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Solar and LEED 2009: An Old Challenge in A New System

from Solar Feeds

Saturday, 18 July 2009

Cost/benefit analysis is certainly nothing new. Leed 2009 NC adds a new twist when your design team compares maximum LEED points against maximum potential energy savings from on-site solar. Project budgets are especially tight in the current economic downturn, and a ‘least cost’ point strategy may be attractive.

LEED 2009 reduces the energy cost savings required per solar point, and with it, the construction cost per solar point. Should a design team focus on achieving maximum solar points on a cost per point basis, or is there a compelling reason to install the maximum solar power system a roof will accommodate? There may be a strong business case for significant increase in the budget line item for solar.

Comparing solar construction costs [1], building energy costs, and energy cost savings for a hypothetical office building [2] in Southern California - 3 stories, 40,500 SF, annual energy costs of $83,500, and 13,000 to 15,000 SF of roof space - the numbers look something like the Table 1:

LEED 2009 requirements for solar points are well below maximum potential solar power system the roof might allow. The design team’s strategy might balance solar construction costs against the LEED point aspirations of the building owner or developer.

However, should energy costs double in the next decade, as is predicted, maximizing the size of the array might better serve your client than simply maximizing LEED points. Table 2

In California, this rooftop solar system will pay for itself by Year 10 and probably sooner. Because the costs, subsidies, incentives, and energy savings are scalable, a 25 kW system will have a the same simple payback period (SPP) as a 190 kW system.

With the system paid in full, largely through tax subsidies, incentives, and energy savings, would your client prefer to pay $77,000 or $155,000 per year for energy? How might a design team make the case for maximum solar during the design development phase?

Case 1: Face value does not tell the entire financial story. Many commercial buildings change hands at 5 to 7 year intervals. Even corporate headquarters are sold to investment trusts, and the original corporation becomes a long-term tenant. Using a valuation based on the amount of energy saved divided by something called the ‘capitalization rate’, the design team might successfully argue the solar array could add over $400,000 to the value of the building when sold in the sixth or seventh year.

Case 2: The American Recovery and Reinvestment Act of 2009 authorizes the US Department of Energy to issue cash “grants” covering 30% of the cost of a commercial or residential solar installation once it is commissioned and producing power. The DOE released a ‘guidance document’, terms and conditions, and a sample application last week.

Case 3: The federal government and several states offer generous tax subsidies. Several states also have appealing cash incentive programs. Programs include: 1) the 30% federal investment tax credit, 2) federal accelerated depreciation (equal to about 35 - 40% of the project depending on the tax bracket), 3) state tax breaks, 4) lump-sum cash incentives such as the Oregon Energy Trust ‘buy-down’ program, and 5) California’s five-year production incentive of $0.22 per kilowatt-hour of solar power. See DSIRE for a complete listing. In combination, they can offset 75% or more of project costs over a 6-year period. (This assumes that the building owner/developer can use all the tax breaks.)

Case 4: A limited number of solar developers will build, own, operate and maintain a solar power system on commercial (and residential) rooftops, and sell power at about the same rate the building owner or tenants would pay the utility. With modest upfront costs, a project gains the LEED points, the power is green power, and the building owner and/or tenants get a hedge against rising electric utility rates. Some solar developers offer power purchase agreements, others offer leases of various kinds. Third party finance of this type has become scarce during the economic downturn, but recent funding commitments to SunPower and SolarCity indicate that this may soon change. (And, after all, a medium to large project has a one- two year timeline.)

Four items to remember when making a case for on-site solar for a LEED building:
1. All financial calculations must be based on estimated cash flows over a minimum of six years. Be sure you can give your client the simple payback period (SPP), return on investment (ROI), and internal rate of return (IRR). Don’t make this case unprepared.
2. Get solar and financial consulting early in the project - this applies to many LEED points, not just solar.
3. Choose a solar contractor or developer early in the project, perhaps as early as choosing your CxA and get a commitment in writing.
4. Solar developers have many projects from which to choose. If you want to pursue 3rd party financing, make your system attractive by keeping it as simple and accessible as possible. [1] In calculating the cost of an on-site solar system, I have used tax subsidies and incentives from the first year of operations to adjust the budget cost of the solar power installation. Subsidies and incentives actually run for 5-6 years. [2] Assumption about the hypothetical 40,500 SF office building are too numerous to list in this post. Contact me if you are interested in the math.