Evaluation of Fair Market Value of

Solar Panels for “Third Party”

Investment Models

Lindsay Miller,
UC Berkeley

Sponsor: Marin County, CA

Sustainability Team

December 12, 2006

ER 226

Topographical solar insolation map

Credit: Marin County
 Where this is going…
Background
BoSoleil’s structural and financial model
Fair market value (fmv)
Three methods for calculating fmv
Conclusions
Implications
 Background: Marin County
• GOAL: 51% electricity from renewables by 2017
– Capacity 300 MW Æ need >150 MW alternatives
• Solar, wind, geothermal, sm hydro
– Roof space available – at least 12 MW
• But how pay for it?? Who own it? Who purchase power?
• BoSoleil Æ financial & structural model
– 160 kW divided into 6 installations
– 3rd party power purchase agreement (PPA) structure

– If successful, Marin will use as template

PROJECT MOTIVATION!
BoSoleil Structure
 BoSoleil Financial Model Timeline

Year 1… 6 7… 20
•Transaction begins.  Transaction ends. •Rooftop & new •Last year for
•Investor, Bank, Investor leaves. Bank are payments on
BoSoleil, & Rooftop are BoSoleil sells involved. panels.
involved panels to Rooftop & •All transactions
Event pays Bank. end.
Rooftop gets new •Free electricity.
loan.

Sale of panels from BoSoleil to Rooftop occurs here.

 BoSoleil Structural Model Issues
– ALL MUST BE RESOLVED before transaction will work
– I will address fair market value issue

Issue Resolved?
1. Find installer willing to take payment when rebate is paid (time-lag) Yes
2. Ensure that net-metering capacity will not be exhausted for future Yes
3. Source capital to finance project Yes
4. Find investor to use passive losses (depreciation, interest deduction) No
5. Reach PPA: rate solar power will be sold, & sale price in year 7 Need FMV

6. Demonstrate that selling the panels for the remaining debt No

in year 7 qualifies as fair market value
 Fair Market Value
willing buyer, willing seller, reasonable knowledge,
no compulsion to buy or sell

• Why? Tax law requirement

• Logical limits
– 4 parties must agree to the free market value
• Investor & Bank: concerned with lower limit
• BoSoleil: wants high price
• Rooftop: wants low price
– Range $304k ≤ Fair Market Value ≤ $330k
Remaining debt $ to PG&E if no panels
• But must be shown with calculations: 3 techniques
 FMV Range Picture

Rooftop

BoSoleil

Bank

Investor

$304K $330K
FMV Method 1 – Replacement Cost
“How much $ to buy a new PV system just like this one?”

• Inflation (i) ~ 2%
• transaction fees (t) ~ 2.5%
• # years (n) is 6
• all systems are 160 kW

•Replacement Cost =
⎡
⎢ (1 − t ) ×
⎛ price ⎞
⎜
⎝
⎟
⎠
× (# watts )⎤
⎥ × [
(1 + i )n
]
⎣ watt ⎦

$5/W (“used”) $5.5/W (low) $6.25/W (mid) $7/W (high)

Value $878,405 $966,245 $1,098,010 $1,229,770

Range for this method: $878,405 ≤ fair market value ≤ $1,229,770

FMV Method 2 – Comparables Analysis
“How much $ did my neighbor pay for a PV system just like this one?”

• Invoice of local installations

• $/W installed, before rebates
• Least relevant method
– Inconsistent capacity & site, all same installer, lack data

86.2 kW 147 kW 254.1 kW 160 kW*

Sector Private Public Public Private
(BoSoleil)
Dollars/Watt 8.46 8.74 11.06 7.00
$ for 160 kW $1,353,600 $1,398,400 $1,769,600
* Note that BoSoleil is not a data point

Carport installation
FMV Method 3 – Cash Flow Analysis
“What is the present value of the future benefits from this PV system?”

• Yearly output: 214,920 kWh • Electricity

– DC Capacity Æ 160 kW – $ 0.15/kWh start PG&E
– DC/AC conv. Æ 0.75 – Inflation of 3% per year
– Availability Æ 0.995
– Capacity factor Æ .205
– Hours per year Æ 8,760
• Annual bill
– (Yearly output) x ($/kWh)
• Net Present Value
– Convert cash flow stream from future to present values

Year 1… 6 7… 20
Yearly output, kWh 214,920 214,920 214,920 214,920
Electricity $/kWh 0.15 0.173 0.179 0.263
Annual bill, $ 16,119 37,373 38,494 56,530
NPV, in year 7, $ 330,876
Cost avoided by rooftop
 Conclusions about FMV
• Willing buyer & seller, reasonable knowledge, no compulsion
• $304,374 ≤ Fair Market Value ≤ $330,876

• Replacement Cost
– Not appropriate in this case
• Rebates/tax credits
• Technology or manufacturing advances
• Market demand for panels and installation
– Changes in electricity prices
• Comparable Cost
– Not appropriate in this case
• Size and site differences, all same contractor
• Not enough data
• Cash Flow
– Makes the most sense
• Note that wild changes in electricity prices could cause issues
Successful transaction: implications
for Marin County
price comparison by annual electric bill
& total annual savings

80,000

pge
70,000

60,000 solar panels

low fmv

50,000 savings low

cost in $, year by year

fmv
40,000
solar panels
high fmv
30,000
savings high
fmv
20,000

10,000

0
0 5 10 15 20 25 30
-10,000
model year
 Predicted Savings
At year 20, savings ~ $195,937
At year 30, savings ~ $862,426
cumulative savings

1,000,000

900,000

800,000

700,000

600,000
total saved, $

500,000
cumulative savings
400,000

300,000

200,000

100,000

0
0 5 10 15 20 25 30 35
-100,000
m ode l ye ars
 Thank you!
Any Questions?

Acknowledgements
• Dawn Weisz, Marin County Sustainability Team
• Don Smith, BoSoleil
• Rich Dudley, GFP Advisors
 SUMMARY: Marin County, Fair Market Value Project
•Marin County Goal: 51% electricity from renewables by 2017
•BoSoleil: developing financial & structural model for solar installations on gov’t buildings
•Fair Market Value needs to be demonstrated due to tax laws
•Marin County wants to use BoSoleil model as template if successful

Fair market value of solar panels with 6 years of use

was determined using cash flow analysis to be
$304,374 ≤ Fair Market Value ≤ $330,876

price comparison by annual electric bill cumulative savings

& total annual savings
1,000,000

80,000 900,000

pge 800,000
70,000

700,000
60,000 solar panels
low fmv
600,000
50,000 savings low
cost in $, year by year

total saved, $
fmv 500,000
40,000 cumulative savings
solar panels 400,000
high fmv
30,000
savings high 300,000
fmv
20,000
200,000

10,000 100,000

0 0
0 5 10 15 20 25 30 0 5 10 15 20 25 30 35
-10,000 -100,000

model year m odel years

Savings from a 160kW system if BoSoleil model is successful

Lindsay Miller