Solar design tips, sales advice, and industry insights from the premier solar design software platform

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Financial Analysis | Solar design tips, sales advice, and industry insights from the premier solar design software platform

### Examining the Impact of Utility Rate Trends on Solar Savings and Design Best Practices

Net energy metering (NEM) policies have played a crucial role in making residential solar installations a good investment for homeowners in the United States. However, as installed solar capacity has increased, many utility companies have introduced changes to their NEM programs that reduce the value of distributed solar.

Using Aurora's proprietary solar financial analysis tools, we conducted a large parametric study that analyzed over 45 million scenarios to determine how these new programs impact solar customers’ savings across the United States. The study analyzes the financial impacts of specific billing mechanisms, as well as the cumulative impacts of different combinations of these mechanisms as implemented by utilities in different states. The policies evaluated slightly diminish the financial value of installed solar but also promote larger system designs in certain circumstances.

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On May 7, 2016, Pearlie Mae Smith, the winner of the New Jersey Lottery Powerball, had an enviable decision to make: Should she accept $429 million in payments over 30 years or accept a smaller amount,$284 million, up front? Though it was 34% lower, Ms. Smith chose the up-front payment. While Ms. Smith was more than 70 years old at the time she won the Powerball, her choice was not unique. Powerball data show that all five winners in 2016 chose the up-front payment versus taking payments over time, forfeiting more than a third of their nominal earnings.

Going back as far as 2003, you will find cases where Powerball winners were willing to sacrifice half their winnings to claim them up front versus spreading them out over time. If sacrificing almost half of one’s nominal winnings in exchange for an up-front payment does not sound totally crazy, you already have an intuitive understanding of the concept of the time value of money, also known as discounting.

### Time Value of Money

The time value of money means that a dollar promised at a future date is worth a discounted amount compared to a dollar guaranteed today. This is because there is no guarantee that whoever promised you the dollar will be around or will deliver it in 25 years. Even if the person does deliver the dollar, due to inflation, it will not buy as much in 25 years as it does today. In addition, if you get a dollar today, you can invest it and grow that dollar over time. For all of these reasons, money promised in the future is worth less than money guaranteed today.

Discount rate. In the context of solar, the value of electric bill savings in the future should be similarly discounted relative to cash in hand today. The amount that a dollar in the future is discounted relative to a dollar today is referred to as the discount rate, which the American Heritage Dictionary defines as “the interest rate used in determining the present value of a future payment or series of payments.” In plain English, this is the rate of return at which it makes no difference to you whether you receive the payment today versus sometime in the future.

For the mathematically inclined, you can calculate the discount of future to current savings using the following formula:

where d is the discount rate, Sn is the savings in year n, S0 is the current value of these savings and n is the year of evaluation. The discount rate is typically expressed as a percentage.

### Modeling Financial Returns

If you are not applying a discount rate, or if the software you are using does not do so, you are likely misrepresenting the financial returns of going solar. You may also be making suboptimal solar design decisions or recommending the wrong financing option to your client. Let us examine what the application of a discount rate does to some of the more commonly quoted solar financial metrics—lifetime savings, internal rate of return (IRR), levelized cost of energy (LCOE), and payback period—across two financing options: cash and loan-financed purchase.

Figure 1. Aurora estimates that the 10 kW array shown here has a weighted total solar resource fraction of 86% and will generate 12.85 MWh of energy in year 1.

Case study. For this example, I used Aurora both to design the 10 kW system in Figure 1 and to perform the financial analysis. The case study assumes the following: The customer is on PG&E’s E-1 baseline utility rate for Region S; the assumed utility inflation rate is 3%; the system cost is $3.50 per watt; the loan terms require 20% down and 4.9% interest; incentives are limited to the 30% Investment Tax Credit; and the project service life is 25 years. The financial results presented in Table 1 (below) show that applying a discount rate leads to a reduction in the present value of lifetime savings and the LCOE, as well as a slightly longer payback period. These results have implications for both the recommended financing option and the optimal system design. Table 1. A comparison of common financial metrics for a cash purchase versus a 2-year loan-financed system (20% down, 4.9% interest), with and without discounting. Customer financing: With a 2.5% discount rate, this client’s discounted lifetime savings are greater with a loan-financed system compared to a cash deal. The discount rate acts as a penalty for tying up the cash that the client might have invested in another asset. It is also interesting to observe the changes in LCOE. With a discount rate applied, the LCOE for a cash purchase increases by more than 30%, whereas the LCOE for the loan structure increases by only about 7%. We have already established that a dollar guaranteed today is not the same as one promised in 25 years, and it is equally true that a dollar owed 25 years from now is worth a lot less than one in hand today. Thus, a loan-financed system generally starts to look more favorable relative to a cash purchase as discount rates increase. Design optimization: Designers can also use LCOE to determine whether a proposed solar installation generates a financially optimal amount of energy. If, on one hand, the effective utility rate is higher than the project’s LCOE, then the homeowner is leaving money on the table by not generating more solar energy. In this case, you should seek to design a higher-producing system to capitalize on the higher utility compensation rate. On the other hand, if the effective utility rate is lower than the LCOE, then the homeowner is losing money on each incremental unit of energy generated. In this scenario, the appropriate design response is to generate less energy, perhaps by specifying less-costly components with lower energy yields. Analyzing results. While nobody wants to show lower financial returns, the discounted values in Table 1 more accurately reflect the financial returns of going solar. Furthermore, by performing this type of analysis, you can now credibly compare the returns on solar to other asset classes. Even with the 2.5% discount rate, the homeowner is saving more than$58,000 over the project’s life in today’s dollars and is earning an annualized return of 14.8%.

To put a 14.8% return for solar in PG&E service territory in context, State Street Global Advisers forecasts that the US bond and stock markets will have long-term annualized returns of 2.5% and 7.7%, respectively. However, financial markets are volatile, whereas solar provides savings as long as the sun shines (and assuming that regulators do not retroactively change policies). Furthermore, unlike income from the stock or bond markets, solar savings are tax-free. This means that if you provide an apples-to-apples comparison of financial returns, going solar is a no-brainer investment for this particular homeowner, as illustrated in Table 2.

Table 2. Applying a discount rate allows for an apples-to-apples comparison of potential investment opportunities.

Accuracy and credibility. Applying a discount rate when assessing investment decisions is a well-established practice for financial and economic analyses. Many analogous industries have adopted this as standard practice. For example, realtor.com offers an online Rent vs. Buy Calculator where the discount rate—identified as the investment rate of return—is a required input. The U.S. government’s Office of Management and Budget uses discount rates when calculating the financial returns associated with investing in clean energy or energy efficiency projects, as well as for general budgeting purposes. Within the solar industry, the National Renewable Energy Laboratory (NREL) System Advisor Model (SAM) includes a discount rate when calculating financial metrics. In fact, NREL’s user guide for SAM states that the “discount rate acts as a measure of time value and is central to the calculation of present value.”

It is well established that the cost of acquiring customers is one of the major obstacles to making solar ubiquitous. Consumer education is one of the reasons commonly cited for the high cost: Consumers are often confused about the economic benefits of going solar. Perhaps one way to help alleviate this is to speak to homeowners in familiar terms. While most homeowners are unfamiliar with terms like azimuth or solar access, they likely have had to assess how much money to put into a 401k or whether to buy or rent. Moreover, they almost certainly understand that a dollar will not be worth the same in 25 years as a dollar is worth today.

Applying a discount rate as part of your financial analyses not only will improve your design and financial decision-making processes, but will also increase the accuracy and credibility of your results and allow you to make an apples-to-apples comparison between the returns of solar versus other asset classes.

Topics: Financial Analysis, Solar Finance

While the cost of installing solar panels has fallen dramatically (more than 70% since 2010, according to the Solar Energy Industries Association ) and continues to decline, cost is still—understandably—a major consideration for customers.

However, when assessing the price of a solar installation, it’s important to evaluate that expense like an investment and consider the value it will provide over time, compared to other ways you could use the money.

One way to think about the value of installing solar is in terms of how it compares to investing in the stock market. A 2015 study by the North Carolina Clean Energy Technology Center explored the financial returns from residential solar systems around the country compared to typical returns from the stock market—and you might be surprised by the results. In many areas, the study found that the 25-year returns from a home solar system exceed those from an equivalent investment in the stock market!

In today’s article, we delve into the study’s findings to give prospective solar customers a better sense of how adding solar can help your bottom-line.

### How Solar Returns Compare to the Stock Market

The study, Going Solar in America: Ranking Solar’s Value to Consumers in America’s Largest Cities, finds that "in 46 of America’s 50 largest cities, a fully-financed, typically-sized solar PV system is a better investment than the stock market.” It also found that in 20 of those cities, paying cash upfront for the system is also a better investment than the stock market.

Figure 1: The 46 cities (of the 50 largest cities) in the U.S., where the financial returns from a fully financed 5kW solar system outperform 25-year returns from the stock market.

The study used a metric called Net Present Value (NPV) as the basis for the analysis. Net Present Value presents the value of future cash flows from an investment in present-day dollars. This is very important because money that you receive in the future is worth less than cash in hand today (a principle known as the time value of money).

Figure 2: An example of cash flows over time from a solar installation. Net Present Value, calculated as the sum of discounted future cash flows, indicates the present-day dollar value of this future income.

The study’s authors calculated the Net Present Value for a 5 kW solar installation in each of the 50 largest cities in the US and compared this to the 25-year return of the Standard & Poor’s (S&P) 500 stock index. The authors note that they selected the S&P 500 stock index for comparison because of its status as one of the “most well-known and well-diversified representations of the U.S. equities market.”

For each city, the NPV of a solar installation was calculated under two scenarios:
1) if the system was fully financed (based on a loan for the full cost with an interest rate of 5%), and
2) for an upfront cash purchase.

Because loan financing distributes the cost of the purchase over time, allowing customers to keep more of their income in the short-term, the financed systems had higher NPVs and outperformed investments indexed to the S&P 500 in many more areas of the country.

In 92% of the 50 cities examined, a financed solar system outperformed the stock market (see Figure 1 above). Systems paid for upfront outperformed the stock market in only 40% of those cities (Figure 3). This makes the important point that different financing options can have a big impact on the value you get from your solar installation.

Figure 3: The 20 cities (of the 50 largest cities) in the U.S., where the financial returns from an upfront cash purchase of a 5kW solar system outperform 25-year returns from the stock market.

While the study makes a number of assumptions, including that current favorable policies—like net metering—will continue, it provides a handy illustration of the fact that solar can be a very smart investment in most areas of the country.

And, this value doesn’t even include the potential increase in the value of your home as a result of installing solar, which studies have found can be significant. Another study, by the U.S. Department of Energy’s Lawrence Berkeley Laboratory , found that a typical PV system can add a premium of about $15,000 to a home’s value! The financial returns of a particular solar installation will vary depending on a number of factors including the cost of the panels, your local utility rate, and the way that you finance it. Your solar installer should be able to give you a clear picture of the value a proposed project will provide. If they use software like Aurora’s, they’ll be able to easily generate projections of the financial returns from a specific solar design under a variety of different financing scenarios. ### Key Takeaways: • While installing solar can be a big expense, in many cases the value it will provide over time exceeds the rate of return from the stock market. • Net Present Value (NPV) provides a way to quantify the present value of the future savings a solar installation will provide. • It is important to consider different financing options for your solar installation because the NPV of the purchase will change under different financing scenarios. This is because money today is worth more than money you receive in the future; financing options that reduce your initial cash expense by distributing over time can help improve the value of your investment. • In 46 out of 50 of the biggest U.S. cities, investment in a solar installation provides a better return than an equivalent stock market investment indexed to the S&P 500 (for a 5 kW installation fully financed by a loan with a 5% interest rate). In 20 of those cities, an upfront, cash purchase of a 5 kW system also provided greater returns than the stock market. Topics: Financial Analysis, Solar Finance #### Examining the Effects of Non-Bypassable Charges with Load Profiles and Systems Designed in Aurora Net Energy Metering (NEM) 2.0 is now the official utility rate policy for solar customers in California – but few people truly understand what it means for the returns of residential solar installations or how solar designs should be adapted to maximize savings under this policy. We evaluated over 600 solar projects designed in Aurora to determine how NEM 2.0 changes the financial returns from solar. Next, we analyzed over 900,000 design variations to identify the new design best practices to account for NEM 2.0. Our surprising results highlight how NEM 2.0 is both a great challenge, and a great opportunity for the solar community. Please note: When you click the link, a pop-up should appear allowing you to enter your contact information to download the report. If this does not occur it may be a result of a pop-up blocker. In this case, we recommend opening this page in the Incognito or Privacy Mode of your browser, which will prevent any conflicts with your cache, cookies, or any browser extensions. Why are more and more businesses going solar? For one, being eco-friendly isn’t just good for the earth, it’s becoming increasingly good for the brand; more than two-thirds of consumers prefer to do business with environmentally responsible companies. Moreover, as PV prices drop, businesses are increasingly attracted to the strong financial benefits of going solar as well. #### Financial Benefits of Solar to Business Save on Electricity Bills: According to the Environment America Research & Policy Center, if all of the big-box stores in the US installed solar, they could collectively save$8.2 billion annually on their electricity bills. Additionally, in certain states such as Massachussetts, performance-based incentives such as Solar Renewable Energy Certificates (SRECs) directly translate energy production into increased utility bill savings.

An example of a commercial customer's savings after installing solar, estimated in Aurora.

Save on Taxes: The Investment Tax Credit (ITC) allows owners of newly installed PV systems to receive a federal tax credit for 30% of the system cost. The full 30% credit will last until 2019, after which it will incrementally decrease through 2021 but will remain at 10% thereafter for commercial projects. Solar equipment is also eligible for accelerated depreciation thanks to the Modified Accelerated Cost Recovery System (MACRS), which allows an 85% deduction of the system value from property taxes for five years of purchase. For solar installations that are financed with a loan, the interest paid on the loan also lowers a client’s tax liability.

Protection against Inflation: Aurora’s study of EIA data shows that commercial utility rates increased an average of 2.4% per year between 2000 and 2015. Fortunately, the cost of producing solar energy stays largely constant over time. By investing in a PV system, a company can protect itself from hikes in electricity costs by offsetting its consumption in part, if not entirely.

#### Financing Options

Of course, not all businesses want to—or are able to—pay upfront. For those who cannot purchase the system upon installation with cash, other financing options can enable businesses to reap the environmental, social, and financial benefits of solar—sometimes without putting a penny down. However, there are long-term tradeoffs to consider.

Cash: In purchasing the system upfront, the business reaps the full benefits of savings on electricity bills, tax reduction, and hedging against inflation. However, owning the solar installation does mean that the business is responsible for all maintenance on the system.

Loan: Paying with a loan also ensures that the benefits of utility bill savings, lower taxes, and inflation hedging accrue to the business. A loan will result in less cash being paid up front for the solar installation, at the expense of interest accruing over the loan’s duration. However the interest payments on the loan are typically lower than the savings on the electricity bill, making this an attractive financing mechanism. Furthermore, interest paid in a solar loan is a tax deductible event.

Lease/PPA: Leases and PPAs are unique in that the business does not own the PV system. Instead, the system is owned by a third party which sells the electricity produced by the system to the business. With a lease, the business pays a fixed monthly amount for the right to use the PV system. With a PPA, the business purchases the power generated by the system at a pre-determined price per unit of energy the system produces ($/kWh). This lease payment, or the PPA rate, are often lower than the businesses bill savings or the prevailing utility rate respectively. This allows companies to save money on their electricity bills, and they do not have to worry about maintaining the system. However, since the system is owned by a third party, businesses do not get the tax savings, and they may not get the full inflation protection. With so many nuanced financing options, it is critical to be able to analyze the best choice for your customer. Given the correct financial analysis tool, commercial installers have the power to bring any business to a greener and brighter bottom-line. Topics: Financial Analysis, Solar Finance Green Button data — if you’re not familiar with it, it might sound like something that a Marvel comic book villain would enjoy reviewing. But, in fact, Green Button data is actually a very valuable tool for understanding a home or business owner’s energy usage. In this post, we’ll explore what Green Button data is and what benefits it provides for solar designers and customers. Green Button data gives utility customers — both residential and commercial — timely access to energy use data in a standardized, computer-friendly format. #### What is Green Button Data? Green Button data refers to an option provided by some utilities that enables customers to download detailed data on their electricity usage with just the click of a (green) button from the utility website. Specifically, Green Button data gives utility customers — both residential and commercial — timely access to energy use data in a standardized, computer-friendly format. The Green Button Initiative emerged as a voluntary, industry-led response to a 2011 call-to-action from the White House to make energy data more accessible to consumers. Beyond showing how much energy a consumer uses, one of the greatest benefits of Green Button data is that it also provides insight into when energy is being used. Historically utility bills have only shown how much energy was used over a monthly period. However with the increased deployment of “smart meters,” which track energy usage at intervals of one hour or less, much more granular energy use data is becoming available. If a customer has a smart meter, Green Button data will allow a customer to see exactly how much energy they use at specific intervals. The measurement interval available to customers depends on what their utility offers, but many utilities — especially in California and Texas, where utilities are required to provide customers with their energy usage data — provide this information in 15-minute increments. Currently, more than half of American households have smart meters and they are increasingly being deployed by utilities around the country as part of utility efforts to modernize the electric grid. Smart meters and Green Button data go hand in hand as methods to give customers’ greater insight into and control over their energy use. The Green Button program is helping to make the improved data from smart meters more easily accessible. Beyond showing how much energy a consumer uses, one of the greatest benefits of Green Button data is that it also provides insight into when energy is being used. #### Why Is Green Button Data Important? Green Button data offers numerous benefits to energy consumers and for solar professionals looking to design and sell high quality solar installations. Green Button data helps consumers better understand when they are consuming energy, and save on their utility bills. For instance, for residential customers in areas where Time of Use (TOU) rates are standard (like California), Green Button interval data can show how changing the timing of certain energy-intensive activities can result in reduced energy bills. Green Button data is particularly useful for customers who are considering solar, because it makes evaluating projects and savings faster and more accurate. Green Button data offers additional value for commercial customers. Beyond the insights it provides with regard to Time of Use rates (which are more common for commercial customers), Green Button data can also help commercial customers better understand demand charges, which are fees a utility charges based on the maximum amount of power a commercial customer consumes over a given time period. An example of a customer's hourly energy usage based on Green Button Data uploaded in Aurora. #### Green Button Data and Solar: A Perfect Combination Green Button data is particularly useful for customers who are considering solar, because it makes evaluating projects and savings faster and more accurate. Having a clear picture of a household’s energy consumption is critical to determining the appropriate size of a solar array. Furthermore, precise data on energy consumption at different times throughout the day is important in enabling accurate evaluation of the financial returns of the solar design. For instance, if the customer is billed under Time of Use rates, in order to understand how much a solar installation will reduce their utility bill, it is essential to understand how much energy they consume during peak demand times when energy is more expensive, and how those usage patterns intersect with the amount of energy their solar array is likely to be producing at different times. A customer’s savings will be greater if the energy produced by their solar installation coincides with and can offset much of their electricity consumption during hours when electricity is most expensive (typically in the afternoon). Furthermore, this consideration might influence the ideal location or orientation of a solar design (such as siting the design where it will get more afternoon light, and thus offset energy when electricity prices are higher, rather than where it would produce the most energy overall). For commercial customers, whose utility bills include demand charges, the benefits of using Green Button data in the solar design process are a little more nuanced, so we will cover them in a later post. With a customer’s Green Button data, you can save time by automatically importing the exact details of the customer’s energy consumption and Aurora will use that to model the customer’s electricity usage throughout the day and throughout the year (their load profile). Combined with Aurora’s simulations of the solar design’s energy production (the industry’s most accurate), you and your solar customer can be confident in the expected financial return on the installation. #### Key Takeaways: • The Green Button Initiative is a program through which participating utilities provide customers with detailed data on their energy usage, in a standardized, machine-readable format. • Green Button data gives utility customers greater insight into the amount and timing of their energy consumption, helping them to understand how they can save energy and reduce their utility bills. • Green Button data is particularly useful in helping potential solar customers accurately evaluate the financial return on a solar installation. • Aurora’s software can automatically import and interpret Green Button data enabling faster and more accurate development of detailed solar sales proposals. Are you using Green Button data? How has it impacted your solar business? Join the conversation on Twitter , Facebook , and LinkedIn with the hashtag #GreenButtonData. ~~~ Want to be in the loop on our latest articles? Click here to subscribe to our blog! There are many benefits of installing a solar system–but a major one for many people is that generating your own solar energy can save you money on your utility bills. In order to understand the cost savings that your solar project will provide over time, it is critical to understand the policies that determine how much your solar energy is worth. There are a variety of different approaches that governments and utilities use to compensate the owners of renewable energy systems for the energy they produce, but two of the most widely used mechanisms are net energy metering (NEM) and feed-in tariffs (FITs). In today's article we provide an overview of each. Feed-in tariffs are a compensation scheme which offers guaranteed cash payments to producers of renewable energy, based on an established rate per kWh. The rate of compensation established under FITs is often higher than the retail rate, and the payments are typically guaranteed through a long-term contract. For example, in the UK, a solar installation with a capacity between 10kW and 50kW installed before March 31, 2017 will be compensated at a rate of 3.89 pence per kWh for a period of twenty years. Under net energy metering , solar system owners are credited at the retail rate for the excess solar energy that they feed onto the grid, while being charged normally for the electricity they draw from the grid. For these customers, it is as if their electricity meters run backwards when their solar system is producing more energy than they need, so they pay only for the net electricity they consume over the course of the year. In contrast, with a feed-in tariff, compensation for the energy produced is independent of your energy consumption. ## Feed-In Tariffs (FITs) FITs are a popular policy tool designed to encourage the investment in renewable energy technologies (including, but not limited to, solar) by guaranteeing that the owner will be compensated at a set rate – often above the retail rate – for the energy produced. Globally, feed-in tariffs (FITs) are the most widely used renewable energy policy for driving accelerating renewable energy deployment. FITs rose to prominence in the late 1990s as a mechanism for encouraging the rapid deployment of renewable energy sources, and have been used to great success in many international markets, including in the European Union, and later China and Japan. (The use of FITs in the U.S., however, has been limited to a small number of states.) By guaranteeing that developers of new renewable technologies will have a market for the resulting energy and can count on being compensated at a rate that reflects the generation costs, feed-in tariffs have helped renewable sources like solar achieve economies of scale. Payments are guaranteed through long-term contracts ranging from 10-25 years. Currently, only seven U.S. states have solar feed-in tariff programs. Information source: Database of State Incentives for Renewable Energy. FITs compensate project owners for the energy produced based on a set rate established by policy makers, which is typically higher than the prevailing retail rate (a major difference between net metering and feed-in tariffs). Different renewable energy sources may be compensated at different rates, depending on how expensive they are to deploy–with technologies like solar and wind typically being compensated at a lower rate than less developed technologies like tidal power. This approach reflects the fact that feed-in tariffs are designed to help emerging industries achieve economies of scale. Feed-in tariffs are usually designed so that rates scale down over time to encourage technological cost reductions. ## Net Energy Metering (NEM) As UtilityDive explains, “U.S. policymakers... never got comfortable with the economics behind the FIT model, preferring to set initial solar supports at or near the retail rate of electricity.” Enter net energy metering (NEM), a policy in which utilities compensate producers of renewable energy at the retail rate for any excess production that flows back to the grid, allowing them to offset the cost of energy they draw from the grid at times when their system is not producing enough to cover their needs. In the U.S., net energy metering is the dominant approach for compensating producers of solar energy. As of July 2016, 41 states have mandatory net metering policies, and an additional two states have voluntary net metering programs through utilities. Cory Honeyman, Senior Solar Analyst at GTM Research, reports that “The overwhelming majority of DG solar that has come online to date [in the U.S.] has come from projects taking advantage of net metering, not Feed-In Tariffs.” Forty-one U.S. states (as well as the District of Columbia) have mandatory net metering policies for certain utilities. Two additional states have utilities that offer net metering programs, though they are not mandated by state policy. Source: Database of State Incentives for Renewable Energy. Compared to FITs, NEM requires less active management from policy makers because the rate of compensation follows the retail rate for energy. Honeyman notes “The good thing about net metering is that it does not require re-adjustments… [With feed-in tariffs] it is difficult to set the step downs in the level of the tariff in a measured way that doesn’t either crater the market or drive demand too fast.” Also unlike FITs, NEM programs typically use bill credits, rather than cash, to compensate system owners. Another way of thinking about how net metering works in practice for system owners is that it enables them to use the energy their system produces as needed, rather than when it is being produced. Since the energy produced by your solar system varies based on time of day and weather conditions–and the times when you use the most energy often will not coincide with when your system is producing the most – net metering is a convenient way to even things out. A forecasted daily load profile for a house in central California, broken down by the source of energy demand, as created by Aurora’s solar design software. In some states, like California, the retail rate for energy varies throughout the day, with higher rates at times when there is higher demand, typically in the afternoon and evening (an approach known as time of use, or TOU, rates). These policies can work hand-in-hand with net metering and affect the value of the solar energy you produce. For instance, owners of solar installations that sell excess energy back to the grid during the day, when demand from businesses is high, may be compensated at a higher rate. While participation in time of use rate programs remains low around the US, most states offer voluntary time of use rates. Whether you live somewhere where TOU rates are mandatory or are considering opting into a voluntary program (which could save solar system owners money), it is important to understand how much energy you’ll be producing and consuming at different times throughout the day to accurately estimate the finances of your solar installation. Aurora’s solar design software automatically predicts how your production and consumption will vary throughout the day, and the compensation strategy used in your area, when estimating the value of the energy your system will produce over time. ## Feed-In Tariffs or Net Energy Metering? Looking to the Future NEM and FITs have both played important roles in the development of the solar industry globally. Looking to the future, policies for compensating producers of clean, renewable energies like solar are likely to adapt. In the U.S., there has been debate over net metering policies, with some stakeholders arguing that compensating solar energy producers at the retail rate does not ensure that they pay for the costs of maintaining the electrical grid. Around the country, states are beginning to explore a variety of new ways of compensating solar producers to reflect these concerns, such as California’s NEM 2.0 policy. No matter what compensation approach prevails, having a solid grounding in NEM and FITs will provide you with a strong base for understanding policy changes to come. ~~~ Want to be in the loop on our latest articles? Click here to subscribe to our blog! [This article was originally published in Solar Power World. ] It isn't easy keeping up with the solar industry. Every few months new products, financing mechanisms, policies, and organizations pop up and change how you design and sell solar. This article will bring you up to speed on some of the industry’s most frequently used acronyms, and keep you up to date on important emerging solar design and financing trends. ## 1. PACE - Property Assessed Clean Energy Infographic on how PACE works. What it is: PACE is a mechanism by which homeowners can finance solar and energy efficiency projects via their property taxes. Local or state governments, working with traditional financiers, fund the upfront cost of the solar installation or energy improvement. Homeowners pay back their local authority via an increased property tax bill, usually over a period of 20 years. Why you need to know about it: PACE has been around since 2001, but for the first 10 years of its life it had a limited impact on the industry. PACE programs received a big boost in August 2015, when the Obama administration issued a new directive to implement legislative changes making it easier to buy and sell properties that have solar installations financed by a PACE loan. PACE offers low financing rates, tolerant credit requirements, but most importantly, local governments are incentivized to promote the product since they keep a portion of the PACE payment. What’s in store: Over the next few years, I predict PACE-based financing will be the fastest growing financing option in the solar market. ## 2. LIDAR - Light Detection and Ranging What it is: LIDAR is a method of obtaining information about objects or areas remotely by using light pulses emitted from a device to measure distances. The device combines GPS data with the distances it measures, constructing precise three-dimensional information about the shape of the environment. Why you need to know about it: LIDAR is slashing solar design costs by helping the solar industry avoid truck rolls. With LIDAR, a solar salesperson or engineer can quickly generate 3D models directly from their office. They can precisely calculate building, tree, and obstruction heights as well as roof slopes. LIDAR data can be used to generate bankable shade reports, which are accepted for rebate purposes by rebate authorities and private lease financiers. What’s in store: As the cost of acquiring LIDAR falls and its benefits become more accessible, I predict that LIDAR will continue to reduce the soft costs of residential solar. NREL estimates that remote site assessment has the potential to reduce industry soft costs by$0.17 per watt -- that’s the equivalent of half the cost of an average string inverter!

LIDAR data is used to improve the accuracy of remote site design in Aurora.

## 3. LCOE - Levelized Cost of Energy

What it is: The LCOE is the average cost per unit of energy that your solar project generates over its lifetime. Mathematically, it is the lifecycle cost of the solar project divided by the amount of energy it produces. The lifecycle cost of a solar project includes the initial cost to purchase it, financing costs (such as loan payments), and operations and maintenance costs (such as inverter replacement costs) over the life of the project.

Why you need to know about it: LCOE is one of the oldest metrics in the solar industry. It offers an “apples-to-apples” way of comparing different financing options. If your client wants to compare the financial returns of going solar via a loan, lease, PACE, or cash purchase, LCOE is one of the best ways to determine their best option. Additionally, knowing your LCOE also has implications for solar design.

What’s in store: Over the next few years there are going to be more and more options for solar design and financing, so knowing how to calculate LCOE offers you the ability to evaluate them on an equal playing field and determine the best option for your customer.

## 4. LACE - Levelized Avoided Cost of Energy

What it is: The LACE is the average revenue per unit of energy that your solar installation generates over its lifetime. Mathematically, it is the lifecycle revenue (or avoided cost in the case of net metering or other similar compensation schemes) divided by the lifetime energy production. Lifecycle revenue includes revenue earned from feed-in tariffs, avoided cost from net metering schemes, and production-based incentives.

Why you need to know about it: One of the drawbacks of an LCOE calculation is that it does not explicitly take into account the revenue or avoided cost of a solar project. LACE, on the other hand, accounts for that. Since utility rates often vary by time of day, it is important to not only know how much energy you are offsetting, but at what times you are offsetting it. Without knowing the value of the energy you are saving, it makes it hard to compare two different solar designs that cost the same, but have different production profiles.

Furthermore, LACE allows you to easily compare a solar installation to an energy efficiency retrofit, for example. This has made LACE popular in government and utility planning circles. For example, a utility can compare the avoided cost of purchasing LED light bulbs versus installing solar (spoiler alert: it partially depends on the differential between daytime and nighttime electricity rates).

What’s in store: As the benefits of solar energy become increasingly explicit, customers will go from asking if they should go green to asking how they should go green. LACE provides a convenient way to compare the economic returns of different ways to reduce your carbon footprint.

Pantone's color of the year is "greenery" for a reason.

And there you have it! Hopefully this overview of some choice acronyms can help you stay on the forefront of this dynamic industry. If you think of some industry acronyms that are important for the solar community to know, tweet us at @AuroraSolarInc!

The Levelized Cost of Energy (LCOE) is one of the residential solar industry’s most commonly used metrics. However, it is also one of the industry’s most poorly understood and incorrectly calculated metrics. Some may have referred to it as the “solar rate” or the “solar cost of energy.”

Most conventional LCOE calculations incorrectly overestimate the cost, making solar seem less compelling than it should be.

Whether you design a sub-optimal project, or you under-sell what you are designing, you are leaving money on the table.

## The Equation

At its most basic level, the Levelized Cost of Energy is the lifetime cost of a solar installation, divided by the amount of energy the installation generates.

By taking into account the upfront cash payment, as well as lifetime O&M and financing costs, the LCOE is supposed to give an “apples to apples” comparison of going solar versus staying 100% on the grid [1].

To explain this better, let’s expand the numerator of the LCOE equation:

Lifecycle cost of solar project = PC - ITC + O&M + LP - PVPBI

where:
PC = Project cost
ITC = Investment tax credit
O&M = Operations & maintenance costs
LP = Loan payments
PVPBI = Present value of performance-based incentive

So far most of this should be fairly intuitive. The more expensive the project (PC) and the higher your costs to maintain (O&M) and finance (LP) it, the higher your LCOE. Your investment tax credit (ITC) reduces your project cost, so that reduces your LCOE.

## Watch Out for Performance-Based Incentives

Pay attention to the term “Present Value of Performance-Based Incentives.” Miscalculating this metric could cause money to leak out of your, and your client’s, pocket. It could contribute to increased carbon emissions by causing you to undersize your solar project, and by reducing your chances of convincing your customer to go solar.

Performance-based incentives (PBIs) are payments that are tied to your solar project’s energy production. In the U.S., the most common form of these is Solar Renewable Energy Credits (SRECs). At the time of writing, ten states  have active SREC programs or markets. SRECs are tradable commodities that represent the energy generated from solar, which can be used to meet renewable portfolio standards (RPS).

An example of how solar renewable energy credits work from Energy Sage.

Carbon credits are another type of PBI. Most home and business owners monetize their PBIs by selling them [2]. The actual value the homeowner receives will reflect the present value of the expected PBIs.

## How Much Do Performance-Based Incentives Really Matter?

The effects this will have on your project’s LCOE vary based on the SREC program. Let us examine a homeowner that consumes 10,900 kWh per year. I designed a 9.9-kW system in a state where SRECs are currently priced at $0.27/kWh. Let us assume that this 9.9-kW installation has a Total Solar Resource Factor of 71% [3] . Aurora’s performance simulation engine estimates that this design produces 10,400 kWh per year, and it will produce 320.5 MWh over the project life [4]. Let us assume further that the homeowner purchased the system (so we don’t have to worry about loan payments) at a price of$44,460 ($4.5/W). Let us also assume an inverter replacement cost of$0.4/W. The inverter is replaced once over the life of the system.

Here is a summary of the assumptions:

Project Cost = $44,460 ITC =$13,338
O&M = $3,960 LP =$0
PVPBI = $21,265 With those assumptions, the project’s LCOE excluding PVPBI is$0.11/kWh, while the LCOE including PVPBI is $0.09/kWh - almost a 20% difference! That makes a big difference in how attractive solar will appear to the homeowner. Let us examine what effect this difference in LCOE has on the optimal system size. An optimal system size is realized when the project’s LCOE is equal to the prevailing utility rate. The example utility in this case, National Grid, has a tiered residential rate that increases with your net energy consumption. By having a lower LCOE, you can have a bigger system since you can afford to offset both the highest and lowest electricity tiers. Max kWh/month Period 1 Period 2 Rate ($/kWh) 600 0.09355 0.10291 Infinite 0.10017 0.10953

For the example above, a 9.9-kW system offsets almost 100% of the homeowner’s energy consumption. This is not a coincidence; when your LCOE is less than your marginal utility rate, you want to offset as much of the homeowner’s energy consumption as you can. In this case, at a LCOE of \$0.11, this project would not be economically feasible (hence the incentive program).

Despite its simplifying assumptions, this example illustrates how understanding all the aspects of a complete LCOE calculation will aid you in sizing solar installations. It also shows the importance of including the present value of performance-based incentives in your LCOE calculation.

For those of you who are interested: here’s the unabridged LCOE formula Aurora uses:

Notes: