S to calculate the estimated energy production Simply select the closest city to the location of the solar PV system For example In Punta Gorda FL the closest city available would be Tampa Version 2 flex viewer uses satellite radiation data and provides solar radiation estimates down to individual 40 by 40 kilometer cells Simply enter the zip code that the solar electric system is located in and click go then click on Send to PVWatts
27. he escalation rate for a valuation performed now would use the time period of 1990 to 2011 21 years along with the CAGR equation as shown below 1 starting electricity rate of years CAGR ee 1 ending electricity rate 3 9 DISCOUNT RATE The discount rate chosen will have an impact on the present value calculation and is based on the PV system purchasers WACC The WACC can be calculated by using the Fannie Mae or Freddie Mac 15 or 30 year fixed rate 60 day commitment and the purchaser s basic investment rate of return during the estimated life of the project This is to compensate for risk associated with owning the PV system and is expressed as a basis point spread which is added to the debt interest rate A custom discount rate can be entered for systems that are not tied to the Fannie Mae or Freddie Mac rates An important note about other instruments Treasury yields are currently AAA rated by some rating agencies and assume no risk other than a rare catastrophic event They are not used in this example to calculate a discount rate assumption on PV projects as they do not accurately reflect an available borrowing rate which is accessible to the PV system purchaser Risk spreads should be utilized in a way that accurately takes into account an acceptable investment rate of return along with adequate compensation for unforeseen risks associated with an investment in a PV system Unforeseen risks can include acciden
28. ic This photo shows two other non PV solar collector types a solar pool heater in the bottom left and a solar domestic hot water heater in the upper right Although the solar water heater in the upper right may look similar to the PV modules in the grid tied example the copper tubing extending off the upper right and bottom left of the collector indicates that these are hot water collectors Photo Credit The Leveredge 3 3 TILT amp ORIENTATION FACTOR The tilt angle of the modules with respect to the horizontal plane along with the direction the array faces with respect to south the orientation or azimuth will also have an impact on the potential solar insolation available and is expressed as a tilt and orientation factor or TOF Tilt and orientation are expressed in degrees For example if the PV modules are within the same plane as the roof surface and you have a roof pitch of 6 12 the tilt angle would be expressed as a slope of 26 6 The rooftop may or may not be facing true south If the system is facing true south and you are in the northern hemisphere true south would be expressed as an azimuth of 180 January 31 2012 PV VALUE USER MANUAL V 1 0 Roof Pitch Tilt Angle In the following example for Sarasota FL in order to receive 100 of the available solar insolation the optimal tilt angle is 27 and for the azimuth it is 174 Annual Insolation as a Function of Panel Orientation Loc
29. imeframe The residential or commercial building owner or purchaser s weighted average cost of capital WACC is used along with a risk premium spread to determine a discount rate for the present value calculation The purchaser s WACC is then calculated based off of a readably available benchmark interest rate such as the Fannie Mae or Freddie Mac 30 year fixed rate 60 day commitment if the purchaser is using a 30 year fixed rate purchase mortgage Regardless of the benchmark chosen for the purpose of this model it should closely mirror the cost of borrowing for the purchaser of the income stream Note Although some states have eliminated real property taxes on renewable energy systems as accurate valuations become necessary for PV systems due to lending requirements it might be easier to assign a value to the PV system if the Standard Test Condition STC kW size along with the month and year of the installation is listed on the respective real property assessors website just like other pertinent data which may be useful for appraisal purposes Using the income approach a reasonable valuation can be arrived at through the observation of visible installed components and a review of the latest system performance test and installation documentation including a digital shading analysis This information should have been provided by the installing contractor to the original system owner after the system was successfully commissioned
30. inium mobile home boat or similar property and all structures or other property appurtenant to such dwelling unit Exception the term dwelling unit does not include that portion of a unit which is used exclusively as a hotel motel inn or similar establishment COMMERCIAL SECTIONS Section 48 a Business Investment Tax Credit Energy Credit The energy credit for any taxable year is the energy percentage of the basis of each energy property placed in service during such taxable year The energy percentage is 30 percent in the case of energy property but only with respect to periods ending before January 1 2017 The term energy property means any property which is equipment which uses solar energy to generate electricity The construction reconstruction or erection of which is completed by the taxpayer or which is acquired by the taxpayer if the original use of such property commences with the taxpayer with respect to which depreciation or amortization in lieu of depreciation is allowable In the case of any property with respect to which the Secretary makes a grant under section 1603 of the American Recovery and Reinvestment Tax Act of 2009 No credit shall be determined under section 45 with respect to such property for the taxable year in which such grant is made or any subsequent taxable year Any such grant shall not be includible in the gross income of the taxpayer but shall be taken into account in determining the ba
31. is fixed during the payback period It is simply the initial upfront non discounted net cost of the PV project divided by the annual fixed non discounted cash flow annual kWh times the fixed utility rate The end result is displayed in years or fractional years Caution is warranted when using only a simple payback analysis on a PV project as the PV system owners actual payback in years will often take longer once all of the other financial considerations are taken into account MODIFIED PAYBACK A case can be made for a modified payback analysis which would allow a prospective PV system purchaser to determine when they would recoup their original investment This modified payback or MPB would take into account many of the financial considerations that are excluded from the SPB model The MPB is fairly easy to calculate from the present value and NPV analysis results it is the time in years it takes for the negative cash flow as determined in the NPV and PV calculations to be equaled by the present value of the positive cash flow This may produce multiple payback timeframes since the initial investment may be recouped before the inverter is scheduled to be replaced If this is the case once the inverter is replaced a new investment cycle is started with a new payback timeframe determined If the initial investment is not recouped before the inverter is replaced then a single payback timeframe would be produced The MPB timeframe will oft
32. l estate market still making headlines mortgage lenders and appraisers have begun to question the valuation of PV systems and the potential value of the annual energy that can be generated There are also concerns that if separate financing is obtained by the home or commercial building owner to pay for a PV installation the monthly loan payment may exceed the monthly energy savings thereby creating a potential negative effect on the value of a residential or commercial building that the system is installed upon Often relying on the system owner s estimate of annual energy savings Is difficult at best for various reasons The system owner s expectations of annual energy production can be higher than the actual energy production measured at the point of use This can be due to improper installation techniques or poor equipment selection by the installing contractor sub optimal location current and future shading over estimating potential kWh production by the PV salesperson and not the least of which can be due to overall system reliability 2 1 APPRAISAL VALUATION METHODS Typical metrics used for an appraisal valuation are usually based on either the sales comparison comparable cost or income capitalization approaches 2 2 SALES COMPARISON APPROACH As a general rule a purchaser of residential or commercial property will not pay more for a given property than what a similar property can be purchased for There is often a lack
33. ntractor and a final inspection by a local electrical inspector all play a key role in the long term success of the PV system and can have an impact on the future energy production Designing and installing a PV system can involve varying degrees of complexity depending on the size local site limitations or other factors However determining if the PV system is designed or installed correctly is beyond the intent of this article A study commissioned by NYSERDA McRae et al 2008 found that The initial program PV installations of NABCEP certified installers had fewer problems than those of non certified installers Legal permitting and the inspection of PV systems is usually required and performed by the local municipality or Authority Having Jurisdiction AHJ It is important to verify that a permit has been issued and also that a final inspection has been passed before attempting to assign a value to an existing PV installation If a completed PV system is encountered that has not been properly permitted if required by the AHJ or was permitted but the final inspection has not been passed the value may be suspect and or difficult to determine similar to any other unpermitted or unfinished major construction improvement project 3 6 CALCULATING FUTURE ENERGY PRODUCTION Although there are many reasons that one may choose for installing PV the primary reason that most PV systems are installed is for the current value o
34. of comparable sales data on existing residential and commercial buildings with installed PV systems in the various regional multiple listing service MLS databases and in some cases there may not even be a search option for renewable energy technology It can be difficult for an appraiser to determine a value for a PV system using the principle of substitution with the sales comparison approach This should improve once the various MLS database providers add search options for renewable technologies such as PV and more residential and commercial buildings with PV systems are put on the market and close escrow Some examples of solar features added to MLS data entry fields can January 31 2012 PV VALUE USER MANUAL V 1 0 be found at the Green MLS Tool Kit http greenthemls org index cfm 2 3 COST APPROACH It is also often difficult when using the cost approach to calculate the replacement cost of the PV system due to the following reasons the installed cost quoted by competing solar companies can vary by 20 30 or more the incentives that are used to bring down the installed net cost may also vary from time to time although generally they have been declining and the beneficial effect of tax credits and accelerated bonus depreciation for commercial systems can vary from one system owner to another due to differing effective federal tax rates The replacement cost is often relied on by insurance companies in order to
35. ote some inverters with promising new designs have been introduced in recent years with warranty terms of 20 or even 25 years It is currently unknown due to lack of manufacturer and inverter operating history if the inverter will last for the longer warranty period or if the manufacturers will still be in January 31 2012 PV VALUE USER MANUAL V 1 0 business to cover the longer warranty in the event of a failure during the warranty timeframe Until more data becomes available a conservative approach entails taking the existing data with a 15 year timeframes for the replacement cycle on these newer inverters with a 20 or 25 year warranty O amp M expenses are usually figured on a cost per watt basis with small PV systems under 5kW and PV systems with micro inverters or DC optimizers having a higher O amp M cost per watt than a medium sized residential or commercial PV system Commercial PV systems larger than 100kW that utilize central inverters can have an even lower replacement cost per watt System Size 15 year O amp M In kw cost per watt lt 5kW and Microinverter 5 kW to 25 kw 25 kW to 100kW gt 100 kW Estimated O amp M expenses for small to medium size systems based on current 2011 inverter and labor cost data from solar electric projects in FL O amp M expenses are figured using a present value calculation ona 15 year replacement cycle in year 16 so that the O amp M expense in year 16 on a 10kW system would be
36. residence defined In general for purposes of this section a taxpayer uses a dwelling unit during the taxable year as a residence if he uses such unit or portion thereof for personal purposes for a number of days which exceeds the greater of 14 days or 10 percent of the number of days during such year for which such unit is rented at a fair rental A unit shall not be treated as rented at a fair rental for any day for which it is used for personal purposes 18 January 31 2012 PV VALUE USER MANUAL V 1 0 Section 280A d 2 Personal use defined For purposes of this section the taxpayer shall be deemed to have used a dwelling unit for personal purposes for a day if for any part of such day the unit is used For personal purposes by the taxpayer or any other person who has an interest in such unit or by any member of the family as defined in section 267 c 4 of the taxpayer or such other person By any individual who uses the unit under an arrangement which enables the taxpayer to use some other dwelling unit whether or not a rental is charged for the use of such other unit or By any individual other than an employee with respect to whose use section 119 applies unless for such day the dwelling unit is rented for a rental which under the facts and circumstances is fair rental Section 280A f 1 Dwelling unit defined For purposes of this section In general the term dwelling unit includes a house apartment condom
37. s of January 2012 the IRS has not issued official guidance for several of the IRC sections mentioned below RESIDENTIAL SECTIONS Section 25D from IRS Notice 2009 41 Section 25D provides a tax credit to individuals for residential energy efficient property The amount of a taxpayer s section 25D credit for a taxable year beginning after December 31 2008 is equal to 30 percent of the qualified solar electric property expenditures made by the taxpayer during the taxable year Qualified solar electric property expenditures are further defined as expenditures for property which uses solar energy to generate electricity for use in a qualifying dwelling unit A qualifying dwelling unit is defined as a dwelling unit that is located in the United States and is used as a residence by the taxpayer The notice further states that a taxpayer claiming a credit with respect to an expenditure is responsible for determining whether the expenditure appropriately relates to a qualifying dwelling unit and cannot rely on a manufacturer s certification for that purpose Section 136 Energy Conservation Subsidies Provided by a Public Utility Gross income shall not include the value of any subsidy provided directly or indirectly by a public utility to a customer for the purchase or installation of any energy conservation measure Notwithstanding any other provision of this subtitle no deduction or credit shall be allowed for or by reason of any expenditure to
38. s to manage technical and policy related issues in solar biofuels climate change and energy water interactions RESOURCES AND REFERENCES Dunlop J 2007 Photovoltaic Systems American Technical Publishers Inc www jimdunlopsolar com EIA Average Retail Price of Electricity to Ultimate Customers by End Use Sector by State Year to Date http www eia doe gov cneaf electricity epa average price state xls EIA Average Price by State by Provider 1990 2010 http www eia gov electricity monthly excel epmxlfileS 6 b xls Fannie Mae 15 year fixed rate 60 day commitment http www efanniemae com syndicated documents mbs apeprices archiv es cur15 html Fannie Mae 30 year fixed rate 60 day commitment http www efanniemae com syndicated documents mbs apeprices archiv es cur30 html Green MLS Tool Kit htt reenthemls org index cfm Internal Revenue Service IRS Website www irs gov Internal Revenue Code Website http www law cornell edu uscode usc sup 01 26 html Jordan D C and S R Kurtz 2011 Photovoltaic Degradation Rates an Analytical Review Prog Photovolt Res Appl DOI 10 1002 pip 1182 McRae M D Moran J S Peters C Nemore P Gonzales and A Ferranti 2008 PV Workforce Development and the Market for Customer Sited PV Presented at ASES Solar 2008 San Diego CA May 3 8 2008 Menicucci D F 1985 PVFORM A New Approach to Photovoltaic System Performance Modeling 18 IEEE PVSC Las Vegas NV O
39. sis of the property to which such grant relates except that the basis of such property shall be reduced under section 50 c in the same manner as a credit allowed under subsection a Section 50 c 1 and 3 a Reduction in basis for credits and grants If a credit is determined under this subpart with respect to any property the basis of such property shall be reduced by the amount of the credit so determined Special rule In the case of any energy credit only 50 percent of such credit shall be taken into account Section 168 Accelerated Cost Recovery System 5 Year Accelerated Depreciation 100 and 50 Bonus Depreciation Section 162 a Trade or business expenses In general there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business 19
40. tal module breakage windstorm damage corrosion of or damage to electrical components requiring replacement roof replacement requiring the PV system owner pay for removal and reinstallation of a roof mounted PV system A range of 50 to 200 basis points is the default setting for this valuation tool to compensate for risk with the average being 125 basis points Once more data becomes available a detailed analysis will be performed to improve on this range 3 10 OPERATION amp MAINTENANCE EXPENSES PV systems require periodic maintenance that ranges from washing the dirt off of the modules during periods of minimal rain to replacing the inverter if it fails after the warranty has expired Although modern crystalline silicon modules have a standard 25 or 30 year power warranties and sufficient data exists indicating continued performance over that timeframe grid tied inverters usually only have a 10 or 15 year warranty and the potential for replacing the inverter after the warranty term has ended must be accounted for Although the inverter rarely fails the day after the warranty expires and some inverter models based on existing designs have data showing they can last up to 20 years if installed and maintained properly using a 15 year replacement cycle for the inverter and including labor charges in the cost can also be used to conservatively estimate the operation and maintenance expenses for residential and small commercial systems N
41. the solar electric system is 3 years old and the module warranty is for 25 years the present value of the future energy production would be calculated for years 4 January 31 2012 PV VALUE USER MANUAL V 1 0 through year 25 to determine the total remaining value of future energy production remembering to account for the first 3 years of module degradation in the calculation Ifa recent custom derate factor is available which accounts for actual module degradation up to the current time frame then in this example the first 3 years of module degradation would not need to be factored in 4 EXCEL SPREADSHEET INSTRUCTIONS PV Value Photovoltaic Energy Valuation Tool v 1 0 An Excel spreadsheet has been created to perform the calculations used in the valuation model The spreadsheet has been tested in Excel 2007 and 2010 No other spreadsheet programs or earlier versions of excel have been tested and therefore may not allow the spreadsheet to open or work property A link for downloading the spreadsheet is provided in the resources section Note due to the rounding of values in the spreadsheet if you are checking the end result with a financial calculator you may experience a difference of a few cents per year You must have macros enabled and internet access in order for the spreadsheet to function properly User input cells are yellow calculated value cells are green and user defined cells used to override calcul
42. ulated over the module warranty timeframe the cumulative effect of module degradation on lifetime energy production will be significant and needs to be factored into the valuation model Until more research data is available which justifies a lower annual degradation rate a conservative valuation may factor in an annual degradation rate of 0 5 Osterwald et al 2006 for crystalline silicon and 1 for thin film modules The calculation is cumulative so that for a crystalline silicon module during year 10 the module could be expected to produce at 95 of its rated capacity This is one area that a certified PV installer can assist the appraiser through a review of the system s condition at the time of appraisal compared with data provided from the original commissioning report 3 8 UTILITY RATE ESCALATION PERCENT In most areas of the country the retail rate charged by the local utility has been increasing steadily over much of the past decade The rate of escalation in any location in the U S can be determined by obtaining at least the 20 year history from the Energy Information Agency s EIA Average Price by State Provider 1990 2010 and Average Retail Price of Electricity to Ultimate Customers by End Use Sector by State Table 5 6 B The history file lists the yearly residential commercial and Industrial rates for each state in nominal terms YEAR Residential Commercial 1990 1991 1992 1993 1994 1995 1996
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