Burn Some Daylight

The key to commercial and utility scale solar is finding feasible projects and successfully capitalizing them.  I am the instructor for a UC Berkeley Extension course this fall, taught at the downtown campus, that has precisely this course objective.

Click here for the current draft of the syllabus.  The course commences with a low gear flyby of current technology and then dives into demand, capitalization and design of commercial PV systems.  The essence of the course is a team-based exercise in investment grade due diligence for a solar photovoltaic [PV] investment.  The capstone of the course is the preparation of your team's investment grade feasibility study for presentation to your classmates and a professional jury on 7NOV09.

These are the texts I use.

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Intent is to build a foundation for getting commercial solar projects identified, quickly selecting the feasible ones, and putting them on a track to executing a deal.  Planning and Installing is exhaustive enough that you can really dive in, or just refer to it when needed.  I believe this is the best current overview and reference on PV--it covers what is happening in Europe and the world, for PV is a globally applicable technology.  Strategic Selling was added this semester, because when you do a feasibility study, you want it to lead to a project, and the study isn't going to do it on its own.

Cooperate and graduate is a big part of the course--you will learn a great deal from your fellow classmates, and you are expected to contribute your experience and perspective as well.  In addition, we are fortunate enough to have some great guest lecturers on several evenings.

My perspective is that of a seasoned solar developer with over twenty years of commercial real estate investment and development experience here in Northern California.

Here are a couple of slides from the course:

I hope you can join me for this course.  First session is Saturday, 26 September from 9A to 5P, then five Tuesday evenings from 630P to 930P, capping off with Presentation Day on Saturday, 7NOV from 9A to 3P with a debrief afterward at the Thirsty Bear.

Click here for enrollment information.

I started responding to some great questions asked by a Stanford MBA student preparing for a class presentation on emerging business demand.    The questions prompted answers that I thought would be most productive noted as an essay on PV, commercial real estate, and where demand is today.

What do you think the biggest business need is in relation to the installation of solar modules on new and existing buildings?

Finding a home for the 5 gigawatts of modules being produced this year that aren't contracted for.  This twenty eight times what California installed in 2008.  This oversupply is a massive opportunity to add value to real estate if you execute correctly.

Module prices have dropped 40% this year, and manufacturers are experiencing rising break-even percentages as prices drop, forcing them to run their factories at higher utilization rates, putting a collar on the amount produced--and setting the conditions for a price war.  Net installed price is about a wash--because lower California incentives just about equal the price drop in modules. 

We are at grid parity in the markets I work in, the need is to recruit users who want to insulate themselves from utility company rate shock and add value to their real estate.

Taking a couple of steps back from this over-supply condition, you have a more fundamental need. 

Solar is part of an overall approach of designing and developing real estate to be a net-zero energy user.  Form follows Energy.  PV is a harvesting technology and is best used as the third energy strategy you deploy.  For new buildings, site planning to work with, rather than against the elements, is the most important thing you can do.  Minimize the amount of sun that hits western glazing, for example.

Intervention, also called passive solar design--daylighting, shading, night flushing of heat trapped inside a building, landscaping to minimize heat gain [in California] or heat loss [northern Europe] is the second strategy we utilize.  Keeping heat out of a building means you don't need to pay to remove it.

We deploy PV as an active harvesting technique only after we are satisfied we have maximized the first two phases.  A general rule of thumb is that it makes sense on 65% of flat commercial rooftops and 20% of residential rooftops.

How big does the building have to be for solar panels to be used efficiently? 

Solar is a modular technology--it scales very easily--so it scales well with the size of the building.  You don't need a big building to make solar work for you.  More relevant than the size of the building is the size of the harvestable area, whether it be rooftops, parking, or open area. 

If you are trying to balance energy consumption w onsite generation, the intensity of the energy used by the building user, and when it is demanded, is important.  You size the system to offset a portion of the cost-based energy demand of the building.  A typical solar system will produce 10 to 15kWh/SF per year, and office buildings use roughly 15/20kWh/SF/yr--a rough rule of thumb is a 1 to 1 offset on square footage--an 80,000SF office building for general office use would need 80,000SF of harvestable area to zero out its electrical use. 

How much sun in the year is needed (or what locations in the country make solar module installations viable)?

The answer depends how much you pay for electricity, and what incentives are provided to stimulate demand.

PV has been proven in Germany as a means of obtaining energy independence--the climate comparable in the USA is Nome, Alaska.  German solar incentives are much higher to stimulate demand, their grid prices are higher, and much of their natural gas is imported from Russia.

In California, electricity from a solar generation asset is now cheaper than utility grid power in the higher residential tiers, and for the A1 and A-6 Time of Use [TOU] tariffs where we can spin the meter backward at the higher $/kWh rate and offtake at a lower nights and weekend rate [think parking lot lighting].

From a big picture perspective, anywhere in the red or orange portions of the solar atlas to the left are feasible areas for solar development in the Western USA.

PV is distributed generation, so it fits where there is demand, high energy prices, and incentives.  From the National Renewable Energy Laboratory:

The northeast and California are great locations due to high energy prices, and Florida and the Southwest due to high insolation, and summer air conditioning loads.

Does it make more sense to use solar panels on certain types of buildings (e.g. on retail vs industrial vs residential)?

The key here is net metering--you want to offset the amount of energy used onsite.  Net metering is based on the value of the kWh generated--kWh generated by the asset during peak period times are worth three times what a kWh used at night or weekends costs.  To maximize the value of the system under a net metering scheme, you maximize how much surplus you generate during peak times, and time shift as much demand into off-peak times.  Parking lot lighting loads are a prime example.

Demand is generated by the user--and some users value the benefit of solar more than others:

This chart shows universities and corporate real estate users are adopting PV as a component of their real estate faster than other types of users.  Developers have a first-cost problem--PV is basically a pre-paid, tax incentivized power contract.  Reducing future operating expense is not as attractive as reducing first costs.

Where it makes tremendous sense for developers is to make the building PV Ready--installing the conduits and configuring the electrical system for a PV system that may be installed by a future user.  The first cost is minimal, and the fact that the property is set up to accept a system can be a key feature at the time of sale or leasing.

How much does installing solar panels help with getting LEED qualifications?

It can help a lot if you are pursuing LEED Core and Shell [LEED-CS], and only a little if you are pursuing LEED Commercial Interiors [>50% of total energy use].    Core and shell energy demands are only for the building shell and services such as elevators, and you get credit for reducing heat islands and introducing innovative technologies. 

We can get up to 50% of LEED certification score on LEED-CS.  LEED CI requires 50% of all energy used to be renewable, and I find it harder to score in multiple areas since the criteria is only energy use and is not concerned with sustainable sites.

Are cities actually requiring solar panel installation or how is demand being driven for this product?  Any idea how you would measure demand or how much demand there is?

Demand is driven by the user.  Cities are beginning to require LEED certification and in some instances, will expedite permitting or reduce permit fees for solar project installations.  Net zero energy real estate requirements are still in the discussion stage and not a permitting requirement as yet.

Demand is driven primarily by the ability to monetize the tax attributes of a system [~52 to 54% of cost] + the ability to lock in power costs competitive with the market, and secondarily by using PV as a way to architecturally brand your real estate. 

McKinsey had a tough time estimating demand, but reported that PV's greenhouse gas reduction abatement potential exhibited the widest range of outcomes.  Depending on cost compression and learning rates for production and installation--demand could be significant.

And we are getting material amounts of both cost compression and learning rates today.

Carbon cap & trade and Feed-in Tariff programs add to demand--I have a hard time throwing a number at this now--but it adds to the snowball effect.

Who currently provides financing to developers for this?

30% of the system installed cost for commercial projects is covered by a cash grant from the US Treasury.  The state of California has a performance based incentive that covers about 15% of the cost.  The remainder of project finance requirement is met via cash, equipment leasing firms, or debt.

Alternatively, there are financial companies that own the systems and just sell the power on a kWh basis, called power purchase agreements or PPA's.  We do not see much of this energy service model being utilized at present, as it depends heavily on the California performance based incentive to cover 25% or more of the system installed cost to meet investment hurdle rates, and incentive levels have dropped below this, to about 15% of installed costs.

The Treasury Cash Grant is paid at the time of the system's Commercial Operation Date, but vests similar to a tax credit over five years at a rate of 20% per year.  Should the system change ownership during that five year period, the cash grant is recaptured.   You should plan to own the generation asset until your tax benefits fully vest.

How much financing do they provide?  At what rates and deal terms?  Is there a huge shortage of financing currently? 

The Treasury cash grant program has met the demand for tax equity through the end of 2010.  Project financing depends on the corporate user's credit.  PPA financing is looking at mid-teens IRRs--most projects do not meet this hurdle due to lower California incentives.

Sale leaseback financing is starting to be offered again, after a dry period of nine months--since October 2008.  The off-taker needs to be a ratable credit, however.

The other option is to include the net costs in your renovation or new construction financing.  Since there is very little new construction financing at any price available at present, this may not be a viable option.

About how much does it cost/SF to buy solar panels? 

Net system installed costs, after the Cash Grant, are $40 to $60 PSF.  Integrating this into the architecture allows you to use the system as a UV and rain screen, which should save you about $25/PSF you would have spent for cladding or scrim material.

What tax benefits do developers get from installing solar panels?

At this point--we find users with a sustainable goal--think universities and Google--are the most attracted to onsite solar generation assets.  As is true with most parts of the energy market, there are very attractive tax benefits for those who own the systems during the vesting period.  These benefits include:

• 30% Investment Tax Credit or Cash Grant through 2010
• 5 year MACRS depreciation
• no state property taxes on the value of the system

Over the twenty five year life of one of our systems, they are net present value positive, reduce a user's carbon footprint, and help brand the real estate--for PV puts the sizzle in sustainability.  It is a visual brand of doing the right thing for the environment, for the company, and for the place we leave behind.