Clean Energy Future by Arno Harris

Who's Getting Credit(s)?

Since my recent post about the SCE solar PV program, several readers and journalists have asked me to clarify my point that building owners who participate in the program can't claim their building is any "greener" as a result. It strikes some people as counter-intuitive--after all, the building's roof is loaded with solar panels generating clean electricity, right?

The answer depends on who is buying the output of the system and whether they're buying the Renewable Energy Credits (RECs), in addition to the electricity.

In terms of physics, "green power" is no different than "dirty power" when it's flowing down a wire--they're both a stream of electrons. What makes green power different is that its generation doesn't result in any harmful emissions being spewed into the atmosphere. Thus for every unit of clean electricity generated, we refer to the "green benefit" as the avoided emissions that would have otherwise have been created if that same electricity had come from a conventional fossil-burning source.

To keep everyone honest, it's important that we have a way of tracking how much renewable electricity has been generated and who can claim the benefit of their avoided emissions. To do this with renewable power, the market uses a simple tracking system called Renewable Energy Credits (RECs). For every megwatt-hour of clean electricity generated by a solar or wind power plant, we grant the owner of the system one REC. The person who buys the REC from the owner is the only one who can claim the benefit of the avoided emissions.

Why is this important? It keeps the accounting of all those avoided emissions from getting fuzzy. Take the SCE example--a large solar array is installed by a utility on the rooftop of an industrial building that houses a shipping company. Without RECs, we might end up with each party--the utility, the building owner, and the shipping company--claiming to have reduced their emissions footprint. That would obviously be triple-counting because only one set of emissions has been avoided. RECs provide a simple and accurate way to make sure avoided emissions are counted only once. Only the buyer of the RECs from the project gets to claim the emissions reductions.

Under SCE's program, SCE is taking ownership of the RECs and using them to meet their obligations to regulators under California's renewable generation rules. So, neither building owners nor their tenants can claim to be any greener because they're still using the same quantities of electricity from the utility.

SCE & ProLogis Solar Roofs Announcement

Given Recurrent Energy's focus on industrial REITs, we've gotten to know the team at ProLogis over the last year. We knew they had been talking to SCE--so we weren't too surprised to see the announcements SCE and ProLogis made this morning. According to the releases, SCE will install up to 250MW of solar over the next 5 years, starting with a 607,000 sq ft roof in Southern California from ProLogis.

In no particular order, below are a handful of thoughts from my perspective on the program:

Doesn’t Serve ProLogis’ Tenants or Green their Buildings – This sounds like a great deal for SCE and ProLogis—but it doesn’t allow ProLogis to make any green claims about their properties and it provides no benefits for their tenants. From what we can see, all the green benefits go to SCE and ProLogis just gets some roof rent.

Solar as a Service is a Better Solution for Leased Properties – Solar as a Service provides property owners with all of the same economic benefits as the SCE program, plus it enables owners to deliver green power directly to their tenants - not to the utility as SCE does.

Validates Recurrent Energy's Market Focus and Customer Demand – The announcement is a validation of Recurrent Energy's focus on REIT and institutionally owned industrial rooftops as a vast, untapped solar resource. Now that SCE and ProLogis have taken this step publicly, our customers will face enhanced urgency to roll out programs of their own. We’re the best positioned company to help them do it.

Increases ITC Confidence – Given the scale and timeline of the SCE project, we’re glad to see the governor, SCE, and CPUC share our belief that the ITC will be renewed soon.

SCE is not a Broad Competitive Threat – We don’t see this as a competitive threat on a broad basis because SCE is limited by their utility footprint to the Los Angeles area and we are addressing the national market.

Big Regulatory Hurdles – Today’s announcement serves as proposal for SCE’s roll-out plans.  However, the program still requires regulators to approve the funding and the biggest hurdle is that their approach will stick the cost to ratepayers. As of now, it’s not clear what the actual costs will be and it’s difficult to assess whether the program will be approved by the CPUC.

Reason to Question the Numbers – While exciting, we have to recognize that this is yet another big solar announcement by SCE. Previous experience suggest we should watch what SCE does, not what they announce to the press – where’s the 900MW Stirling Energy Systems deal that was announced two years ago?

GreenTech's PPA Report -- Key Insight on Leased Buildings

GreenTech Media just published a report by Jon Guice & John King entitled Solar Power Services: How PPAs are Changing the PV Value Chain, one of the first reports I've seen that tries to describe the current state of solar PPAs in the industry. A key observation that comes through in the report is just how the "rise of the PPA" has become a major dynamic driving the US commercial solar market.

Among the reports key points that correlate with what we're seeing in the market at Recurrent Energy are:

• In 2009, PPAs will be established as the standard way that American businesses pay for on-site green power, bringing solar to commercial rooftops of mainstream America with yearly additional growth of 30-50%.
• In 2008 the clear majority of new commercial installations will be third-party
  managed, with 65-75% of the market.
• In 2007, of the national commercial and institutional solar market, an estimated
  50% was developed under PPAs, up from 10% in 2006.
• The PPA segment has not only outstripped conventional commercial PV sales, it has also expanded the market — acquiring new customers that would not have purchased solar hardware.
• PPA companies will continue to drive down costs with innovations across the entire
  value chain.

There were two things I was somewhat disappointed with in the report. First, I think what almost any reader would want is an in-depth analysis of the companies competing for position in solar services. The report provides a fairly high level description of the major players and summary stats on financing and fund status. Recurrent Energy compares well on those metrics as we were one of the earliest of the venture-financed market entrants--and we have the largest open-ended solar project fund at $200MM. But I would have liked to see a more critical look at how the various companies differentiate themselves (or don't) in the market

The second issue I have with the report is that it captures the current state-of-the-art in PPA solar finance, but neglects to explore how companies like ours are extending and enhancing solar service offerings. For example, the report states that PPAs work best for customers that "own their building or have a long term lease" and "customers who have good credit." Indeed, these have been the criteria for most "plain vanilla" PPA financings because they represent the easiest combination to finance with a bank or tax equity investor.   

It is precisely the industry focus on these easy financings that explain the rush to big box retail and corporate campus solar projects--and why solar has achieved almost zero penetration in the leased properties market segment. Yet leased buildings easily represent 60% or more of the solar friendly rooftops in the US! Owner-occupied buildings are the minority.

The key to opening up the market substantially is to solve the "lease barrier"--and that's exactly what Recurrent Energy has done with it's approach. Our key innovations enable us to offer our service to owners and tenants of leased buildings where leases and even ownership terms are  shorter than the typical PPA finance term. These breakthroughs mean that we can address the largest market segment in a way that differentiates our offering on features other than price.

All in all, for anyone in the industry, I think the report is a must read. I look forward to the next report from the authors that will hopefully shed more light on the players and innovations in service offering that are also driving the industry forward. 

AB 1103 - Building Energy Usage Disclosure Coming to California

California Governor Arnold Schwarzenegger signed no less than 10 energy bills in October 2007, many of them specifically promoting usage of solar generating systems.  However, it was AB 1103, one the face of it one of the non-solar bills, that really caught my attention.  Effective Jan 1, 2009, AB 1003 promotes energy conservation by requiring electric and gas utilities to record energy consumption data of all nonresidential buildings in the state to which they provide service.  This data is to be uploaded in a format compatible with the US EPA’s Energy Star Portfolio Manager and preserve the confidentiality of the customer.  So far, so good.

The real impact on property owners will come after January 1, 2010.  With a year’s worth of data at its disposal, the EPA would have a significant database for benchmarking the performance and energy efficiency of any commercial building in the state.

What does this mean to building owners?  Well, it means that buildings owners and operators would have a data resource allowing them to compare their buildings’ energy performance relative to other buildings and to manage their energy costs.  However, the bill also requires building owners to make that data available to prospective tenants, buyers and lenders. Here’s where the so-called “green premium” comes into play. 

Energy ratings--on efficiency and sustainability--just became another tool in the building owner’s toolkit for attracting a new, higher-paying, socially-responsible tenant, premium pricing from a buyer and the best loan terms available from a lender.  Of course, all this pre-supposes that the building actually is energy efficient and ranks highly on the Energy Star database.

Building owners, property and asset managers in California have less than two years to prepare their buildings for this new reality.  You have to believe they are looking into every available renewable energy option and assessing if it will work for their existing property or planned development.   

How Green is Your Building?

It’s no secret that the real estate industry is a major user of natural resources and thus, has one of the largest carbon footprints of any industry sector.  In fact, a recent report released in the United Kingdom and produced by property advisors GVA Grimley, assessed the carbon footprints of the country’s 10 largest cities based on total overall commercial space.  It’s an illuminating report, even for those of us “on this side of the pond,” because it is indicative of a growing awareness among the real estate sector that issues such as sustainability and renewable energy sources such as solar are not just a passing trend.  With the U.K and many other countries committed to reducing greenhouse gas omissions, the green movement is there to stay.   

This fact was brought home to me in another recent report, “The Greening of U.S. Investment Real Estate – Market Fundamentals, Prospects and Opportunities” which was issued late last year by the research division of global institutional property manager, RREEF.  The report concludes that “green building is fundamentally altering real estate market dynamics” and that, through a combination of revamped building codes, federal and local government regulation, tenant demand and peer pressure, there will come a redefinition of what constitutes “institutional-quality” real estate. 

This report – and I expect others like it now in the works – points out that this redefinition is already be taking place.  Data analyzed by RREEF suggest that buildings meeting LEED and/or Energy Star standards consistently outperform other buildings in attracting tenants – space stays dark for less time and vacancies are less -- and in commanding higher rents per square foot than non-green conventional buildings.  Admittedly, most of these buildings are newly constructed and thus, more appealing, from a tenant perspective.  But, over the next few years, we expect more existing buildings to be retro-fitted to higher green standards and thus, to compete with even newly constructed product.

So, as the real estate industry becomes more aware of the economics of green, the bifurcation of the “institutional-quality” real estate market is likely to become complete.   This should leave many property owners today thinking: “How Green is my Building”?

$200mm for Solar Rooftops

Recurrent Energy announced the close of a $200mm solar project fund today. The fund represents a commitment by Morgan Stanley to provide financing for $100mm of Recurrent Energy's solar electric power projects in 2008 and an additional $100mm in 2009.

We're very excited about the news because of the size of the fund--and because we're the only new entrant in the solar services field to have reached this milestone. We've been working on putting the fund together for some time now and  settled on working with Morgan Stanley a little earlier this year.

But best of all, with the fund in place we can offer our customers and partners the added certainty of knowing we have capital lined up--with a leading investment bank--to offer PPA financing for solar power projects.

Solar & Greening Existing Properties

Sustainability and green building have taken the real estate investment world by storm. We've been working with some of the biggest REITs and institutional property owners on Solar as a Service--and we've witnessed firsthand as our clients have set lofty corporate environmental objectives and launched major internal initiatives aimed at greening their portfolios.

But an interesting question arises when you consider that most of these green building initatives are focused on new construction. How will sustainability be applied to existing buildings? How will those buildings compete in an increasingly green-built world? And what options to building owners have to prevent their buildings from becoming obsolete?

Jim Thomas, chairman of Thomas Property Group, put it plainly when I saw him speak at the PREA conference earlier this year. To him the sustainability of new buildings was old news. He challenged the audience to think about how they would protect the value of their current non-green portfolio investments,  "Every new office building being built will be green. The interesting question is what will happen to all those existing assets?"

This is where solar power and our service have a very important role to play. Rooftop solar is an ideal way to enhance the sustainability of an existing asset--unlike many other green building solutions, solar does not require major re-engineering of a building's systems. It integrates easily with the existing structure and electrical system and can be deployed in less than a year. And a solar array is like a "big, green billboard" advertising the sustainability of a building.

In other words, Solar as a Service is an ideal way for property investors to drive sustainability into their existing portfolio--quickly and with almost no risk or additional cost. It enables them to enhance the competitive position of older properties in increasingly green markets. And that's critical to maintaining asset value rather than letting it erode due to obsolescence.

Sizing the US Rooftop Solar Potential

We recently released the summary results of an internal study by Recurrent Energy assessing the solar potential of US rooftops controlled by REITs and institutional investors. The study is a nice complement to  those developed by Navigant for the CEC and DOE, assessing the California and national solar rooftop market opportunity.

The Navigant studies present a rigourous projection of market size under various cost scenarios. Our study is meant to answer a different question: what is the maximum generating potential of solar friendly rooftops controlled by institutional investors? This is an important question--for Recurrent Energy and for the future of the US solar market--because institutional property owners control the single largest concentration of solar-suitable rooftops.

Here's the relevant sections of our study:

Institutional owners of U.S. commercial real estate, including publicly owned real estate investment trusts (REITs), control enough rooftop real estate to generate 40,000 megawatts of solar power. A third of those rooftops are located in markets where solar can be a cost-effective source of electricity, according to Recurrent Energy, a San Francisco-based solar services provider. 

Currently, there is approximately 8.5 billion square feet of investor-owned large (> 35,000 s.f.) commercial rooftops nationwide, according to data analyzed by Recurrent Energy. Of this figure, about 5.5 billion square feet is considered suitable for photovoltaic installations because the roofs are flat and free of shading. Roughly two billion square feet of this space is located in states that currently have – or will have in place by 2010 – favorable incentives for solar electric generation. These rooftops could accommodate up to 15,000 megawatts (MW) of solar electric generation, compared to a total of less than 750 MW currently installed throughout the U.S. in both off-grid and grid-connected installations.

The study uses data from the DOE, various real estate industry databases, and models from Recurrent Energy.

Recurrent Energy: Financing 'News'

With the rise of the solar PPA, we've been experiencing increased press inquiries about Recurrent Energy and Solar as a Service. As a result, we made the decision last week to officially confirm the facts of Recurrent Energy's March financing to reporters.

The funny thing was that in trying to make the news sound more current, the early coverage we received (from Venture Beat and Red Herring) gave the story a more immediate angle and made it sound like we'd just raised the round last week. The fact is we raised the $10MM round in back in March and the business has been around (as my readers know) since early 2006. The stories also made it sound like our investors--Mohr Davidow Ventures and JEN Partners--were piling into a hot category when in fact both have been supportive and involved with Recurrent Energy from our early days. Of course, we're happy to get the coverage and it's been nice to get the congratulatory notes.

One of the key reasons we were able to raise our round was that we convinced our investors we had a well differentiated strategy. What makes us different is our market focus on organizations with large property portfolios—the largest and most valuable market segment—and innovations in our Solar as a Service offering that meet some very unique needs of our target customers. Raising the round back in March means we've been actively engaged in the market with our offering, validating the approach.

We believe the market for solar services is huge and growth will be sustained over the long-term. We don't think that being first or biggest at this moment matters all that much because it's so early. What matters is being smart about what you're selling and who you're selling it to--it can't just be about "solar financing" or selling the lowest cost kilowatt-hours via a PPA. Price is important of course, but there are other critical components to delivering value via solar services. Our focus on providing a differentiated service to the highest value market segment is the core of a strategy that will ultimately deliver market leading growth.

We intend to tell more of our story over time of course, but the pace will be determined by what makes sense for our customers--which is of course the way it should be.

SMUD Visit -- Solar Shares

I had a nice visit with the team at SMUD several weeks ago along with Shai Agassi, Martin Roscheisen, and Chris Anderson (who arranged the trip). We were very graciously received by SMUD CEO Jan Schori and members of her team.

One highlight of the trip was the tour of SMUD's grid operations center led by Jim Shelter. It's one thing to read about things like transmission congestion, dispatch, reserve margins, and ancillary services; but, it is another to see how the operators actually track, manage, and control it all. What is equally remarkable is how calm and orderly the process is--I kept thinking about the plans we have for Recurrent Energy's solar network operations center and took lots of mental notes.

Here's a photo of Shai, Martin, and me at the heart of it all:

Another highlight was the opportunity to meet with some of the senior executives at SMUD who oversee programs relevant to our businesses. We met with Bill Boyce who runs SMUD's electric vehicles and vehicles-to-grid program which was of particular interest to Shai, who is blogging about his efforts to start a very ambitious electric vehicle service following his recent departure as president of SAP.

For Martin and me, it was great to hear from Mike DeAngelis, the program manager for renewables and DG, and John DiStasio, the assistant general manager for energy delivery and customer service. Of particular interest is the upcoming Solar Shares program, which is the approach taken by SMUD to comply with the California Solar Incentive program requirements. Rather than implementing a host-customer incentive program, SMUD will meet it's solar generation targets by purchasing bundled solar energy in 1MW units from developers via a solar Power Purchase Agreement (PPA). It will then sell solar "shares" to its residential and commercial customers, allowing them to make a claim that their supporting and receiving solar energy service.

Solar shares is yet another take on how utilities will integrate distributed solar generation into their supply mix--and I think it's a promising approach. It encourages larger scale generation, which should create some purchasing efficiencies. Buying energy via a PPA allows them to shop for the most efficient projects that combine the best siting, design, and capital structure--leveraging the efficiency of the market to achieve the best cost per kWh. Plus using a PPA puts the performance obligation on the developer, aligning the interest of the developer with the utility's interest in receiving reliable solar output. Recurrent Energy is participating in the RFP process on Solar Shares -- we'll be very interested to see how it all turns out.

Thanks to Linda Carey Johnson, SMUD's chief information officer, for arranging the visit on SMUD's side -- we had a great time.

Solar PPA: Role in Carbon Footprint Reduction

I hear constantly from well-meaning but frustrated companies struggling to prioritize the various carbon reduction opportunities in front of them. At its simplest level, the problem is best broken down into three steps:

1. Quantifying and categorizing a company's carbon footprint or GHG inventory;
2. Determining what mitigation strategies are most credible and relevant; and,
3. Prioritizing the most cost-effective of those strategies to deploy.

The GHG community has largely settled on the WRI/WBCSD GHG Protocol as a means of achieving the first step. In short, it identifies three "scopes" or emissions categories that define a corporate GHG inventory:

• Scope 1: Direct Emissions - a company's direct GHG emissions from equipment and processes owned or directly controlled by the company.
• Scope 2: Indirect / Energy-Related Emissions - GHG emissions related to electricity or steam purchased from third parties.
• Scope 3: Indirect / Other Emissions - GHG emissions related to a company’s activities, but from sources not owned or controlled by the company. Scope 3 emissions can include upstream emissions from suppliers and raw materials industries, downstream emissions from customers that result from the use of a company product, or even employee travel.

(Mark Trexler has an interesting post on this that is well worth reading, particularly as he addresses some of the thornier issues associated with Scope 3 emissions definition and potential for double-counting between Scopes.)

For this discussion, the important point is that most companies will focus their efforts on Scope 1 and Scope 2 emissions--because those are the emissions most directly connected to a company's controllable operating activities and those that are most likely to be subject to future regulation.

Furthermore, according to the EPA, "generating electricity is the single largest source of CO2 emissions in the United States, representing 38 percent of all CO2 emissions." And, for the majority of non-industrial businesses in the US, electricity usage is the largest driver of their GHG inventories. This leads to an interesting insight, which is that most US companies will find the biggest opportunity for GHG mitigation focused on reducing and/or greening their electricity consumption.

This is in part why there has been so much attention and skepticism around the use of RECs. As companies have sought to quickly and easily green their energy consumption, some have ended up calculating their Scope 2 emissions and then addressing them by just offsetting their inventory with a bulk REC purchase. While this has the allure of being easy, it raises a number of questions about the quality of GHG inventory reduction achieved. The ironic result is that companies that are trying to do something good end up running the risk of damaging their credibility.

A more robust Scope 2 mitigation strategy should focus on (1) reducing energy consumption through elimination of waste and inefficiency and (2) displacing third-party energy sources with clean on-site energy (usually solar power). Offsetting with RECs should be applied only to the remaining energy balance after all efficiency and on site energy opportunities have been exhausted.

Historically, the main challenge for companies engaging in efficiency and energy projects has been challenge of allocating capital to various projects because of the complexities of calculating project returns that incorporate tax benefits, utility incentives, and performance risk. The development of energy service performance contracts and solar PPA's removes this hurdle, enabling companies to make efficiency and solar power commitments on a pay-as-you-go basis with predictable pricing and no capital investment. From my perspective, these innovations play a key role in enabling companies to achieve robust Scope 2 mitigation with a lot more certainty that they are taking the right steps in the right order.

In closing, here's a link to a slide from one of our presentations on how we see Solar as a Service (Recurrent Energy's solar PPA offering) fitting into the overall GHG protocol,

The Rise of the PPA

ThinkEquity's latest GreenTech Newsletter confirmed what all of us in the California solar industry are witnessing firsthand: (1) the California Solar Incentive is "the locomotive hauling the nation into the global PV market" and (2) the beginning of  true mainstream adoption of onsite solar power facilitated by the rise of the Power Purchase Agreement (PPA).

In the last few weeks, we've seen large solar commitments by two signficant retailers. Kohl's Department Stores announced it would cover 75% of its California stores in the coming years--at an average store size of 88,000 sf that pencils out to somewhere between 20 and 30 MW of solar installations for one customer alone. That announcement was followed by one from Walmart providing notice of a 22-store solar pilot project in California and Hawaii estimated at 11MW. Target also announced a smaller scale pilot  in the same time frame for several of its California stores.

These deals are remarkable for their size, who's buying, and why--and it's these aspects that demonstrate why I consider this a sign of a mainstream market adoption trend. In an earlier post, I explored the idea of mapping technology market adoption models to greentech markets. One of the key purchase behaviors that distinguishes early adoption from mainstream adoption is buyer motivation. Mainstream customers are pragmatic buyers who's purchase rationale is to secure an important business advantage. Kohls, Walmart, and Target are buying solar power for two principal reasons: (a) energy is one of a retailer's biggest controllable operating expenses, and (b) as consumer-facing brands they benefit from associating green values closely (and credibly) with the customer experience. That combined with the scale of the commitments is enough to convince me that these qualify as mainstream behavior markers.

I remember once talking with an operating executive at a large grocery chain several years ago who told me that his company "made money by saving money." In thin-margin, competitive industries, understanding and capitalizing quickly on opportunties for saving is a key part of maintaining a competitive edge. That's why the PPA is such an important part of this market picture. Mainstream buyers seeking competitive advantage typically do not want to invest capital directly in a solar power system because they can't control enough of the operating risks to guarantee a sufficient economic return. It makes much more sense to hire an expert vendor to own and operate the system -- and then buy the energy at a competitive rate as it is needed (locking in predictable energy prices).

Based on what my company, Recurrent Energy, is seeing out there in terms of interested buyers and deal opportunities, I think we're going to see more announcements soon that will continue the mainstream trend. For those of us who've dreamed about this since 2001 when California's first solar incentives launched, it's a welcome development indeed!

Skepticism and Carbon Neutrality

It was just months ago that Webster's named "carbon neutral" the word of the year. But in the last month or two, we've seen the first wave of "neutrality skepticism" expressed in articles from publications like NYTimes, FT, and Newsweek.

We can argue about whether these article got the details right, but I think that misses the point. The reality is that the media and the general public have a justifiable right to be skeptical about the neutrality claims and the related use of credits and offsets. In voluntary markets, this has been the focus of a heated industry debate for some time now. However, even in the EU ETS, it's apparent that there is a wide range of quality issues and accounting problems with CDM-originated offsets and gaming of credit allocations.

Rather than denying there's an issue, the neutrality and renewables industries need to take the issue head on. This is a credibility issue that threatens to undermine the public's trust in the very notion of trading emissions, a principle that is critical to ensuring the marginal cost of reversing our emissions trends is shared fairly and equally among market participants. If the public's skepticism attaches to the notion of trading emissions--rather than to the underlying issues of credit quality, standards, accounting methods, and neutrality practices--we will have lost a valuable economic tool in the fight to capture externalities and reverse climate change.

I'm a huge believer in credit/offset trading for both carbon and renewable energy--so I see this issue framed from the perspective of an enthusiastic advocate. In my opinion, the industry needs to do two things quickly:

• Adopt standardized methods and practices for achieving carbon neutrality. Some very well-meaning companies have received poor advice and have chosen as a result to simply "offset" their carbon footprint with bulk REC and/or carbon credit purchases. We need to encourage more rigorous practices that emphasize process change, energy efficiency, and onsite renewables--with offsetting as a final method for addressing emissions that cannot be reduced otherwise.
• Address the quality problem by establishing rigorous standards for the origination and accounting of credits/offsets. There are industry groups working to do this now, and it's my hope that what results are credible and rigorous, rather than self-serving, standards.

Certainly we should not let "perfection be the enemy of the good"--yet conversely we cannot let market expedience be the argument for practices that hurt the public perception of the neutrality industry in the long term.