Financing is quickly become necessary for the successful adoption of renewable energy in the United States. If you want to sell geothermal or solar projects, you need to understand finance.
Great Resources
Finance 101 for Renewable Energy Pros
Finance 101 for Solar PV Pros
Mastering Commercial Solar Finance
The Complete Guide to Geothermal Tax Credits
There has been much recent discussion on solar and energy blogs and in other discussion forums relating to the tax treatment of Solar Renewable Energy Certificate (“SREC”) income.
The purpose of this article is to provide a brief overview of the taxability of SREC income for both commercial and individual taxpayers.
What is an SREC?
An SREC is […]
Over the past month, I’ve seen a pick up in the amount of companies that are offering ‘bridge financing’ to small and middle size solar PV contractors. So, I thought I would put together a short post and a free downloadable guide based on my research that outlines what bridge financing is, the best markets […]
Here is a crazy thought: we will know that solar pv has become mainstream when 3rd party financiers are no longer needed.
I’m very bullish on the ability of 3rd financiers to be able to compete with the general trend of the solar PV industry, huge installed costs reduction, increase electric rates and extremely low risk place to […]
In this article, I’ll go through the basic step-by-step process of how to evaluate, understand and communicate the financial benefits of investing in a solar thermal system. The analysis will be on the client side, but obviously it’s critical for sales as well.
Before you read: get familiar with financial terms and analysis, you should read the first article in the series “Finance 101 for Renewable Energy Pros”. Also, it’s important to note that I’m using the word “finance” as a way to build financial models, understand the economic drivers and benefits of specific technology – not finance as in ‘we financed our car instead of paying cash’.
Here are the other articles in this series:
Finance 101 for RE Pros
Finance 101 for PV Pros
Finance 101 for Geo Pros
We’ll be going through the same drill that I did with solar PV and geothermal in terms of the outline but the specific content will be tailored to the technology that we’re looking at, solar thermal.
Here’s the outline
What makes SHW special and a little different then analyzing other technologies
Step 1. Estimating solar thermal load, array size and power production
Step 2. Gross and net installed costs
Step 3. Determine the value of a SHW BTU
Step 4. Estimating operations and maintenance costs
Step 5. A few examples IRRs and sensitivity analysis for residential and commercial projects based on 1) load 2) fuel source 3) site characteristics
Marketing Implications
What I did not address that could be investigated.
A few issues around the difficulties and issues with determining the exact NPV of a SHW system.
On residential applications, it’s too costly to figure out exactly how much hot water is being used. Thus, we use assumptions that frankly, are not very accurate. See the Canadian study that found out the average of 65 gallons used per day, was actually around 44.
Unless the hot water generator is the only fuel source of that specific kind, it’s difficult to estimate on residential applications and mainly based on assumptions, which can be very wrong.
On commercial applications, it is common to use ultrasonic BTU meters for a week or so to understand exactly how much water is being used. However, it’s still key to understand daily and yearly usage patterns. For example, if a laundromat is used heavily in the morning or a college dormitory is not used during the summer that will have implications for the value of the heat the solar thermal system is creating. See point 2.
Production and usage of solar thermal energy are not equal. A property owner only gets the value of a solar BTU when they’re using water that is getting preheated by a solar thermal system. If they’re not using water, and the solar thermal system is producing that energy gets lost. Not all of it is lost, because the storage tank is able to hold a lot of water but they can’t hold it forever. The reason this is important for financial modeling is because, UNLIKE SOLAR PV, just because the solar thermal modules produce power doesn’t mean it was used and thus doesn’t mean the financial benefit was realized. The classic example is a family that goes on vacation for 2 weeks, if it’s a pressurized solar thermal system (we’re not going to get into pressurized vs drawback in this article and the design and financial implications of each) the pump will likely still cycle and energy will be produced, but nothing will be used. From a finance perspective, nothing is gained, only lost in the power the pump needed to run.
Quoted prices for solar thermal systems can vary widely from site to site and between geographic regions. The main drivers between sites will likely be 1) structural support needed. All else equal pitched shingle roofs are cheaper then flat roofs. 2) If a storage tank is required. For buildings that have a constant load 365, storage is typically not required. Pool heating is a good example. This will decrease installed costs. Between geographic regions that main drivers of costs tend to be the training of the crew. Almost all of the parts are off the shelf, or close to it, so it’s difficult to get better pricing on equipment, however a crew’s ability to executive and their level of training will be different between regions.
Module output is based on more factors then in solar PV. In a solar PV product output is mainly based on 1) the solar resource available 2) orientation of the module 3) efficiency of the module 4) temperature. With solar thermal, all of those factors also apply IN ADDITION to the load profile of the building. Why? The higher the load of the building the colder the water will tend to be, all else equal, when entering the solar therm module. This will increase heat exchange. So for example, if the modules were 180 degrees, the water passing through them will collect more BTUs if it enter the modules at 50, then if it entered the modules at 100. What this means is that if we installed 10 modules on a building with a load of X, if the same number of modules were installed on a building and the load was 2X, the production of the modules would be much higher. For this reason, it’s a good idea to keep the solar fraction low in a design, to maximize the BTU production of each module. How low? Dr. Ben suggestions between around 30% and 60%, see his great explanation of the subject here.
Maintenance costs can vary widely based on the type of system, equipment used, equipment warranties, and what the type of system is connected to. Also, because the solar thermal industry is relatively small, I haven’t been able to find large data sets of warranty information that I can be confident in.
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(Image using LoopLink Geothermal Design Software)
The only thing that the geothermal industry needs to worry about is sales. We need more sales. For the most part, we have talented enough engineers and tradespeople to install any project that we could imagine, we just need to sell it first.
In order to sell more, we need to be able to understand the economic benefits of the technology. However, after my attempt to write this article, I can honestly say that it is difficult (compared with solar PV and solar thermal) to accurately calculate the direct financial benefit of ground source heat pumps. I’m not saying it can’t be done, it just takes a lot of work.
This article is a stab at understanding the economics of ground source heat pumps. I wasn’t able to answer all of the questions I wanted to, so I will surely be doing a follow up post on some more specific topics. Also, the basic financial methodologies in this article can provide a solid foundation for anyone interested in advancing the industry. In the end, cash flows and IRRs are cash flows and IRRs.
There are many ways to sell geothermal: it’s more comfortable, especially in cooling mode because it removes a lot of latent heat. There is the foreign oil argument. And then of course, it’s an amazing investment that provides great returns and reduces HUGE fluctuations in energy costs that will happen with other fuel sources. Which argument is the best? Well, that depends on the customer you’re speaking with 🙂
Two of the arguments are subjectively valuable (the comfort and foreign oil arguments) and the other is based on direct economics of the technology. This is not to say that ‘soft’ benefits are worthless. For some customers, they are worth more then direct financial benefit, for others they are not and its all about the $$. However, we can’t put numbers on the subjectives, especially in residential sales. In commercial sales, understanding the raw economics will be critical to the success of any geothermal company.
Understanding the financial implications of a geothermal system is a must for a successful company. You need to understand how to calculate the benefits of the technology, communicate the benefits to clients and understand what the key factors are that will determine a profitable project from a less-profitable project.
This post will help you understand the financial implications of investing in a geothermal system from the clients perspective. It will by no means be an advanced piece but will give good guidance to 1) new professionals to the geothermal industry or 2) companies that are looking to beef up sales.
If you’re new to finance and renewable energy, start by reading the Finance 101 for Renewable Energy Pros piece. All of these analysis assume you can understand the cash investments and savings in a project, performing discounted cash flow analysis, and determine the IRR of the project. The structure of the this post will follow the Finance 101 for Solar PV Pros article.
First, What makes geothermal a little special, and more difficult to perform then other technologies?
The majority of modeling and projections are based on a lot of assumptions. Getting exact measurements in heat loss, heat gain, and the exact cost of a comparable fossil fuel BTU and the cost of a geothermal BTU are all based on models. The models have been getting better, but most are based on a series of assumptions that cannot be measured with 100% confidence. In this way, solar thermal and geothermal are related, and different from solar PV, where exact electric usage can be measured.
In order to calculate the savings from a geothermal system, you need to calculate the cost to deliver a geothermal BTU vs the cost of another BTU. Again, this is based on a lot of assumptions. They are the best assumptions that we have, but I just wanted to be clear that they are not 100% accurate either so it’s always best to be super conservative.
Lastly, installed costs and savings will vary greatly depends on the applications. While geothermal at $9,500 a ton might be a good average, there will be some applications where its $5,000 per ton, and others where it is $15,000 per ton. This is similar in operating savings, geothermal vs oil saves a much larger amount then geothermal vs natural gas. The huge amount of variation makes the economics of the technology hard to average because it’s so specific to each site.
Understanding the benefits of geothermal is really a pain the aXX. The amount of possible scenarios that you can face in each building, heating system, and thus installed and operating costs are truly staggering and are MUCH more numerous then one would deal with in solar PV or SHW. This adds up to a technology that requires lots of time to calculate the benefits.
Understanding the Variables That Impact Geothermal Economics
Before we run through some examples, let’s understand the variables that we need to understand about each installation that will drive the economics of the project.
1. Government Rebates
Residential: 30% ITC for Residential Project. Very straightforward. The owners of the geothermal project will receive 30% of the value of the project in the form of a tax credit that will directly reduce the amount they pay in federal taxes.
Commercial: 10% ITC for Commercial which can be applied in addition to the EPA Act.
Commercial: EPA Act of 2005, Section 179D Tax Deductions: Qualifying energy reducing investments can obtain immediate tax deductions of up to $1.80 per sq. foot. Many specific criteria need to be met from a building perspective, tax perspective, and engineering perspective. Take this free course to learn more. For this article, we’ll use 1.80 per square foot and a corporate tax rate of 20%. It’s possible that a specific system might only receive a $.60 or $1.20 per square foot deduction. The deduction can be used for anything that is directly related to the operation of the geothermal system; loop field, heat pumps, distributions system, pipe, ductwork, etc. For example. The calculation of this is very simple: Building square footage * 1.80 = tax deduction. Tax deduction * corporate tax rate = cash value of the tax credit. If the building was 100,000 square feet * 1.80 deduction per square foot = 180,000 tax deduction * 20% tax rate = $36,000. If you want to learn more about geothermal tax credits, take our free course about geothermal tax credits.
Commercial: MACRS. Same calculation as solar PV, except the basis for commercial geothermal systems is 10%, not 30%. If you want to have a detailed explanation of how to calculate MACRS, see the solar pv financing article.
State, municipal, utility rebates. Utility is common, but the range of rebates very unclear. MassSAVE for commercial electric retrofits is one. As you can see from this utility rebate, the amount of HVAC is “varies widely”. Call your utility is you have any questions. For this sake of this article, we’ll assume that there is no geothermal incentives from state, municipal or utility sources though it’s very likely that there would be.
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