01/21/2010
California announced this week that it again has a solar hot water program after a multi year run with the Solar Hot Water Pilot Program in San Diego. It has been decades since the state has provided incentives for solar hot water and many years since substantial systems have been built. Here is a quick FAQ on how the program will be run.
Who is eligible?
Everyone who is a customer of the large gas and electric utilities in the state is eligible. The program is a rate payer funded program and the funds come through the large utilities (SDG&E, PGE, SoCalGas, etc...). The program administration however will come through an organization called CSI-Thermal, to mirror the organization CSI ("California Solar Initiative") which jump started solar electric installations in the state.
How large is the incentive?
The incentive will be based on how much natural gas or electric your system will save. The incentives are larger for gas than electric, but are approximately $12 per therm for estimated savings in the first year. (approximately 40 cents per thermal kWh). For a typical residential system, the incentive will be approximately 1000-1500 dollars.
How much do systems cost?
The CSI estimates that a solar hot water system for a single family home could cost in the area of $6000.
We find that question more complicated. Asking how much a system costs depends on the size of the system, the quality of the materials, length of the warranty coverage, and importantly, the amount of government and programmatic compliance costs. Altadena Energy & Solar intends to work with local officials and the CSI Thermal Program Office to lessen the compliance costs for systems, so that they are affordable for customers.
Our Analysis of the Program
Altadena Energy believes it is good state policy to provide incentives for green energy & to encourage the migration towards efficiency. At our current standpoint, it is sound from many perspectives:
1) California recognizes that global warming presents very specific challenges to the state, especially regarding snowpack & state water supply. We need to work in our own best interest!
2) Providing money to use green energy provides job and keeps more of California money in California - Rather than paying for imported natural gas, we can pay our fellow Californians to build solar hot water systems. That provides skilled jobs to our state, and reduces our export of money for fuels.
3) Solar is a sound investment in our future - Solar systems are productive systems that will pay for themselves many times over. They limit the emissions of each household or business that installs one, and provides a hedge against future inflation from fuel cost escalation.
Our Response
AES is currently a solar hot water and thermal system provider in California & Virginia, and provides equipment to installers in other eastern markets. We've cut our teeth on solar design in Germany, among the most technically and programmatically advanced solar thermal market. We bring a depth of experience to our projects and to this market.
We look forward to working with CSI Thermal staff, local building officials, and customers to bring quality solar thermal and solar hot water systems to the local market, for the benefit of Californians.
-hwr
01/23/2010
Saturday, January 23, 2010
Friday, February 13, 2009
Tax rate effects on your investments in self-owned renewable energy systems
What does my tax status have to do with my investments in residential renewable energy?
Your tax status has everything to do with your personal investments in renewable energy! Your tax status is a very important consideration in looking at renewable energy investments at the personal level. In order to effectively compare investments in home based renewable energy systems and their financial returns to other investments that you have, you have to consider the effects of tax. We'll use as our reference frame the amount of cash return you have after taxes from a home solar system to the return from a savings account (This example can be extended to stocks and bonds as well).
You can separate the investment world into many categories. One division is taxable investments and non-taxable investments. If you are a regular citizen, then most of your investments are taxable, unless you are looking at US savings bonds, municipal bonds, or other tax free government debt. That means that need to consider your tax rate and its effect on your investments.
Since our tax system in the US is progressive, the logical approach is to consider your marginal tax rate, and to 'correct' your pretax returns from investments to 'posttax' returns. You can do the conversion like this.
Posttax return (%) / (100 % - marginal tax rate %) = Pre tax return (%)
Pretax return (%)* marginal tax rate % = Post tax return (%)
Examples
To put some numbers on this example, let's look at your solar electric (PV) system that returns 8% annually to you. We'll define that return as electricity savings/(total effective cost of system - rebates - tax benefit). That is typical of solar electric systems in Pasadena, CA. Marginal tax rate will be 35%, which is very middle class in California's tax brackets.
To get a comparable financial return from a stock or bond, you would need 12.8%, which is actually quite close to the stock market's long term performance. The tax implications of investing are very important to consider in high tax countries. These effects have an even greater impact in Germany where I also design solar systems.
The next question for you as a homeowner is why not invest in a solar system that has a bond's stability, has a growing yield over time, and compares to exceeds stocks' long term performance?
Sunday, February 8, 2009
Cost of Capital and your Investments - What is wise?
What is your cost of money?
I often ask companies if they have a hurdle rate for investments to their facilities. Some of them don't know. Others tell me they want investments to pay off in 2-3 years. Others have told me they want payoffs in one year. It is interesting to hear these demands and try to correlate these responses to the organization's cost of capital, which is likely close to 5-15% than it is 30-60%, however this is the implicit response i get from facility managers. This implies a misunderstanding of the cost of money.
The cost of money can be computed or reached in many ways. There is a cost of equity capital and a cost of debt capital, and the combined cost of capital depends on the capital structure of the organization.
For the consumer, the cost of debt and equity capital could be computed the same way. Debt is money that you borrow, equity is money that is already yours. What is the cost of your debt? What is the yield of your savings?
Another interesting slice on this questions for persons and non public companies is looking at the marginal cost of capital. Debt cost is easy to come up with. It's the rate that we are charged. The marginal rate of equity capital can be looked at by looking at our various uses of our own money. From an individual’s standpoint, he/she could evaluate the varying cost of money from different sources:
• Investment account: What is your average return?
• Bank account: What is the interest that you are receiving?
• Do you have a lot of money to spend, "just for the fun of it?" If so, your cost of equity capital is essentially 0%, since you don't expect any (financial) return from your money.
What are other important considerations?
• Need for liquidity
• Risk of projects
• Other?
In evaluating whether an investment in energy efficiency or renewable energy is wise or not, look at its rate of return vs. your other investments or uses of money. The "green" projects likely still outweigh your cost of capital, whether debt or equity, and likely exceed the return of your other investments.
See how the numbers compare. I'd be interested in your results.
I often ask companies if they have a hurdle rate for investments to their facilities. Some of them don't know. Others tell me they want investments to pay off in 2-3 years. Others have told me they want payoffs in one year. It is interesting to hear these demands and try to correlate these responses to the organization's cost of capital, which is likely close to 5-15% than it is 30-60%, however this is the implicit response i get from facility managers. This implies a misunderstanding of the cost of money.
The cost of money can be computed or reached in many ways. There is a cost of equity capital and a cost of debt capital, and the combined cost of capital depends on the capital structure of the organization.
For the consumer, the cost of debt and equity capital could be computed the same way. Debt is money that you borrow, equity is money that is already yours. What is the cost of your debt? What is the yield of your savings?
Another interesting slice on this questions for persons and non public companies is looking at the marginal cost of capital. Debt cost is easy to come up with. It's the rate that we are charged. The marginal rate of equity capital can be looked at by looking at our various uses of our own money. From an individual’s standpoint, he/she could evaluate the varying cost of money from different sources:
• Investment account: What is your average return?
• Bank account: What is the interest that you are receiving?
• Do you have a lot of money to spend, "just for the fun of it?" If so, your cost of equity capital is essentially 0%, since you don't expect any (financial) return from your money.
What are other important considerations?
• Need for liquidity
• Risk of projects
• Other?
In evaluating whether an investment in energy efficiency or renewable energy is wise or not, look at its rate of return vs. your other investments or uses of money. The "green" projects likely still outweigh your cost of capital, whether debt or equity, and likely exceed the return of your other investments.
See how the numbers compare. I'd be interested in your results.
Saturday, February 7, 2009
Green Energy as Investments
Feb 7, 2009
I work in renewable energy. My company sells and implements efficiency and solar projects. I speak with people daily about renewable energy projects that they are considering at home, or at their business. Many people want to 'do the right thing', but many times are disuaded by what they say is an insufficient return. "It's not worth it." "It is too expensive." "I'll never get my money back." I've heard many similar responses from people. What is interesting about people's response is that they use different measures of 'worth it' in different areas of their lives without realizing it. It is a mistake that the common homeowners make just like professional managers in large corporations do.
Money is money, and return is return, regardless of what type of project you are evaluating. You can qualify investments based on other factors as well, such as risk, or social effects, such as effects on people, communities, or the environment. However, if you are looking at financial returns you should treat your home or business just like your savings and retirement account. You should look at a risk weighted comparison of investment options. In my experience, I am finding that people underestimate or undervalue physical investments in their home or business as equals to their investments in their retirement accounts or other 'paper investments'. By doing so, they are missing the opportunity of a very good yielding investment [as well as a good thing to do for the world].
Green Energy as an Investment
I believe that the traditional view of efficiency and renewable energy projects has revolved around the concept of 'years to payback'; this concept best suits 'non-durable goods', or things that wear out quickly. This concept is not a good fit for long lived durable assets such as solar energy systems. In these cases the concept of yield gives better comparison with alternative investments to solar, which would be bonds. The concept of the growing annuity is the best comparison for solar energy systems.
The math
A growing annuity is usually a product that a person buys from an insurance company as a safe investment. The product has a yield, which would pay at regular intervals during the year. The growing annuity, as opposed to the standard annuity, would not only yield cash on investment. Its yield will increase over the years. This behavior is a good match for the solar electric system. The yield is the savings on electricity purchases divided by the investment cost of the system.
How can we compare these investments?
The annuity yields 10% and grows at 3% per year. With a $10,000 investment, the yield is $1,000 in the first year, and $1,030 in the second year.
If the solar system has a similar yield and growth rate to the bond, it would also cost $10,000, yield $1,000 in the first year and $1,030 in the second year. If power rates increase 3% per year, then this scenario would hold true. We will look at power inflation in a later issue.
Can we compare these results? No, because the bond delivers cash to the investor which is taxed at the state and federal unless the bond or annuity is government debt and is tax free at the state or federal level. This means that we must consider the investor's marginal tax bracket and its affect on the return. If the investor earns $80,000 per year, is married, and lives in California, he/she pays 25% federal and 9.3% state tax (marginal rates). That is 34.3 %, which must be considered to convert the bond result to a post tax rate.
The solar system does not return cash to the investor, but defers electricity purchases. Since a deferred purchase is not income to the investor, it is not taxed. It is tax free. So we must convert the bond result with the investor's tax bracket to compare the results with a solar system's yield.
Bond yield is 10%, but the investor loses 34.3% of that yield to taxes, leaving 65.7% of 10%, or 6.57% after tax yield.
The solar system's yield is 10%, but since the result is tax free, the yield remains 10%.
Lesson: Know whether you are comparing pre tax or post tax results when comparing solar investments to other investment options. The comparison may be different that you initially thought.
Topics that will be covered in future installments include:
- Risk adjusting yield in renewable energy system comparisons.
- What is your cost of capital and how does that affect your investment decisions? How to make consistantly good decisions.
- The value of small predictable savings - How even big companies don't get it.
-Hans
" Hans is President of Altadena Energy and Solar. He has his MBA from University of Southern California and MSEE from Penn State University"
I work in renewable energy. My company sells and implements efficiency and solar projects. I speak with people daily about renewable energy projects that they are considering at home, or at their business. Many people want to 'do the right thing', but many times are disuaded by what they say is an insufficient return. "It's not worth it." "It is too expensive." "I'll never get my money back." I've heard many similar responses from people. What is interesting about people's response is that they use different measures of 'worth it' in different areas of their lives without realizing it. It is a mistake that the common homeowners make just like professional managers in large corporations do.
Money is money, and return is return, regardless of what type of project you are evaluating. You can qualify investments based on other factors as well, such as risk, or social effects, such as effects on people, communities, or the environment. However, if you are looking at financial returns you should treat your home or business just like your savings and retirement account. You should look at a risk weighted comparison of investment options. In my experience, I am finding that people underestimate or undervalue physical investments in their home or business as equals to their investments in their retirement accounts or other 'paper investments'. By doing so, they are missing the opportunity of a very good yielding investment [as well as a good thing to do for the world].
Green Energy as an Investment
I believe that the traditional view of efficiency and renewable energy projects has revolved around the concept of 'years to payback'; this concept best suits 'non-durable goods', or things that wear out quickly. This concept is not a good fit for long lived durable assets such as solar energy systems. In these cases the concept of yield gives better comparison with alternative investments to solar, which would be bonds. The concept of the growing annuity is the best comparison for solar energy systems.
The math
A growing annuity is usually a product that a person buys from an insurance company as a safe investment. The product has a yield, which would pay at regular intervals during the year. The growing annuity, as opposed to the standard annuity, would not only yield cash on investment. Its yield will increase over the years. This behavior is a good match for the solar electric system. The yield is the savings on electricity purchases divided by the investment cost of the system.
How can we compare these investments?
The annuity yields 10% and grows at 3% per year. With a $10,000 investment, the yield is $1,000 in the first year, and $1,030 in the second year.
If the solar system has a similar yield and growth rate to the bond, it would also cost $10,000, yield $1,000 in the first year and $1,030 in the second year. If power rates increase 3% per year, then this scenario would hold true. We will look at power inflation in a later issue.
Can we compare these results? No, because the bond delivers cash to the investor which is taxed at the state and federal unless the bond or annuity is government debt and is tax free at the state or federal level. This means that we must consider the investor's marginal tax bracket and its affect on the return. If the investor earns $80,000 per year, is married, and lives in California, he/she pays 25% federal and 9.3% state tax (marginal rates). That is 34.3 %, which must be considered to convert the bond result to a post tax rate.
The solar system does not return cash to the investor, but defers electricity purchases. Since a deferred purchase is not income to the investor, it is not taxed. It is tax free. So we must convert the bond result with the investor's tax bracket to compare the results with a solar system's yield.
Bond yield is 10%, but the investor loses 34.3% of that yield to taxes, leaving 65.7% of 10%, or 6.57% after tax yield.
The solar system's yield is 10%, but since the result is tax free, the yield remains 10%.
Lesson: Know whether you are comparing pre tax or post tax results when comparing solar investments to other investment options. The comparison may be different that you initially thought.
Topics that will be covered in future installments include:
- Risk adjusting yield in renewable energy system comparisons.
- What is your cost of capital and how does that affect your investment decisions? How to make consistantly good decisions.
- The value of small predictable savings - How even big companies don't get it.
-Hans
" Hans is President of Altadena Energy and Solar. He has his MBA from University of Southern California and MSEE from Penn State University"
Subscribe to:
Posts (Atom)
.JPG)