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.
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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?
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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.”
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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.
]]>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.
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The hammer in the original 20% RPS target was a $50/MWH penalty incurred by the IOUs and their shareholders for not meeting the 20% requirement. The CPUC recently released a decision allowing utilities to meet 40% of their obligation by purchasing and retiring RECs generated by renewable generation assets in the western power [WREGIS] markets, since it looks like we are three to four years behind schedule in meeting the requirement. And the CPUC capped value of these tradable RECs at what the compliance penalty is, so not to motivate IOUs to shift non-compliance costs from shareholders to ratepayers (us). The price cap allows the IOUs to shift up to 40% of their shareholder-borne non-compliance costs [non-recoverable] into a recoverable cost through the purchase of TRECs at the same price as the penalty price.
In a nutshell, this proposed decision sets out:
The price cap is higher than the ~$10 value of solar RECs in California previously, equal to what City of Palo Alto Utilities pays 3 Degrees, Inc., but less than the $120 value in Colorado, where they have a separate REC market for smaller solar generation. Adds a nice little boost to our investor owned systems, particularly in the early years where demand for our solar RECs will outstrip supply. What it really does is define a value for an attribute that was previously hard to pin down.
So the new sweet spot is 1MW installations on the customer side of the meter [under the CSI program], offsetting high retail electrical rates, and remarketing the SRECs to the IOU. Five year paybacks on a thirty year asset.
Eventually, the TREC price will revert back to the unbundled price of renewable generation less the cost of brown energy, but demand is likely to create attractive valuations for the next three to four years.
UPDATE: CPUC approved the use of TRECS for IOU's to meet their RPS on 11MAR. Click here for a copy of the decision [.pdf, 500k]
]]>The big winners:
So now is when it gets interesting--
Time for the heavy lifting of project development to start. I see two big risks—
Our integrated solar project delivery [Bridging] tool may be the best way to deal with the first risk. It accomplishes the following:
The 30% tax credit is all or nothing—if you miss either your certification or completion deadlines, you lose the credit. Selecting the right delivery tool is a big deal.
The second risk is mitigated by using a market-friendly tax equity structure. Of course, the best answer is to put the tax equity on your balance sheet and match it with your federal tax liabilities, but not everyone has the cash flow to do that. If you need to monetize the tax equity piece [like most solar developers do], you typically have three options:
What follows is my take on what needs to be done—please remember I am a solar developer, not a tax accountant, so please confirm your own understanding on the tax equity side.
Monetizing tax equity—No cash grant option in this program—so credit monetization structures, such as partnership flips, sale leasebacks, or inverted leases will have to be utilized if the credit cannot be used directly. If the facility takes over two years to build, the credits can be used during construction. Not describing a partnership or leasing structure in the credit application, but admitting an investor later using a partnership or lease structure does not appear to change the project in a “significant” way, provided the investor signs the same credit agreement executed by the original taxpayer.
$2.3B is the total award, and some companies will be able to use the credit to offset their own tax bill. A significant share of third party tax equity will be needed however—and to solicit this from a market that is just opening up again after being shut down during the financial crisis—I question how much of this equity gets placed. Will the IRS want to see a tax investor prior to certifying your project as eligible for the credit? Do you start construction and buy equipment without your tax investor lined up?
Tax Basis [263A cost]--Eligible investment credits cover future expenditures and cover investments made after 17FEB09. This credit does not apply to a building or its structural components—the basis can only involve the equipment portion of the facility, meaning building leases make more sense than owned real estate—but lease costs are not includable in basis. Good news for Silicon Valley, where the commercial property vacancy rate is north of 20%. Qualifying property must be “necessary for the production of specified advanced energy property” and qualify as tangible personal property. Base building upgrades—power, technical infrastructure, HVAC, industrial gases, lighting, logistic systems and disposal facilities—need to be clearly tied to equipment support, and probably won’t be includable as basis unless specifically needed for the project.
IRS Terms for the credit will be dictated by 15MAR2010. This credit agreement needs to be executed and returned to the IRS so that they can execute it by 16APR2010. Any successor taxpayer will have to file a new credit agreement, or face forfeiture or recapture of the credit.
The taxpayer will have one year from the date of the award letter to provide evidence that all requirements for the allocation have been met—construction contracts, all permits, long lead-time components ordered, the balance of project financing, and off-take agreements. The IRS may disallow the credit if facility plans are changed significantly.
Integrated Project Development—To mitigate or eliminate risks of forfeiting the credit, the facility description needs to translated from the business plan into working drawings and construction contracts in a manner that demonstrates consistency with the original facility description.
The applicant will have one year from the date of the IRS acceptance letter, or 8JAN2011 to pull all permits and complete all other long lead-time work required to demonstrate a placed in service date no later than three years after this certification date.
Pull all permits within 12 months of Treasury acceptance letter >> 8JAN2011.
Treasury will certify that project is eligible for tax credits.
Place project in service within three years of certification date.
The taxpayer will have three years from the certification date to place the property into service, Including receipt and satisfactory signoff of all federal, state, and local permits—including occupancy permits, if applicable. If you don’t complete within that three year window—the certification is no longer valid.
DOE or Treasury can audit the project—so care in project development and management practices, along with the accountant certs and opinions need to be in the development files.
Construction risks when you have already locked in the value of your credit and when you face deadlines in placing the equipment in service are significant, and rest squarely on the taxpayer’s shoulders. That is why I like our integrated, two step project delivery tool for this application—we lock in certification at the same time we have price and schedule certainty. And with the most enforceable construction contract in the industry, to boot.
Recapture—the credit vests at at 20% per year, so the recapture risk exists for five years after the date of service due to the taxpayer selling the project or more than one-third of their stake in the facility.
Don’t hesitate to email or call with any questions, or to discuss a potential project. Successful project execution will need both tax equity structuring and integrated project delivery expertise to meet these deadlines. We can do both, or be part of a team that gets it done.
Tom Friedman is right--our clean energy future and energy independence depend on deploying these credits and getting these new clean technologies right. Now.
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Taught at UC Berkeley’s Downtown Center (425 Market Street, San Francisco), I use the feasibility report as the framework for understanding what goes into a profitable project. Click here for a current draft of the syllabus. Here is a course overview
This course may be a great use of ~20 hours of your time if you really want to dive into what comprises a feasible solar project. The course capstone is a day of student team presentations on 24 APR. You and your team present your feasibility report on a potential solar project of your choosing.
What is new this semester? We will discuss the $700M in Clean Renewable Energy Bonds that have been allocated to hosts in California, and what it will take to get this financing tool more widely used. Understanding Utility Feed in Tariffs and how to use them to capitalize projects. And PACE—Property Assessed Clean Energy financing—a potential blockbuster capitalization tool.
You will learn a great deal from your fellow students—you will be working with them to understand, underwrite, and present potential solar investments. We use Microsoft Excel [or Google Docs], Google Sketchup and Google Earth as evaluation tools—give yourself a headstart, download them now [they are free] and start to play with this software to understand how these tools work. All course materials will be available on a class-specific Google Groups site that serves as the online partner to your classroom work. Here are the texts I use:
and 
Course intent is to build a foundation for getting commercial solar projects identified, quickly selecting the feasible ones, and putting them on a track to a real deal. Planning and Installing is technically complete 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. 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. I added Strategic Selling because no one has a project until someone sells something.
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.
I hope you can join me for this course. First session is Saturday, 13 March from 9A to 5P, then five Tuesday evenings from 630P to 930P, capping off with Presentation Day on Saturday, 24APR from 9A to 3P with a debrief afterward at a local restaurant.
]]>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.
![clip_image002[1]](http://blog.norcalpv.com/WindowsLiveWriter/AnsweringanMBAstudentsquestions_F8D2/clip_image002%5B1%5D_1.jpg)
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.
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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:
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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.
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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.
and 
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.
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No word yet about how the SFPUC and the Marin Energy Authority are planning to handle this initiative--called the Taxpayer Right to Vote initiative but what should really be called the CCA Killer ballot initiative.
Follow the math, and you can understand how much this means to California's investor owned utilities. PG&E, as one example, has about $1B in annual ratebase revenue. San Francisco's CCA would have ripped about $200M in ratebase, and Marin would have pulled another $80M. This represents a 30% reduction in PG&E revenues in 2010--a change from forecasts in 2006:
"In its medium case, PG&E assumed that 3% of its customers would begin to migrate to community choice aggregation in 2006 and the rate of loss to this market will increase by 1% annually, reaching 10% in 2013."[p 26]
A $240M delta in 2010. So you can see why the money spent putting together the Taxpayer Right to Vote Act looks like a really good investment. Efforts to defeat this initiative look insufficient at this point.
As a solar developer, a CCA is a great customer, typically with higher demand for renewables--Marin is planning on offering a 100% renewable program for customers. More customers means more demand for clean renewable power. Is this initiative bad news? There is an interesting carveout in the initiative:
"This section shall not apply to any bonded or other indebtedness or liability or use of public funds that...is solely for the purpose of purchasing, providing, or supplying renewable electricity from...photovoltaic...[or other renewables].
This carveout sounds like it preserves the property assessed energy district financing that is a real innovation, but will it save a CCA if it is sourcing 100% renewable power? Does this work if you are on the utility side of the meter? Looks like we stay on the customer side of the meter, and compete against retail power rates. Or we focus on the feed in tariffs working their way through the CPUC and the legislature.
I will vote against this initiative if it makes it to the ballot this fall--the issue is about communities having the right to "own" their ratebase assets instead of the investor owned utility, not about taxpayers and right to vote.
A close reading also leads me to conclude that it stops any municipally owned utility [MOU] from raising any additional capital or expanding their service territory without a 2/3 majority vote at the ballot box--a very tough restriction in a capital intensive industry. No capital to establish or expand electric delivery service without first winning a 2/3 majority at the ballot box--this is going to slowly strangle a lot of MOU's.
Competition in power is a good thing--and this initiative cripples competition because it locks in the rate base with the IOU.
]]>Conceived about five years ago as a response to the 2001 California energy crisis, local communities can own their power generation assets and supply power via wires and poles maintained by the investor owned utility. Areas such as Palo Alto, Los Angeles and Santa Clara [all municipally owned utilities, or MOU's] stood out during the crisis because they did not suffer, but had sufficient energy independence to avoid blackouts and actually sell surplus power back during the crisis. Now, using the in-place rate base for the community as an asset, local power authorities have the power to not only choose who provides their power, but also where it comes from. Called a Community Choice Aggregator [CCA], these joint power authorities are being set up in a number of California communities who want greener, and cheaper grid power.
Marin CCA revenues paid in power rates would be about $80 to $90 million per year, San Francisco's about $200 million. The key assumption that is being tested is whether CCA's can source power that is greener and cheaper than the investor owned utilities doing business here.
CCA's can be a great ramp and job creation engine for local distributed generation assets. San Francisco's plan shows a need for 31MW of solar in the city, for example. The question is how best to use the CCA format to capitalize the development of this local green power. The goal is using inexpensively generated baseload power to help fund development of lots of cheap, green power.
The Marin request has the following main points:
Here is Marin's forecast energy demand:
To date, no CCA has been established in California. Uncertainty due to true-up costs related to utility stranded costs and customer drop-outs and the short term meet or beat requirement has stopped CCA implementation. San Francisco, Kings River and Marin are now testing the primary premise of whether an energy service provider can meet or beat investor-owned-utility pricing.
My interest is how you use CCA purchasing power to increase the amount of local solar.
The implementation of the American Recovery and Reinvestment Act's renewable energy provisions is a huge stimulus for the deployment of renewables.
Combine this with the oversupply situation of silicon and modules, and we have a situation where I forecast where we will be able to provide carbon-free peak power at a lower cost than fossil fuel within five years.
Add to this the carbon cap-and-trade legislation in the Congress right now, and there is a nice tailwind developing.
The trend is our friend, the question is becoming one of implementation.
Issues I am working through include:
"Even in this time of enormous financial uncertainty (not to mention a deepening concern, if not panic, about the health of the planet), the sense of boundless potential, the promise of The Graph, is palpable."
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This Mother-of-All project finance incentives--$25 billion--is just what our industry needs to retake the USA's global leadership in the solar industry--a position we last held more than twenty years ago.
Project finance was the single largest obstacle in continuing our path to a cleaner future. HR1 is a huge win for energy independence. Kudos to our President for getting this achieved so quickly. Now that's Shock and Awe...
1. Renewable Energy Grants
With the goal of doubling renewable energy generating capacity over three years, this legislation restarts our project pipeline. HR1 creates a new program through the Department of Treasury that gives us another option to placing the solar investment tax credit with a bank or life company. Treasury is now authorized to buy our Section 48 Solar Investment Tax Credits with cash grants equal to 30 percent of the cost of solar property placed in service during 2009 and 2010.
Projects we don't power up prior to 31DEC10 qualify for the grant program as long as we begin construction prior to 31DEC10 and we place in service by 1JAN17. Applications must be filed by 1OCT10.
The single biggest impediment to capitalizing commercial projects was the inability to monetize the tax equity [PTC/ITC above] because the banks were kaput. HR1 fixes this.
Solar's big advantage in being shovel-ready is that many of our projects take only six to twelve months to complete--no discretionary planning approvals required for California. My projects can be powered up by the time another technology gets through running the gauntlet of discretionary approval.
Stay tuned--Treasury will have to clarify how to apply and what it means to commence construction.
2. Coupling Renewable Energy Grants with Subsidized Renewable Energy Financing
Starting in 2009, our projects can now qualify for the full amount of the solar tax credit, or the above grant, even if we are capitalizing a solar project with subsidized energy financing (e.g. below market loans, tax preferred bonds, state grants etc.). Winners here are public entities who need us to capitalize their solar plants as well as programs funded through district energy financing--Berkeley's being one of the first. Together with state legislation authorizing non-charter cities to offer solar system loans through property tax assessment districts [CA AB811], this funding structure brings our cost of power down to below grid cost here in Northern California.
3. Renewable Energy $60B Loan Guarantee Program
Leveraging off of a forecast $100B in private sector clean energy investments, HR1 includes a two year DOE loan guarantee program for renewable energy projects, renewable energy manufacturing facilities, and electric power transmission projects. The legislation appropriates $6 billion to pay the credit subsidy costs, which should support $60 billion worth of loan guarantees. Eligible renewable projects are those that generate electricity or thermal energy and facilities that manufacture related components.
One side benefit of these loans financing incremental renewable generation is that we insulate our economy and our standard of living from fossil fuel price spikes.
Projects must commence construction by 30SEP11. Davis-Bacon wage requirements (prevailing federal wage) apply to any project receiving a loan guarantee. Missing piece is now a widely deployed feed in tariff [FiT] that allows us to harvest the available sun and not just offset onsite demand. Both California and Hawaii should have a FiT in-place by mid 2009.
4. Renewable Energy Manufacturing Investment Credit
Treasury will provide $2.3 billion to fund a 30 percent investment tax credit for manufacturing assets used to manufacture advanced energy property. Projects must be certified by the Treasury, in consultation with the Secretary of Energy, through a competitive application process. Effective upon enactment.
5. Remove Limits on Solar Water Heating
Solar water heating is actually the most economic way to harvest daylight--it works in diffuse daylight conditions [cloudy days], in northern climates where you have a higher heat demand than a cooling demand [Seattle instead of Santa Barbara] and to date has not been well incentivized here in the US. Section 25D of the Code provides a 30% personal tax credit, claimable against AMT, for the purchase of qualified solar water heating property that is used for a purpose other than heating swimming pools and hot tubs.
6. Extend Bonus Depreciation
PV systems benefited from bonus depreciation in 2008. HR1 extended bonus depreciation until the end of 2010.
Small business taxpayers are allowed to write-off up to $125,000 (indexed for inflation) of capital expenditures subject to a phase-out once capital expenditures exceed $500,000 (indexed for inflation).
7. Solar and Green Renovations on Federal Property
HR1 added $5.5. billion to be deposited into the Federal Buildings Fund to construct, repair and make alterations on federal buildings to increase energy efficiency, including installing solar energy equipment. $4.5 billion shall be available for measures necessary to convert GSA facilities to high-performance green buildings.
The Department of Veteran's Affairs was appropriated $1 billion for non-recurring maintenance on their facilities, including energy projects.
GSA estimates that 75% of the anticipated projects will include a solar component.
8. Department of Energy Funding
Appropriates $16.8 billion to DOE’s Office of Energy Efficiency and Renewable Energy, including $2.5 billion for applied research, development, demonstration, and deployment projects.
The total amount includes specific appropriations for the following:
9. Department of Interior Funding
There are about 60GW of renewable projects planned on BLM lands in the Mojave Desert--more than California's current 33GW peak power need. Lack of transmission and distribution (T&D) and permit approvals from the Bureau of Land Management have stymied these projects. HR1 appropriates $125 million to BLM for the management of lands and resources and suggests funds be used for renewable energy rights-of-way and related permitting projects.
10. New Clean Renewable Energy Bonds (“New CREBs”)
HR1 provides an additional $1.6 billion for new clean renewable energy bonds to finance facilities that generate electricity from renewable energy sources including solar facilities.
11. 5 Year Carryback of Net Operating Losses
For tax years 2008 and 2009, extends the maximum carryback period for net operating losses from two years to five years. Eligible small business may elect to increase the carryback period for an applicable 2008 NOL from two years to any whole number of years elected by the taxpayer that is more than two and less than six. An eligible small business is a taxpayer meeting a $15,000,000 gross receipts test. (see Sec. 448(c))
An applicable NOL is the taxpayer’s NOL for any taxable year ending in 2008, or if elected by the taxpayer, the NOL for any taxable year beginning in 2008. However, any election under this provision may be made only with respect to one taxable year.
12. Qualified Energy Conservation Bonds
HR1 authorizes an additional $2.4 billion, up from $800 million, in bonds to finance State, municipal and tribal government programs to reduce greenhouse gas emissions. These bonds can be used by government agencies to reduce energy consumption in publicly-owned buildings by at least 20 percent, implement green community programs, or develop electricity from renewable energy resources.
Demonstration projects that reduce peak electrical use also qualify. Public education campaigns to promote energy efficiency can also be funded.
13. Electric Transmission Infrastructure
3,000 miles of new or modernized power transmission lines and 40 million smart meters. HVDC grids need to run east/west to follow the sun. Current HVDC transmission runs from Bonneville Power's dams on the Columbia to Los Angeles. HR1 remedies this by permitting Western Area Power and Bonneville Power Administrations to borrow funds (up to $3.25 billion each) to construct or finance transmission lines. It's a big, multivariable problem--here is the current report on available renewable resources.
DOE is directed to include analysis of renewable energy sources, including solar, in its 2009 National Electric Transmission Congestion Study.
14. Solar for Schools
HR1 has a provision for a $53.6 Billion state fiscal stabilization fund. Approximately $10B of this shall be used for public safety and other government services, including the renovation of facilities and schools to meet green building standards--including installation of solar electric and solar thermal.
15. Green Collar Jobs
Appropriates $500 million to fund job training programs in energy efficiency and renewable energy. Also appropriates $250 million for rehabilitation and construction projects on Job Corps Centers, including energy efficiency and renewable energy projects.
16. Smart Grid
HR1 provides up to 50% reimbursement to smart grid demonstration projects in urban, suburban, tribal, and rural areas, including areas where electric system assets are controlled by nonprofit entities or investor owned utilities. The Secretary of Energy is also required to maintain a smart grid information clearinghouse. As a condition of qualification, demonstration projects are required to use open protocols and standards. This sounds like a great idea for our Marin Energy Authority.
The legislation provides a 30% tax credit for property designed to produce energy conservation technologies (including energy-conserving lighting technologies and smart grid technologies).
17. Solar for the Military
The military is one of the biggest energy users in the Federal Government, and its operations are often in locations with limited or non-existent grid power. HR1 appropriates $300 million for DOD research, development, testing and evaluation of projects to improve energy generation, transmission, and energy efficiency.
An additional $100 million is appropriated for Navy and Marine Corps facilities, and further specifies that funds are for energy efficiency and alternative energy projects.
18. Remedy for AMT and R&D Credits in Lieu of Bonus Depreciation
Where a taxpayer is in a loss position, deductions in excess of income are unable to enjoy the benefit of bonus depreciation. HR1 extends the allowance in the Foreclosure Prevention Act of 2008 that permits AMT and loss taxpayers to receive 20% of the value of their old AMT or R&D credits to the extent such taxpayers invest in assets that qualify for bonus depreciation. The amount is capped at the lesser of 6% of outstanding and unused AMT and R&D credits or $30 million.
The extension of the additional first-year depreciation deduction is generally effective for property placed in service after December 31, 2008. The extension of the election to accelerate AMT and research credits in lieu of bonus depreciation is effective for taxable years ending after December 31, 2008.
19. Solar Water Treatment Plants
Water treatment is a huge energy user. The stimulus bill provides $6 billion for the State and Tribal Assistance Grants account ($4 billion for the Clean Water State Revolving Funds and $2 billion for the Drinking Water State Revolving Funds). To ensure that the funds are used immediately to create jobs, the money must be committed to projects under contract or construction within 12 months of the date of enactment.
HR1 requires that not less than 20 percent of each Revolving Fund be available for projects to address green infrastructure, water and/or energy efficiency, or other environmentally innovative technologies. The bill allows States to use less than 20 percent for these types of projects only if the States lack sufficient applications.
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The single biggest issue to me is the lack of confidence among our customer base--solar happens when your customer believes it is the right thing to do, and commits.
]]>I queried many solar professionals at the end of 2008 on what they believe will happen in our industry in 2009. Solar power has been growing much faster than people believe. Renewables are a major plank in the new administration's pragmatic platform--creates green collar jobs--and the economics are getting dramatically better. We need to get past this financial train wreck unfolding before us and then watch distributed [variable] generation become a major part of how we source cheap, green power.
10. Where Do We Install It All?
Supply is doubling in 2009 from 7GW to 14GW of production, if you believe Rogol and Photon, on its way to 50GW of production by 2012--130GW to be developed and powered up in the next 48 months. 
Germany is good for 1GW/yr, rest of Europe for 1GW/yr...where will the rest be integrated into?
Aidan Foley notes potential solar development market in US doubles in size in 2009, as cap and trade, RPS, and incentives make developers, investors, and host customers all see--and want--solar's economic value-add.
9. European Energy Companies Enter the US Market.
The US is the largest, fastest-growing market in the world at this point. We have a new president who understands the value of renewable energy from a national security, job creation, and environmental standpoint. Demand is growing. This giant sucking sound will attract independent power producers from Europe and elsewhere, wanting to profit from the retooling of our power grid.
It's not easy--note the near disappearance of German company Conergy AG. Losing up to $50M in the US market over the last three years, Conergy pursued a flawed strategy of breakeven-at-best projects. They made the odds even worse by buying small companies to aggregate a US footprint. They shoulda bought PowerLight when they had the chance.
8. Electric Car Charging Stations become Standard Equipment in Parking Garages. Transferring 10kWh of power from the grid to your plug-in car is becoming an oft-requested design element of our parking garage solar arrays. How close are we to a tipping point for plug-in hybrids?
What better way to tell your customers and employees that you are serious about reducing your carbon footprint than allowing them to plug their hybrids into the sun?
7. Finding Out the True Meaning of A Warranty. There will be a major component recall during 2009 that will cause our industry to focus on product and production warrantees. There are a number of bleeding edge technologies that are starting to be deployed--some will be great, some will become a footnote--reminding us a warranty from a reputable manufacturer is different from a startup's. Historical warranty reserves may not be sufficient if we are deploying a "cool" technology.
6. Micro-inverters own the residential market. Enphase Energy is producing a game changing product for the residential market. Better communication, easier wiring, and less susceptibility to ground-fault interuption. Now they just need to get the cost down to big dumb inverter pricing. Several more to follow, but enphase has a 12 to 18 month jump on the competition.
5. Second Solar is Already Here.
First Solar--the Ohio based lowest-cost solar PV producer in the world--with an impressive manufacturing ramp and 2009 pricing of $2.20/W for long term contracts [versus $3.40/W for multi-crystalline currently] is a force in getting us to the $1/W coal-equivalent cost of power .
$1.7B of venture capital was invested in the first three quarters of 2008 on bets as to who will be the next industry leader. Capital has since dried up, but I like Solyndra's cylindrical modules, CaliSolar, and 1366 Technologies.
A recession is the best time to start a company, and with a new president and a new administration focused on climate change and energy independence, I am optimistic.
Here is Nanosolar CEO Martin Roscheisen's take on the solyndra product, although he does not mention it by name.
4. AB 32/Cap & Trade ReFrames the Growth Debate.
33% renewables by 2020 means we need to get started yesterday. This is California's mandate on global warming--costing $25B in 2020, but providing $40B in energy savings alone. Cap and Trade means no new coal fired power plants have been approved recently, and none are likely to be permitted in 2009. Combine this with increasing fuel costs, and the difficulty of extending operating licenses on older, polluting power plants, and you get increased demand for green power. More compact development patterns [SB 375] means that marginal real estate--rooftops, parking and walls--is used to harvest daylight.
3. Component Costs Drop, Capital Costs Rise.
Industry expert Andy Black predicts module prices will drop 40% by the end of 2009, taking $1.50/watt out of the cost stack. Currently PV system costs are far below prices--driven by demand from Spain, Germany and increasingly California. High-margin sectors such as polysilicon and wafering take a hit as system prices drop to a more normal relationship with costs, opening up demand.
System prices move from $7-$7.50 per watt to $5 to $5.50 per watt. Cost per kWh for ppa deals rises slightly as tax equity is 20% more expensive than it was eighteen months ago, before dropping down to the 8% after-tax range by the end of the year. Tax equity costs go from 7% in early 2008, to 11% in early 2009, dropping to 9% by the end of the year. Solar tax equity is priced against the low income housing tax credit, and the wind production tax credit. Solar is a more straight-forward, lower risk transaction--question is when will the market recognize the lower risks of the solar ITC and price it accordingly.
Tobin Booth of Blue Oak Energy predicts grid power prices will go up 8%+ in 2009--meaning solar equivalent power pricing in our markets goes from $0.173/kWh to $0.187/kWh.
2. Significant Consolidation of Module Manufacturers.
Shift from a demand constrained [~6GW] to a financing constrained market [~12GW] means that prices will drop and smaller manufacturers will be slammed together into companies that can make it through the repricing that will occur between 2009 and 2012. Companies will be merged and assets bought for pennies on the dollar.
1. Utilities Learn to Love the Solar ITC. The top 30 utilities pay an estimated $16B in federal income taxes per year. The push towards renewable portfolio standards--20% in California in less that 12 months means increased demand for clean, cheap power. Combine this with the drop in system costs and streamlined permitting available for distributed PV generation, and you get a spike in demand for solar investment tax credits from a new market segment. Renewable tax equity investment was about $6B in 07, trending to about $5B in 08--the utilities can double this with an additional $5 to $7B in tax equity.
Current estimates are about 1GW in additional demand, 7x over 2007--7 to 8% of global production for 2009. Utilities will have a tough time figuring out how to play this, but they are the logical candidate to replace/augment the banks in the cap stack--and have a better idea of what technology they want to own and generate power with.
BONUS Prediction:
With all these plug-ins in our property parking lots, solar powered vehicle charging kiosks will be a valuable amenity. You will park your Tesla in the parking structure, recharge it via the kiosk at $0.20/kWh and then permit your car to sell power to the building's grid at a price you choose when peak demand occurs--typically in the late afternoon, leaving you enough power to return home and charge up on your home grid.
And it seems we will need those kiosks--the boys at Top Gear made a couple of interesting discoveries when test-driving a Tesla:
How many plug-ins will be in your parking lots by the end of 2009? I bet they will be clamoring for solar powered re-charging kiosks.
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