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PV System Costs | Solar design tips, sales advice, and industry insights from the premier solar design software platform

What are the core differences in serving residential and commercial and industrial (C&I) solar markets as a solar contractor? If you’ve ever thought about expanding your residential solar contracting work to serve commercial customers as well, you might find it helpful to understand what these sectors have in common and where they diverge.

To get the lowdown on some of the key differences in solar contracting for residential and C&I solar projects, we spoke with Barry Durand, Director Commercial Sales, and Yashwanth (Yash) Ganti, Design Engineering Manager, at Green Solar Technologies.

Green Solar Technologies expanded into commercial solar several years ago, after nearly a decade serving residential solar customers–so Durand and Ganti were well positioned to highlight the important differences between the two sectors.

Our conversation highlighted several notable differences between C&I and residential solar contracting, including differences in the length and complexity of projects, communication with customers, project costs, and financing. Read on to learn more!

## 1.C&I solar projects take longer, partially because of permitting complexity.

As Durand explained, “Residential [solar] is a quicker process. As far as determining the size of the system, calculating the [financial] benefits, and actually getting it installed, it typically takes from 4 weeks to 12 weeks.

Commercial, not so much. It's a lot longer process for people involved with it; it could take anywhere from six months to a year before the project gets done.” A big part of this is the permitting process, which Durand noted “is quite a bit different, and quite a bit longer.” Ganti reiterated this point, noting that “There's a lot more review involved from the local jurisdictions.”

“For example, here in the city of Los Angeles, when it's a residential job under 10 kW, you can apply for permitting approval online and you don't even have to turn in a plan set. But when it comes to commercial, anything bigger than 10kW, there is a more detailed review process.”

Ganti explains that after turning in plan sets to the local permitting office, “they'll give you a time frame to review the entire plan set, which could be up to two weeks. From there, there can be multiple revisions, if they want you to add more detail.”

Durand also noted that these time frame differences affect the sales process. Companies considering expanding their work into C&I solar need to be aware that the commercial solar sales process is longer (a theme that also came up in our interview with the Community Purchasing Alliance).

## 2. Commercial projects are more technical.

Increased technical complexity is another important factor that differentiates commercial solar contracting. As Ganti explains, “From my perspective when it comes to designing a residential and a commercial job, residential is fairly straightforward. It's on a smaller scale so you're easily able to identify any technical issues and suggest a cost-effective solution for them right away.”

“But when it comes to commercial, there are much more technical concepts involved. For example, you may be dealing with electrical equipment at a higher rating, such as 2000 or even 3000 ampere (amp) switchgears. You have to understand whether you may need transformer upgrades based on whether the local lines can handle the solar backfeed. Basically, all of the technical considerations get more complex when you transition from residential to commercial.”

Because of this, Durand emphasized that it’s very important for companies considering making this transition to ensure “they have a quality engineering firm or a really good in-house designer that's very familiar with commercial [projects] to help streamline the process.”

Beyond ensuring technical competence, this can help speed up the permitting process by reducing the need for revisions. Durand explained that an experienced engineering firm or in-house engineer, can “make sure that you've got [the permit application] done as well as you can the first time. That means a very good site survey and making sure you've accurately answered every question.”

“Once you do that, [the permitting process is] going to be a lot more streamlined. Yes, it will still take two to six months to get to the point where the system is ready to be installed–but if you don't start with that it could take a year.”

## 3. Communication with customers differs from residential solar projects.

Communication with customers is also somewhat different for C&I solar contracting compared to residential. Because commercial projects span over a much longer time, it’s important to establish clear expectations at the outset for the length of time the project will take.

“The difference is all about length of time,” says Durand. “With a homeowner, the minute you sign an agreement with them, they want solar on [their house] tomorrow... You have to communicate with them every few days... it's a totally different animal.”

“With commercial, we manage those expectations a certain way,” letting them know “it's going to take six months to a year." Because of that, the frequency of communication may be less than with a homeowner (though of course clarity in communication and regular updates are important in all solar projects).

## 4. Commercial projects have higher costs, but lower cost per watt.

Another key difference between residential and commercial solar projects is in the costs. While it’s intuitive that the price tag of a large C&I project will be greater than for a small residential solar system, Ganti and Durand highlighted some particular aspects of C&I projects that come with much higher costs.

“For example,” Ganti noted, “if you have to upgrade an electrical panel, it will probably cost you about $2,000 in a residential job. When it comes to commercial, you're actually looking at upgrading the local transformer, which could cost from$4,000 to $20,000 or more depending on the local transformer and other technical factors.” Despite this, because of the economies of scale at play in commercial projects, the cost per watt of commercial projects tends to be lower. “A contractor can end up saving money on a cost per watt basis for a [commercial] installation due to the fact that some of these costs are set, whether residential or commercial.” He cited the cost of truck rolls to bring staff to a project site as an example. Additional savings come from buying hardware components in bulk. For these reasons, for contractors that are prepared to manage the complexity of C&I solar projects, it can be a very lucrative sector. ## 5. Financing for commercial solar projects is less accessible. A final important difference between residential and C&I solar relates to financing. Durand notes that “it's a lot easier access to financing for the residential market, than for commercial,” a factor that has held back the growth of the C&I sector. Durand notes that in residential solar, financing options have been more developed, whereas the C&I sector is somewhat new territory. Despite that, he observes “there are more and more ways to start financing your commercial projects; not everybody wants to pay cash.” He recommends that for businesses that have a relationship with their own bank, that can be a great place to start when seeking a solar loan. Although commercial and residential solar contracting diverge in a number of respects, a final takeaway from our conversation with Durand and Ganti was that, ultimately, the two sectors are not so different. “As long as [contractors]... hire the right engineering firm, have the right equipment, and the skills to do the installation, it's the same process,” says Durand. “[Commercial solar is] not that difficult, it’s just a matter of having all of your ducks in a row when you start.” Concerned about solar tariffs? You’re not alone! Given that there have already been three tariffs introduced this year that affect the solar industry, it’s understandable if you’re concerned over their impact on your business. In today’s article, we provide an overview of each of the 2018 solar tariffs to date and explore the extent of their impact so far. We spoke with David Dunlap, Vice President of Operations at Baywa r.e. Solar Systems, to get a distributor's perspective on the impact of these tariffs on contractors. Tariffs have definitely caused some pain in the industry, but thankfully the repercussions have not been as dire as many initially expected–at least for solar contractors and customers. And, there may just be some lessons to be learned from the experience! ## The Context When the first solar tariff was announced in January 2018, there was a great deal of uncertainty about how it would impact the industry, but many feared the worst. An initial industry response predicted a loss of approximately 23,000 jobs in the solar sector. Indeed, cancellations of more than$2.5 billion in large installation projects by solar developers have resulted in a loss of thousands of jobs this year.

There were a lot of factors at play, however. M.J. Shiao of Wood Mackenzie Power & Renewables highlighted the multitude of forces impacting the economics of the solar market, in addition to the tariffs, in a GTM podcast. Among these were the upcoming reduction of the Investment Tax Credit in 2020, lower interest rates in general, the repeal of the Obama-era Clean Power Plan, and individual states’ efforts to drive their own pro-renewable policy agendas in response. Some of these elements have tempered the extent of the tariffs’ impact, particularly for residential and commercial installers.

Today, after some short-term turmoil, module prices have largely stabilized and the impacts of tariffs on other solar components are expected to be less severe. Dunlap explains, “Entering Q4 2018, PV module prices to installers are flat to 10% below [prices before the first tariff was applied in February 2018].”

## The Solar Tariff on Panels and Modules: Section 201

In January 2018, the Trump Administration announced a 30% tariff on imported crystalline silicon PV panels and modules, imposed under Section 201 of the Trade Act of 1974. The decision came after two module manufacturers, SolarWorld and Suniva, argued they could not compete with the lower-priced imports. The tariff, which went into effect in early February, will be reduced by 5% a year over four years. The first 2.5 gigawatts of imported cells are exempt.

Though there was quite a bit of concern about the impact of this particular tariff, so far there has not been a dramatic market shift. Dunlap explains that “while there was a temporary spike in prices from the 30% tariff (effectively anywhere from 0% to 20%), we have since recovered to end of 2017 pricing while the manufacturers are still paying the 30% import tariff fee.”

### Stockpiling and Supply Chain Pain

In anticipation of this tariff, many solar firms stockpiled their supplies. As Dunlap explains, “Manufacturers and distributors saw a huge spike in sales leading up to the tariff date (Q4 [of 2017] was huge, and January plus some of February were way above normal). This means that project development companies and large and medium installers stuffed their warehouses, and maxed out their cash reserves and credit lines to lock down inventory.”

“By April and May, sales slowed down dramatically, because the entire channel was stuffed with all this product purchased in advance. If we were to look at the total excess inventory bought by installers in Q4 + Q1 and spread it out over Q2 and Q3 2018, the total net sales to installers would be right in line with overall market expectations for 2018, which was flat to maybe only 10% up year over year.”

He says that only later did it become apparent that the module price increase caused by the tariff was temporary because manufacturers were ultimately forced to reduce prices to stimulate demand (while still paying the 30% import fee). However, Dunlap does point out that many installers who stockpiled are struggling with resulting challenges around cash flow, storage costs, and credit lines.

Dunlap also notes that in many cases residential customers were insulated from a net price increase. This is because many installers who had to absorb the temporary 10%-15% spike chose not to pass on the price increases to the customer.

### Other Factors Influencing Module Prices

Another global policy factor which seemed likely to impact U.S. panel prices was China’s mid-year decision to halt the majority of it’s solar development, which eliminated 20 GW of global demand for solar and shifted the panel market to one of oversupply. According to Dunlap, however, that ultimately the policy change had little impact in the U.S. because earlier anti-dumping tariffs had shifted module imports from China to Southeast Asian countries like Malaysia and Thailand,

However, he does predict additional price reduction due to the expiration of the Minimum Import Price for Chinese modules in Europe. This has “opened the floodgates for excess Chinese capacity to go to Europe at far lower prices than had previously been allowed.” Already prices have dropped 30% in four weeks. Dunlap says this will remove European demand for Southeast Asian products, leaving the U.S. as the only real market for their modules–driving prices down even further.

## Solar Tariffs on Additional System Components: Sections 232 and 301

In March, the Trump Administration imposed a 25% tariff on steel and 10% tariff on aluminum under Section 232 of the Trade Expansion Act of 1962, increasing prices for racking, wiring, and ground mount posts.

Then, in August, a 25% tariff implemented under Section 301 of the Trade Act of 1974 was placed on a host of imported Chinese goods – including solar cells and modules. Another tariff was added to Section 301 on September 24 that includes solar inverters and non-lithium batteries; it starts at 10% and increases to 25% in January.

Once again, the impact of these tariffs is not thought to be dire. As Dunlap mentioned, Chinese cells and modules make up a small fraction of U.S. solar imports (11% reports PV Magazine). Plus, most new factories planned for the U.S. will not be affected because they use materials that do not come from China.

Dunlap believes that “Looking ahead to the Section 301 tariff affecting certain Chinese-manufactured inverters, the net impact to the overall system will be much lower than in the Section 201 tariff on PV modules, because inverters are a lower portion of the total system equipment cost than PV modules.” Plus, “it won’t even affect all manufacturer brands, so therefore won’t affect all installers and homeowners.”

He also notes that since equipment prices have dropped so much over time, hardware now represents a much smaller piece of the overall system cost.

## Conclusions

The 2018 solar tariffs have certainly had an impact on the American solar market. Amanda Levin, a policy analyst for the Natural Resources Defense Council, recently noted that the solar market would almost certainly be growing more rapidly if the current administration had not imposed these tariffs.

Cory Honeyman of GTM Research, whose organization lowered its prediction for additional U.S. solar generating capacity for the next five years by 11%, stated, “There’s just a lot of demand that could have happened that is not going to ultimately be realized because of these tariffs.”

But although the solar industry could be growing faster if tariffs had not been imposed, the prediction continues to be for rapid growth for solar in the U.S. The SEIA Solar Market Insight Report 2018 Q3, released in September, showed some positive numbers including the prediction that total U.S. installed PV capacity will more than double over the next five years. As of July, there has only been a loss of 8,000 solar jobs.

For Dunlap, the industry’s response to tariffs offers some lessons for the future. “In retrospect, I think our collective industry fear about the potential negative impact on the consumer market caused us to act somewhat irrationally to “safe harbor” more product than we actually needed… and caused financial stress on all organizations…. All of that stress and effort resulted in very little change to the rate of new installations in the end.”

“As our industry grows up, I hope we can manage cost changes in healthier ways.” He concluded his remarks by noting that “there is very little room for additional cost reductions in solar equipment with current technology, and as an industry, we need to focus our value-engineering efforts on non-hardware costs, which have much more room for improvement.”

Topics: PV System Costs, solar policy

Community solar programs have the potential to greatly expand the market for solar energy and make the benefits of solar more accessible. However, growth of this sector is currently inhibited by uncertainty in project delivery costs.

We sat down with Dr. Joseph Goodman of the Rocky Mountain Institute to understand this challenge—and how detailed design modeling capabilities can help overcome this barrier.

#### What is Community Solar?

By now you've likely heard about community solar – also known as shared solar or solar gardenone of the solar industry’s fastest-growing sectors in 2016. Community solar provides a way for customers to share in the energy produced by a solar installation in their community. The solar installation, which may be community-owned or third-party owned, provides electricity to community members who choose to participate. An important appeal of community solar programs is that, if designed correctly, they save participants money compared to what they would otherwise pay their local utility.

Community solar allows homeowners that do not have ideal building conditions to enjoy all the benefits of solar ownership, such as lowered utility bills and the knowledge that they are contributing to a cleaner environment. Factors like having a shaded roof, being a renter, or living in an apartment building, may limit one’s ability to switch to solar. In fact, the National Renewable Energy Laboratory (NREL) has found that these issues affect 49% of households and 48% of businesses! Accordingly, community solar has a critical role to play in the development of the solar industry and in ensuring that the clean energy economy is inclusive and equitable.

#### How Does Community Solar Work?

The Solar Energy Industries Association (SEIA) identifies four different models for community solar. A utility may provide its customers with the option to purchase a set amount of solar energy from a shared facility- typically at a fixed rate for a long term, such as 20 years (a utility-sponsored model). An on-bill crediting model allows residents and businesses to invest in a portion of a shared solar installation and receive a proportional credit on their utility bill. Individuals can create a business entity to develop a shared solar project, a Special Purpose Entity (SPE) model. Finally, in a non-profit (or “buy-a-brick”) model, donors may contribute to support the development of a shared solar installation that will be owned by a non-profit. The availability of community solar projects depends on state-level policies; the option is not yet available everywhere but 26 states currently have community solar projects.

Four different business models for shared solar. Photo Credit: U.S. Department of Energy.

#### Cost Certainty: The Secret Ingredient for Community Solar Success?

The Rocky Mountain Institute was founded in 1982 to transform global energy use to create a clean, prosperous, and secure low-carbon future. RMI engages businesses, communities, institutions, and entrepreneurs to accelerate the adoption of market-based solutions that cost-effectively shift from fossil fuels to efficiency and renewables. They are pioneers of community solar, developing innovative community-scale solar pilot projects to make solar energy affordable and accessible for all. Their analysis looking at community-scale solar (both shared solar systems and other mid-size arrays), estimates that the community solar market could reach 30 GW by 2020!

Dr. Joseph Goodman, Principal with Rocky Mountain Institute’s electricity practice.

Dr. Joseph Goodman is a Principal with Rocky Mountain Institute’s electricity practice. He leads RMI’s work to accelerate the deployment of community solar, with a focus on providing practical support to communities transitioning to shared solar. We sat down with him to understand what it will take for community solar to reach its full market potential, based on his work with community stakeholders.

We asked Dr. Goodman about some factors that affect the expansion of community solar. He highlighted uncertainty when evaluating the cost of a potential project as a major issue. Even among otherwise comparable community solar projects from the same company, there is often significant variation in what it costs to develop a community-scale solar project. This ambiguity in actual delivery costs means that companies must price projects on the higher end of the spectrum to avoid losses.

“[Community solar projects] basically live or die based on... incremental costs in the way the system is developed, designed, sourced, and deployed.”

Why is this so significant for community solar in particular? While uncertainty in project cost exists across solar project types, the impact on project viability is particularly significant for community solar. Slight variations in project cost can make the difference between whether or not a project will save members money compared to utility rates, and thus whether communities see it as a good option. As a result, the expansion of community solar on a large scale hinges upon increased certainty and transparency in project costs.

As Dr. Goodman explained, “[community solar projects] basically live or die based on those incremental costs in the way the system is developed, designed, sourced, and deployed.” Additionally, he noted that when people don’t have the right information to make a decision, the common reaction is to do nothing—so until there is greater transparency in these costs, community adoption is likely to be slow.

There is a great potential to reduce this uncertainty, however, and RMI is working to provide solutions. “Based on the analyses that we’ve been able to conduct, there is tremendous opportunity to reduce the cost of installation and improve total cost of [community solar] ownership. There’s also room to decrease your construction project cycle, and to eliminate much of the variance of projects…”

#### Delivering Cost Certainty with Prototyping

One solution that Dr. Goodman and the Rocky Mountain Institute have been working on is the use of standardized project design prototypes to eliminate this uncertainty. The development of prototype designsfor which the total cost of ownership has been analyzed and established with certaintyallows communities considering shared solar projects to make informed decisions.

“There are other variables at play in finance, but I think the two dominant ones are: ‘Will this asset produce what you said it will produce?’ And ‘Will you be able to sell the energy it produces at the rate that we’re banking on?’”

But how do you arrive at a trusted cost evaluation for a particular solar project prototype? One option would be to actually build out a particular design, documenting the costs in detail. Of course, that’s a significant investment!

But, as Dr. Goodman explained, “Before you’ve got that luxury, you’ve got to [do this] through more efficient means- and Aurora’s enabled that.” With a solar software design platform that can make accurate projections of project costs and performance, researchers can develop hypotheses on how to effectively reduce project costs and test them without physically developing the projects. These experimental capabilities have the potential to be a major game changer for the community solar sector.

Dr. Goodman and his team use Aurora’s design capabilities to run experiments evaluating how different community-scale design scenarios perform based on total cost of ownership. “We’ve found huge savings, savings that are so significant that the total cost of ownership goes from being higher than buying from—either wholesale or retail, depending on the customer—to below.”

Aurora’s application enables the development of detailed designs for solar installations, including industry-leading energy performance simulations.

Being able to evaluate multiple design solutions that meet diverse project needs provides great value to the industry. “I want to really underscore the magnitude of it…. with a software tool that allows us to search the design space, we can have a step change in the value proposition. It goes from ‘out of the money’ to ‘in the money.’”

Dr. Goodman also discussed how this change in the value proposition will expand access to financing for community solar. “There are other variables at play in finance, but I think the two dominant ones are: ‘Will this asset produce what you said it will produce?’ And ‘Will you be able to sell the energy it produces at the rate that we’re banking on?’ And that’s a much more believable story when you’re providing real savings- rather than marketing against inflated utility costs...”

An example of a ground mount typical of a community solar project. Photo credit: John Thornton / NREL.

#### A Bright Future for Community Solar

Despite the current challenge that cost uncertainty creates, Dr. Goodman is optimistic about the growth of community solar across the U.S. "We... foresee getting to play a significant role in the creation of this industry at RMIthrough working with industry, and with [community stakeholders] who are really willing to represent the best interests of their communities.” His outlook is echoed by NREL estimates that community solar could comprise up to 49% of the U.S. distributed PV market by 2020 with supportive policies.

Goodman stressed that we are at an exciting time for the growth of community solar: not only do we have the right technologies and business models, but there is growing political will within communities at all scales, from local to international, to reduce carbon emissions through the expansion of renewables.

~~~
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Background Photo Credit: U.S. Department of Energy.

## Costs Associated with a PV System

In order to determine financial returns, it is important to have a solid understanding of the basic economics that dictate PV system costs. There are two general categories of PV systems costs: capital costs and operation and management (O&M) costs.

### Capital Costs

Capital costs refer to the fixed, one-time costs of designing and installing the system. Capital costs are categorized into hard costs and soft costs.

Hard costs are the costs of the equipment, including modules, inverters, and BOS components, as well as installation-related labor.

Soft costs include intangible costs such as permitting, taxes, customer acquisition costs, etc.

Figure 1. Cost breakdown of PV systems. Source: B. Fiedman, et al, "Benchmarking Non-hardware BoS Costs for US PV Systems, Using a Bottoms-Up Approach and Installer Survey," National Renewable Energy Laboratory, Second Edition, December 2013.

Figure 1 illustrates the relationship between soft and hard costs, and breaks down hard costs into its components. According to SEIA, while hard costs have come down dramatically over the last decade, soft costs have remained largely constant.

### Operation and Management Costs

O&M costs refer to costs that are associated with running and maintaining the system. These can include fuel, repairs, and operation personnel. PV systems generally have low O&M costs.

## Incentives and Policies that Benefit Solar Energy

The high capital costs are one of the biggest factors that discourage people from going solar. To combat this, there are a number of incentives and policies in place to make PV systems financially competitive.

### Cost-Based Incentives

Cost based incentives, such as the Solar Investment Tax Credit (ITC), allow those who invest in a solar system to apply a tax credit towards their income tax. The incentive is determined by the cost of the system, and is independent of its performance.

### Performance-Based Incentives

Performance based incentives (PBIs) encourage PV system owners to install and maintain efficient systems through payments that are based on the monthly energy production of the system.

### Net Energy Metering

In addition to incentives, many states, such as California, implement a net energy metering (NEM) policy that allows consumers who generate excess electricity to be reimbursed at the then-prevailing rate of electricity. For instance, if a residential PV system produces an excess of 100 kWh over the course of the month, the owner will be reimbursed for 100 kWh at the market rate of electricity for that time period. The owner is then free to use that reimbursement credit towards electricity they consume from the grid when solar is not meeting their current energy load. Therefore, households with solar PV and NEM are able to significantly reduce their electricity bill.

Figure 2. Visualized relationship between PV energy production and household electricity use for an average home in New South Wales, Australia. Source: solarchoice.net.au

Figure 2 shows the relationship between PV electricity production and electricity consumption during the day. Note that while the PV system can generate more than enough electricity during the daytime, it can fail to deliver electricity during peak consumption hours.

## Basic Financial Calculation for a Residential PV System

In return for a large upfront investment in a solar installation, homeowners that go solar benefit from a reduced monthly electricity bill. Thus, for NEM regimes the benefit of solar comes in the form of avoided costs.

For instance, assume that upon installing a rooftop PV system, a home electricity bill is reduced by $1,500 per year and the cost of the hypothetical PV system is$10,000 after incentives. In order to calculate the simple payback period, which is the approximate time for a PV system to pay for itself, we divide the cost of the PV system by the savings.

$$\text{Simple Payback Period} = \frac{\text{System Cost}}{\text{Annual Savings}} = \frac{10,000}{1,500\mathrm{/year}} = 6.7\mathrm{years}$$

Thus, the payback period for a system that costs $10,000 and reduces the electricity bill by$1,500 per year is 6.7 years.

However, a PV system can last much longer than the duration of its payback period. A typical rooftop PV system has a lifetime of about 25 years. This means that for the last 18 years of its life, after it has paid itself off, the hypothetical PV system described above will generate revenue in the form of additional savings. To calculate this revenue, we multiply the annual savings by the remaining lifetime of the system, after it has paid itself off.

$$\text{Net Revenue} = \text{Annual Savings} \times \text{Years left in lifetime after system is paid of}$$ $$\text{Net Revenue} = 1,500\mathrm{/year} \times 18.3\mathrm{year} = 27,450$$

Based on this simple analysis, the system will generate approximately $27,450 in savings over its lifetime. It is important to note that this is an approximation, and does not take into account factors such as maintenance costs, changes in electricity price and usage, as well as system degradation over time. The figure below shows another financial analysis for a hypothetical residential PV system. In both graphs, the y-axis is the dollar amount and the x-axis is the year. Figure 3. The cumulative (top) and annual (bottom) cash flows of a hypothetical PV system. Source: Aurora Solar The top graph, which shows the cumulative cash flow of the project over time, and indicates that the project has a payback period of approximately four years. Additionally, the dollar amount in the 25th year, which is about$25,000, is the cumulative net revenue that the system generated. The bottom graph is the annual cash flow of the project. The first year is characterized by a large negative cash flow, due to the large upfront cost required to install the system, but after that there is positive annual cash flow with the exception to this is in the 14th year, which is when the inverters are being replaced.

### About Solar PV Education 101

The Basic Principles that Guide PV System Costs is part of Solar PV Education 101, a six-article series that serves as an introductory primer on the fundamentals of solar PV for beginners.