Burn Some Daylight

The California Solar Initiative has been very successful in inducing demand for distributed solar while preventing the herky-jerk of incentives starting then stopping customer demand [see: Spain].  There is a glide path—but we are approaching a big step down, and we are working hard to get our partners positioned appropriately. 

The big idea behind the CSI was to lay out a ten year glide path of incentives that decreased in step with projected system costs.

Step 6 down to Step 7 is percentage-wise the biggest decrement in the glide path, and it is difficult to see where we are going to be able to take ten percent out of the cost stack to restore equilibrium—or recruit investors at a 75bps lower return.

If we look at what has happened historically, you get an idea of what the next several months are likely to look like—a rush of epic proportions to get your claim reservation form in when we get close to the end of this step.  The vertical bars represent reservations made per month.  Note for Step 5 the monthly reservations volume tripled as the end neared.  This analysis was done by the good people at Santa Clara County [PBI numbers are governmental, not commercial] and says it all:

Here is where we presently stand:

We are encouraging all of our site hosts to move with us now.  For most of our partners, this next step down is a mid six figure loss on the value of their investment—easily preventable by Doing It Now.

Maintaining your LEED AP credential is an idea whose time has come, and starting this year, you need to earn 30 CE hours every two years to maintain your credential.

My Investment Solar course, taught at UC Berkeley Extension’s Downtown Center [425 Market Street, SF] is now accredited for 30 CE hours.  If you are a LEED AP, take the course and you are good for the next two years!

Next class starts 13MAR2010, so enroll now—space is limited.

PACE—Property Assessed Clean Energy Financing district—is going live in San Francisco on 1MAR.  Green Finance SF will provide $150M in bond capacity to help property owners finance making their real estate more energy efficient and increasing property value by lowering utility costs via onsite generation.  Click here for more information about how PACE works.

This is the perfect way to cover the upfront cost of energy efficiency and renewable energy, and has spread nationwide—seventeen states in the last 18 months have authorized similar programs.  Scientific American calls it A World Changing Idea.  Harvard Business Review identifies it as 2010’s Breakthrough Idea Number 5 [pdf here]. 

Cost of capital [aka assessment rate] hasn’t been set yet—but probably not too far off of Sonoma County’s Energy Independence Program’s [SCEIP]  seven percent [deductible as a property tax expense]  assessment rate with a 15 or 20 year term.  Sonoma allows you to borrow up to 50% of the assessed value of the property, and you also get the Treasury Cash Grant and California Solar Initiative incentives for solar if you are eligible. The assessment goes with the property, eliminating any due on sale clauses typical with current lease programs offered. Commercial property owners will need to get consent from their lenders—most banks are on-board with PACE, since the value of the asset increases by more than the cost of the improvements.

This program can pay for an entire Green Package--solar electric, solar hot water, sub-metering and demand response, real time monitoring, lighting retrofits, and HVAC retrofits.  These Green Package improvements are a great way to add value and distinguish your property in a very competitive real estate market.  And the payback time goes to zero—improvements with a roughly five year payback amortized on your tax bill over fifteen or twenty years.  Think about this for your next lease renewal—a tenant incentive that adds real value to your property.

Noted is the fact that 50% of Sonoma County’s investment to date has been for PV—a natural step for our climate.

The first step is getting a PG&E or equivalent energy audit and then reviewing your current baseline and real estate with us to discuss project feasibility.

Your property not located in San Francisco?  You are in luck if you are in Sonoma County [application here .pdf] —and programs are in development elsewhere in the Bay Area with deployment expected later this year.  CaliforniaFIRST, a program available from Renewable Funding, is recruiting pilot counties and cities.  Want to get a program launched in your community?  Start here.

UPDATE:  Go Live date postponed. “Money awarded from the ARRA funds through the State Energy Program (SEP) was provided recently, and there are legal considerations about the proper use of this money and how it affects program requirements that still need to be figured out before the program is ready to launch.  All of the information available on March 1 will be put up on the website at www.greenfinancesf.org and the program is now expected to roll-out on or before April 1.”

CREBs—Clean Renewable Energy Bonds—$2.2B of them were allocated as part of the American Recovery and Reinvestment Act of 2009—are a tool for schools and public agencies to fund solar electric and hot water systems on their buildings.  Called “new CREBs”, the borrower pays back only the bond principal, and the bondholder receives federal tax credits in lieu of interest payments.  All in costs are lower than issuing most tax-exempt muni bonds and lower than current power purchase agreement rates as well as continuing to pay for grid power.  Here is the way Santa Clara County compared the options.

Simply put, CREBs are a financing tool to put solar on public schools—a noble intention. 

California government agencies were allocated about $640M of these bonds—Palo Alto Unified School district allocated over $20M, Mt. Diablo USD allocated over $50M, San Diego USD allocated $74M for 111 projects, and LAUSD received over $120M for 90 projects.  These allocations are good for three years.

Problem is, the $1.2B 2005 allocation of “old CREBs” authorized under the Energy Policy Act of 2005 never got much traction—only $50M of them were issued.  A real missed opportunity.

Part of the problem is that CREBs are allocated on a smallest to largest basis, but you needed to aggregate about $10M of CREBs to have the costs of issuance be covered by the two percent cost cap allowed.  The other part of the problem is that public agencies have their credit rating re-examined every time they go back to the market—and risking your agency’s current rating for a small issuance of CREBs could be a bad career move these days.

The bonds yield about 6% pretax—and since they are paid in tax credits, borrows can use 70% of the payment to offset their federal tax liabilities.  To make the bonds attractive, bondholders have been asking for either discounts or interest payments in addition the federal tax credits—these have been averaging about 1 to 1.5% to make them equivalent to munis.  Repayment is established through a sinking fund, and the power savings can be redirected into this interest bearing sinking fund account.  Currently, the tax credit can be stripped by the issuer or holder and sold separately.

I don’t understand why California’s Investor Owned Utilities don’t make a market in these bonds—they have the tax appetite, they have a vested interest in seeing solar distributed generation more widely adopted, they would have first crack at buying the system SRECs to offset their RPS requirements, you have a market size of north of $500M—seventy to a hundred megawatts of solar created—and the halo effect of sponsoring solar on schools would be huge.  They could buy these bond in private placements, so a school district’s credit ratings would not be publicly bandied about.  They seem like the perfect buyer for the school’s new CREBs.

What don’t I get here?

In most of the markets my company is active in, solar is close enough to grid parity that it can no longer be considered “too expensive” or “not efficient”.  Colleague Aidan Foley has a great post that 50% of US markets are now solar-ready.

Now it’s about discovering what the off-taker’s investment threshold is, and how you compete for investment dollars.

Most of my corporate customers use discount rates of seven to nine percent—solar now meets that easily with the value put on RPS compliance using tradable RECs.  Investment solar gives you mid-teens returns if you are a corporate owner [not subject to passive loss restrictions].  Not a bad return on investment given the low risk of solar energy production.