What are the top mistakes in solar and energy efficiency and how to avoid making them?
The common mistakes seen in energy project financing are:
1. Using high utility tariff escalation rates to make the project economics look good. Higher rates in the future can make your solar system or energy efficiency project look good on paper. You should ask the seller for a sensitivity analysis on the escalator. Utility rates historically have gone up by only about 2% to 4% annually but this varies by state/geography.
2. Not using net present value to compare alternate opportunities – We need to make a apples to apples comparison. Is my investment in solar today going to earn the same or greater return compared to an investment in energy efficiency or investing in stock market? This is called the “Opportunity Cost of Capital”
3. Using longer useful life number. In order to make the project economics look better, sales people could use a higher expected useful life of the equipment. For example they may use a 25 yrs useful life number for solar versus using a 20 yr life to improve the economics.
4. Not understanding warranty terms and performance guarantees – Some components require replacement during the lifetime of the project and these costs need to be accounted for when calculating returns. For example in a solar project an inverter needs to be replaced between yrs 7-10 and again in yrs 15 to 17. Inverter may only have a warranty period of 5 yrs; so you may have to pay for the replacement. Also any operations and maintenance (O&M) requirements have to be considered. Furthermore it is important to understand what kind of performance is guaranteed. Is the seller guaranteeing a minimum kWh production or kWh savings OR is the seller guaranteeing a minimum dollar savings? How are the excess savings or production accounted for?
5. Not requesting a quote from multiple vendors. The best way to analyze any proposal is by comparing it to a benchmark or national average and other competitors. You should shop your energy efficiency or solar project with multiple vendors and compare line by line how each one is better or worse. This also give you a leverage when negotiating the price and terms.