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Posted: June 01, 2010

Putting a price on the sun

The ROI calculation for solar takes more than just crunching numbers or weighing tax benefits

David Lewis

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ColoradoBiz has analyzed the cost and potential of solar energy circa 2010, and some of our conclusions are going to play into the hands of the solar industry's sales and marketing pitchmen.
This is because our analysis indicates that, when it comes to the economics of investment in solar today:

1. There is no time like the present.
2. There is no place like here.
3. Neither No. 1 nor No. 2 means you will achieve a positive return on your investment or attain any other goals, but still, see Nos. 1 and 2 above.

We will shortly go on to prove our case mathematically, via a return on investment case for commercial investment in solar energy today in terms simple enough to be understood by a journalist.
The bottom line is, if a business owner builds a commercial solar array in the service areas of either Xcel Energy or Black Hills Power, said owner this year can subtract up to 70 percent from the top-line costs of his solar project, and then figure his after-tax ROI from there.

If you don't buy your electricity from one of those two providers, you can still shave quite a little bundle off the solar installation bill. Also, the federal government and the two Colorado utilities wish not only to give you tax deductions, oh no, not even tax credits, but cash rebates.

Cash.

Now, the parable. Back, back wanders this aged reporter's mind, back to 1979.

Energy prices had skyrocketed. The economy was a mess. A great Asian power threatened to overwhelm the U.S. economy. And Washington, D.C., heatedly debated questions that today seem quaint yet oddly familiar.

"In a message to Congress, (President) Carter outlined a broad program that would include ... a tax credit of up to $2,000 ($6,000 in 2010 dollars) for new homes designed for solar systems," reported UPI on June 20.

A landslide the next year unseated President Carter in favor of Ronald Reagan, who slashed federal solar research and development budgets. Much of the-then mom-and-pop solar industry soon collapsed when home installation credits were zapped, too.

In policy terms the Reagan R&D budget still hurts Colorado solar, argues Neal Lurie, executive director of Louisville-based CoSEIA, the Colorado Solar Energy Industries Association.

"What we've seen is that those early investments in countries like Germany have led to their being the global leader in renewable energy today," Lurie says.

Pointing out that Germany's GDP is about one-quarter of the U.S.'s, Lurie says Germany has seven times to eight times the number of photovoltaic solar installations as the U.S., as well as "many times" the number of green jobs we have here.

Further, nations such as Germany and Japan "are well-positioned for significant additional growth," Lurie says. "For Colorado to position itself as a global leader, we have to recognize that there is significant (global) competition and keep on being aggressive to ensure that the investment and jobs come here."

Now we bid an affectionate farewell to policy and turn to a happier subject: making money while making oneself look good making money. We shall demonstrate our economic case in simple mathematical terms in a moment, but first it's important to point out that solar industry, uh, industrialists agree that clients are concerned with two issues: making money and reducing energy costs; and being a good corporate citizen/leader.

"There are a few different key bullet points that people like to focus on," says David Henry, commercial project development director of Boulder-based Namaste Solar. "No. 1 is the financing: ‘What's the payback on this investment? Are we going to recoup our investment?' The second part of that is, ‘What are our energy savings projected to be? And, if you look at that over time, what kind of an impact is that going to have?' "

Of secondary importance to most are issues that can be classified under the headings, "Leadership," or "Image."

"‘This is us doing good for the environment and being folks who are setting an example, being perceived as leaders in this movement,' is usually very important, which also ties in closely with folks who will receive a fair amount of marketing benefit out of this," Namaste's Henry notes.

On to the numbers.

Crunching away on our behalf was Robert Quist, sales director for Denver-based Vibrant Solar Inc., who was working from a new and reasonably generic photovoltaic system case study. We assume a Denver-based business, and for a couple of reasons start by assuming an install with a yield of 35 kilowatts, indicating the size of array that might be found atop an office building or mid-sized restaurant. In round numbers that system will cost $180,000.

Thanks to Colorado's Amendment 37 and follow-on legislation, Xcel Energy's Solar Rewards Program will rebate around $70,000 of that by check in about six weeks to eight weeks. (Note: that $70,000 is taxable income.)

The U.S. Treasury discovered that tax credits didn't help commercial entities that hadn't made enough to owe taxes, and so the 2009 American Recovery and Reinvestment Act through the end of this year added optional cash assistance to energy producers in place of tax credits, up to 30 percent of the cost of the program. So if you act fast, subtract another $54,000, or 30 percent, from your $180,000. 

Also, you can depreciate about $150,000, or 85 percent of $180,000, of your capital investment over five years. And you will save about 10 cents per kilowatt hour at Xcel's current rates, or $5,600 in the first year, of your electricity costs. Xcel Energy's Solar Rewards Program also will write our mythical Denver business a first-year check for about $3,000 for renewable-energy credits (RECs) produced by the solar upgrade.

Our Denver business' invested cash balance is about $61,000 the first year, Quist says, declining to $35,000 the second year, $15,000 in year No. 3, and "after that your balance turns positive."
After-tax payout period: about four years. Annualized after-tax return: 16 percent to 18 percent, Quist says, "and I don't think that you're going to find many fixed-income vehicles out there these days that can make that same claim."

One business investor in today's subsidy-rich solar market awaits a verdict: In late 2009 a Wells Fargo Bank program called Solar Pilot Colorado outfitted 10 Denver Metro stores (nine Wells Fargo, one Wachovia) with arrays designed and installed by Namaste Solar.

Xcel's generous rebates, which were somewhat more generous last year than this, "really were the driver for choosing Colorado for the pilot" program, says Sheri Lucas, San Francisco-based Wells Fargo vice president of LEED Standardization.

"Also, there are a number of really good local companies to work with and incredibly strong support from local leaders in Colorado," adds Stephanie Rico, San Francisco-based assistant vice president-environmental affairs.

Wells Fargo is watching the pilot project's electrical production as well as a checklist of financial metrics, but the data is too fresh to draw any worthwhile conclusions, caution the company officials.

Still, "This was more than a nice ‘to-do,'" Rico says. "I mean it absolutely is a nice ‘to-do' as far as creating good will, reducing greenhouse gas emissions - but we believe this also was a very smart investment."

Wells Fargo watches the sky, too.

"I found that the good news for the Denver area is, the snow doesn't always stick, it melts pretty quickly," Lucas says. "We haven't had any major downtime due to snow - but when it does snow there is a measurable difference" in solar production.

Much the same goes for Egan Printing, founded on Larimer Street in Denver in 1891, just 39 years after easterners Henry Wells and William Fargo started Wells Fargo. Eagan Printing in 2008 hired longtime customer Vibrant Solar to install a 12-kilowatt photovoltaic array on its 10,000-square-foot roof. Installation took perhaps a few weeks, and the system began supplying power by January 2009. Facility manager Ken Zetye says it seems too early to reckon any meaningful ROI numbers from limited data, although it appears solar has brought down company electricity bills some. More significant by far were the tax bennies.

"The tax benefits were incredible," Zetye says. "The rebates are really great. Getting a tax credit was really helpful, especially in 2008. We had a good year, so it really saved us a lot of money."

Yet subsidies giveth and taketh away, too. Egan Printing officials at one point wanted to install solar up to their building's 10,000-square-foot capacity, but they settled on a system about one-fourth the size.

"It was the biggest that we could get. The rebates, the tax benefits, the credits are all consistent with how big your system is," Zetye says. "If we had made the system larger we would have gotten a smaller benefit."

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David Lewis is a freelance writer based in Denver.

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Readers Respond

Where's the ROI? The Solar energy ROI is smoke and mirrors without a government hand out. Unless cap and trade drives up coal fired energy costs, there is no way that solar or even wind will become as consistent and as cheap as coal. Solar energy rebates is a folly of taxpayer money. By Bob Jones on 2010 06 10

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