Georgetown Energy, a student consultancy devoted to helping residents convert to solar electricity, is heading a monumental solar project that involves turning 43 quintessential student townhouse residences to solar electricity in the midst of Washington DC’s historic Georgetown district. Although it is a long-term project to be enjoyed by the generations after many of the current members of the group have graduated, Georgetown Energy students believe that the rewards of such an innovative project are well worth the effort.

What magic surrounding solar coaxed students to become involved so profoundly?  First, there is a substantial payback for the investment. In a solar lease contract signed between Georgetown University, which owns the student townhouses, and Solar City, a leading national solar installation company, adding 96.6 kW of solar capacity to 43 townhouses will require an initial investment of about $164,000, much less than if the University were to purchase the solar panels. Although Georgetown Energy has partnered with SolarCity for this project and used its solar lease scheme as a model, the project will be offered to various installers at its final stages. In the innovative solar lease scheme, the University will “lease” the roof of each townhouse to the installer, which will design, own, and operate a solar photovoltaic system on each townhouse.  The installer will then sell the electricity produced from each solar project to the residents of the townhouse at a lower price than the traditional competing utility. Savings increase every year and over the 20 years duration of the solar lease contract, students would save a total of $458,856 in their electricity cost. After the contract is over, the student body can decide whether to buy the panels at a low price.

Indeed, another charming aspect of the proposal is that everything is student-owned. Originating from the need to allocate a 3.4 million dollar defunct student endowment, the solar investment will take up only a portion of the available fund and coexist with other student proposals as well as generate profit. Ideally, Georgetown Energy sees the proceeds creating a fund for related projects to further environmental awareness and energy studies on campus.

Is there anything else in it for the university, the students, and the DC area? Sol Systems, a strong force in the fight for better solar incentives in DC, believes so. Not only is being involved in such a movement ideal preparation for a career in renewable energy (two recent graduates and former members of Georgetown Energy actually work at Sol Systems), but there is much potential for the greater DC area too. Of course, cleaner air for the district tops the list. It may even attract more students interested in environmental and energy issues and demonstrate the feasibility of clean energy investments, creating a virtuous cycle of environmental awareness and action in the university community. Perhaps the project may even set an example of a successful clean energy investment that some students may follow individually in the future. Lastly, it is a modern display of service to the community, the crux of the founding Jesuit ideals of Georgetown University.

What stage is the project at right now? In April 2011, a student commission voted in support of the proposal. Now Georgetown Energy students are working with University officials on the details. These include contractual issues, billing mechanisms, pricing, and structural and electrical issues with the houses. The Georgetown Energy students are learning some concrete skills needed for evaluating any type of construction investment. The work done from June-August 2011 will culminate in a final recommendation to be handed to the University on September 1^st after which Georgetown Energy students will have to persuade the rest of the student body off their feet for a concluding student referendum and choose from final proposals from competing vendors and permitting.  If all goes well, the battle will be won one year from today. The panels will be constructed in Fall 2012 and convert ordinary sunrays to a unique opportunity for revenue and intellectual growth – truly magic!

The result is a strange dichotomy of a manufacturing industry undergoing rapid growth and simultaneously undergoing a stressful reallocation of resources and a fairly pessimistic outlook on Wall Street. The WilderHill Clean Energy Index, which includes solar and other alternative-energy stocks, fell 5.3 percent last year, compared with a 12.8 percent rise in the Standard & Poor’s 500 index. Companies like SunPower, Yingli, JA Solar, Trina, Canadian Solar, MEMC, Suntech and others all produced significant negative returns, some upward of negative 20 percent.

This fall in module prices, and the corresponding difficulties for module manufacturers, will likely continue through 2011 as the world’s top solar market, Germany, further cuts its solar subsidies and a growing supply of photovoltaic modules outstrips demand, putting pressure on prices and producers’ profits. As others have noted, a weak euro will compound the problem for Chinese and U.S. manufacturers. Last year, Germany, Spain, France, Italy and Czech Republic all cut back their solar subsidies. Further cuts are expected in Germany and France in the first half of 2011 and in Italy in the second half. Those three markets account for around 70 percent of the global market, according to Bank of America Merrill Lynch. Next year may be the first year in which more solar is built in the United States than in Germany.

For the solar installer and developer community this is presumably welcome news (ignoring the risks, of course, that similar reductions in incentives may take place here). As solar module costs decline, so are total system costs since modules compose a significant portion of the overall costs of a solar system.

However, cost reductions do not uniformly impact the solar community. Because of economies of scale, module costs account for a much larger portion of commercial-sized solar system’s costs than residential. The impact is still more powerful with regard to utility sized projects. As a result, falling module costs disproportionately benefit larger systems, as illustrated the figure below (care of SEIA).

Not only are commercial and utility costs already significantly lower than residential costs, they are also falling more rapidly. Indeed, utility projects are falling in price at three times the rate that residential projects are. This is an interesting window into the solar industry in the United States, which is that solar systems will undoubtedly get BIGGER.

To compound this trend, as states drastically reduce or altogether cut their rebate and grant programs for residential and small commercial systems, the economics that once favored smaller projects are starting to disappear. States like New Jersey, California, Maryland, Pennsylvania, Ohio and many others have all gutted their tax-funded rebate or grant programs. American Recovery and Reinvestment monies that flowed through the states in much of 2009 and 2010 are nearing their ends. Although module costs are falling significantly, they are not falling (nor could they) by two to three dollars a watt , which was often the size of grant and rebate monies. The result is a further shift upward in size. In Massachusetts, for example, given the emphasis on a solar renewable energy credit (SREC) market, many developers are starting to focus exclusively on commercial and utility scale projects.

For residential focused installers and developers, this may be an opportunity or a challenge. Presumably, those firms that can secure large economies of scale in purchasing power will better weather these changes than those that cannot. Additionally, because size matters, the industry may see consolidation. Hopefully, it will also see aggregation or collaborative models, where residential and small commercial installers work together to secure better financing opportunities and engineer more sophisticated acquisition models. This, of course, is a primary focus of financing firms like Sol Systems. Additionally, power purchase agreements and lease agreements may gain prominence if effective costs rise for residential customers in the absence of rebates.

For commercial and utility developers, a move upward in size means a necessary move towards more complex financing instruments. It becomes a bit more difficult to make a pure equity play on a multimegawatt project – a blended debt/tax equity/first loss equity product is typically required to reduce risks and bring down the costs of capital. To see this approach succeed, the capital markets will have to open further to solar projects. A lack of access to debt markets and tax equity was a big part of what has slowed the growth in wind and large-scale solar in the last few years. So this may be a challenge. On the other hand, Chinese banks continue to push into the US market to debt finance multi-megawatt portfolios, so it may not only be Chinese modules the US industry is using, it may also be Chinese money.

In sum, as the industry grows, there will be a continued movement towards larger projects. To succeed, players will have to become more sophisticated. This will favor players in the residential space who are able to collaboratively or individually leverage economies of scale and acquisition models and players in the commercial and utility space who are able to better secure complex financing instruments.

This program is revolutionary because it specifically incentivizes the development of “distributed generation” electricity. Distributed generation, unlike centralized generation from large fossil-fuel power plants and renewable energy farms, reduces the amount of energy lost during electricity transmission and helps Independent System Operators (ISOs) mitigate congestion in the transmission lines.

States such as New Jersey, District of Columbia, Pennsylvania, Ohio, Maryland and Delaware have set up aggressive Renewable Portfolio Standards (RPS), which promote the development of solar energy and create markets for Solar Renewable Energy Credits (SRECs). However, if these states wish to incentivize the promotion of distributed solar generation, it is important that they follow California’s lead in creating specific incentives for residential solar development.

If the 375,000 new homes sold across the U.S.* were equipped with a 5kW solar photovoltaic system, an additional 2,250 MWh would be generated each year. This would be sufficient to meet their energy demand for approximately six months.

*2009 Census- new home sales in U.S.
**Energy Information Administration- Table 5 Average Monthly Bill by Census Division, and State

So what does it mean for solar energy? In sum, it doesn’t hurt solar, but its immediate effects may not help much either. The proposed alternative compliance payment (ACP), which is the penalty energy suppliers must pay if they do not comply with their requirements is set low, especially when compared to current state RES programs such as New Jersey or D.C that have developed a foundation for a strong solar market. In addition, the portfolio of qualifying technologies may be too inclusive (by including numerous technologies the impact on any one technology is limited.

However, the legislation provides the framework, a seed of sorts, for the continued implementation and development of RES legislation nationwide. As RES markets develop nationwide, the solar industry can begin the task of adjusting to a more sustainable regulatory mechanism that is likely to help accelerate the implementation of solar technology (and others) well into the next decade. Our analysis is below.

BACKGROUND

What Does a Federal RES Do?

The federal Renewable Electricity Standard requires that a certain percentage of the electricity purchased in the country come from renewable energy resources. The purpose of an RES is to set up a competitive market in which utilities either (1) directly produce a specific amount of renewable energy based on their total load or (2) effectively purchase this renewable energy from others producing it or (3) pay a penalty. Most utilities will choose some combination of all three. In some state markets, an RES is called a renewable portfolio standard (RPS) or alternative energy portfolio standard (AEPS).

If utilities opt to go with the second strategy listed above, they usually do not purchase the energy from renewable energy resources, they simply purchase title to the “credit” associated with the renewable energy, termed a renewable energy credit (REC). Since energy can be measured in megawatt-hours (MWh), one REC represents the green attributes associated with one MWh of production from a renewable energy resource. Each time a homeowner or business produces one MWh from its solar system, it can sell the REC associated with this MWh in a competitive market. Technologies compete to produce RECs and sell them, and as these technologies scale, the supply of RECs increases, and the costs of these RECs decreases. The market is designed to drive down the costs of compliance and catalyze alternative energy technologies to scale.

CURRENT RES OVERVIEW

Volumes

The RES targets are less than the twenty to twenty-five percent recommended by most industry groups and President Obama himself this last year. The current RES requirements are below:

2012-13: 3%
2014-16: 6%
2017-18: 9%
2019-20: 12%
2021-39: 15%

The Alternative Compliance Payment

The Alternative Compliance Payment, which is the fee that electric utilities must pay in lieu of actually purchasing or producing the renewable energy credits required by the RES, is $21, adjusted for inflation. This means that for every MWH of electricity that the utility fails to supply from renewable energy, it must pay a fine of $21. The ACP effectively sets the ceiling on the value of renewable energy credits, with the caveat that there are multipliers (described below) that make some RECs more valuable than others.

Qualifying Technologies

Under the current RES, those resources include solar, wind, geothermal, biomass, landfill gas, qualified hydropower, marine and hydrokinetic renewable energy, incremental geothermal, coal-mined methane, qualified waste-to-energy, and potentially other technologies.

Multipliers

In order to incentivize certain technologies, states (and in this case the federal government) often provide multipliers for RECs from specific technologies or locations. Under the federal RES, utilities will receive double credit for RECs produced by renewable energy systems located on Indian land (to incentivize the development of renewable energy on Indian land) and triple credit for small renewable distributed generation less than 1 MW. Although not stated, it is likely that the maximum ceiling on energy efficiency credits will conversely reduce the value of RECs produced from energy efficiency upgrades.

No Preemption

The national RES will not preempt current state RES or RPS standards. Instead, the RES is meant to set a floor for states without current RES or RPS legislation to set up trading regimes and complement preexisting state legislation. The RES is a bit like the federal Clean Air Act or Clean Water Act in this respect, both of which provide states with a blueprint which they can either accept in whole, or mimic with state-specific standards that are as strict or less strict. This is incredibly important for those states that have more favorable solar requirements than the federal RES.

National Market

It is unclear at this point whether a national market will develop because of the legislation. Currently, the legislation provides for the delegation of responsibilities to either a national trading mechanism or a more regional mechanism. States will have to figure out whether they want their REC markets to be regional, like the Regional Greenhouse Gas Initiative (RGGI), or isolated, like Delaware, New Jersey, Massachusetts and others.

SREC Values

The value of solar renewable energy credits (SRECs) is typically a function of supply and demand . It is therefore unclear what the values of SRECs will be since this supply and demand will differ from state to state. Taken by itself, the legislation will not push SREC prices very high since the ACP is $21, with a potential multiplier of three ($63). However, current RPS states will likely retain their markets, and states without an RPS may develop more aggressive RPS legislation in light of the national RES.

ANALYSIS

Potential Negatives

1. The effective solar alternative compliance payment (SACP) is $63 per MWH for distributed solar energy systems (those below 1 MW in nameplate capacity). This is low enough that it is not likely to create a significant market for solar renewable energy credits (since the ACP provides a ceiling on the value of SRECs). This legislation is therefore unlikely to single-handedly develop robust markets for solar. However, as discussed below, the RES may provide the necessary legislative framework for the creation of such a market.

2. The list of qualifying “renewable energy resources” includes technologies that will be much less expensive to implement initially, and will likely flood REC markets. Solar energy, for example, is not likely to be able to compete with biomass or methane from mining.

3. Utilities can purchase energy efficiency credits. These credits are also likely to be much less valuable than SRECs, and may also flood the market – although they are limited to 26.67 percent of their overall required needs.

Potential Positives

Setting up a national RES begins to set minimum requirements, build the framework for the introduction of renewable energy legislation that many states currently do not have in an organized fashion, and develop a sustainable means by which to incentivize renewable energy. RES legislation is especially important for new technologies that may have higher up-front costs (like solar) because requirements can be structured around these costs. Although the standards may not be perfectly structured to assist solar energy at this time, most RES legislation is tweaked over time to better suite solar energy.

OUR CONCLUSION

The proposed federal RES is a good beginning, and provides a decent foundation for future legislation. Although it may not be perfect for solar initially, it forces legislators to address the important issue of alternative energy development, and provides them with a blueprint with which to do so. Our guess is that the requirements, and the ACP, will likely increase on a state-by-state basis. In the meantime, renewable energy is able to put itself on the map, and we’ve taken the first step of many in diversifying our energy infrastructure and moving towards a more sustainable future.

Arlington County has issued a Request for Proposals to pre-qualify multiple firms for installation of solar thermal and solar photovoltaic systems on County government buildings over the next 3 years. Pre-qualified firms will receive the Invitation(s) to Bid for solar installations. We anticipate these will range from 5 kW to 50+ kW in size.

As always, Sol Systems wants to remind our partners that we have SREC financing solutions to help you reduce the cost of your solar installations and win bids like these.

The Solar Licensing Database inventories, on a state by state basis, the licensing requirements to become a solar thermal and photovoltaic installer for each state.  This Database also provides useful links to the relevant state authorities who facilitate the licensing.

We think the Database could provide some valuable insights to installers who are  considering branching out into new markets.

However, on July 6th, the Federal Housing Finance Agency (FHFA) stated that these loans “present significant risk to lenders and secondary market entities, may alter valuations for mortgage-backed securities and are not essential for successful programs to spur energy conservation.”i The FHFA have taken this position because PACE loans are senior liens on a borrowers’ property, which means they take precedence over other mortgages. The FHFA oversees Freddie Mac and Fannie Mae and the organization believes this senior lien presents a risk to their mortgage portfolio. Currently, all PACE programs have been put on hold until further notice.

The FHFA needs to understand that PACE is a key component to the successful implementation of a sophisticated domestic energy policy. Many stakeholders have voiced their concern are trying to reverse or sidestep the FHFA’s resistance to the program. The State of California has filed a lawsuit against the FHFA, while numerous senators have introduced legislation that could potentially save PACE funding. Hopefully, they will prevail, since the program is a great way to create growth in the renewable energy sector and does not burden the borrower with high interest rates like many other lending opportunities. The most promising option appears to be a compromise in which the FHFA allows for a “pilot project” of between 10,000 – 300,000 homes to test out their concern over the perceived risk of this financing option.ii If approved, the success of this test cycle could lead to an increase in funding for solar energy systems.

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i Werthan, Jeffrey. “Federal Housing Finance Agency Warns About PACE Loans; Warning Communicated by FDIC,” Corporate Financial Weekly Digest < http://www.corporatefinancialweeklydigest.com/2010/07/articles/banking/federal-housing-finance-agency-warns-about-pace-loans-warning-communicated-by-fdic/>
ii Hiskes, Jonathan. “Fate of PACE clean-energy programs about to become clearer.” < http://www.grist.org/article/2010-07-20-fate-of-pace-clean-energy-programs-about-to-become-clearer/>

Clean Currents is a leading independent solar energy installer and clean energy broker, operating in the mid-Atlantic region. Clean Currents provides a diverse array of services, ranging from solar installations to power switch agreements for homeowners and businesses. Recently, Clean Currents provided Sol Systems with a Wind Renewable Energy Credit (REC) purchasing agreement that offset Sol Team’s entire business and personal carbon footprint. Clean Currents has been honored with such awards as the Maryland Green Company of the Year in 2010 and the DC Mayor’s Environmental Excellence Award in 2009. For more information about Clean Currents, please visit www.cleancurrents.com.

Sol Systems is a Washington D.C. based solar energy finance and development firm. With more than 1,000 customers across 13 states, Sol Systems has become a critical player in developing SREC markets and financing solar energy systems. Sol Systems currently offers long-term, fixed price SREC contracts, upfront SREC contracts, and SREC brokerage solutions in New Jersey. By utilizing Sol Systems’ options, customers can reduce solar installation costs anywhere from 20-40%. For more information about Sol Systems, please visit, www.solsystemscompany.com.

The current cycle of funding will offer $0.75 per watt in incentives limited to the first 7.5 kW of solar installations. Excluded from funding eligibility are commercially owned systems as well as all systems over 10kW. The current rates mark the lowest incentive offerings by the REIP since its inception.

Overall the REIP program has been very successful in making solar energy more affordable. However, as REIP incentives are scaled down and applications for incentives are backlogged, homeowners interested in installing solar energy are relying more heavily on SREC income to finance their solar energy systems. New Jersey SRECs remain the most valuable in the country and as state incentives decrease, SRECs will play an even larger role in making solar energy affordable to homeowners across the state.

Currently,  NJ homeowners and businesses interested in SREC financing have three different options to monetize their SRECs, each of which are available through Sol Systems: multi-year fixed-price contracts (Sol Annuity), upfront payment for SRECs (Sol Upfront), and a short-term market-based option which allows owners to sell SRECs at their current spot-market value (Sol Brokerage).

For more information on Sol Systems products, please click here. For more information on solar energy rebates and incentives in the state of New Jersey, please visit the Database of  State Incentives for Energy and Efficiency.