News & Press

Solar Energy: How Sweet It Is

Environment Design & Construction

January 21, 2011

The solar energy industry is currently in a “sweet spot,” created primarily by the combination of low material costs and relatively high financial incentives. This creates a unique opportunity for developers to increase the scope of their projects while adding significant value. There are several reasons why now is a great time to go solar.

Lower Equipment Costs: Prior to the economic downturn, the solar industry was growing very quickly, which led existing solar manufacturers to significantly increase production capacity while many new manufacturers entered the solar arena. The economic meltdown slowed industry growth, leaving the world with a large oversupply relative to demand. This precipitated a rapid decrease in solar equipment pricing throughout 2009, leveling off in Q4. Now the industry is bouncing back, due in part to the economic stimulus package passed in February 2009, with equipment costs stabilizing at levels of about 20-30 percent lower than pre-recession prices.

Tax Credits and Cash Grants: The economics of solar are partially driven by time-sensitive federal and state government incentives. There is a federal investment tax credit of 30 percent for installing solar until 2016. Even better, Obama’s recently passed Tax Bill will extend the Treasury Department’s 1603 cash-grant program. This means the tax credit can be replaced by a cash grant from the Treasury Department—and cash is almost always more desirable than a tax credit. The federal government also provides a five-year MACRS accelerated depreciation schedule for solar assets.

In addition to federal incentives, there are state, utility and other local incentives which are also designed to decline over time. California, for example, utilizes a rebate program called the California Solar Initiative (CSI), which is a partnership between the state and the three largest publicly owned utilities. Currently, this program pays a significant rebate based on the power a system produces over the first five years of operation, but the total amount of rebate dollars available is limited and is expected to be significantly depleted by allocation within the next 18 months for the SCE & PG&E utilities. SDG&E (San Diego’s local utility) has fully dispersed all of their available funds. Other states have recently developed their own versions of a solar rebate program. Massachusetts and New Jersey both have evolved into a Solar Renewable Energy Credit program (a system by which the owner of the solar system can sell SRECs for as high as $600 per SREC depending on market conditions with a floor minimum of $300 per SREC for up to two years).

Magnified Impact: A third reason why developers should strongly consider implementing solar energy now is that many utilities have recently introduced rate schedules that magnify the impact of solar. The application of demand and consumption charges is performed in such a way to make the impact of the utility cost savings much larger. All three of the large public utilities in California, for example, have introduced renewable schedules, and many utilities in other states are preparing to follow suit.

The Bottom-Line Benefits of Solar Energy

There are many ways a developer can structure a project to leverage solar benefits to their advantage. For example, if a merchant builder is developing a 100,000-square-foot light industrial building at an estimated cost of $12.5 million, and they opt to add a 500 kW solar system at a gross cost $4.50 per Watt, the total project capitalization is now $14.75 million—an 18 percent increase. After all subsides—including federal cash grant, accelerated depreciation, rebates based on state programs, annualized incentives discounted at seven percent and assuming a three percent annual increase in utility costs—are taken into account, the net cost of the solar system is just over $500,000. The system will offset approx $100,000 per year in utility costs, resulting in an ROI of 20 percent annually and an IRR of 13 percent over seven years.

The savings generated by the solar system will also greatly reduce the overall cost of ownership of a building. The value of those savings can be easily quantified to justify a higher per-square-foot price as well as differentiating the asset in a very competitive commercial real estate market. This same logic can be applied to build-to-suites and fee development projects justifying higher developer fees along with a larger scope of work.

Developers also have the option of partnering with third-party system owners, either leasing rooftop space to solar project developers, joint venturing on solar projects and sharing returns or even partnering with tenants who have an appetite for solar and structuring their lease provisions around the cost savings.

The next 18 months will be the best time to implement solar energy, and there are many ways developers can add value to projects, create competitive advantages to differentiate their assets and realize higher-than-average returns by integrating solar power into their portfolios.

Power Purchase Agreements

A real estate developer may want to explore a Power Purchase Agreement (PPA). A PPA is a scenario where a third party developer funds, owns and operates a solar system on the real estate owner’s property and sells the power produced to an off-taker. The off-taker may be the property owner, who can utilize the power themselves or resell it to their tenants. Or it may also be a public utility that uses the power produced elsewhere in the local grid. In the latter case the PPA provider would be an incentive to the property owner who may be paying a fixed rental rate or structuring a profit sharing arrangement based on the power sales. There are many ways to structure a PPA and many should be analyzed to determine the best structure for the parties involved given the local combination of rebates, SRECS and potential power off-takers.

Nate Whigham

Nate Whigham, Senior Project Developer with Borrego Solar Systems, Inc. (www.borregosolar.com), is a leading designer and installer of commercial solar photovoltaic energy systems.

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