How To Profit From Solar Power

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1 Bank of Hawaii Equipment Leasing Photovoltaic Leasing What s s Behind the Numbers Jaewon Jay Kwak Vice President and Senior Lease Officer jkwak@boh.com

2 Economics of PV (Commercial Systems) Highly dependant on both state and federal government subsidies 30% federal tax credit; 35% state credit Also dependant on net metering Ability to sell power back into the utility s grid and receive credit for energy generated but not used Third party is able to easily absorb credits Tax credits are available to owners, not the producers like wind systems (Production Tax Credits or PTCs) Many options to economically benefit from this technologies Buy Lease -Power Puchase Agreement

3 Buy Purchase the systems with cash or through a loan PROS It is your system, aka Free Energy Tax credits available to reduce tax liability CONS Large upfront costs Payback is often beyond 3-7yr 3 typical for capital investments depending on your region, island, etc. Must have tax appetite SOH max on commercial structures is $500,000 Means that owner must have Hawaii taxable income of $5Million to absorb credits in 1 year. Non-profits organizations cannot benefit from credits

4 Lease Bank of Hawaii Leasing or other lease company can absorb the tax credits and pass on the savings in the form of lower rent payments. PROS No money upfront Match monthly payment to projected monthly utility savings Own system after lease termination (after at least 5 years) Free energy after year 5 Fixed payments with no variability; ie.. No oil price tremors CONS Credit approval more difficult for longer terms. To match payment to savings, may need term of lease to extend 7, 10, 12 years; terms that are normally available to the best borrowers Non-profit associations may only benefit from state credits Buyout at lease termination is at Fair Market Value (FMV) Estimated range of FMV is 5% to 20%

5 Power Purchase Agreement Allow a third party, usually one that specializes in owning solar, to sell electricity to you PROS No upfront costs Power may be cheaper or at least the same per kwh than from the utility with a fixed inflationary factor Pay only for the energy generated, i.e. rainy day Maintenance handled by the provider CONS Long term agreement, usually 20 years No point of free electricity

6 HB2175 HD2 SD2 CD1 ACT96 Governor s s Message 626 dated 5/12/06 HRS Agencies shall maximize their use of available alternative financing contracting mechanisms, including energy- savings [performance] contracts [and utility energy- efficiency service contracts], when life-cycle cost-effective, to reduce energy use and cost in their facilities and operations. Energy-savings contracts shall include: (1) Energy performance contracts; (2) Municipal lease and purchase financing; and (3) Utility energy-efficiency efficiency service contracts. Energy-savings [performance] contracts [and utility energy- efficiency service contracts] shall provide significant opportunities for making state facilities more energy efficient at no net cost to taxpayers."

7 Municipal Tax Exempt Financing v. FMV Lease What is a municipal tax exempt lease? A A Municipal Lease is a financial agreement whereby the Lessor provides money to the Lessee to purchase property and charges the Lessee interest for the use of that money. The Lessee takes title to the property and the Lessor takes a security interest in the property as collateral. Lessee builds equity with each principle payment and has the option to purchase the property at the end of the lease, usually for $1.00. Municipal Leases are subject to the annual appropriations of the Lessee and provide financing at a low tax-exempt rate. This lease is best used to finance energy efficiency projects, vehicles, equipment, and other non-tax credit equipment. What is a true lease? Lessor maintains title and ownership to the property Lessor takes all the tax benefits of asset, including depreciation and tax credits. Payments under a true lease with consideration of tax credits will be lower than a municipal tax exempt lease. At the maturity of the lease, equipment may be returned or purchased at fair market value or FMV. FMV will be determined at the time of termination.

8 Leasing Example 100 kw utility connected PV system For Profit w/ State and Federal Credits Assuming system cost of $750,000 ($7.50/W installed) Monthly payments of $5,000.00(+/-) ) 7 years Average daily PV energy = Array Rated Capacity(100 kw) x average sun hours (6.5) x efficiency factor (.8) = 520 kw/day 520 kw x 30 days = 15,600 kw / mos Oahu $.1544/kw = $2408/mos savings Maui $.2425/kWh = $3783/mos savings Kauai $.34/kWh = $5304/mos savings Very simple math. Should do the engineering.

9 Power Purchase Agreement Courtesy SunEdison LLC

10 Power Purchase Agreements Commercial customers in Hawaii are being offered PV electricity from 3 rd party system owners at $.21/kWh with 1 or 2% escalation factors and 10 or 20 year terms. Steve Burns, HECO

11 PPA Providers SunEdison Corporation Powerlight Corporation Hoku Solar Zero Emissions Leasing Lighting Services Inc.

12 Questions?