Clean Energy Future by Arno Harris

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”?