Rooftop Solar Power Generation

Although 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 two-part article discusses the types of solar power generation, recent federal and state incentives to increase supply and demand for the photovoltaic (PV) market, and challenges and opportunities for commercial users. It provides a step-by-step guide that will allow commercial building owners to determine when investment in PV is right for them.

Considering PV

When considering PV as a supplemental source of energy, commercial real estate owners should:

• Assess the solar energy source in their areas;
• Evaluate the Renewable Energy Policy Incentives available to them;
• Understand net metering options;
• Look at specific laws in their state; and
• 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 using renewable energy. According to the U.S. Environmental Protection Agency (EPA), the benefits of “green power” include avoiding carbon dioxide emissions, reducing air pollution, hedging against future increases in electricity prices, serving as a brand differentiator, generating customer, investor and employee pride, creating positive publicity, and enhancing an organization's public image. In addition, taking “green” initiatives 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 a 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 develop PV reliably. Commercial building 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 has experienced tremendous growth. According to the U.S. Department of Energy (DOE), the five-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.

Cost

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 the 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 with a four-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 eight-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, CA; Portland, OR; and Madison, WI, have all adopted favorable policies to encourage and expedite implementation of PV systems.

Financial Incentives for Solar Energy

Net Metering

One significant attraction to PV system installation is “net metering.” This 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 states and Washington, DC, 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 and Spain, for instance) 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. Building owners should investigate the use of PACE programs the same way they use tax increment financing (TIF) for infra-structure improvements in project development. Let the PV system investment be paid via the tax payments made by the tenants. 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

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 U.S., 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.

Solar Lease Arrangements

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., the “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.

A Case in Point

One of the early users of “green power” was Whole Foods, Inc., which hosts and owns solar systems at 11 locations and has contracted for up to 20 more. Combined with energy-efficiency upgrades, Whole Foods saves 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.”

Conclusion

Part Two of this article, in next month's newsletter, will discuss some of the practical considerations for PV systems.

Michael P. Carvalho is an Environmental and Energy Attorney based in Marietta, GA. He can be reached at 678-354-0066 or via e-mail [email protected]. Please contact him for a list of the source materials. Mr. Carvalho acknowledges the assistance of Christine E. Westberg in researching and writing this article.

Although 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 two-part article discusses the types of solar power generation, recent federal and state incentives to increase supply and demand for the photovoltaic (PV) market, and challenges and opportunities for commercial users. It provides a step-by-step guide that will allow commercial building owners to determine when investment in PV is right for them.

Considering PV

When considering PV as a supplemental source of energy, commercial real estate owners should:

• Assess the solar energy source in their areas;
• Evaluate the Renewable Energy Policy Incentives available to them;
• Understand net metering options;
• Look at specific laws in their state; and
• 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 using renewable energy. According to the U.S. Environmental Protection Agency (EPA), the benefits of “green power” include avoiding carbon dioxide emissions, reducing air pollution, hedging against future increases in electricity prices, serving as a brand differentiator, generating customer, investor and employee pride, creating positive publicity, and enhancing an organization's public image. In addition, taking “green” initiatives 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 a 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 develop PV reliably. Commercial building 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 has experienced tremendous growth. According to the U.S. Department of Energy (DOE), the five-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.

Cost

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 the 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 with a four-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 eight-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, CA; Portland, OR; and Madison, WI, have all adopted favorable policies to encourage and expedite implementation of PV systems.

Financial Incentives for Solar Energy

Net Metering

One significant attraction to PV system installation is “net metering.” This 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 states and Washington, DC, 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 and Spain, for instance) 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. Building owners should investigate the use of PACE programs the same way they use tax increment financing (TIF) for infra-structure improvements in project development. Let the PV system investment be paid via the tax payments made by the tenants. 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

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 U.S., 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.

Solar Lease Arrangements

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., the “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.

A Case in Point

One of the early users of “green power” was Whole Foods, Inc., which hosts and owns solar systems at 11 locations and has contracted for up to 20 more. Combined with energy-efficiency upgrades, Whole Foods saves 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.”

Conclusion

Part Two of this article, in next month's newsletter, will discuss some of the practical considerations for PV systems.

Michael P. Carvalho is an Environmental and Energy Attorney based in Marietta, GA. He can be reached at 678-354-0066 or via e-mail [email protected]. Please contact him for a list of the source materials. Mr. Carvalho acknowledges the assistance of Christine E. Westberg in researching and writing this article.