SOAKING UP THE SUN

Rooftop Solar Power Generation

If the 60,000 ICSC members own anything, it’s a lot of rooftops.   While rooftops once served the limited function of keeping weather out, they can now, with the right equipment, be transformed into a platform to generate Solar Power for the building’s owner or tenant.  This article discusses the types of Solar Power generation, recent federal and state incentives to increase supply and demand for the Photovoltaic (PV) market, as well as challenges and opportunities for commercial users.  It provides a step by step guide that will allow shopping center owners to determine when investment in PV is right for them.  

 

When considering PV as a supplemental source of energy, commercial real estate owners should:  1) Assess the solar energy source in your areas; 2) Evaluate the Renewable Energy Policy Incentives available to you; 3) Understand net metering options; 4) Look at specific laws in your state; and 5) build a business model using dollars in a cost/benefit analysis along with the opportunity to recapture dollars from tenants in the Shopping Center.  Shopping Center owners should also consider the intangible benefits of solar power that demonstrate a commitment to renewable energy programs and decreasing reliance on petroleum and coal.  Tenants often value properties that have a commitment to use renewable energy.  According to U.S. EPA, the benefits of “green power” include avoiding carbon dioxide emissions, reducing air pollution, hedge against future increases in electricity prices, serve as a brand differentiator, generate customer, investor and employee pride, create a positive publicity and enhance an organization’s public image, and demonstrates civic leadership.  A PV investment decision for new developments should be made early on so that “green power” may be used as a selling tool to attract tenants and lease documents may be drafted to incorporate recoveries to be paid by tenants.

 

 

SUN AS GROWING GLOBAL SOURCE FOR ENERGY

 

Broadly defined, solar energy includes numerous technologies.  Concentrated Solar Power (CSP) uses focused solar energy to generate heat for the turning of turbines for generating electricity.  Large scale utilities apply CSP technology to generate power.  By comparison, residential and commercial customers use PV technology (i.e. rooftop solar panels) to convert sunlight directly into electricity.  While the capital cost of installing PV equipment is high, the “fuel” (i.e. sunlight) is unlimited and free.  However, not every location has sufficient sunlight to reliably develop PV.  Shopping Center owners that install PV equipment for the benefit of reducing utility costs for the project may be able to recoup some of the cost from the tenants by charging the tenants a usage fee comparable with the charge of the local utility company, for energy consumed that was created by the PV.   

 

In recent years, the solar industry experienced tremendous growth.  According the U.S. Department of Energy (DOE), the 5-year compound annual rate of growth through 2008 (the most recent comprehensive study available) was 56%.  Global production reached 6.9 gigawatts in 2008, led by manufacturing in Europe, China, and Japan.  From 2007 to 2008, there was a 152% increase in global installed PV capacity, with Spain and Germany leading in capacity addition. The U.S. ranked fifth at 6% of the market share.  The U.S., however, has led the world in the production of thin-film used in the manufacture of solar cells, with First Solar and United Solar Ovonics being the largest U.S. manufacturers.  Although small by comparison, the U.S. increased PV capacity by 63% from 2007 to 2008, with significant additional capacity expected as the country continues to emerge from the global recession.     

 

The cost of PV capacity continues to drop with capacity weighted average PV installation costs in the U.S. decreasing 31% from 1998 to 2008. Significant acceleration in cost reduction occurred over the past couple of years.  Perhaps most importantly, however, is the continued investment in global private-sector investment in solar energy technology, which exceeded $16 billion in 2008. Approximately $4 billion was invested in the U.S.   According to DOE, global private sector investment increased more than 25-fold from 2004 to 2008. U.S. venture capital and private equity investment increased from $61 million in 2004 to $2.3 billion in 2008, corresponding to a 4-year compound annual growth rate of 148%. All shopping center developers and big box retailers should include solar energy components in their prototype building plans.  This concept is here to stay and may soon be a building requirement of many municipalities in the near future.

 

 

RENEWABLE ENERGY POLICY INCENTIVES

 

 

Federal, and increasingly state, policies and incentives play a vital role in the commercialization of solar technologies.  On the federal level, the Emergency Economic Stabilization Act of 2008 (“EESA or “bailout bill”) contained tax incentives designed to encourage and support individuals and businesses to invest in renewable energy, including an 8-year extension of the investment tax credits.  Additionally, the American Recovery and Reinvestment Act (AARA or “stimulus bill”) contained many provisions supporting investment in solar energy projects.  State and local policies work in parallel with these federal laws, but vary greatly from state to state.  States with stronger long-term policies and incentives, coupled with higher-than-average electricity rates and adequate solar resources (think California), have well-established solar projects in place. 

 

On the local level, planning and permitting for solar projects are significantly lacking and sometimes non-existent, although this appears to be changing in certain communities that have embraced renewable energy goals and objectives.  Lack of planning and permitting framework can increase the cost and time requirements associated with project development or even derail a project completely.  Challenges include complex permitting requirements, lack of trained local government personnel in renewable energy systems, and burdensome restrictive covenants. Fortunately, a number of U.S. cities have implemented comprehensive permitting and planning policies that foster greater interest in PV projects.  San Jose, California; Portland, Oregon; and Madison, Wisconsin have all adopted favorable policies to encourage and expedite implementation of PV systems. 

 

FINANCIAL INCENTIVES FOR SOLAR ENERGY

 

One significant attraction to PV system installation is “net metering”.  Net metering allows PV system owners to offset electricity purchases from the local utility and is considered one of the most important policy drivers because it allows owners to recover a portion of their invested capital.  Net metering systems allow the billing meters to “run backwards” and put power back on to the electrical grid.  At the end of the month, the PV system owner receives a bill for the net electricity used.  Currently, 42 state and Washington, D.C. have net metering policies, although the individual state policies do vary. 

 

As the interest in PV technologies accelerates and challenges associated with project implementation are met, new policy and financing mechanisms are expected to further fuel the expansion of solar energy projects.  Feed-in tariffs (FIT) would require utilities to purchase electricity from eligible PV systems at a fixed or marginal price over a fixed period that allow the owner to receive guaranteed pricing.  FITs have been utilized extensively in Europe (Germany, Spain, etc.) and are increasingly being contemplated in the U.S.  Another incentive to accelerate investment in PV projects is associated with property tax financing that allows PV system owners to spread implementation costs over the long term.  These programs are often referred to as property-assessed clean energy (PACE) programs and are currently in use in Berkley, CA and Boulder, CO.  Shopping Center owners should investigate the use of PACE programs the same way they use tax increment financing (TIF) for infra structure improvements in shopping center development.  Let the PV system investment be paid via the tax payments made by the tenants in the shopping center. Finally, adjustments in rate structures are increasingly being considered to recognize that solar PV peak generation frequently correlates with peak electricity demand.  Peaking power capacity is frequently the most expensive energy purchased, and PV systems reduce this demand.  It is anticipated that better rate structures for PV could capture the actual value of time-demand fluctuations in the market pricing, thus lowering the demand for high-cost peak energy production and further expanding the solar market. 

 

Third-party ownership of Power Purchase Agreements (PPAs) is private sector, market-based development designed to expand PV development.  Under this model, the property owner “hosts” a PV system on, say, the roof of a “Big Box” retailer.  The solar developer purchases, installs, owns, operates and maintains the system, and the owner agrees to purchase the electricity produced under a long-term PPA.  Such arrangements eliminate the need for significant capital outlay and O&M costs, while guaranteeing pricing of the electricity produced at or below current market rates.  These arrangements also provide the owner the intangible benefits of being “green.”  The benefits for the PV producer include monthly cash-flow from the sale of electricity, the fully monetized federal and state tax credits, and accelerated depreciation.  National providers of these PPAs include SolarCity (www.solarcity.com), which offers a range of services to commercial businesses interested in exploring the benefits of PV technologies.  Recently, Southern California Edison (SCE), the largest purchaser of solar power in the US, launched one of the most ambitious solar programs in the country.   Solar power modules will be used in SCE’s Solar PV Program, which will cover 65 million square feet of unused Southern California commercial rooftops with 250 MW of PV. The program will provide electricity for over 160,000 households.

         

Another form of private sector, market-based development is the use of customer solar lease arrangements.  While similar to the PPA model, this approach allows the “host” (e.g. our “Big-Box” retailer) to lease the PV system instead of purchasing the power generated by the system.  Under this scenario, the host’s lease payment remains constant even if the system output fluctuates.  If additional energy is needed to meet the host’s demands, it is purchased through the local utility provider.

One of the early users of “green power” is Whole Foods, Inc. who hosts and owns solar systems at 11 locations and has contracted for up to 20 more.  Combined with energy efficiency upgrades, Whole Foods save more than 15 million kWh annually, and has implemented energy efficiency standard into all of its new store designs.  The company now receives 109% “green power”. 

PRACTICAL CONSIDERATIONS FOR SOLAR POWER INSTALLATIONS

There is significant concern among PV system operators over the cost and availability of insuring the PV market.  According to a recent study by NREL, insurance products for PV systems are limited and premiums make up approximately 25% of a PV system’s annual operating expense, and can account for 5% to 10% of the total cost of energy produced.  Such pricing and availability (adjusted annually) affects the PV developer’s ability to enter into profitable long-term contract pricing contracts, and requires that the risk associated with uncertainty be passed on to the customer.  These issues reflect the lack of maturity of the PV market, risk perception, lack of familiarity with the marketplace, and little claims history. 

 Additionally, the generation of solar power requires a large area for the system to be efficient.   To generate 2 kilowatts of power, you need about 240 square feet of solar panels.  This is a problem in inner cities where demand is high but space is limited.  

While the costs of PV are steadily decreasing, Solar Power technology remains expensive.  Currently PV systems cost between $6,000-$10,000/kW installed.  This includes the cost of the PV module itself, as well as installation, wiring, support structures, battery storage (if present), etc.   Solar energy does not work at night without battery storage.  Furthermore, cloudy weather can hinder the technology even during the day.  Efficiency is an issue; most modern PV modules are about 10% efficient in converting sunlight.

Despite these challenges, major shopping center owners such as Macy’s, Inc. and Wal-Mart are increasing their commitment to renewable energy and being recognized for their efforts.  In 2007, Macy’s Inc. earned a Green Power Award from the U.S. EPA.  Similarly, in 2008, Safeway, Inc. entered into green power purchase agreements as part of a comprehensive environmental strategy to benefit exiting design.  According to EPA, Safeway is also the first retailer and grocer in North America to join the Chicago Climate Exchange and commit to legally binding reductions of its greenhouse gas emissions.  Notably, Kohl’s Department Stores receives 100% of their power from renewable sources, and received a Green Power Leadership Award in 2008, and EPA’s Partner of the Year in 2009. According to EPA’s Green Power Partnership, the purchase of electricity generated through renewable sources has experienced significant growth in recent years and the total market for green power exceeded 24 million MWh in 2008.

A SOLAR FUTURE

Currently, any consumer can purchase “green power” through renewable energy certificates (RECs).  The vast majority of RECs are sold to commercial and institutional customers by utility companies using a variety of renewable energy sources (e.g. solar, biomass, wind, etc.).  According to a recent report by the National Renewable Energy Laboratory (NREL) in May 2010, on-site solar is projected to increase its market share forecasts for the total voluntary demand for renewable energy, while utility green power programs and competitive markets are projected to decline.   According to NREL, in 2015 voluntary demand for renewable energy will range from 63 million MWh annually to 157 million MWh.  When extended to 2020, projections show 94 million MWh to 327 million MWh.  These estimates vary based on the adoption of national, regional and local policies that affect purchaser motivation (i.e. cost) based on the adoption of carbon policies that would significantly reduce the volume of existing purchasers.   The higher estimates assume optimistic growth in on-site renewable energy installations driven by aggressive cost reductions in solar PV systems.  In the end, much of the value of green energy will be driven by increased demand for energy, and policy decisions that address how green house gas inventories are allocated by utility customers.   

CONCLUSIONS

For the many reasons described in this article, PV technologies combined with energy policy and tax incentives create significant opportunities for sourcing renewable energy to the commercial real estate market.  According to William E. Winner, Ph.D., Professor of Forestry and Environmental Resources and Program Coordinator for the University Energy Counsel at North Carolina State University, “The current technologies for providing energy to shopping centers are simply not sustainable.  The need is to look forward to a new energy future that ensures safe, sustainable, secure energy that mitigates climate change.  The vision for the new energy future is not a decrease in the standard of living, but an advancement in living standard that provides the heating, cooling, lighting, and space needed for the human endeavor.”  According to Professor Winner, “Forward looking, the new energy technologies will include not only PV, but other energy sources and management strategies that include passive solar heat exchange, more effective use of natural lighting, better insulation, new paints to optimize thermal balance, and creation of new energy sources such as solar fuels.  The role of shopping center owners is to help lead the nation towards the new energy future, and now is the time to evaluate the potential for PV to supplement existing energy sources.” 

 

If you are considering PV as a supplemental source of energy, commercial real estate owners should began with an assessment of the solar energy source in your areas.  Next, evaluate the Renewable Energy Policy Incentives available to you and develop an understanding of the specific laws in your state.  Finally, develop a business model using dollars in a cost/benefit analysis.  Determine what costs may be born by the tenants either as an up front obligation or a contribution payable over time.  Such an approach will establish a framework for deciding whether rooftop solar power generation is right for you.

For more information on purchasing renewable energy visit EPA’s website

By Michael  P. Carvalho, Esq.
CARVALHO & ASSOCIATES, P.C.
Published in Retail Law Strategist
Februray 2011

 


 

MICHAEL CARVALHO is an environmental attorney and President and Shareholder at Carvalho & Associates, P.C., headquartered in Marietta, GA. He practices law in Massachusetts, Georgia, Michigan and Washington, D.C. His national practice includes litigation, regulatory enforcement matters, and transactional issues associated with the re-development of environmentally impaired real property.  He is a former environmental consultant and nationally recognized expert in Brownfield Redevelopment.  He can be reached at (678) 354-0066 or by e-mail.


SOURCES

Southern Alliance for Clean Energy, www.cleanenergy.com

Southern California Edison, www.sce.com

Solar Energy International  http://www.solarenergy.org

National  Geographic, “Solar Energy

National Geographic, “Future Power: Where Will the World Get Its Next Energy Fix?” 

U.S. Energy Information Administration, “Solar Explained

Sustainable Business

First Solar FSLR

2008 Solar Technologies Market Report, DOE Energy Efficiency & Renewable Energy, January 2010

Voluntary Green Power Market Forecast through 2015, National Renewable Energy Laboratory, May 2010

Insuring Solar Photovoltaics: Challenges and Possible Solutions, National Renewable Energy Laboratory, February 2010. 

Constructing Commercial Buildings to be Solar-Electric Ready, Focus on Energy, 2008.