A Tailored Approach to Solar

Work With Your Solar Installer to Provide Renewable Energy Benefits That Best Fit Your Goals - Written by Martin Morehouse - Posted May 1, 2015

A Tailored Approach to Solar

A major component of greening your rental property is including on-site renewable energy production. Photovoltaic (PV) systems and solar water heaters follow your energy efficiency projects to reduce your electric and natural gas bills. Like most construction projects, solarizing a building is not a one-size-fits all activity. It requires a tailored approach guided by expected net financial returns for each technology, as well as an understanding of the variety of sophisticated financial tools available in the marketplace.

Solar Electricity (PV), now a major component in the mainstream real estate marketplace, is essentially a miniature electrical power plant that offsets some, or all, of the electric usage on the property. When exposed to direct sunlight, the panels generate electricity that is then used by the building and potentially even exported to the electrical grid (your utility).

 

Costs

In California, most solar power systems back feed the grid through what is called a Net Energy Metering agreement. Net Metering requires the utilities to pay for exported power at retail rates up to 100% of total usage on the annual electric energy bill. This makes the size of the PV system, and the subsequent value of its offset, dependent upon usage and the retail rate of electricity at the site. The installed cost of a solar investment is currently assuaged by a solar federal investment tax credit (ITC) that pays 30% of the total cost. The solar installation can also qualify for an accelerated five-year Modified Accelerated Cost Recovery System (MACRS) depreciation schedule. This tax credit is scheduled to decrease from 30% to 10% at the beginning of 2017. This pending decrease is set to drive a frenzy of activity in the sale and installation of solar equipment.

 

Solar Water Heating

Solar water heating, because of significant state rebates, is re-emerging as a popular investment choice for apartment owners. The basic technology involved in solar water heating systems is very simple: it’s a direct transfer of the sun’s energy into usable heat. The typical solar water heating system is used to pre-heat cold water supply before it enters the hot water heater. Whatever heat the solar system contributes is essentially gas not burned by the water heater, resulting in savings on the property’s gas bill. Because there aren’t cost effective ways to provide long term storage of the solar heat gained in the summer to use in the winter, the solar water heating system is typically sized to provide a maximum of 70% of the hot water consumed at the property.

Much of the upfront costs of a solar water heating system can be offset by existing state rebates, the 30% ITC and the MACRS depreciation. The California Solar Initiative–Thermal (CSI-T) rebate program pays an upfront incentive that is based on the expected annual offset of the system. In January 2015, the incentive rate was increased to $20.19/therm offset, which means it will now pay for 30% to 50% of the upfront installed cost. When added to the tax benefits (ITC) and depreciation, the financial returns for a solar water heating installation is quite impressive.

 

A Tailored Solution

When asked to evaluate both solar PV and solar water heating options for an apartment complex, I strive to tailor a solution that provides the best overall benefits given the available financial resources and site constraints. In October of last year, I got a call from the property manager of a 100 unit building in Oakland. He received a bill insert mailer from PG&E promoting the solar water heating rebate program and was curious to see the benefits of going solar at his site. I met with the property manager and performed a detailed site evaluation to gather information about the technological feasibility of adding solar to his site.

The prospects for the solar water heating system looked great, the building had plenty of nice open roof space, room for a large storage tank in the garage, and simple pipe runs to the roof. Solar water heating is very efficient and the largest sized system for the site would not take up all of the available roof space. So I looked at his electric service just in case he might have the budget for adding some PV in the future. There was only one master meter at the site, which means that the tenants didn’t pay their own electric bill but instead, the property owner was responsible for payment. I was curious to see how the bills would look and asked for the annual breakdown of his gas and electric bills.

When I received copies of his electric bills, I was shocked. It turns out that this building was on a PG&E tiered rate schedule, in which the majority of his electric costs were from usage in the highest tier. Because of the high usage at his facility, he was paying upwards of $.34/kWh, over double what is typical. I quickly ran some numbers on the solar thermal with a small PV option and the combined return on investment was really high. The PV savings alone were so high that I re-ran the numbers with PV covering the entire roof and the long term savings were even better.

It turned out the roof space was much better utilized to offset his expensive high tiered electricity even with the robust rebates helping to pay for the majority of the solar water heater’s upfront cost. After showing him lifetime savings of both options, it was clear that the best path forward was to maximize the PV system and exclude solar water heating.

 

Sub-metering

The unique value proposition in the above example was influenced by the metering decision made when the building was built to only provide a master meter—a single meter that delivers the electricity to all the units. The alternative to master metering is sub-metering of the unit level utilities. Sub-metering is typical in newer buildings and is required today in new construction. In most cases, the building owner is still responsible for the common area loads, often called the house or common meter. The bills associated with this house meter can vary widely and will depend on what it is powering. The usage of a property with hallway lights, underground parking and a pool will have a much larger load than a property with townhomes and only low level landscape lighting and irrigation controls on the house meter.

While current standard practice is to sub-meter tenants’ electric usage, it is still very common to have master gas meters with a central water heater supplying their hot water. In cases where there is a central water heater and a sub-metered electric usage, the most cost-effective course of action is often maximizing the solar water heating system, and if there is room, add as much PV that can be useful.

It is possible (and legal) to increase the overall size of the PV system beyond what will offset the common meter and share the PV power with the tenants. Some owners see this as an opportunity to be an electricity provider for their tenants in addition to being a landlord. The process to share the PV system with tenants requires a significant amount of utility paperwork and it may require that leases are modified to include provisions accommodating the power generation.

 

Making the Investment

Once the best combination of solar options is determined, there arises the next question: what is the best means to make the investment? With the significant growth of the solar market over the past decade, along with the reliable returns that can be achieved from a solar investment, a variety of financing opportunities have cropped up over the last few years that are designed to provide a solar installation without the initial investment of personal capital. Just like choosing the right kind of solar system, a financing solution can be tailored to fit your specific needs.

As with most investments, using available operating capital often has the highest returns and savings. Keep in mind that when using available cash, solar financing allows access to terms that are not available for other property improvements. Utilizing the flexibility of the solar investment structure can leave capital available for other investments or improvements.

The simplest form of financing is a standard on-balance-sheet loan, secured by the rental property itself through a line of credit, or through a designated solar loan or capital lease. The solar system is owned by the property holder and they receive all the associated benefits of the system, including the tax credits, depreciation write-offs and all savings from energy generation. They are also ultimately responsible for the operation and maintenance of the system. Some solar specific loan products can have longer terms, making a net-cash-flow-positive investment possible.

Solar leases are available and are modeled after an operating lease which is considered off-balance-sheet financing and is most often used when the property holder doesn’t have the tax liability, or wants to preserve borrowing capability for other investments. The equipment is not technically owned by the property owner and the tax credits typically go to the investor. In some cases, the property owner usually is still responsible for operation and maintenance of the system.

Another method of financing a solar project is through a service contract where a third party owns and operates the solar equipment, and charges a fee for the energy produced. This type of financing is essentially a shared savings plan and is most commonly referred to as a Power Purchase Agreement (PPA). While this type of financing is very popular with large PV systems, a lot of the solar water heating systems installed in the 80s were financed in a similar manner. Under the current tax rules, a PPA agreement is often the only option for nonprofits interested in taking advantage of the 30% tax credit.

 

PACE Financing

One of the most significant financing options that also pairs well with energy efficiency improvements is called PACE financing (Property Assessed Clean Energy). PACE financing is essentially a long term loan funded through the local property tax assessment. For credit purposes, PACE financing is considered off balance sheet. For all tax benefits, it works like a standard loan in which the property owner claims the tax credit, depreciation and loan interest deductions. One unique added benefit of the PACE loan’s attachment to the property tax is that it provides a clear path of transferring the loan to another owner.

 

Define Your Goals

When asking for financing proposals it is important to be clear about what your overall goals are. For one investor, a cash flow positive position is going to be more important than a rapid path to ownership. For another, having off-balance sheet liabilities may be more important than reaping the most benefit from the tax credit. In all cases, once you have chosen your best option that fits your goals, it is critical that the tax assumptions and terms are reviewed with your accountant and attorney.

With the variety of choices available, asking for a tailored approach from your solar installer and project financier will provide the renewable energy benefits that best fit your goals. Compounding the low cost of PV, tax credits and financing flexibility with the high rebates for solar water heating and increasing costs of energy, the next 18 months are perhaps the best time in history to install solar on multifamily housing. The fantastic feature about this moment in time, is that doing the wise choice from an investment perspective is also a great benefit for your tenants, the community and the environment as a whole.

-Martin Morehouse

Martin Morehouse is a 10 year veteran of the solar thermal department at Sun Light & Power, an East Bay installer of solar water heating and PV systems. He can be reached at 510-809-3686 or .

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