Burn Some Daylight

Two things matter in developing PV--the system design, and the cap stack. 

Luigi Sciabarrasi reminded me again of this fact the other day when he pointed out that most public companies are judged by their book earnings, and if the after tax value of their pv power system has a greater net present value than the book value, the system has an effect beyond merely saving the planet.

Now, I am not a tax accountant, but I needed to understand if this book vs tax thing was a headwind or a tailwind in adopting this new technology.  Turns out it is a nice little tailwind--but you get your tax advice from your accountant, not your pv power developer.

The difference is basically the early year benefits of the 5 year MACRS versus the 25 year straight line w/ $0 salvage value.  I didn't include a residual system value in this analysis, but it would be the same for either option.

I am the first to counsel that you don't do PV for the tax benefits.  We have larger problems to fix.  But it is comforting to know that these systems are CFO-friendly.

Grazie mille, Luigi!

Looked over a retail development project last week--pv adds real value by reducing operating costs.

The strategy is to knock out the parking lot lighting load [house meter] with PV.  In addition to getting a fourteen to sixteen IRR--accretive on a six cap deal--the PV array keeps the roof cooler--lowering AC demand, and provides a nice pop at the time of sale.

Key issue--can the owner can use the 30% ITC and the five year MACRS?  If not, we structure the deal so that the owner buys the power only, and then has the option to buy the system when the tax benefits have been amortized--year six to eight. 

Since these projects are typically on a TOU demand meter--summer peak pricing is close to 3x night and weekend pricing--you tweak the system to maximize value rather than output.

These systems can be wrapped up into the overall construction financing, increasing your returns.

Not tested yet is whether tenants on longer term leases will want PV to power their operations.  If the lease is over ten years, and you can use the tax bennies, the first conclusion is that it may make sense--free power after year six or eight, and you insulate yourself from peak demand price shock.

Had a meeting with an office building developer yesterday and we reviewed a migration path for renewables on their project.

They are merchant builders--they permit, manage construction risk, and then sell--so the long term benefits of pv, and the multiplier effect on residual value, is not compelling for them.  They focus on first costs, not life cycle costs.

"PV ready" was my recommendation to them.  PV ready is defined as:

• the future array area is mapped out, and an array is sized based on general performance data.
• the future inverter location and point of grid interconnection is selected.
• Provide DC only conduits from the array location to the inverter location,
• Provide AC conduits from the inverter connection to the point of interconnection
• The bus at the point of interconnection is sized per NEC for backfeeding the PV power production, and
• We certify the project as "PV Ready" and stand by to reserve the California Performance Based Incentive, and design, permit and provision the system--all the owner needs to say is GO.

When this builder sells the property, their brokers can advertise it as "PV Ready", and the new owner, who will be more focused on life-cycle costs, can reduce their carbon footprint and operating costs through a PV power system--the conduit will already be there.  Now that's thinking ahead.  There is a value to the builder of such thinking ahead.  This property is worth more than one that isn't PV ready--more than the incidental cost of installing the conduits and getting the certification.

PV adoption among real estate professionals is reaching new highs.  Hedging higher energy costs, easing the challenge of greening their bottom line, and straight-forward financial smarts are all resulting in greater demand for PV in new and retrofitted buildings.

"We believe that energy costs will continue to escalate rapidly, and addressing these issues now will help mitigate the cost impacts to our operations"

--Sanford Smith, Toyota Motor Sales USA

Green Buildings Research White Paper [October 07] tallied over 2500 responses to find the current industry stance on green building.

Sure, the capital costs can be slightly more, but when you look at the total cost of the operation of a building, most of the features added make solid economic sense.  Add to that the perceived productivity increases from more-satisfied employees or tenants and you have a winning combination."

--Jim Petsche, Nike Inc. 

The next step?  Senior management buy-in--seeing the costs from a life-cycle perspective, not a first cost perspective.

is designing buildings that engage the environment in a way that dramatically reduces or eliminates the need for fossil fuels.

Buildings use 48% of total annual energy production--40% for building operations and 8% for building construction. 

Building operations account for 43% of total annual greenhouse gas emissions.

75% of all electricity produced at power plants in the US goes to operate buildings.

Architecture 2030 issued the 2030 Challenge--reducing the fossil fuel energy consumption for all new and renovated buildings by 50%, progressing to carbon neutral by 2030.

Sounds like a perfect job for PV.