Solar photovoltaic system valuation

Recent Research and Techniques

James F. Finlay y

VP, Commercial Real Estate Appraisal Manager

Wells Fargo Bank – RETECHS Los Angeles

Ch i C i l RE & Fi C i USGBC L A lChair, Commercial RE & Finance Committee, USGBC-Los Angeles

1st Valley Green Building Education Conference

CA State University Northridge, June 23, 2011

Wells Fargo Bank and sustainabilityg y

July 2005: 10-point environmental commitment, July 2005: 10 point environmental commitment, creates the Environmental Initiative team

Now Environmental Affairs My role: Primary appraisal manager, risk analysis, trendsy y pp g , y ,

More than $3.7 billion in loans for high-performance $ g pdesigned real estate – LEED, Energy Star

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Wells Fargo Environmental Finance Report

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Presentation goals :

Valuation techniques for solar photovoltaic (PV) systems

Review past and recent research

Show an example

f h How to prepare for the appraiser

M b k d i i l b t t My background is commercial, but most ideas also apply to residential

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What this talk is NOT about An endorsement of any particular appraisal method

Info is not one size fits all – every situation is differento o o a y ua o dBE PRUDENT, UNDERSTAND THE NUMBERS

Before you invest consider a whole building audity g

EE [Energy Efficiency] investments might be better

Solar PV leasing : no money downSolar PV leasing : no money down

Group pricing (like 1 Block Off the Grid - 1bog.org)

Rooftop leasing for others to install PVRooftop leasing for others to install PV

PPA [Power Purchase Agreement]: multiparty, tax equity, high credit qualityequity, high credit quality

Solar thermal, hot water systems or just EE upgrades4

“Investing” consists of 4 major versions

Capital Expenditure budget - you pay, your cash, get rate of return; investment must make sense and you must KNOW it makes sense.

Traditional financing - via banks; some your Traditional financing via banks; some your money + loan. Uses USPAP appraisal process

Public/Private - SBA 504, Utility programs, credit enhancement CA SB 77. Some of your cash

Creative – Energy Upgrade Los Angeles, PACE [Property Assessed Clean Energy], group pricing[ p y gy], g p p g

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Solar PV “Cost” is really an “Investment”

Solar PV investment offsets utility expense, might produce incomep oduce co e not an cost/expense like management, taxes, maintenance

Solar PV Investment “Cost” has different levels, is not a simple, single number

ff Gross Cost, Effective Cost, True Cost

Different based on tax situation location property etcDifferent based on tax situation, location, property, etc

Incentives, electricity, gas expenses always changing

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Case Study – 20,000 SF Commercial Building

Information needed to “run the numbers” Solar installer contact info, sale packet, p

PV panel make, model, # panels, warrantee

Energy output estimates by installerEnergy output estimates by installer

Inverter make, model, warrantee

System monitoring email interruption notices System monitoring, email interruption notices

Maintenance contract

Utility rate Time of Use tier average annual rate/kWh Utility rate, Time of Use, tier, average annual rate/kWh

Annual energy bill saving estimate

E t l ti / Energy cost escalation/year

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System size - 30kWatt DC system

Gross Cost = $161,838

Effective = $107,655 (after incentives)

True Cost = $ 57,881 (after depreciation)

$0.15/kWh, energy +5%, CPI 3%, Loss -0.4%

Maintenance 0 25% inverter replace @ yr 15 Maintenance 0.25%, inverter replace @ yr 15

W/out depreciation repaid in year 13

30 yr DCF, 9% discount rate (conservative)

@ Y 13 NPV f i i i $128 693 @ Year 13 NPV of remaining saving =$128,693

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Income Approach: Direct Capitalization

Quick and simple, sometimes rightBusiness investment approach vs debt reliefBusiness investment approach vs debt relief

No accounting for inverter replacement g pAccuracy varies depending on system age

Energy costs are rising faster than CPI

At 10% capitalization rate becomes a 10x rule

Cap rate is RE rate per PPA buyout contracts

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This is conservative per the cash flow durability

Solar PV Value including depreciation

Tax basis is beyond typical appraisal scope

B t i t i ll id d i b i But is typically considered in business

Tax rates in pro forma: 28% Fed, 8% CA

Now solar PV repaid in year 9

PLUS resale value in year 9 PLUS resale value in year 9

Reduces: investment payback period 4 yrs+risk

Determining value at sale = several techniques

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Market value is the “value in exchange”

Three appraisal approaches: cost, sale, income

Solar PV not just ROI stream of payments,

“# of years until payback” is not enough

Asset value at sale, called the “reversion”

Yield Capitalization is discounted cash flow + sale

Cost is also a factor, but not dollar for dollar

Sales comp is weakest, but most common12

Research: Solar PV Valuation

“Evidence of Rational Market Valuations for Home Energy Efficiency”e gy c e cy

By Rick Nevin, Gregory Watson

The Appraisal Journal Appraisal Inst October 1998The Appraisal Journal, Appraisal Inst. October, 1998

Supported by US EPA

Value range 10x to 25 times annual energy savings Value range 10x to 25 times annual energy savings

Looks at advantage via mortgage relief from energy cost saving cost saving

Uses a 5% mortgage rate

Basis of famous “The 20 Times Rule” Basis of famous The 20 Times Rule

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PV Value based on Cost

“More Evidence of Rational Market Values for Home Energy Efficiency”Home Energy Efficiency

(also) by Rick Nevin

The Appraisal Journal, Appraisal Inst Oct,1999

Remodeling Magazine Cost vs Value studyg g y

Energy savings per window replacement cost

Confirms general range of 20x rule

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Cost verses Value – Using the Cost Approach

“Remodeling Magazine

Annual Cost vs Value Study 2010-2011”

35 popular remodeling projects, 80 US cities

16 are building envelop relatedg p

Windows, doors, siding, roof, backup generator

Cost verses % of value at resaleCost verses % of value at resale

US National range: 49% to 102%, Median 72%

Los Angeles range: 50% to 112% Median 87%Los Angeles range: 50% to 112%, Median 87%

Window replacement: National 68% to 73%

Back-up generator: National 49% LA 62% Back-up generator: National 49%, LA 62%

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Important recent documents & research

DOE and The Appraisal Foundation M d f U d t diMemorandum of Understanding

June 10 2011June 10, 2011

• Part of Obama Better Buildings Initiative, Part of Obama Better Buildings Initiative, commercial bldgs more energy efficient

• Encourage appraisers to more closely examine value impact of energy efficiency

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Landmark solar PV value study“An Analysis of the Effects of Residential Photovoltaic Energy Systems on Home Sales Prices in California”

Ben Hoen, Peter Cappers, Mark Thayer, Ryan Wiser

Lawrence Berkeley National Laboratory, April 22, 2011

Support by Office of Energy Eff and Renewable Energy Support by Office of Energy Eff. and Renewable Energy, DOE, Clean Energy States Alliance

Core Logic & Fiserv RE data, sales; matched to solar financial incentive program recipients

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CA Solar Initiative per home re-sales and new homes

Lawrence Berkeley Labs study overview

• Home sales 1999-2009 : matched market data of70,425 non-PV homes to 1,894 PV homes

• Repeat sales 27,919 non-PV matched to 394 PV homes

• Results robust across study, 25 variables

• Market value premium of $17K• Average PV system size 3.1 kW DC

• Market value: $3.9-$6.4/watt DC•coalesce around $5.5/watt

• Existing homes $6 to $6.5/Watt DC• New homes $2.3-$2.6/watt DC

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• 14 – 22x annual energy savings, 20:1 existing homes

USPAP Appraisal Competency Provision

A i tAppraiser must:1. be competent to perform the assignment;2. acquire the necessary competency to perform the assignment;3 d li ithd f th i t3. or decline or withdraw from the assignment.

If the appraiser determines that he or she is not competent prior to accepting an assignment, the appraiser must:

1 di l th l k f k l d i t th li t b f 1. disclose the lack of knowledge or experience to the client before accepting the assignment (or at that point in the appraisal process at which the deficiency is discovered);2 take all steps necessary or appropriate to complete the 2. take all steps necessary or appropriate to complete the assignment competently (such as through expanded personal study/research or consulting with an expert); and3. describe in the report the lack of knowledge and/or experience

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3. describe in the report the lack of knowledge and/or experience and the steps taken to complete the assignment competently.

USPAP Appraisal Competency Provision

COMPETENCY RULE’s Comment section about “Being Competent” which states:Being Competent , which states:

“Competency may apply to factors such as, but not Competency may apply to factors such as, but not limited to, an appraiser’s familiarity with a specific type of property or asset, a market, a geographic area, an intended use specific laws and regulations or an intended use, specific laws and regulations, or an analytical method.

If such a factor is necessary for an appraiser to develop credible assignment results, the appraiser is responsible for having the competency…”

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for having the competency…

Utility connection : a major future issue

• Demand response payments – utility load reduction tied to smart grid and load reduction tied to smart grid and meterWill be tied to smart home energy • Will be tied to smart home energy

management; not ready yet

• Electric vehicle growth & Vehicle to Grid• Power grid can’t always accept powerPower grid can t always accept power

• Track in newsletters, blogs of Pike h ld

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Research, Boulder

Conclusions: Recent research supports past PV value claims

Energy efficiency and resource monitoring firstEnergy efficiency and resource monitoring first

Null Hypothesis is invalid;

“Don’t know does not equal zero”

Appraisers feeling pressure to be Competent

Sales Comparison Approach not only method

Value impact varies by location (maybe a lot) Value impact varies by location (maybe a lot)

Still early, owners need to help (maybe a lot)

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Will grow as more buildings become Net Zero

Thank You !!Thank You !!James F. Finlaya es ay

VP, Commercial Appraisal Manager

W ll F B k RETECHSWells Fargo Bank – RETECHS

707 Wilshire Blvd, 11th Fl

Los Angeles, CA 90017

310-821-8111310 821 8111

James.F.Finlay@WellsFargo.com

’ k d

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I’m LinkedIn

The Economics of Green BuildingThe Economics of Green BuildingPiet Eichholtz, Nils Kok, John M. QuigleyUniv of CA, Berkeley – April, 2011Inst of Business and Economic Research, Fischer Center for

RE & Urban EconomicsSupport by RICS European Center for Corporate Support by RICS, European Center for Corporate

Engagement, Univ of CA Energy Institute

ff b ld h l k l lGreen office building have lower market volatilityHigher rent & asset value, both EE & sustainability

----------------------------------------------------------------------www.OnGrid.netOnGrid Solar; excellant financial analysis under Papers, P bli ti B A d Bl k ft d l lt tPublications, By Andy Black, software developer, consultant

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Integrating Sustainability and Green Building into g g y gthe Appraisal Process

Timothy Runde, Stacey ThoyreJournal of Sustainable Real Estate, Oct, 2010Markets have different values for “greenness”

----------------------------------------------------------------------------------------------------------------------Understanding the Solar Home Price Premium: Electricity Generation and “Green” Social StatusElectricity Generation and Green Social Status

Samuel Dastrup, Joshua Graff Zivin, Dora L. Costa, Matthew E Kahn

CA Center for Population Research, UCLA Dec, 2010

Valley Green Conf, Northridge , CA - 06-2011 pg 25

Market Value and Cost of Solar PV Electricity P d iProduction

By Severin BorensteinCenter for the Study of Energy Markets Jan 2008Center for the Study of Energy Markets, Jan, 2008

Looks at solar PV relative to grid powerLooks at solar PV relative to grid powerSince solar output matches peak demand potential with

timed pricing to increase output valueB ild i t PV l i t ti di t ib ti t Build into PV value savings on construction, distribution cost

and loss of energy transmission

--------------------------------------------www.PikeResearch.com : Newsletters, high-end research on solar, innovation in energy & efficiency

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