Golden Solar MBA Thesis

A Comparative Analysis of Financial Programs Used to Promote Residential Solar Power in San Francisco and Berkeley 

This study is a comparative analysis of two financial programs designed to promote solar power in residential buildings. The research methods were secondary research, literature review of academic and professional journals, related websites, and interviews with two program managers.

The focus of this study is a comparative analysis of San Francisco and Berkeley solar programs. The outcome of this project is my recommendation that Berkeley and San Francisco should combine the rebates, subsidiaries, financing programs and incentives that the two cities already use into one program that both the cities can use.

California has ideal conditions for solar, with the weather being warm and dry in all seasons, with 354 days of sunshine a year. The state is not offering the same incentives, rebates, and subsidiaries in all of its cities though. California does not have reliable financing programs set up either. The financing programs that the few cities in the state are currently using are set up with long, costly paybacks, etc.

A few cities in California are experimenting with these financing and subsidiary ideas. But most cities in the state are waiting to evaluate the results of those early adapters. This report is a will include an overview of California solar incentives, rebates, and subsidiaries that the state is currently using.

I will give descriptions of the Berkeley and San Francisco incentive, rebate, subsidiary, and financing options that these two cities are currently using. I will then give a comparative analysis of these two programs. I will show the advantages and disadvantages for each program in my analysis and then will follow up with my recommendations for the way residential solar financing and subsidiary programs should be set up in all of California.

Photovoltaic (PV) Solar Power Farms:

Solar powered Photovoltaic’s (PV) is used to transform solar cells into energy, converting sunlight into energy. PV panels are made up of silicon solar cells which produce electricity when exposed to light. When the solar cell(s) are wired to an external circuit and exposed to sunlight, electrons can flow through the circuit, turn into electricity, and then the electricity returns to the circuit. Most PV panels are made of solar cells coated in a plastic, these protect the bare cells from the glass. The most common type of solar cell is the crystalline solar cell. These cells are very fragile and must be covered with this plastic coating to protect them from fracture and moisture infiltration. Solar modules are manufactured to be strong enough to survive the most extreme weather conditions, including extreme heat and cold, high humidity, and storms.

Californians have the ability to finance the installation of a PV system using increased property tax assessments, rather than a more-traditional credit vehicle, to recover both system and administrative costs. This seems like an innovative approach that has a number of handy features that should appeal to PV owners. These include long-term, fixed-cost, attractive financing and loans that are tied to the tax capacity of the property rather than to the owner’s credit standing.

There is also a repayment option available that transfers ownership, along with the sale of the property and a potential ability to deduct the repayment obligation from Federal taxable income, as part of the local property tax deduction. These features make this kind of system much more attractive to residential consumers.

 California Solar Installations:

Californian consumers are now realizing that solar energy will help them reach their personal environmental objectives, by adding solar to their residence. The state has goals to reduce greenhouse gas emissions by 25 percent by 2020.   Solar energy can help the states solar consumers attain these goals. It can also help prevent climate change and many other environmental and public health threats caused by fossil fuel energy. The state has recently become a very progressive national and international leader in its adaption to solar power.

These environmental benefits are directly connected to the lower costs of energy that Californian solar creates by providing a never ending source of solar energy. Unlike the price of gas and oil which we have seen go up astronomically lately. Electric utility prices in California increase as natural gas and other fuel prices increase, but as the cost of electricity from a utility becomes more expensive, a solar unit saves more money and pays for itself at an even faster rate.

California passed the net-metering law in 1996, which requires all residential utilities, with the exception of publically owned utilities with over 750, 000 customers, to offer net metering to all customers for solar and wind-energy systems up to 1 megawatt (MW). Investor owned-utilities are required to offer net metering for their electric systems and fuel cells. This law allows the states residents to deliver clean and renewable solar power into the utility grid, and pay the utility only for the net difference between the power consumed and the power produced.

Net metering allows the residential electricity meter to spin forward as usual when electricity flows into the building. It also spins backwards when your Photovoltaic system produces a surplus of electricity that is not immediately used. Your meter will keep track of all the additions and deductions. Your excess electricity is stored on the utility grid. The consumer can use the difference in the amount of electricity used later without any extra cost. The resident then is given credit for the energy not used in the previous month and that credit is passed on to the current month for the resident to use free of charge. The goal is to reach a net of zero consumed power.

The California Revenue and Taxation Code allows a property tax exclusion for certain types of solar energy systems installed between January 1, 1999, and December 31, 2009. This code added another section that allows the solar exclusion to include the building of new homes that are going to be sold to somebody else. This only applies if the owner or builder did not already receive exclusion for the same active solar energy system. This code expires December 31, 2016.

The state has been making rapid advances in solar technology over the past 9 years. It only had 40 statewide residential and commercial solar installations in 1999, with a total kilowatts (kw) of 175.69, and saved a total .05 K-tons of carbon. By October of 2008, the state has shown substantial gains by having installed 30, 079 solar units, a total of 131,801.94 kw, and saving a total of 286.74 K-tons of carbon.

The Global Warming Solutions Act was passed in 2006 by with overwhelming support by the Legislature and Governor Schwarzenegger. This bill would force the California Air Resources Board (CARB) to report rules for major sources of greenhouse gases by January 1, 2009. CARB must also start a plan by January 1, 2009 stating how emission reductions will be achieved from significant greenhouse gas sources by regulations, market mechanisms and other measures. They would also be responsible for starting technology, cost effective regulations in carbon-gas, market mechanisms and alternative compliance mechanisms by January 1, 2011. This will force the government to aid the solar movement in the state.

California made incentives mandatory in 2007 for residential systems smaller than 100 KW, that all incentives will be paid to consumers before the consumer is billed, based on prior performance. The projected performance will be calculated based on equipment ratings and installation factors, such as geographic location, tilt, and shading. The rebate levels will also decrease an average of 7% per year between 2007 and 2017. The purpose of this initiative is to set incentive levels high enough to stimulate solar investments, yet not so high that ratepayers are subsidizing projects that would be built with smaller incentives. Developers and customers profit in knowing how much the rebate will be as demand for the solar rebates increase.

California passed another law in July 2008, which allows cities and counties to make low-interest loans to homeowners and businesses to install solar panels and other energy-saving improvements. Participants can pay back the loans over decades through their property taxes. If a property owner sells his home or business, the loan balance is transferred to the next owner, along with the improvements.

There are clear benefits to Californian consumers under their subsidized solar energy programs. These programs provide a predictable cost for electricity over the life of any solar system. Most of these systems also have the power to produce back-up power in a blackout, creating a very self sustaining environment.

Residential Californian Consumers are also faced with many challenges when installing solar energy in their homes. All these plans make it much easier for Californian consumers to be able to afford solar energy. Californian consumers can actually build industry around it and count on it being there a while.

New and Existing Residential California Programs:

The California Public Utilities Commission (CPUC) controls the California Solar Incentive (CSI). The CPUC helps ensure that consumers have safe, reliable utility service at reasonable rates, protecting against fraud, and supporting the health of California’s economy. The CPUC benefits California by offering clean energy related initiatives and policies designed to benefit consumers, the environment, and the economy.

In 2006, the CPUC implemented the California Solar Incentive (CSI) with plans to have one million roofs in California by 2018. The CSI builds on and adds to the rebates that are already in place. This Initiative also offers financial incentives for solar installations based on the estimated performance of a selected residential solar installation.

The CSI has a partnership with Pacific Gas & Electric (PG&E), that states that if you have solar in your residence then PG&E will offer you a rebate as an incentive to go solar. The state put together a strategic plan in 2008, in order to effectively meet its energy, environmental, and economic goals to 2020 and beyond. This plan was put into place to progressively deliver energy efficiency to existing homes state wide. It also contributes considerably to California’s goal of having reasonably priced, stable, reliable, and clean selection of energy resources.

California Solar Initiative and PG&E incentives make powering your residence with clean, renewable solar energy easier than ever before by offering an incentive for qualifying photovoltaic systems, (California Alternate Rates for Energy, PG&E Oct. 7, 2008). PG&E have already assisted over 25,000 existing residential consumers with their installations, more than any other utility in the United States, and they are powerful advocates of helping California become the leading solar energy state in the United States.

The state has many performance based incentives set up to promote solar power among multi family and low income residential consumers. To be eligible for these programs, all of the Systems must be installed by appropriately licensed California solar contractors. These programs were started in January 2008 and were given a budget of $3.8 billion over 10 years. Californian consumers who install solar panels on their residences can sell excess energy back to power companies for credit on their monthly bills. That produces a great incentive for consumers to install solar panels. By providing these kinds of rebates the government is providing for part of the needed financial incentive to bring more solar power to California

This will create a huge incentive for new California residential developers to go Solar. When you add this to the other aggressive solar initiatives such as requiring utilities to acquire 20 percent of the power used within the state from renewable sources, this plan will have taken great steps to make California once again a world leader in solar power. That will help develop a self-sustaining solar industry for Californian consumers.

The state’s residential building industry, which constructs about 150,000 new single family homes a year, is required by 2010 to offer a solar PV option to prospective buyers. This means they will have to offer literature, educational material and other basic information regarding a solar option on the home. This is supposed to entice new home buyers to opt for a solar system. This reduces the pressure put on the builders to entice consumers to go solar.

The California Energy Commission’s New Solar Homes Partnership (NSHP) is part of the complete statewide solar program, known as the California Solar Initiative, (WHAT IS THE NEW SOLAR HOMES PARTNERSHIP?. Go Solar California. Nov. 19, 2008). The NSHP provides financial subsidies and other support to home builders. This encourages the construction of new, energy efficient solar homes that can save homeowners money on their electric bills and protect the environment at the same time.

Under the California New Solar Homes Partnership, a solar home is a highly energy efficient home that applies photovoltaic (PV) modules in new homes to produce electricity from the sun. Currently, California has tens of thousands of homeowners enjoying the benefits of solar on their homes. A solar home with high energy-efficiency features offers homeowners clean, renewable energy, utility bill savings, predictable utility costs, and protection against future rising electricity costs

Comparative Analysis of Subsidies and Financing Options:

The city of Berkeley offers a great financing tool that potential residential consumers can use to pay for their solar installations. But the cost is very high with a long payback period, etc. San Francisco offers many incentives, rebates, and subsidiaries to help lower the initial capital required to install a residential solar unit.

Northern California seems to be taking a very proactive approach to subsidizing solar energy programs, with Berkeley helping set the example.  Berkeley has already set a goal of getting 51 percent of its energy from renewable sources by 2017. The city started a plan in October 2007 to help achieve this goal, that will pay the upfront costs of installing solar power in their homes and then property owners will pay them back in taxes. In exchange, property owners, who own the solar-power systems, would pay back the loan over 20 years as part of their property taxes. While the consumers are paying back the loans, they should be paying lower electric bills.

The city of Berkeley plans to create a “Sustainable Energy Financing District” in order to start its own PV program to aid the residents of the city. This financing vehicle is modeled loosely on existing “underground utility districts” that allow the City to fund the burying of utility wires through increased property tax assessments. City staff continues to meet with commercial banks, community banks, and private investment firms to find a financial partner for all these Berkeley consumers.

Berkeley’s City Council started a 1.5 million dollar plan in September of 2008, which would make municipal bond financing available to homeowners to help them install solar panels on their homes. This is all part of the city’s community relations plan that would give homeowners the option of joining to finance the solar installations. The city would set up a special tax assessment and would back taxable bonds for consumers. The tax appraisal would stay with the property even if the house was sold. Studies show that up to 4,000 homes in Berkeley could benefit from a rooftop solar installation and would cost about $20,000 each.

The $1.5 million is expected to be enough to finance installations on at least 40 properties. Each property owner will be eligible to request funding for up to $37,500. The average residential solar-power system costs about $20,000 to $30,000, not counting an average $6,108 rebate available though the California Solar Initiative. After adding other fees and charges, a property owner could expect to pay only about $2,100 per year on his or her tax bill.  This is a great way to get people started in the solar power industry, but it does not save them any money, as I will go into detail in my analysis of the two cities.

Berkeley has a Financing Initiative for Renewable and Solar Technology (FIRST) set up, that allows property owners to borrow money from the city’s Sustainable Energy Financing District to install photovoltaic (PV) systems and repay the cost over 20 years through an annual special tax on property tax bills (“Berkeley FIRST” Nov. 18, 2008) On-line applications were accepted between 9:00 a.m. on November 5, 2008, and 9:00 a.m. on November 19, 2008, for the first round of installations. Berkeley expects the program to initially fund 40 residential installations.

The FIRST Program will provide financing up to $37,500 per installation on residential properties. The effective rate is approximately 8.26% as of October 31, 2008. Payments will be made through a special tax on the participant’s property tax bill. If the owner moves out of their house during the 20 year repayment period, the property tax assessment and the PV system remain with the property, transferring to the new owner.

Program participants are required to apply to the California Solar Initiative (CSI) rebate program, which will help off-set the total cost of the solar project. The FIRST program does not reduce the amount of the rebate available through the CSI program. This CSI rebate is $1.55/watt. Participants may also be eligible for deductions or tax credits claimed on personal taxes due to their solar installation. As you can see from the table below of an hypothesized residential solar installation this could end up costing Berkeley consumers quite a bit extra. I will show you how they can save money in my recommendations section.

-Berkeley Residential First Program
– 150 Square Foot Unit  $22,000
– California Solar Incentive Rebate (1.55/watt) -$3,100.00
– Interest Rate of FIRST Loan x 8.26%
– Duration x $20yrs
Monthly Cost = $130.10
NET SYSTEM COST = $31,200

Berkeley would then assist consumers to finance all of the cost (after using up all the rebates the CSI provides first) of installing a PV system on the home of any participating residential consumer. This program offers the possibility of 100% financing at a fixed, favorable interest rate over a long 20-year time frame. The increased property tax assessment is tied to the property, rather than to the current owner. If the current owner sells the property during the 20-year repayment period, then the new owner will pay the increased assessment over the remainder of that period.

The city is also being set up to become the first city in the nation to help thousands of its residents produce solar power without having to put down any money. The consumer would hire a city-approved solar installer, who would decide the best solar system for the property, depending on energy use. The city would pay the contractor for the system and its installation, minus any applicable state and federal rebates, and would add an estimate to the property owner’s tax bill to pay for the system over an average of a 20 yr time frame.

The property tax payments are fairly secure for the banks as well. If there is a default or foreclosure condition, the property tax tied to the PV system would be paid off  before the first mortgage on the property. All property taxes would be paid first, followed by special taxes and fees for services collected through property taxes (including PV tax’s), then first mortgages, and finally second mortgages and home equity loans. There would also be write offs for those taxpayers who itemize their deductions from Federal taxable income.

This plan would set up a win-win situation for everybody involved. Berkeley would secure low interest bonds and loans and pass the savings on to the consumer in the form of low interest fees. The property owner would save money on monthly Pacific Gas & Electric bill because the electricity generated by the solar panels would partly replace electricity delivered by the utility. After the contact is paid off, the solar panels would continue to partly replace PG&E electricity. This plan is set up to entice the majority of people who do not have enough cash on hand to go green.

The city uses proactive consumers to educate the public on solar. Landlords in the city now have original ways to install solar on their buildings thanks to the new subsides and tax incentives. They attain paybacks in less than five years, huge tax credits, increased property values (with no increased property taxes), and their tenants get the solar power at no cost. The city has over 16 residential solar installers. They have installed 871 PV Systems, with a total capacity of 5.9MW. The Annual Energy produced in the city is 9,625 MWh saving the residential consumer an average of $1,585,631 a year. The solar panels also save the city an average of 7,180,287 lbs of CO2.San Francisco is a major supporter of solar power, and has determined plans to install solar systems in residential areas under its jurisdiction. The city proactively offers energy savings to the consumer when they install solar system on buildings or properties. This gives them the power to both use the PV electricity and sell it to their utility for credit to lower their future utility bills.

The city also has called “net-metering”, that reduces an electricity bill to the difference between how much a solar system generates and how much electricity is used. When the system produces more electricity than needed, the consumers’ electricity meter will run backward, saving them more money and energy. If the consumer requires more electricity than the system produces, they can use electricity from their utility as usual.

San Francisco offers many solar subsidies, in June 2008 the city’s Board of Supervisors passed the nation’s largest municipal solar incentive program.  The program clears the path for a 10-year program intended to provide between $2 million and $5 million of subsidies for solar installations annually. The City offers residents up to $6,000 under its new city incentive program.

Collectively, these incentives offer an unique opportunity for landlords and tenants to ”green” their buildings. While San Francisco enjoys a green reputation, solar isn’t necessarily its strong suit. Currently, privately and publicly owned solar systems make up the city’s 5-megawatts of installed solar capacity.

This 10-year-incentive program could help the city reach up to 50 megawatts of installed solar capacity over the next decade. As long as San Francisco consumers, property owners and citizens take the initiative and put solar on their roofs the city has a good chance of reaching capacity. With the existing aid of state and federal incentives, the city’s new program will provide numerous incentives for residential and business building owners. A solar system for a single-family home could save over half the cost of an estimated $25,000 if the homeowner takes advantage of all three incentives and subsidies.

With the incentives capped at $3 million total for both residential and commercial installations, plus an additional $1.5 million in incentives specifically for solar projects at low-income and affordable housing approved in November 2008, San Francisco could subsidize between 383 and 1,500 installations, depending on the size of each of the rebates. That means the rush is on to get installations approved for incentives before the money runs out.

The City and County of San Francisco has set up a program through the San Francisco Public Utilities Commission, which offers financial incentives to reduce the capital cost of solar electric installations to San Francisco citizens. The San Francisco Public Utilities commission met in June of 2008 with local solar installers to train them on the logistics of the subsidy that called the SF Solar Incentive Program. Depending on the varying subsidy levels, some based on geography, income, and installer location, they are all mutually exclusive, except for the “low income” incentive. The residential consumers in the city can get either $3000, $4000, $5000, or $6000, if the consumer qualifies.

The GoSolarSF program was launched in July of 2008. It provides incentives that are being provided to solar power installations approved to receive financial rebates from the California Solar Initiative. This means a residential consumer installation will qualify for both a CSI rebate and a San Francisco incentive, provided that the consumer has applied for a CSI rebate is dated on or after December 11, 2007, the GoSolarSF announcement date. The CSI & GoSolarSF rebates that go along with the Federal Tax credit are very important to residential consumers, because they allow systems to be purchased at a very affordable cost. The San Francisco local installer credit is a part of the GoSolarSF program and if the residential installers are trained under the City’s workforce development program, they can pass further savings on to the consumer. There is a breakdown of these savings below.

San Francisco Residential Solar Subsidiaries (average)
-150 Square Foot Unit
– Gross Cost of a 2kw Solar System $22,000.00
– California Solar Incentive Rebate (1.55/watt) – $3,100.00
– San Francisco Local Installer Credit – $4,000.00
– Federal Tax Credit – $4,470.00
NET SYSTEM COST $10,430.00
San Francisco Residential Solar Subsidiaries (average)
 -150 Square Foot Unit
-Gross Cost of a 2kw Solar System $22,000.00
– California Solar Incentive Rebate (1.55/watt) – $3,100.00
– San Francisco Local Installer Credit (workforce employee discount) – $6,000.00
– Federal Tax Credit – $3,870.00
NET SYSTEM COST $9,030.00

There are many different kinds of installations available under the GoSolarSF umbrella, which makes the consumer eligible for different incentives. In the workforce development program there are levels for residential projects and an additional incentive for low-income residents to encourage them to get involved. Under the basic incentive program, any San Francisco residents who install solar generation on his/her own property within the city limits qualifies for these incentives.

A San Francisco consumer who qualifies as “low income” by the Mayor’s office of housing (MOH), or any consumer who qualifies for the PG&E CARE program can receive the “Environmental Justice District” reward for up to $5,000. To qualify at the MOH the residential solar consumer must make less than $63,350 for a household of one up to $97,700 for a family of 5. The MOH may also be able to help the consumer with low interest financing for a solar project. These loans usually have a low rate of 3%. San Francisco also offers an additive Low-Income subsidy of an extra $5,000 for those who qualify for the same low-income as the MOH.

An incentive is available for consumers on the electric meter program, meaning that all installations that handle more than one meter in a building are eligible for more than one incentive. San Francisco incentives will not be paid out under any circumstances if the consumer is already receiving maximum federal and state incentives and would just be pocketing the extra money.

I interviewed Paul Luna, the Production Manager at Occidental Power in San Francisco and he told me the “CSI & GoSolarSF rebates along with the Federal Tax credit are very important since they allow systems to be purchased at a very affordable price.” The San Francisco GoSolar initiative offers local solar installers a $4,000 rebate. But, if the installer has a workforce employee on the project then the amount is upgraded to $6,000. A workforce employee is a person who is trying to become a contributing United States citizen, which was born in another country. The Cities Federal Tax credit is now 30% of the post rebate amount with no cap. These are the main big incentives designed to help out the Californian consumer right now.

The federal bail out bill that was just instated also included legislation to extend the federal investment tax credit for solar energy. The SFPUC is setting the groundwork on the rebate process getting the money to the applicants. They have determined that the solar payment is now assignable to any party on the application.

Now that I have analyzed the details of what both cities offer, I will now compare both plans.  I have put together a comparative analysis of residential solar installations in of Berkeley and San Francisco in the table below:

Berkeley

San Francisco

Target Population -Owners and potential customers of existing residences. – Owners and potential customers of new and existing residences.
Funding Mechanism – California Solar Incentive Rebate- Federal Tax Credit-FIRST loan – California Solar Incentive Rebate- Federal Tax Credit- San Francisco Local Installer Credit
Strengths -Gives consumers the option to finance their solar. -Saves the consumer installation costs.
Weaknesses -The high price the consumer has to pay when he/she pays back the loans. -The city does not offer any kind of financing vehicle.
Opportunities -Offer more incentives, rebates, or subsidiaries to the solar consumers.-Focus on installing solar in new residential structures. -Offer a financing option to solar consumers.-Focus on installing solar in new residential structures.
Threats Potential solar consumers with not enough  cash on hand may be deterred away from financing because of the long pay back time and interest charges added to the overall price of the installation. Potential solar consumers do not currently have any option to finance the installation.

Both cities offer the CSI rebate. But, San Francisco obviously offers more savings with all its subsidies, rebates, and other incentives. The city has the California Solar Incentive Rebate, San Francisco Local Installer Credit, Federal Tax Credit, and the workforce employee program that presents its’ residential citizens the chance to cut the cost of installing a solar unit in half.

On the other hand a majority of what Berkeley has to offer its potential solar residents is the chance to install the solar. That is a great help for people who do not have enough money to pay for the solar installation up front. But the city does not offer its residents many subsidies, rebates, or other incentives that would help reduce the price for those people who have enough cash on hand to install a solar unit.

Recommendations/Conclusion:

I think Berkeley and San Francisco should combine the rebates, subsidiaries, incentives, and financing options that the two cities already use into one program that both the cities can use. Other cities can use the Berkeley and San Francisco examples to imitate and mold into the best functioning plan for their own cities.  By doing this they would create new jobs, limit their electricity bill, all while reducing their carbon footprint at the same time.

The combined cities could use the Berkeley example with a “Sustainable Energy Financing District” in order start their own PV program to aid the residents of the California who do not have enough money to pay for the installation of a solar unit up front. They could then both offer the subsidies, rebates, and other incentives that San Francisco already offers  to make solar more attractive to both these cities potential consumers.

Jointly subsidizing San Francisco and Berkeley’s solar systems can be more palatable then cities that are not green, politically and environmentally for these two cities consumers. Please refer to the table below for specific examples of the most lucrative scenario for both cities. By combining the rebates, subsidiaries, incentives, and financing options these two cities offer they can make residential solar systems a lot more accessible for potential solar consumers.

-Berkeley & San Francisco co-op program
– 150 Square Foot Unit  $22,000
– California Solar Incentive Rebate (1.55/watt) -$3,100.00
– San Francisco Local Installer Credit (workforce employee discount) – $6,000.00
– Federal Tax Credit – $3,870.00
Sub Total $9,030
– Interest Rate of FIRST Loan x 8.26%
– Duration x $20yrs
Monthly Cost = $62.16
NET SYSTEM COST = $14,917.56

California is well aware of the need for stable energy markets and reliable electricity supplies and transmission systems. All the cities in the state need to offer the same rebates, subsidiaries, and financing programs to its residential solar consumers.  By offering reasonably priced and environmentally sensitive energy resources to support economic growth and attract investment of new and old residential structures.

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