Dissertation, PhD

Curricula Business Administration

INNOVATIVE FINANCING MODEL
FOR ENERGY EFFICIENCY AND
RENEWABLE DEPLOYMENT:
PACE, Property Assessed Clean Energy

Advisor:
Gian Luca GREGORI PhD candidate:
Nadia AMELI
Advisor:
Daniel M. KAMMEN

X cycle
http://www.dimoi.univpm.it/ http://rael.berkeley.edu/

Outline

Energy, the big picture

PACE - Property Assessed Clean Energy

Papers:

1. The Linkage Between Income Distribution and Clean Energy
Investments: Addressing Financing Cost

2. Financing Schemes Toward Grid Parity Convergence

3. Supporting Schemes VS Effectiveness, How Well Are We Doing?


“A World Changing Ideas: 20 Ways to Build a
Cleaner, Healthier, Smarter World”*

*Mims, et. al. 2009, Scientific American

“What we’re really seeing is a transition in how we
think about buying energy goods and services”*

*Daniel M. Kammen

Key messages:
New tools needed to meet energy cost containment, security and climate targets

PACE - Property Assessed Clean Energy financing provides a new opportunity

Energy services are less expensive if the full energy system is assessed, not
single technologies


Why energy matters

• Climate Targets Europe - Climate Package “20-20-20”

• Energy import Italy’s primary energy import
approximately 87.7% (2009)
Energy cost* (millions €)

51.7 Billion €
Energy import cost/GDP
3.3%

* Energy cost considering 2010 prices
Source: Unione Petroliera, Data Book 2011


What we can do
http://rael.berkeley.edu/financing-italy-IV
Supporting schemes and policies

Feed in Tariff

Tax Credit

Clean Energy Financing Disctricts

Designing user-friendly tool:
Italian Calculator

Help homeowners understand the
financial impacts of financing solar
PV, solar thermal, and energy
efficiency.


Paper 1

THE LINKAGE BETWEEN INCOME
DISTRIBUTION AND CLEAN ENERGY
INVESTMENTS: ADDRESSING FINANCING COST

Barriers to Energy Investments:

Lack of information (Sanstand e Howarth, 1994)
Uncertainity about the energy savings
Split incentives
Transaction cost
High upfront cost

… that explains “The Energy Efficiency Gap”


Distribution of wealth in Italy

80% of taxpayers receive
Income distribution 50% of national income Lorenz Curve and Gini index

Taxpayers Owner taxpayers

Income range Average
Average Owner
[€] Taxpayers owner
taxpayer taxpayers
number taxpayer
income number
income
< 10'000 € 14.112.749 4.656 6.210.707 4.946
10'000 - 26'000 18.914.233 17.458 11.299.196 17.820

26'000 - 55'000 6.970.245 34.349 5.460.127 34.631
55'000 - 75'000 734.919 63.689 623.904 63.737
> 75'000 790.908 129.973 696.533 130.249
Total 41.523.054 24.290.467

72% of owner taxpayers receive
42% of national income


Comparison Financing Options
5 year unsecured personal loan at 8.97% (average interest rate applied
by 20 banks)

10 year financing banks solution for solar PV and energy efficiency at
7.01% (average interest rate applied by 10 banks which provided specific
energy package).

20 year tax assessment PACE program

Profitability
Difference from best case
Financing options NPV Index
[NPV cash
flows/Investment] NPV PI
PACE program 8,474 € 0.53 - -
Unsecured personal loan 7,364 € 0.46 1,110 € 0.07
Bank package for Solar
PV and EE 7,561 € 0.47 913 € 0.06


Main conclusions

Financing barriers are particularly relevant for low-income households

Inequality is reasonably high in Italy

Typical energy package (16,000 €) upfront cost represents a huge
deterrent considering the average income pre capita is 18,900 € (taxpayer)
and 22,700 € (owner taxpayer)

PACE program could represent the most cost-effective way to finance
energy improvements, as when it is well-designed it ensures higher NPV
than the other market options


Paper 2

FINANCING SCHEMES TOWARD GRID
PARITY CONVERGENCE

GRID PARITY … the point where the cost of PV
Goal: generated electricity EQUALS the cost
TARGET
of electricity purchased from the grid

… economic assessment that includes all
Method: Levelized Cost of cost categories, i.e. investment, cost of
Electricity (LCOE) financing, operations and maintenance


Levelized Cost of Energy Method

CAPEX + NPV (OPEX ) CAPEX, capital expenditure
LCOE = OPEX, operations and maintenance costs
NPV ( EP ) EP, electricity produced

This formula can be thought as:

NPC, net project cost
LP AO RV LP, loan payment
NPC + ∑n =1 + ∑n =1
N N
−
(1 + d r ) (1 + d r ) (1 + d r ) AO, annual operation cost
LCOE =
 N  E n ∗ (1 − d s ) n   RV, residual value
 
∑n =1   En, net-energy output first year
  (1 + d r )
n
 
 dr, discount rate
ds, system degradation rate


LCOE Break-down

Gap accounts 0.114 €/kWh Financial factors represent
+42% above the target 30% current LCOE

0,30 0,30

0,25 0,25

0,20 0,20

Financing cost
€/k W h

€/kW h
System cost 0,15 0,15
O&M costs
Target
Balance of system
0,10 0,10
Module cost

0,05 0,05

(Rocky Mountain Institute
0,00 and EPIA 2010)
0,00
Target LCOE Current LCOE 1 2


LCOE projections 2020
2010 2012 2014 2016 2018 2020
0,40 0,40

EPIA Max
0,35 0,35
EPIA Min
0,30 0,30 Taking in place
+3%
0,25 0,25 +2%
PACE policy results
0,20 0,20 PACE
in LCOE average
LCOE annual reduction of
0,15 0,15
6,45%
0,10 0,10

0,05 0,05

0,00 0,00
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

• photovoltaic modules, learning factor of 20%, first doubling of cumulative
installation (Breyer and Gerlach, 2010). Additional learning factor of 20% will be
Assumptions take into account for the years 2015-2020 (IEA, 2010)
• inverter, learning factor of 20% (EPIA 2010)
• structural components and operating cost, reduction cost of 30% (RMI 2010)
• financing cost, PACE program implementation has taken into account


PACE VS Feed In Tariff

• Short term: grid parity achievement

• Long term: sustainable policy scheme
Feed in Tariff cost: 4.9 billion €/year according to GSE meter
(Updated October 2011)

• Primo Conto Energia 0,09 billion €/year
• Secondo Conto Energia 3 billion €/year
• Terzo Conto Energia 0,7 billion €/year
• Quarto Conto Energia 1,03 billion €/year
Cap 6,5 billion €/year
(Department of Economic Development)

What is going to happen in 2012/2013?
We do not know!

Main conclusions

The grid parity achievement requires a reduction of the current
LCOE about 0.114 €/kWh corresponding to 42% above the target

The variability of financial factors is shown to have a significant
effect on the LCOE with an average annual reduction of 6,45%
(PACE implementation)

The break-even point for residential projects will be achieved as
early as 2015/2016

PACE policy will enable to keep the current PV investment ratio,
without other economic schemes in place (i.e. FiT)


Paper 3
SUPPORTING SCHEMES VS EFFECTIVENESS,
HOW WELL ARE WE DOING?
Our Team


Main issues

• Realized investment cost - Importance of restriction of cost per unit

GAP: Average application and price list/estimated cost (average +25/30%)

Ex. Windows replacement applications received ~ average value 610 €/m2
estimated cost ~ 233- 440 €/m2

Heating system applications received ~ average value 12.000 €
estimated cost ~ 5.000 €

• Economic impact on National Budget


Economic impact on National Budget of a 55%
tax credit, period 2007-2010
Discounted values to 2010, annual cash flows - Millions € Revenues
2000
Expenditures
Balance
1500

1000

500

0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
-500

• IRPEF 62% -1000
(Revenues from income taxes)
• IVA 22% -1500

(Revenues from consumption taxes)
• IRES 7% Revenues
(Revenues from companies taxes) 5,5 Billions €
• Other 9% Debit balance
(Revenues from extra income)
-1,8 Billion €
• No collected tax by deduction 81% Expenditures
• No collected tax by bill savings 19% -7,3 Billions €

Source: ENEA July 2010


Economic impact on National Budget of a 55%
tax credit period 2007-2013
2000
Discounted values to 2010, annual cash flows - Millions € Revenues
1500 Expenditures
Balance
1000

500

0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
-500

-1000

-1500

• IRPEF 62%
-2000
(Revenues from income taxes)
• IVA 22% -2500

• Other 9% Debit balance
-2,8 Billion €
• No collected tax by bill savings 18% -12,467 Billions €



Economic impact on National Budget of PACE
policy period 2007-2013 (PACE implementation 2011)
Discounted values to 2010, annual cash flows - Millions € 2000
Revenues
1500 Expenditures
Balance

1000

500

0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
-500
• IRPEF 62%
(Revenues from income taxes) -1000

• IVA 22%
-1500
• Other 9% Positive Balance
1,5 Billion €
• No collected tax by bill savings 18% -8 Billions €



Main conclusions

Main issues related to Tax Credit of 55% were:
1. Realized investment cost
2. Negative economic impact of national budget

Scenarios modeled (taking into account of tax credit 2007-2010):
1. 2007-2013 Tax credit of 55%: - 2,8 B euro
2. 2007-2013 PACE implementation: + 1,5 B euro

Policy intervention based on PACE would represent a sustainable
supporting scheme in the long term


Opportunities to Implement PACE in Italy

The rate of innovation in clean energy in the EU has not kept pace
with initial goals, so new tools are needed

PACE provides a logical and analytically simple new tool

PACE integrates key externalities to make clean energy financing
more attractive:

- It builds clean energy capital in property value

- It forces an integration of energy efficiency and renewable
energy planning


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