Finance 101 for Solar PV Professionals
In order to sell solar PV projects, especially commercial projects, you need to understand finance. Understanding finance will allow you to calculate and communicate the financial benefit of a system to your client.
Download the Commercial Solar Finance Model
Read the Guide to Financing Commercial Solar Projects
Solar Executive MBA
LinkedIn group: Best Practices for Financing Commercial PPAs Between 200kW and 5MW
60-minute interview with Solar Executive MBA instructors on financing commercial solar PV projects and power purchase agreements (PPAs)
50-minute interview on what commercial solar developers need to understand about yieldcos
This is the follow-up to Finance 101 for Renewable Energy Professionals. In that post I did walk-throughs and provided examples of all the financing terms you will need to know (IRR, NPV, discount rates, nominal cash flows, etc.) and how the terms of your financial analysis will impact the returns.
In this article I’m going to discuss how finance applies to residential and light commercial solar PV. I’ll discuss how to plug solar-specific installed costs, incentives, etc. into a financial model so that you can properly understand the returns of a specific project and then communicate those returns to a client.
The post is a basic walk-through of solar PV financing, but some of these topics get complex quickly and are dependent upon specific customers, utilities, and geographic areas. I’ll try to keep it basic but provide further reading and note where and why subjects get more complicated so you can do your own research.
I’m going to use Massachusetts-specific numbers because that’s the market I understand best. I will note if you should look into different elements depending on where you are located. For example, you may have time-of-use electric pricing in your area and you may not have SRECs, like we have in Massachusetts.
Here is the outline of what I’m going to discuss:
1. Government Rebates
The difference between one-time and production-based incentives
The value of tax credits vs rebates versus depreciation
How to calculate MACRS for commercial clients
2. Installed Costs: Gross and Net
Where to find good industry averages for installed costs
How to find gross and then net installed costs for a project
3. Operations and Maintenance Costs
The variables that drive operations and maintenance costs
How to calculate O+M costs based on a percentage of installed costs or by dollar amount of kW installed per year
4. Value of a Solar kWh based on Customer Type
The value of a solar kWh is worth EXACTLY the cost of the power it is replacing
Understanding how a residential client can be billed
Demand charges versus usage rates for commercial clients
5. Conclusion and Example Customers
Lastly, we’ll run through a few examples of different residential and commercial clients and determine the financial viability of the projects based on their IRRs and NPV, given a discount rate.
What is the impact of commercial client’s demand charges on the value of a solar project?
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