WESTERN PENNSYLVANIA ROOFTOP SOLAR CHALLENGE

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1 WESTERN PENNSYLVANIA ROOFTOP SOLAR CHALLENGE Solar Financing Options for Southwestern Pennsylvania Prepared for PennFuture By Clean Energy Finance Center January 8, 2013

2 Acknowledgment: This material is based upon work supported by the Department of Energy under Award Number DE-EE /000. Disclaimer: This report was prepared as an account of work sponsored by an agency of the United States Government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, product, or process disclosed, or represents that its use would not infringe privately owned rights. Reference herein to any specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply its endorsement, recommendation, or favoring by the United States Government or any agency thereof. The views and opinions of authors expressed herein do not necessarily state or reflect those of the United States Government or any agency thereof. 2

3 Solar Financing Options for Southwestern Pennsylvania Executive Summary A consortia comprised of Citizens for Pennsylvania s Future (PennFuture), Allegheny County, the Southwestern Pennsylvania Commission, the City of Pittsburgh, and the Congress of Neighboring Communities and Solar Unified Network of Western Pennsylvania (SUNWPA) were the recipients of a U.S. Department of Energy Sunshot Rooftop Challenge grant aimed at lowering the non-equipment costs of deploying solar photovoltaics (PV) by streamlining permitting and zoning practices and addressing financing barriers. As part of the scope of work, the consortia partners committed to produce a summary of regional financing options for residential and small scale commercial PV with specific recommendations for implementation in southwestern PA. The consortia partnered with the Clean Energy Finance Center (CEFC) to assist in researching various funding mechanisms and to convene a regional stakeholder group to generate regional solar financing recommendations with the goal of making solar more affordable and desirable in the region. This report is the result of research on national best practices and interviews with over 25 organizations involved with solar implementation both nationally and locally, as well as regional private and public financing organizations. The report also reflects the input from participants at a stakeholder meeting held in Pittsburgh on September 20, 2012, that focused on solar financing in southwestern PA. It is important to note that this report focuses on feasible short term financing initiatives to increase demand for solar in the region given current policies, and does not make broad policy recommendations. In addition, the report focuses solely on small-scale solar (residential and commercial rooftop installations of 20kW or less). Following a period of considerable growth, Pennsylvania s solar industry currently faces a challenging situation in regard to solar financing. The growth of solar in the state was fueled by a robust Solar Renewable Energy Credit (SREC) market and by rebates funded through the state s $100 million Pennsylvania Sunshine Grant program. But since the beginning of 2012, new solar installation commitments in the entire state have dropped dramatically due to several factors, including the near depletion of the state's Sunshine Grant program and a virtual collapse of the SREC market due to oversupply that is expected to last until about Southwestern PA has experienced even greater challenges than other parts of the state due to a variety of factors. No sustainable funding sources (ratepayer or other funds) exist for solar in southwestern PA. Although many states (for example California) are seeing their solar markets take off due to the dramatic growth of solar leasing, leasing companies are generally not attracted to PA due to the lack of available incentives to make the cost competitive for the companies. Other policies also make it difficult to fund solar in PA. 3

4 To overcome the collapse in the SREC market and the lack of public or rate-payer funds available, the goal is to bring down the cost of solar to a point where it is equal to the cost of retail electricity. That is, if a customer takes out a loan to install a solar system, the cost of paying back the loan needs to be equal to or less than the price of grid-based electricity. We used a model to analyze what the current gap (between solar and retail electricity) is based on current and projected electricity prices, looking at three key variables: loan term, interest rate, and installation cost. The analysis showed that for an average-size (5 kilowatt) residential solar system, the system's cost can be competitive with electricity rates if the loan term is 20 years, the interest rate is kept low (around 5%) and the installation cost does not exceed around $3,500 per kilowatt. With these criteria as a foundation, we make the following recommendations for solar financing in southwestern PA: 1) Building off the September 2012 stakeholder meeting in Pittsburgh, convene a public/private stakeholder group interested in furthering solar development in the region. Such a group would be comprised of banks and lending institutions, solar developers, government agencies, public financing authorities, foundations, nonprofits, and other organizations. 2) Create a 1000 Solar Installations Campaign featuring a Solarize approach. The Campaign would set a goal of 1,000 small-scale solar installations (residential and small commercial) in southwestern PA over a five year period. The Solarize concept refers to the collective purchasing of solar in which customers in a neighborhood all use the same solar installer and bring down the price of installation the more customers participate. An additional key element of the Solarize approach is "neighbor to neighbor" outreach to drive demand. Another component of the Solarize approach could be a Lead by Example Solarize Initiative which focuses on municipal facilities and non-profits. 3) Develop a loan program fund with credit enhancements, including an interest rate buy down or a loan loss reserve, and a solar rebate fund. We estimate that a maximum of $17.5 million (or $3.5 million per year) in loan capital would need to be raised for 1,000 installations of 5 kilowatt systems over the five year period. The actual amount would likely be considerably less. To keep the interest rate low (around 5%), additional public/private funds will be needed for a loan loss reserve or an interest rate buy down (a loan loss reserve the is the most cost effective approach). In addition, some funds should be raised for rebates to help lower the upfront installation cost for customers that need it. These three recommendations, in total, will establish the infrastructure, goals, and program design elements needed to make solar affordable and successfully drive solar deployment in southeastern Pennsylvania, and create a bridge between now and the 2016 timeframe in which the PA SREC market might become strong again. 4

5 Introduction A consortia comprised of Citizens for Pennsylvania s Future (PennFuture), Allegheny County, the Southwestern Pennsylvania Commission, the City of Pittsburgh, and the Congress of Neighboring Communities and Solar Unified Network of Western Pennsylvania (SUNWPA) were the recipients of a U.S. Department of Energy Sunshot Rooftop Challenge grant aimed at lowering the non-equipment costs of deploying solar photovoltaics (PV) by streamlining permitting and zoning practices and addressing financing barriers. As part of the scope of work, the consortia partners committed to produce a summary of regional financing options for residential and small scale commercial PV with specific recommendations for implementation. For this part of the grant initiative, the consortia partnered with the Clean Energy Finance Center (CEFC) to assist in researching various funding mechanisms and to convene a regional stakeholder group (including financial institutions, solar installers, local foundations, and government representatives) to generate regional financing recommendations. The following report is the result of research on national best practices and interviews with over 25 organizations involved with solar implementation both nationally and locally, as well as regional private and public financing organizations. The interviews gathered information on the current economics of solar, the services and programs in Pennsylvania now offered to support solar, and suggestions regarding solar financing options given the solar incentives currently available on a federal and state level. The reportalso reflects the input from participants at a stakeholder meeting held in Pittsburgh on September 20, 2012, that focused on solar financing in southwestern Pennsylvania, as well as follow up discussions with selected stakeholders. While there are many policy options to change the regulatory framework in Pennsylvania - such as a better designed SREC market - policy changes are not the focus of this scope of work. Rather, this report focuses on feasible short term financing initiatives to increase demand for solar in the region given current policies. It is also important to note that this report is solely focused on small-scale solar (residential and commercial rooftop installations of 20kW or less) as opposed to commercial (up to 5MW) or utility-scale (20MW or more) deployment. In Pennsylvania, it is difficult to make large scale solar financeable because the commercial retail rate for electricity is relatively low (approximately.09/kwh) making the economics difficult. Background Following a period of considerable growth, Pennsylvania s solar industry now faces a challenging situation in regard to solar financing. The growth of solar in the state was fueled by an Alternative Energy Portfolio Standard (AEPS) solar carve out that established the Solar Renewable Energy Credit (SREC) market, and rebates funded through the state s $100 million Pennsylvania Sunshine Grant program. But since the beginning of 2012, new solar installation commitments in the entire state have dropped dramatically due to several factors, including the near depletion of the state's Sunshine Solar Grant program and a virtual collapse of the 5

6 SREC market with current prices at $20/MWh (down from a high of $310/MWh in early 2011). In August 2012, Pennsylvania ranked 8th (the state was ranked 6th the previous year) in solar capacity in the country with almost 157 megawatts (MW) of installed solar capacity and 6,360 installations. And southwestern PA has experienced even greater challenges than other parts of the state; of the 157 MW statewide, the nine county region of southwestern PA has only 4 MW or 3% of the state s total deployed solar. The picture is different on the national level. PV installations grew 109% in 2011 to reach 1,855 MW, which represents 7% of all PV globally, up from 5% in According to the Solar Industry Electric Association (SEIA) installed solar capacity as of September 2012 now exceeds 5,700MW of solar electric capacity, enough to power more than 940,000 homes. Weighted average installed PV system prices fell 20% in 2011 as a combined result of lower component prices, improved installation efficiencies, and a shift toward larger systems. Since 2008, solar module prices have declined by 75% which has had an enormous impact on the overall installation cost. There were over 61,000 individual PV systems installed in the U.S. in 2011, bringing the total number of operating systems in the U.S. to more than 214,000. More than 100,000 Americans work at 5,600 companies in the solar industry, double the number in i Growth continued nationally at 35% in Q over Q GTM Research expects growth in 2012 to represent 11% of worldwide PV installations. Residential installations grew 12% quarter-over-quarter (Q/Q) and 31% year-over-year (Y/Y). This represents the fourth quarter in a row of steady, incremental increases in residential installations in the U.S. While the residential market remains the smallest segment in terms of volume, it has also shown the least volatility over the past three years. The overarching trend in the residential market is the shift from host-owned systems to third-party ownership through power-purchase agreements (PPA) or lease structures. At least 16 companies nationally offer residential leases/ppas, either with their own installers or through partnership with local installers. Many residential integrators now have access to a lease/ppa program of some kind, and customers increasingly select third-party ownership over direct ownership. ii The lease or PPA option offers the homeowner the attractive option of no or little money required upfront for a solar system as well as monthly payments that are designed on average to be no more than what the customer is currently paying for electricity. The leasing companies own the solar system and utilize all available federal and state incentives. Leasing companies are attracted to states where they can take advantage of available incentives, but because Pennsylvania has nearly no incentives at this point, it is a less attractive target market for these companies than states that do have incentives. According to a recent estimate from the National Renewable Energy Laboratory (NREL), there is tremendous growth potential for rooftop PV in the U.S. While the U.S. is closing in on 4 GW of installed capacity, total potential is 664 GW. Pennsylvania has the potential for 20 GW installed capacity with less than 1% of that currently installed. iii Pennsylvania Regulatory and Solar Market Environment 1. SREC Market: As mentioned above, the SREC market in Pennsylvania has virtually collapsed. This was due to an oversupply of in-state solar fueled by the 6

7 Sunshine Grant program that solely supported in-state projects. and to an open borders policy that allows Pennsylvania to accept out of state SRECs to fulfill compliance obligations. Increasing the amount of solar required under the AEPS in the near term and allowing only in-state solar credits to count towards the RPS AEPS requirement would help to re-establish a healthy SREC market in Pennsylvania. However, legislative proposals to address current challenges in the SREC market have not yet been successful. Without a stable SREC market, the state remains at a competitive disadvantage in deploying solar and attracting private sector financing for solar leasing and solar purchases. The AEPS s incrementally increasing compliance schedule may naturally realign the SREC market by 2016 or 2017 in terms of supply and demand, enabling the market mechanisms to function (providing that SREC prices increase enough to support new project development). However, the challenge is bridging the gap between now and 2016/2017. The figure below illustrates the solar requirement as defined by the AEPS, the currently installed solar capacity in Pennsylvania, as well as the SREC-eligible capacity. Currently, there is more SREC-eligible solar than what the AEPS requires in 2015 illustrating the oversupply. The SREC demand will increase significantly in 2016 and may create an opportunity for higher SREC values depending on how the supply-side multi-state market is functioning. If solar projects in other states are permitted to earn Pennsylvania SRECs, then the market may remain oversupplied and the price will remain low. 7

8 PA Installed capacity Aug MW PA Installed capacity + out-of-state eligible SRECs Aug MW State Incentives and Public Service Benefit Charges: There is no sustainable funding source that provides solar incentives to the southwestern PA region. In some states, including Pennsylvania, statutes or legal settlement agreements have created public service benefit funds. Typically these funds are capitalized through a fixed surcharge on customer utility bills to fund renewable energy and energy efficiency programs. In Pennsylvania, Sustainable Energy Funds (SEFs) were created as a result of utility settlements in four regions of Pennsylvania, including the West Penn Power SEF which serves West Penn Power/Allegheny Energy (now First Energy) territories near Allegheny County. However, there is no SEF for the Duquesne Light territory. In addition, these SEFs are no longer adding. Solar funding is now limited and is no longer available for developing projects. Furthermore, most of the funds that were authorized were utilized for energy efficiency because of the cost test required by the PUC. In addition, as a result of the Alternative Energy Investment Act legislation passed in 2008, the state created the PA SunShine Solar program with $100 million for residential and small commercial solar systems. Since the funds are nearly depleted, a waiting list was created in Currently, there is about $3 8

9 million in funds identified on the waiting list with an additional $4 million available to the program that is yet to be released by the Commonwealth Finance Authority. The rebate levels provided are $0.75/watt for residential and small commercial PV systems up to 10 kw, and one-third the cost of solar thermal systems (up to $2,500). 3. Act 129: In October 2008 Pennsylvania adopted Act 129, creating energy efficiency and conservation requirements for the state s investor-owned utilities with at least 100,000 customers. The standard requires obligated utilities to develop plans to provide expected electricity savings of 1% by May 31, 2011 and 3% by May 31, 2013, measured against projected electricity consumption for the period from June 2009 to May The utilities are also required to develop plans that provide for peak demand savings of 4.5% by May 31, 2013, measured against actual peak demand from June 2007 to May The Act 129 program was recently extended to require energy efficiency and conservation requirements through Notably, eligible energy efficiency measures may potentially include solar. iv However, there are strict cost tests established by the PUC that the utilities must meet, and to date solar has been too costly on an installed basis to meet the cost tests. 4. Net Metering: According to the publication Freeing the Grid, Pennsylvania has excellent net metering and interconnection standards compared to others states, allowing for up to 50kW residential and up to 3 MW non-residential systems to earn full retail electricity price for solar energy produced. v In 2012, the PA PUC determined that 3 rd party owned solar installations are eligible for net metering benefits, clarifying that solar financed through PPAs would have access to the net metering revenue stream. However, only electric distribution companies (EDC) are required to offer net metering at the full retail rate. Electric generation suppliers (EGS) are not required to offer net metering. This puts solar owners at a disadvantage when engaging in competitive electricity shopping, since leaving their default EDC supplier may result in the reduction or elimination of net metering benefits. 5. Virtual Net Metering: Pennsylvania s rules allow meter aggregation on properties owned or leased and operated by a single customer. This primarily benefits farms that are commonly owned and operated. Aggregation is limited to meters (in a single utility s service territory) that are located on properties within two miles of the boundaries of the customer s property. vi Virtual net metering is a useful tool, however, Pennsylvania s virtual net metering policy is not designed to enable the creation of community solar projects that allow more than one customer to invest in a solar project and to have their bills credited for the energy produced from that single solar project. For instance, in Colorado where virtual net metering is permitted, solar community gardens are an attractive option for consumers including renters and owners of homes not well situated for solar. 6. Property Assessed Clean Energy (PACE): Pennsylvania has not passed enabling legislation that would allow PACE financing. PACE gives municipalities 9

10 the authority to establish clean energy loan programs in which loans can be paid back through an assessment added to the participating taxpayer s property tax. The loans are supported only by program participants, so non-participants property taxes are not increased. The loans are secured by the property and can be transferred upon the sale of the property. While residential PACE is currently blocked at the federal level, commercial and industrial PACE is allowed by federal regulators and could increase the volume of private loans to nonresidential entities for eligible activities such as energy efficiency and solar. In sum, the regulatory framework in Pennsylvania is not favorable to solar development at this time. It allows for an imbalanced SREC market; does not provide for ongoing solar incentive funding (even at reduced levels), and shortcomings in the existing net metering and virtual net metering policies preclude some of the more innovative solar initiatives occurring in the country today (such as community solar gardens in Colorado or community solar in Sacramento Municipal Utility District (SMUD)). However, despite this unfavorable policy environment, the existence of a trained solar installer workforce, public support for solar as evidenced by the successful Sunshine program, and the rapidly declining cost of solar provide potential opportunities to continue development of a solar market including effective financing structures for southwestern Pennsylvania. The remainder of this report will examine various solar financing options for the region and recommend next steps. Solar Economics for Southwestern Pennsylvania One of the largest obstacles for residential owners in purchasing solar in Pennsylvania is the high upfront cost associated with installation. Currently, the majority of homeowners who purchase solar use a home equity line of credit or pay cash. There are some higher interest loans available, the disadvantages of which are discussed later in this paper. If the cost of installation could be absorbed into a loan product with monthly payments that are below or equal to what the customer is currently paying for their non-solar electricity, then solar becomes accessible to many more people. Three key variables affect the viability of this objective to create an affordable loan product for solar: 1) the term of the loan; 2) the installed cost, and 3) the interest rate. In addition, the current and projected future cost of electricity is an important factor. In the case of southwestern PA, the prevailing retail electricity rate for residential customers is approximately.14/kwh. The cost of electricity for large non-residential customers is.09/kwh. The analysis we undertook was based on the residential customer rate, the commercial rate would require much larger incentives for the customer to break even. In order to determine the cost gap for residential solar installations, a model provided by the Connecticut Clean Energy Finance and Investment Authority (CEFIA), also a recipient of a DOE Sunshot grant, was used. vii The model calculates the gap between the current retail customer electric rate and what the customer would have to pay for solar, including all the costs of the system and financing. The model takes into account the 30% federal Investment Tax Credit (ITC) which is realized by the owner of the 10

11 system and reflected in the cost of the system. In essence, this analysis identifies what is needed to bridge the gap to socket parity, or close to the retail rate of electricity. The model was used to calculate loan terms of both 15 and 20 years with a Levelized Cost of Electricity (LCOE) that assumes a 2% annual increase in the cost of residential customer electricity over the time period starting with.14/kwh. Also calculated were the different installed system cost scenarios from $3,500/kW to $4,500/kW and interest rate assumptions for 0, 5 and 8 percent. Table A illustrates the amount of the upfront subsidy needed to bring monthly solar loan payments in line with existing retail priced grid-based electricity over a 15 or 20 year time period for each 1kW of installed capacity. As of December, 2012, Western Pennsylvania residential electricity rates for Duquesne Light territory are currently $0.14 per kilowatt hour (kwh), so this rate is used for the first year assumptions with prices estimated to escalate two percent per year, providing an average of $0.1611/kWh over 15 years and $0.1695/kWh over 20 years. A dash ( - ) in the table indicates that no subsidy is required at that level. Table A. Residential Solar PV Rebates (per kw) Needed to Achieve Levelized Cost of Energy (LCOE) for 15 and 20 Years Estimated Residential Solar PV Rebate Cost at Utility LCOE PV Rebate Needed ($/kw) to Equal $0.1611/kWH ($0.140 /kwh - Yr 1) Utility LCOE (15 Yrs) Interest Rate $3,500/kW $3,750/kW $4,000/kW $4,500/kW 0.00% $ - $ - $ 203 $ % $ 873 $ 1,123 $ 1,373 $ 1, % $ 1,334 $ 1,584 $ 1,834 $ 2,334 PV Rebate Needed ($/kw) to Equal $0.1695/kWh ($0.140 /kwh - Yr 1) Utility LCOE (20 Yrs) $3,500/kW $3,750/kW $4,000/kW $4,500/kW 0.00% $ - $ - $ - $ % $ - $ 110 $ 360 $ % $ 498 $ 748 $ 998 $ 1,498 Note 1: Utility escalation rate - 2% Note 2: Capacity factor - 13% Note 3: Panel degradation factor -.5% * Source: Data Generated by Connecticut Clean Energy Finance and Investment Authority s model The data from Table A can be used to calculate the subsidy needed for varying sized solar systems given different loan terms (15 or 20 years), installed cost, and interest rates. Table B, below, illustrates the upfront subsidy needed to bring monthly solar loan payments in line with existing retail grid-based electricity over a 15 or 20 year time period for a typical 3kW, 5kW and a 7kW solar system. This table demonstrates the different impacts of the same three variables: term, installed cost and interest rate. 11

12 Table B. Residential Solar PV Rebates Needed to Achieve Levelized Cost of Energy (LCOE) for 15 and 20 Years for 3kW, 5kW, and 7kW Solar Systems Solar Rebate for LCOE (15 Years) Solar Rebate for LCOE (20 Years) Size of Solar System Size of Solar System Interest Rate 3kW 5kW 7kW 3kW 5kW 7kW Estimated System Cost - $3500/kW 0% $ - $ - $ - $ - $ - $ - 5% $ 2,620 $ 4,365 $ 6,110 $ - $ - $ - 8% $ 4,000 $ 6,670 $ 9,338 $ 1,500 $ 2,500 $ 3,500 Estimated System Cost - $3750/kW 0% $ - $ - $ - $ - $ - $ - 5% $ 3,370 $ 5,615 $ 7,860 $ 330 $ 550 $ 770 8% $ 4,750 $ 7,920 $ 11,000 $ 2,250 $ 3,750 $ 5,250 Estimated System Cost - $4000/kW 0% $ 610 $ 1,015 $ 1,420 $ - $ - $ - 5% $ 4,120 $ 6,865 $ 9,610 $ 1,080 $ 1,800 $ 2,520 8% $ 5,500 $ 9,170 $ 12,840 $ 3,000 $ 5,000 $ 7,000 * Source: Data Generated Via Connecticut Clean Energy Finance and Investment Authority Examples from Table B Using a 5kW system as an example, such a system with an installed cost of $3,500/kW, financed with a 5% interest rate over 15 years, needs $4, or $0.87/watt in an upfront incentive. In other words, with the subsidy, the system would cost no more than the customer would pay for electricity over the same 15 year time period. If electricity prices increase more than an average of 2% per year, then the customer (purely from a financial basis) is much better off having installed solar. In addition, the environmental and energy security benefits of the solar system make it all the more compelling to deploy. Varying the Term: The impact of the term of the loan is shown in the table. If you take the same system with the same installed cost and interest rate, but with a 20 year term, no incentive would be required in the example provided above. Varying the Loan Interest Rate: Referring again to Table B, a 5kW system that costs $3,750/kW with an interest rate of 5% and a term of 15 years, would require a solar rebate of $5,615 or $1.12/watt. That same system with an 8% interest rate and with all other factors staying the same would need a $7,920 or $1.58/watt in order for the customer to pay the same for solar as for electricity over the 15 year period. Varying the Installed Solar System Cost: Finally, when the interest rate and term of the loan remain the same, but the cost of the installed solar system varies, the required 12

13 rebate amount is again altered. For instance, on Table B, with the term of the loan at 20 years and the interest rate at 5% for a 5kW system, the rebate amount needed varies from $0 to $550 ($0.11/watt) to $1,800 ($0.36/watt) for systems with installed costs of $3,500/kW, $3,750/kW and $4,000/kW, respectively. From this data, it becomes apparent that with a program and/or financing mechanism that keeps the interest rate low, the term of the loan at 20 years, and the cost of the installed system at a maximum of $3500/kW, the solar system can be competitive with retail electricity rates. Solar Financing and Program Options Many of the stakeholders in southwestern PA interviewed for this report mentioned the need for financing. Even when the SREC market and Sunshine incentives were available, the southwestern region was overlooked in terms of private company lease options and other financing offerings. This may have been due to lower population density of western Pennsylvania, and thus, smaller market demand. In addition, the proximity of southeastern PA to regions such as New Jersey and Maryland where solar lease companies have a large presence, makes it easier logistically for leasing companies to extend their reach. In addition, the lower average household income demographics of western PA have not been as attractive to leasing companies as in other regions where disposable incomes are higher. Furthermore, the lack of public awareness of the feasibility of solar and of its economic and environmental benefits in the region has resulted in low public demand. What is needed in southwestern PA are mechanisms that not only address financing but also drive greater demand. The following options address the barriers of both financing and demand: 1. Solarize Southwestern Pennsylvania The Solarize concept refers to the collective purchasing of solar systems in a community. The first Solarize campaign started as a grassroots effort to help residents of Portland, Oregon overcome the financial and logistical barriers to installing solar power. What began in one neighborhood as Solarize Southeast! quickly caught on with residents across the city. With support from the U.S. Department of Energy s (DOE) Solar America Communities program, the City of Portland Bureau of Planning and Sustainability partnered with neighborhood coalition offices, Solar Oregon (the state American Solar Energy Society chapter) and the Energy Trust of Oregon to provide community organizing, technical assistance, project management, and rebates in a very popular grassroots driven program. Within six months of starting the campaign, Solarize Southeast had signed up more than 300 residents and installed solar on 130 homes. These deployments created 18 professional wage jobs and the campaign spread to other Portland neighborhoods increasing solar installations almost 400% over the previous year. After three years of Solarize campaigns, Portland has added over 1.7MW of distributed photovoltaics (PV) and established a strong, steady solar installation economy. viii 13

14 In addition to Oregon, Massachusetts, Connecticut, Washington and other states have established Solarize programs. The Solarize model overcomes three market barriers: upfront cost, complexity and customer inertia. Solarize campaigns are customized to the needs of the community (it is important to keep the geographical size of the campaign small in order to build on the community connections in place). Generally, the way Solarize works is a committee of neighbors pre-selects one or more installers through an RFP selection process. Technical assistance is provided to the community in drafting and issuing an RFP by the partner organizations involved in the campaign. In the case of Solarize Southeast, it was the City of Portland. RFPs can include specific requirements that the community deems important such as using local installers and made in USA equipment, offering a lease option, etc. The bid request can also require tiered pricing based on number of purchases, which can spur neighbors to sign up other neighbors so that everyone receives the best price (see discussion below of the Mass Solarize program). Other communities prefer a flat price bid. In all programs, there has beena limited time offer in order to encourage timely customer commitments. In addition, there is a strong educational component including workshops and Q&A sessions supported by the sponsoring organizations. In general, results of the campaigns have lowered PV installed costs, decreased decision buy time (from 2 years to 3-6 months) and increased the number of solar systems installed. ix From the perspective of the solar installers and leasing companies interviewed for this report, all believed that offering similar campaigns in southwestern PA would be beneficial. They believed that there would be cost savings in volume discounts and installation efficiencies by doing a number of installations in close proximity. Most important from their perspective would be the savings in customer acquisition costs, including marketing and education. One interviewee estimated the cost impact from the marketing reduction would be between $ $0.50/watt. A feature that was used by the state of Massachusetts in their Solarize program (Solarize Mass) is tiered pricing, in which the price per kw goes down as more customers participate in the purchase. This works because costs per kw drop for the installer as more installations are included. Table C below shows one example of the tiered pricing approach from the winning bid for three communities participating in Solarize Mass. The price is reduced by a significant $0.45/watt if an equivalent of 50-5kW installations is reached (Tier 5). x 14

15 Table C. Reduction in Cost (per watt) of Solar Systems under Bulk Purchasing Program Cost per watt reduction Cumulative size of solar system(s) bundled with bulk purchase * Source: Solarize Mass: Non-profits and small commercial/industrial customers could also participate in a Solarize program if their electricity price was generally the same as the residential price. If the kwh cost was much lower, then solar would not be attractive from a financial perspective. In addition, non-profits would need to have a leasing option so that they could realize the benefits of the 30% federal investment tax credit. There are other group buying approaches through such companies as Group Energy ( Group Energy organizes campaigns for aggregated solar and energy efficiency purchases through large corporate, government and non-profit employers. They have an arrangement with Local Governments for Sustainability USA (ICLEI) to offer this to all its members. Group Energy provides program awareness, a personalized company purchase webpage, workshops and webinars for education of energy options and savings. The sponsoring company creates a purchase committee. Group Energy solicits bids and works with the committee on evaluating the proposals and advising on final selection. Group Energy then interfaces with the selected installer and oversees the installation process. They are paid a per watt fee of the overall aggregated purchase. Allegheny County could potentially offer this type of program for its employees in all its agencies and authorities. Collective purchasing programs such as Solarize and Group Energy have the ability to significantly reduce installation costs. The average installed price quoted from the solar installers in southwestern PA interviewed for this report was $4.00/watt. If this price per watt can be reduced through a Solarize-type program or group purchase, then the need for an incentive is greatly reduced or eliminated. For instance, as illustrated in Table B, the subsidy required at $4,000/kW ($4/W) is eliminated if the solar installed price can be reduced by $0.50/watt to $3,500/kW ($3.50/W) at 5% financing for a 5kW system. If similar 15

16 pricing to the Solarize MASS is achieved through a bidding process, the cost reduction could be realized if 50 or more 5kW systems could be purchased through a bulk purchase program. In terms of the financing challenges faced by southwestern PA, the Solarize approach would help to drive down costs. With the reduced costs, financing becomes more achievable through loan programs and other options described below. 2. Solar Loan Program with Credit Enhancements AFC First Financial, through its Keystone Home Energy Loan Program for Solar and Other Improvements, offers secured loans for solar up to $35,000 with interest rates ranging from 6.375% to 8.875% depending on the Loan to Value (LTV) and terms up to 20 years. Details of this program can be found at: Because the Keystone program offers LTV as high as 120%, homeowners with no equity left in their homes can still qualify for loans. Given the plunge in home values in the last few years, this is a very attractive feature of the program. As seen on Table C, the region needs a $3,500/kW price at 5% for 20 years to make the system pay for itself. Therefore, if funds to buy down the interest rate could be raised, a competitive loan rate could be created through the AFC program. An interest rate buy down approach has been used with some of AFC s energy efficiency loan offerings. AFC s management estimates that to buy down the interest rate for a 20 year loan would cost 21% upfront of the principle amount of the loan. For instance, for a 5kW system at $3,500/kW the cost to the customer would be: Cost of 5KW system at $3500/kW $17,500 Total loan amount needed $17,500 In order to reduce the interest rate from 7.88% (the current amount for a 20 year loan at 100% loan to value at AFC First) to 5% on a loan amount of $17,500 approximately $3,675 (or 21% of the loan) is needed. So, if the region were to deploy 1,000 solar systems, $3,675,000 or $0.74/watt would be needed to supplement the AFC loan fund. An alternative approach would be to lower the average size of the installation by combining energy efficiency measures with solar - an emerging national best practice - thereby, requiring less absolute dollars for the interest rate buy down. Another channel to explore is to create a loan pool with a local community bank that might want to create a green lending program. Such a program could be a differentiator for the community bank in the marketplace However, because solar loans are relatively new, many banks would need to be educated on solar technology and solar economics.. The bank may also require either an interest rate buy down or a loan loss reserve pool to mitigate the perceived risk of a new 16

17 loan product offering. Typically, loan loss reserve funds require about 10% or 10:1 leverage of the total loan pool. For example, the City of Milwaukee created the Milwaukee Shines program that includes solar financing through a partnership with Summit Credit Union ( Utilizing Federal ARRA funding, the government provided $100,000 or a 5% loan loss reserve pool to leverage at 20:1 a $2,000,000 loan program through Summit at an interest rate range of Prime plus 2.25% depending on the term up to 15 years. xi As another example, Phoenix, Arizona with the National Bank of Arizona created a $25 million dollar loan pool with a loan loss reserve of $250,000 from the Industrial Development Authority to cover what industry officials said is a typical 1 percent to 2 percent default. xii Sources for funding the interest rate buy down or loan loss reserve will need to be further investigated for southwestern PA. One approach would be some combination of foundation and public sector support. For instance, there are two economic development grant funds with awards ranging from $250,000 to $500,000 dollars. The first is the Redevelopment Authority of Allegheny County Gaming Economic Development Fund (GEDF) and the second is the Allegheny County Economic Development Community Infrastructure and Tourism Fund (CITF). xiii These funds come from gambling revenues and are awarded through a competitive application process. Demand for these grants is extremely high and job creation is an overarching criteria. Another possible source of funding might be certain environmental air quality penalty payments that the County currently holds. Since the deployment of solar directly impacts air quality including a reduction of greenhouse gases, using these funds to increase solar installations would be a particularly good application. 3. Solar Rebate To create a program to subsidize solar, the figures in the tables above could be used to calculate the dollar size of the program desired. For instance, one thousand (1,000) 5-kW solar systems financed over 20 years at a 5% interest rate with a $4,000/kW installed cost (the current installed cost quoted from a sampling of Allegheny County installers) would require $1,800,000 in funding. With $3,750/kW installed cost with the same terms, a total of $550,000 would be required to finance 1,000 solar systems. However, if the installed cost could be reduced to $3,500/kW, incentive financing would not be required; although, it still might be needed to make the solar offering more attractive.. 4. Solarize Combined with a Loan Fund or Rebate Combining a Solarize approach with an upfront rebate and/or an interest rate buy down for loan funds that already exist through AFC First could create a great deal of excitement about solar in the region and expedite the decision-making process of the homeowner as well. AFC First is open to the idea of creating a 17

18 separate brand for the solar funding pool that they now receive from the Pennsylvania Finance Housing Authority (PHFA). Bundling financing, marketing and education in one program would be a and creative way to bridge the gap between the current situation and the resumption of a viable SREC market or socket parity. If a bank were to provide a competitively priced loan product, the same integration with an overall Solarize approach would make it a more impactful offering. For those who have existing access to financing, the Solarize program could offer either a lower interest rate or a rebate. 5. Bond Funds Solar rooftop installations in the municipal/not-for-profit sector are not the primary focus of this report, but it is worth discussing the potential role of bonds in this sector. There are some case examples using bond financing to address this marketplace as described in the recent white paper, Clean Energy and Bond Finance Initiative: An Action Plan to Access Capital Markets by the Clean Energy Group and the Council of Development Finance Agencies. One case example is called the Morris Model where bond financing was provided through the Morris County New Jersey Improvement Authority to a private third party developer in exchange for a lower power purchase agreement (PPA) to install and own the solar on public buildings. xiv New Jersey has a strong SREC market that helped make the economics of this arrangement work. For southwestern PA, there are two financing challenges to deploying solar for the municipal/not-for-profit market segment. First, the average retail, nonresidential electricity rate is $0.09/kWh. This makes the economics very difficult, if not impossible to work without incentives. Second, the government and institutional market cannot take advantage of the federal 30% tax credit, and therefore, needs to go through a third party leasing company who would own the solar installation and be able to monetize the tax credit and accelerated depreciation. A bond offering similar to the one in Morris County would need to have favorable enough economics to attract a leasing company. The same challenge holds true for the use of Federal Qualified Energy Conservation Bonds (QECBs). These bonds offer a very attractive interest rate, but because of the transaction costs to issue the bonds, they need to be applied to large projects. One approach to make the economics more positive would be to combine solar and energy efficiency projects on municipal or other buildings. A detailed financial analysis would need to be done to see if the return on investment would be sufficient to support the required bonding repayment. It may be possible to use bond funds for residential or small commercial installations, but the feasibility of doing this through aggregating small projects into one financing would need to be further explored. In addition, the bonding authority would need to have the ability to aggregate bond funds for smaller projects. 18

19 6. New Markets Tax Credits: The Federal New Markets Tax Credit Program (NMTC Program) was established to spur new or increased investment into businesses and real estate projects located in low-income communities. The NMTC Program attracts investment capital to low-income communities by permitting individual and corporate investors to receive a tax credit against their Federal income tax return in exchange for making equity investments in specialized financial institutions called Community Development Entities (CDEs). The credit totals 39 percent of the original investment amount and is claimed over a period of seven years (five percent for each of the first three years, and six percent for each of the remaining four years). The investment in the CDE cannot be redeemed before the end of the seven-year period. xv There are some examples of NMTCs being used for solar projects including US Bank s participation in solar projects for affordable housing in California xvi and the City of Denver xvii utilizing them for solar deployment on municipal buildings. NMTCs were used to help finance the construction of a 1.65 MW solar array on Salt lake City, Utah s Convention Center. xviii This $9.3 million dollar project used $7 million in NMTCs and other sources of private and public sector capital. The downside of NMTCs is the level of complexity of the financial structure results in high transaction costs. However, further investigation of the potential application of NMTCs for southwestern PA should be undertaken. Recommendations: The Department of Energy Sunshot Initiative which funded this report seeks to lower the soft costs of solar deployment. This is particularly important in Pennsylvania because of the lack of incentives for solar. As noted earlier in this report, Pennsylvania experienced rapid solar installation growth and is now experiencing a rapid rate of decline solar installations due to the near depletion of its Sunshine solar grant program and the very low price of SRECs. Neither form of incentive appears likely to return within the next few years unless there is a change in the political will to fund solar. However, the southwestern PA Sunshot partners want to see solar deployment not only continue but to ramp up. They have set a goal of 1000 small-scale solar installations in the next five years at a cost no greater than the prevailing electricity rate. To support this goal, we recommend three initiatives related to solar demand and financing: 1) Strengthen public outreach and education on the value of solar; 2) Maintain the existing trained solar work force and expand it as demand increases; and 3) Make solar as affordable as the current price of electricity. There are positive trends that have made solar systems much less expensive in the last few years. Global forces and technology advances have lowered solar module prices by 75 percent since 2008, and the low interest rate environment has brought down 19

20 financing costs. The cost of electricity in southwestern PA is relatively high (which is good for solar energy), and solar installers in southwestern PA are very competitive on installed cost. All of these factors make socket parity" within reach with relatively small incentive dollars required. In order to address the barrier to upfront funding, a loan product with a subsidy and/or interest rate buy down could provide the needed gap in funding, which has been a significant deterrent for solar deployment since the loss of the state incentives. The amount of the subsidy required can be reduced by varying three major criteria: 1) installed cost; 2) term of the loan; and 3) interest rate. As illustrated in the solar financing model discussed previously, for residential and small solar to be affordable without a rebate, the cost of the solar system must be $3,500/kW or less, the term of the loan must be 20 years and the interest rate must be no greater than 5 percent. Any program designed to further solar deployment should incorporate these financial objectives. This report recommends the following programmatic and financing action steps as a roadmap to reach the goal of 1000 small-scale solar installations in southwestern PA over the next five years. The following are the recommendations for growing the solar market in southwestern PA: Convene a public/private solar financing stakeholder group Establish and promote a 1000 Solar Installations Campaign featuring a Solarize approach. Also, begin a Lead by Example Solarize Initiative for non-profits and municipalities Create a Loan Fund with credit enhancements (interest tate buy-down or loan loss reserve) and a rebate fund 1. Create a public/private stakeholder group interested in furthering solar deployment: The solar financing stakeholder group convened for this Sunshot financing initiative in September 2012 brought together foundations, non-profits, Community Development Finance Institutions (CDFIs), solar developers, government agencies and public financing authorities. This mix of public/private interests and perspectives produced a rich and productive exchange of ideas. The financing organizations, while having expertise in financing, were, in general, not familiar with energy loans. The solar groups were not familiar with the government economic development agencies and pubic financing authorities and so on. Continuing communication and problem solving across these groups is important to generate creative solutions to the solar financing challenge. While we were not able to attract a local bank or credit union to this initial meeting, it would be important to continue to try to bring one or more banking representatives into this solar group. We suggest that this public/private consortium be led by Allegheny County in order to secure strong buy in to move the initiative forward. Under the purview of this group, further exploration of local and state resources should continue including the economic development organizations and the grants and financing programs that may be applicable. For instance, initial conversations have been started with the Pittsburgh Urban Redevelopment Authority on how their 20