Imposing Tariffs on Chinese Solar Manufacturers
Last week the United States Department of Commerce (DOC) determined that Chinese manufacturers were unfairly selling solar panels below market value in the US. This practice, known as “dumping,” violates the World Trade Organization’s rules governing international trade.
As a result, the US will now impose a 31% tariff (higher in some cases) on solar cells manufactured in China and exported to the US. The duty does not apply to panels assembled in China–just the cells, which are the basic “building blocks” of panels. As the Los Angeles Times points out, Chinese firms can simply manufacture the cells in surrounding countries and assemble them in China to avoid the tariff.
The DOC’s action against China is controversial, since it will have a mixed impact on the US solar market. On one hand, the DOC wants to curb the closure of US manufacturing plants, which has been happening at an alarming rate in recent years.
Courtesy of Congressional Research Service
On the other hand, solar installers argue that the tariff will hurt the solar market, as it will make panels more expensive for homeowners and business. The solar industry has experienced tremendous growth in recent years due, in part, to a 30% federal tax credit and dwindling panel prices. As the price of installing solar becomes more affordable, the more sales and installation jobs we stand to gain.
Courtesy of Congressional Research Service
Is there reason to prefer solar manufacturing jobs to solar installation and sales jobs? Should we be concerned if the tariff reduces the overall number of panels installed in the US? How do we balance the environmental consequences of fewer solar installations? Energy security? Share your thoughts in the comments below.
Interesting sources for further reading:
http://www.fas.org/sgp/crs/misc/R42509.pdf (in-depth report covering industry trends written by the Congressional Research Service)
http://articles.latimes.com/2012/may/18/business/la-fi-china-solar-dumping-20120518 (LA Times article providing solid overview of the recent DOC decision)
http://info.ussolarinstitute.com/blog/bid/79841/What-a-US-China-Solar-War-Means-for-Your-Solar-Installation-Career (Industry analysis of what DOC decision means for solar installers)
Solar Financing Models
Previous posts on this blog have dealt with financing energy retrofit projects. As a general rule, residential efficiency is cheaper to achieve than installing renewable energy systems. And it’s important to remember that saving energy is just as good as generating energy from renewable sources.
But, if you’ve already made energy efficient upgrades, you might consider looking at installing a solar array. There are several interesting financing options available, including solar leasing, power purchase agreements and loans. The following is a brief overview of each model and the pros and cons associated with each.
Solar Leasing
A solar lease is a contract whereby a homeowner (the lessee) rents a solar system–either a photovoltaic system or solar thermal unit–from a third party (the lessor). The lessor is responsible for installing the solar array and maintaining it over the duration of the lease period–typically 15 to 20 years. In exchange for making the monthly lease payments, the homeowner/lessee gets all the clean, solar energy produced from the system.
The primary benefit of leasing is that it requires little or no money down. This means you don’t have to prepay for solar energy that you’ll use 20 years down the road–not bad if you’re on a tight budget! Be aware, though, that some lease rates can increase between 2.5 to 4.5% per year (c.f. utility rates which typically increase about 5% annually).
However, there are a couple of drawbacks to the solar leasing model. First, the monthly fee is fixed, and not a function of the solar output of the array. If you have a cloudy month, snow on your roof, or an equipment malfunction, you could be paying for the equipment without getting any production. Thus, it’s important to choose a qualified leasing company with an equally qualified installation team.
Second, leasing is typically more expensive than buying a solar array outright, and often lease agreements have provisions for balloon payments or buyouts. The buyout price is determined by the fair market value of the equipment at the expiration of the lease period, not a predetermined number.
Other things to consider when entering into a solar lease are maintenance and downtime. Ensure that the lessor is obligated to repair/replace any equipment in a timely and professional manner. If not, see to it that you’ll be reimbursed for downtime.
Power Purchase Agreements
A PPA is a contract where a homeowner agrees to purchase all the solar energy produced from an array installed on his/her property (the host property), but the equipment is owned and operated by a third party (the solar services provider). Rather than making a monthly payment, the homeowner is obligated to purchase all the power produced at a certain price per kWh.
Much like a lease, the contract term for a PPA is usually between 15 and 20 years, requires little or no money down, and often a rate escalator of 2.5 to 3.5% per year applies if you don’t pre-purchase the energy. However, the terms, PPA rate, annual escalator, term length should be negotiable.
There are numerous benefits under the PPA financing model:
- For climates with significant snow or clouds, a PPA makes more sense than a lease. Since you only pay for energy produced, you don’t have to pay out of pocket if your array is covered in snow or blocked by clouds.
- Energy purchased under a PPA is typically cheaper than that offered by a local utility, so you can live sustainably while saving money!
- PPA’s are a great way to avoid the volatility of energy markets, because you’re purchasing energy at a set rate for an extended period of time.
- You don’t have to pay for maintenance or deal with the system if it breaks.
A PPA may not make sense for everyone, though. If you can afford to purchase a solar system outright, or qualify for low-interest financing, you’ll pay less over the long haul than if you go with a lease or a PPA.
Purchasing, Financing & Incentives
If solar leasing and PPA’s don’t sound attractive, you can always do it the old fashioned way — purchase the system and pay for its installation. A number of tax credits and local rebates soften the blow of the initial expenditure. First and foremost, you can get a 30% federal tax credit until 2016. Many states also offer rebates or performance-based incentives of up to several thousand dollars, which you can look up at www.dsireusa.org/solar.
If you can’t swing the initial expense, you can obtain a number of low-interest loans from both federal agencies and private lending institutions. Solar projects can be financed through an Energy Efficient Mortgage (EEM) as well as through PACE loans in a few states.
There are two significant benefits under the purchasing model:
- Once the system pays for itself in savings, you get free energy for the remainder of the equipment’s useful life (well, except for minimal maintenance); and
- If your utility allows net metering, you can sell electricity back to the grid, or, at least, wipe out some of your utility bill each month.
What everyone should know about EEMs.
Jason Payne
At the ACI National Conference in Baltimore, MD, last week, I sat down with Jason Payne and picked his brain about Energy Efficient Mortgages (EEMs). Jason founded EEM Training and has been instrumental in promoting EEMs to lenders, appraisers, real estate agents and energy efficiency professionals.
You may have read my last post about the Save Act, which would require federal lending agencies to factor in energy costs during the underwriting process for home mortgage loans. EEMs achieve a similar result, just without the legislative mandate.
So, what are EEMs?
Much like a traditional mortgage loan, an EEM may be used to purchase a home or to refinance an existing home. EEMs differ from traditional mortgage loans in that you can receive funds above and beyond what you would normally qualify for, so long as the additional money received is spent on energy efficiency–either purchasing retrofit upgrades or buying an efficient home over an energy hog.
Even though your mortgage payment goes up, since you’ve increased the loan principal, your total monthly out-of-pocket expenses decrease. So, as long as the monthly energy savings are greater than the increase in mortgage payments, both the homeowner and lender win.
Example of how EEMs work.
Assume you’ve budgeted $1500 per month to put towards a mortgage and purchasing energy. You’ve got two options:
- Option 1: Stay the course and pay $1250 for your mortgage and $250 for energy bills; or
- Option 2: Refinance and tack on $10,000 that gets folded back into the mortgage. Your monthly mortgage payment goes up to $1350 but your utility bills fall to $125, resulting in a $1475 monthly expenditure.
Option 2 is the better course of action, since you’re paying less per month and getting a better house (i.e. one that is more efficient, has better air quality, is more comfortable, etc.).
This example assumes that you can refinance at the same or a lower interest rate then you’re currently paying. For the next few years, though, interest rates will likely remain low, so there’s a decent chance of this example coming to fruition.
Qualifying for an EEM.
The good news is that your income doesn’t factor into qualifying for the additional funds that will go towards energy efficiency improvements. Of course, you’ll still need to meet the debt-to-income ratio for the standard mortgage loan, but not for the dollars allocated to achieving energy efficiency. This is because your ability to repay the additional principal and interest comes from the predicted energy savings, not from your income.
Although income won’t hold you back in getting an EEM, there are several steps to follow:
- Find a lender that offers EEMs, which can be difficult;
- Qualify for a standard mortgage (or refinance);
- Find a Home Energy Rating System Rater (HERS Rater) experienced with EEMs;
- The HERS Rater performs an energy audit on the home and calculates a cost-effective energy package (meaning the cost of installing the energy package is less than the present value of the savings of the useful life of the energy improvement);
- The HERS Rater writes a report acceptable to the U.S. Department of Housing and Urban Development (HUD) that will be used in the underwriting process.
If the lender is satisfied that the energy savings will exceed the increase in mortgage payments, the loan should be granted.
What’s the response from lenders?
Energy typically represents the second largest carrying cost for homeowners, and private lenders are beginning to see an opportunity here. A homeowner who purchases less energy has more income to allocate to other expenses, like a mortgage. This means lenders can get a larger slice of a homeowner’s income without taking on greater risk. Additionally, EEMs represent a way for a lending institution to differentiate themselves in a crowded market. Who wouldn’t want to work with a lender who can get you into a better house for less money? Thus, we’re seeing some lenders enter the EEM market, but they are few and far between at this point.
For those that do offer EEMs, a sticking point has been mortgage brokers and sales agents who work on commission. They don’t want to hold up closing, even for a week. Getting an energy audit, calculating savings, and preparing the report for the lender can take the HERS Rater a few weeks. For the agent, this delay is not justified by the marginal increase in loan principal, and, thus, his/her commission. A key step for the growth of the EEM market, then, is for lenders to develop a better incentive structure for the sales agents and brokers. But, the looming question remains: Is there enough profit in the EEM for both the lender and the sales agent to justify the delay?
Jason Payne is currently building a website that will list lenders, appraisers, HERS Raters and real estate agents who work with EEMs. You’ll be able to search a directory and find a knowledgeable EEM team in your area. Be sure to check out www.eempartners.com in the near future.
The SAVE Act: Sensible Accounting to Value Energy
Current homeowners will also be able to bundle the cost of energy efficiency upgrades into their home mortgages. Under the SAVE Act, federal lenders will have to consider the net present value of home performance projects when calculating the loan-to-value ratio, another key metric that helps determine the loan amount.
Many Benefits
Proponents of the Save Act cite job creation (83,000 jobs over 5-7 years) and reducing dependence on foreign energy as primary benefits. These would obviously be fantastic outcomes, but this bill is worth enacting simply for the benefits it bestows on homeowners, such as:
- Nicer or less expensive homes. With less money going to the utilities each month, you can afford a more valuable home or simply repay your mortgage faster.
- More comfortable homes. Retrofit homes typically have less than a 2 degree temperature differential from room to room, so you can avoid having hot rooms and cold rooms.
- Healthier homes. Generally, it’s preferable to control the quantity and quality of air entering your home through air sealing and mechanical ventilation, as opposed to filtering air through the old insulation and dead squirrels in your walls.
- Greater financial security. A 50% increase in the price of oil hurts less when you’ve reduced your energy consumption by 50%.
Sounds good, right? What’s the holdup?
I recently attended a presentation held by the Leading Builders of America Association and the Institute for Market Transformation where the two primary criticisms against the bill were highlighted:
- Congress is nervous about touching anything involving the underwriting process given the fragile housing market.
- The recent recession has reignited the debates on federalism and Keynesian economics with groups like the Tea Party speaking out against governmental interference in markets.
These arguments should not stand in the way of the Save Act becoming law. First, the bill would not inhibit the growth of the housing market, since homeowners will qualify for more money when purchasing efficient homes. Remember, federal lending agencies will be instructed to raise the debt-to-equity ratio for loans used to purchase efficient homes.
With regard to the Washington intermingling with markets, it’s already happened. Federal agencies are the only game in town, guaranteeing over 90% of all new residential loans. So, if we’re going to address efficiency through the underwriting process, which seems to make sense, we have to look to the Federal Government before turning to the private market.
Austin’s Energy Conservation Audit and Disclosure Ordinance
Austin Texas
Two weeks ago I attended the annual Residential Energy Services Network (RESNET) Conference in Austin, TX. In addition to attending lectures by some of the brightest minds in building science and checking out a late night James McMurtry concert at the Continental Club, I got to learn first-hand about “Austin’s Energy Conservation Audit and Disclosure Ordinance”–the first of its kind in the U.S.
About the Ordinance
The Ordinance requires a person selling a single family home (or an apartment building with fewer than 4 units) to get an energy audit and provide a copy of the report to all prospective purchasers. Homes built within the last 10 years are exempt. On the other hand, owners of large apartment buildings have to get an audit, irrespective of intent to sell, and post the report within the building to alert renters and prospective tenants of the building’s energy use.
The primary goal behind the Ordinance is to give home buyers and renters complete information, so they can purchase (or rent) the best possible house (i.e. one that is efficient, comfortable and healthy). On the community level, though, the Ordinance is important as it gets the market thinking about ongoing energy use as part of a property’s value.
Opposition by Real Estate Agents
Such disclosure ordinances have been widely opposed by real estate agents, as they make it more difficult to sell older, less efficient homes. Decreasing the pool of “attractive” homes leaves fewer opportunities for agents to turn a quick profit.
Opposition by real estate agents, though, is insignificant when compared with the importance of protecting buyers from getting into homes they can’t afford to carry from month to month. Just as price and school districts are often guiding requirements in a home buyer’s search, so to should the ability to heat and cool the home throughout the year. Before making appointments to view homes, buyers should know the energy efficiency of the home compared to its price, since they may be required to do a retrofit or pay significant utility bills. Early notice would allow buyers to pass on all homes at the top of their price range that are energy hogs, which would sink their monthly budgets.
Notions of Fairness
But is it unfair to require a seller to pay for the audit when it’s the buyer who will benefit? Why not treat the audit like a home inspection? In the absence of an audit subsidy by a state or utility-sponsored program, the seller is best positioned to shoulder the cost of the audit. Typically running $300 to $500, the price of an audit is fairly insignificant compared to the total sale price of the home. But to a prospective buyer using energy efficiency as a guiding criterion for their home search, it would be too expensive to purchase an audit for each home they want visit. Thus, the seller is best positioned to pay for the audit.
Another Arrow for Your Quiver
The key point to take away from this post is that disclosure ordinances are yet another tool that communities can use to reduce energy consumption. They should be considered alongside other mechanisms including:
- Rebates for Efficiency Upgrades
- Subsidized Audits
- Tax Incentives
- Building Codes
- Contractor Training
- Public Education and Outreach
For more information, check out www.imt.org, which is a great resource for disclosure ordinances.
“Cut Energy Bills at Home Act,” A.K.A. Proposed Section 25E of the Internal Revenue Code of 1986
Overview
Section 25E, introduced to the Senate by Senator Olympia Snowe on November 18, 2011, would provide a federal income tax credit for individuals who make energy efficiency upgrades to their primary residences.
Tax Credits vs. Deductions
A deduction reduces your amount of taxable income dollar for dollar. A credit, on the other hand, reduces your tax liability dollar for dollar, so it’s preferable to a deduction. A dollar saved is a dollar earned!
How much would you get under proposed Section 25E?
The proposed credit amount is tied to energy savings achieved through a home energy retrofit project. To qualify for the credit, you must get at least a 20% reduction in your home energy. The base amount for a 20% is a $2000 tax credit, and an extra $500 for every additional 5% reduction.
20% reduction = $2000 credit
25% reduction = $2500 credit
30% reduction = $3000 credit
And so on . . .
The tax credit is capped at either $5,000 or 30% of the total cost of the energy efficiency work.
No Double Dipping Allowed!
If you receive a Section 25E credit one year, you cannot also get a credit for installing renewable energy (such as solar or geothermal) or a deduction for purchasing an energy efficient appliance. Don’t forget to reduce your home’s tax basis by the amount of the credit.
What types of projects are covered?
Qualifying projects include improvements that will last longer than 5 years, such as:
The cost of an energy audit, which typically ranges from $300-$500, can be baked into the price of the upgrade.
However, specifically excluded are:
- Renovations that increase the size of your home; and
- Improvements to your pool or hot tub.
Furthermore, the work must be done by an “approved contractor,” which is someone with a BPI or RESNET certification. Your BPI or RESNET certified professional has to first calculate the cost of “heating, cooling, hot water and permanent lighting” over the course of the year prior to the work. An energy audit is typically performed to determine the upgrades that will deliver the most bang for your buck. After the retrofit is complete, a test must be performed to determine the level of energy efficiency achieved.
Example:
Flora lives in Portland, ME and owns a landscaping business. She makes $50,000 per year, pays $1,500 in interest per year for her home mortgage, and has a very leaky house. After being cold for too long and paying crazy high heating bills, she decides to get an energy audit.
Auditor Sammy comes and inspects the home with his infrared camera and performs a blower door test, determining that the home’s energy consumption could be reduced by 40% with some air sealing and additional insulation. Contractor Sandra performs the work, totaling $6000, which Flora pays out of pocket.
Here’s what Flora’s taxes are going to look like . . .
Gross Income $50,000
Mortgage Interest - $1,500
Adjusted Gross Income = $48,500
Tax Rate x $4,750 plus 25% of amount over $34,500
Tax Liability = $8,250
Tax Credit - $1,800
Total Tax Liability = $6,450
So how did we determine the Section 25E tax credit? The 40% reduction yields a $4,000 credit. Remember, though, that the credit is capped at 30% of the cost of the project. In this case, Sandra’s work cost $6,000 multiplied by 30% equals $1,800. Thus, the energy efficiency project after the credit cost Flora $4,200.
Here’s what you can do if you want to support Section 25e?
- Write to your congressional representatives and tell them you support the bill.
- Visit Efficiency First and add your support.
What does surfing have to do with LIHEAP?
Energy Efficiency, LIHEAP and Surfing
My friend Andy recently gave me a copy of Yvon Chouinard’s, “Let my People Go Surfing.” It’s a great account of how a “dirtbag” rock climber created a great mid-sized company that serves as a model for sustainable growth. His company is called Patagonia, and in addition to making great gear, they also contribute 1% of revenue or 10% of profits (whichever is more) to environmental protection. Working for Patagonia isn’t too shabby either; they have a leading in-house daycare at their offices, a cafeteria that serves organic food, and a policy that lets employees go surfing whenever the surf is up–so long as they get their work done.
A key factor to Patagonia’s success, Yvon contends, is that he and the team make business decisions on the assumption that Patagonia will be around for the next 100 years. Don’t take actions that are easy today but that will put you in a bind down the road.
Now back to energy. In Maine, and many other cold states, there’s been a buzz lately
about cuts to the Low Income Home Energy Assistance Program (LIHEAP). Folks like Stephen King and the Lerner Foundation have made significant contributions to offset the $30 million budget cuts. These contributions are huge, and the people of Maine are very appreciative.
However, I can’t help but wish charitable donations could be used to bring about greater good. You know, get the most bang for your buck. When we start thinking long-term, like Yvon and the folks at Patagonia, we have to realize that next winter will be cold, we’re still going to need heating oil, and the economy isn’t going to miraculously turn around overnight. We all want fellow Mainers to stay warm, so we need to find a way to get ahead!
Contrary to Governor Paul LePage’s view, we need to invest in Efficiency Maine and low-income weatherization programs. Rather than buying oil year in and year out for LIHEAP recipients, let’s retrofit their homes. We can air seal their walls, roofs, floors and ducts while also insulating. The money saved on heating will pay for the work in about 4 to 6 years.
Thereafter, we’re going to be buying a lot less heating oil every year (my retrofit project led to a 40% reduction in heating expenses). If it seems like a simple investment, it is.
