Where Einstein Meets Edison

South West Solar: Installing and Financing Solar Power in the Southwest

South West Solar: Installing and Financing Solar Power in the Southwest

Mar 4, 2010

As another summer heat wave descends over San Diego on a July afternoon, San Diego Gas & Electric begins to issue warnings that electricity usage is nearing the grid’s capacity. Businesses respond by turning off some lighting and switching their air conditioners to lower settings. However, several businesses must power down certain equipment they would rather not suspend, in order to ensure that their most important operations can continue running.

Reductions in power availability from the grid would have previously had a major effect on one of the largest organizations in the area, but the University of California, San Diego has learned to defend against usage reduction requirements and possible rolling blackouts. When these warnings occur, solar energy generated from panels on the rooftops of its buildings helps keep the university running while keeping grid usage low. The solar energy is supplemented by fuel cells that run on renewable gas. Although the university must still decrease its electrical usage during these blackouts, UCSD’s investment in renewable energy generation has helped it to avoid the worst consequences of the reduction requirements, reduce its greenhouse gas emissions, and save money on its electrical bills.

In response to the threat of global warming, California has set a short-term goal to reduce greenhouse gas (GHG) emissions to 1990 levels by 2020. The state’s long-term goal is to reduce GHG emissions to 80% of 1990 levels by 20501. Their energy policy also requires that 33% of all generated power comes from renewable resources by 2020 (ref. 2). As renewable resources are not readily available, this policy creates economic hurdles for the state. Solar energy is one option for companies to create renewable energy generation projects that can supply electrical energy from renewable resources and help them reach GHG emissions targets.

Presently, California’s utilities fulfill most of the state’s power needs using electricity from GHG-emitting plants. Organizations that purchase electricity from California’s grid increase the amount of emitted GHGs and also expose themselves to fluctuating energy prices and occasional power failures. On-site solar installations would reduce the amount of energy purchased from California’s electrical grid, resulting in a reduction in GHG emissions at the source. Although solar installations can be costly to buy, the major disadvantages associated with solar technology can be mitigated with nontraditional financing arrangements.

UC San Diego’s Environment and Sustainability initiative has set several ambitious goals for the university, one of which is to become a leading user of renewable energy. The university’s goal is to generate 7.4 MW of renewable energy and provide 10 to 15 percent of the campus’ annual electrical usage from renewable sources. At UCSD, Solar Power Partners (SPP) developed a combined 1.2 MW solar energy system, which covers eight campus locations.

In order to avoid a large up-front cash expenditure, UCSD entered into a Power Purchase Agreement (PPA) with Solar Power Partners. Under a PPA, a solar installation is financed, designed, purchased, installed, maintained, and owned by the manufacturer3 or a third party4 The buyer does not invest up-front capital, but in exchange, agrees to purchase power from the provider at an agreed-upon rate for a set length of time – typically 15 to 20 years. The rate is set so that over the course of the agreement, the buyer ends up paying slightly less than they would have had they bought the same amount of electricity from the grid. After the PPA agreement expires, the buyer has the option to renew the PPA, buy out the installation at present market value, or have the installation removed.

Entering a PPA addresses the major obstacles associated with installing photovoltaic technology. The buyer avoids the capital expenditure, maintenance cost, and risk of obsolescence. Additionally, the provider is incentivized to maintain the efficiency of the installation, offloading this responsibility from the buyer’s facilities maintenance team. Thus, entering into a PPA presents the most practical approach to adopting photovoltaic technology.

In 2008, the average unit cost of electricity in California was about 14.5 cents per kWh. At startup, the cost of electricity under a PPA can be as low as 10-15 cents per kWh. The actual cost per kWh rises annually to allow the provider to recover design, hardware, and installation costs and make a profit. This increase is delineated in the contract and is usually set to increase more slowly than the cost of electricity from the grid. For a potential buyer, a PPA can act as a hedge against rising electricity prices, generating cost savings in the long run5. Due to the presently high cost of photovoltaic technology, buyers generally do not break even from a cash flow perspective until they are halfway through the agreement.

At present, the main disadvantage of photovoltaic energy is the high initial cost relative to other options for energy generation. The cost of photovoltaic systems has decreased in recent years due to learning curves, government incentives, and improved manufacturing processes; however, in most states the cost of electricity from photovoltaics remains higher than electricity from coal.

A photovoltaic cell converts sunlight into electricity, releasing zero GHG emissions during operation. Photovoltaic technology has received enormous attention in recent years, because the amount of sunlight that impinges on the earth is about 6000 times the amount of energy consumed by humans6.Because harvesting only a small fraction of the available solar energy would supply the world’s energy demand, considerable effort has been focused on improving the cost and reliability of photovoltaic technology.

Locations in the Southwestern United States, including San Diego, are the most favorable locations for photovoltaic power generation. However, solar power generation has also been profitable in northern states such as Massachusetts7.

Photovoltaic power generation provides three other distinct advantages beyond reduced GHGs. First, the peak power production of a photovoltaic system occurs during the daytime, which coincides with the peak power consumption of most businesses. This reduces an organization’s peak load on the power grid and reduces the amount of energy purchased at a premium price. Second, the cost of electricity has steadily increased in recent years. This trend is expected to continue as the prices of coal, oil, and natural gas continue to increase. Because photovoltaic systems do not rely on these conventional fuels, they act as a hedge against rising utility costs. Third, photovoltaic systems have no moving parts and are therefore easy to maintain.

An indirect advantage is that a photovoltaic system generates public goodwill. The general public views solar power systems favorably, and installing such a system is a highly visible way for an organization to associate itself with environmentally responsible business practices.

Photovoltaic systems are generally less expensive to install on commercial rooftops than on dedicated structures (such as parking canopies). Rooftop installations require relatively few fasteners, while dedicated structures require a foundation and additional materials for the structure. Typical commercial roofs can last 20-30 years9, compared to the 20+ year expected life of photovoltaic systems. A facility should install photovoltaic systems only on newer roofs to ensure that the roof will not need to be replaced during the system’s lifetime.

Additionally, if buildings undergo frequent reconfigurations that involve modifications to the rooftop layout (penetrations for exhaust systems, installation of new air conditioning equipment), a rooftop photovoltaic system can complicate things. Part of the buying process involves assessing the cost-convenience tradeoff before making a final decision between a rooftop and a free-standing system.

Under the terms of UCSD’s solar PPA, SPP owns, operates, and maintains the systems, which produce a total of 1.2 MW. The university purchases power generated from the systems without incurring operation or maintenance costs, and the photovoltaic systems have contributed towards the university’s recent Climate Action Registry “Climate Action Leader” status. The combined annual estimated production from the SPP systems is equivalent to eliminating 1,219 metric tons of carbon dioxide, 169 homes’ electricity use, or 138,365 gallons of gas10.

“Solar Power Partners has done a great job in coordinating a set of complex installations on the UCSD campus,” said David Weil, UCSD’s director of Building Commissioning and Sustainability. “The resulting arrays are beautiful, and represent a clear commitment on the University’s part to meeting our sustainability goals.” Due to the recent availability of PPA financing, many other large organizations and homeowners in the Southwest are following UCSD’s lead and adopting photovoltaic power generation.


 

References

  1. Executive Order S-3-05, signed by Governor Arnold Schwarzenegger June 1, 2005.
  2. Executive Order S-14-08, signed by Governor Arnold Schwarzenegger Nov. 17, 2008.
  3. From past project archive on website of Solar Power Partners.
  4. Referred to as the “provider” for the rest of this article.
  5. A drop in grid usage leading to a decrease in electricity prices is unlikely because demand increases with population and the uptake of photovoltaic technology is still relatively slow.
  6. Global Science Forum Conference on Scientific Challenges of Energy Research, Paris, May 17-18, 2006.
  7. For example at Raytheon in Andover, MA.
  8. Modified from Solar Energy Industries Association, “US Solar Industry Year in Review 2008”.
  9. U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy; Solar Technologies Program.
  10. Calculations are according to the US Environmental Protection Agency.
Mark Chew

About

Mark Chew presently leads the distributed generation policy and strategy at Pacific Gas and Electric Company in San Francisco. He joined PG&E in 2010 as an internal consultant, and he has also worked on demand-side management programs and forecasting distributed generation penetration. Mark received his MBA and MS in Chemical Engineering graduated from MIT; he also holds MS and BS degrees in Electrical Engineering and Computer Science from UC Berkeley. While at MIT, Mark was a founding editor of the MIT Entrepreneurship Review and was a lead organizer for the MIT Energy Conference. Before MIT, Mark spent 4 years at Qualcomm designing RF chips now used in mobile devices, including the iPad 3 and iPhone 4, 4S, and 5.