Commercial, Demand Management, Energy Efficiency, GHG Emissions, Industrial, Commercial, Distributed Generation, Finance, Industrial, Solar, Sourcing Renewables - May 9, 2016 - By Amy Poszywak
Views from the top: Jigar Shah's vision for the convergence of solar, energy efficiency solutions
Smart Energy Decisions exclusive
Jigar Shah, founder and former CEO of SunEdison Inc., is often credited with unlocking a multibillion dollar solar market. In the early days of SunEdison, before the company was sold off and transformed into the massive and complicated renewable energy developer whose aggressive growth strategy crashed in bankruptcy in April, Jigar's company sold rooftop solar systems to early corporate adopters like Wal-Mart, Staples and Whole Foods through a then-revolutionary "no money down" financial model that is now the go-to for rooftop solar installers across the country.
Shah, currently President and Co-Founder of specialty finance firm Generate Capital, holds the vision that business model innovation will have an outsized impact on bringing about the next productivity revolution —resource efficiency — which he details in his book, Creating Climate Wealth: Unlocking the Impact Economy. He's now committed to helping both entrepreneurs and large companies implement resource efficiency solutions using similar "no money down" project finance models. He is also on the board at sPower and the Rocky Mountain Institute.
Given his copious experience in the clean energy sector alongside his work helping commercial and industrial energy users adopt renewable energy, Smart Energy Decisions recently spoke with Shah to get his take on the current pace of renewable energy sourcing and efforts to reduce energy consumption across the business world. The following is an edited transcript of the conversation.
Adoption of renewable energy sources by commercial and industrial, or C&I, companies has evolved over the past couple of years. From first becoming involved with renewable energy credits to more direct involvement via rooftop solar, and then moving toward even larger investments in large-scale solar through power purchase agreements. Do you have any insight as to whether that will evolve further, or what does C&I involvement with renewable energy look like, going forward, from here?
There are several different threads in there.
One is that, for large credit-worthy buyers like the Wal-Marts of the world, there are two issues they have. One is that their rooftops actually can't provide them a material amount of their electricity. So while Wal-Mart's CEO said ten years ago, we're going to go 100% renewable energy, and they're still a ways off from there. The only way to get to 100% is to do these large solar and wind farms where they are the PPA offtaker, and it's real power. So where as before, Whole Foods had just bought $200,000 worth of energy credits and said 'Hey! We're 100% renewable energy!' and you can imagine, no one thought that was interesting, because there was no additionality. Now, it's like, here's a solar farm and a wind farm that are pretty much completely permitted except there's no power purchase agreement. So now Wal-Mart can step in and say, we'll give you the power purchase agreement, we'll do this contract for differences and now we can say we're at 50% renewable energy from 6%. From that perspective, I think they find that strategy valuable.
The flip side of that is the value of the wholesale power is of course far less than the value of retail power for Wal-Mart, so they're saving an average of 30% to 40% on the kilowatt hours that they're buying off their roof, or they're probably breaking even on kilowatt hours that they would buy from the wholesale markets, given the depression of wholesale prices right now.
So that's one category of customer, but there's an entirely different category of customers, which are credit-worthy smaller businesses. So someone who owns a distribution warehouse or a cold storage warehouse, that's been around for fifty years, they're profitable, and they've got a large roof, but they aren't a publicly traded company or credit-rated by the ratings agencies. So for those people, certainly doing a PPA like that wouldn't work because they don't have enough load to buy a 100-MW wind or solar farm.
Secondly, even on the rooftop side, no one has really focused on those types of customers. In general, I would say the majority of people have focused on credit worthy rooftops like Kohl's and Wal-Mart, Whole Foods, Costco, Macy's and folks like that, but I don't know that there has been a systematic sales effort around private credits. From a mom and pop store to a local food bank, or a chain of thrift stores, or whoever, that have huge roofs and have been around for decades, and the latter may not be profitable but they do buy power. But since the financial crisis, the way those types of entities are viewed has changed. Solving that issue seems hard, so solar people decided to focus on residential customers, using FICO scores, and on large-scale utility contracts. So the C&I space in general, I think, has not received the level of attention that it did previously. So there are issues around figuring out how to serve those types of customers, but that doesn't mean it can't be done. I would say it's harder to do.
Is that something people are actively working on figuring out? Are we going to eventually get there?
Yes, we [Generate Capital] are actively funding those types of deals now. So we really like those deals, but we don't know if they're ever going to be securitized. So we think we're going to have to hold the paper for 20 years.
What other innovations are on the horizon that you think could trigger the next dramatic increase in adoption of renewables by C&I energy users?
The big innovation is going to be these financial models, because ultimately that's the biggest problem. You've got the PACE financing, you've got all these other types of financing models that folks are looking at for commercial, and the goal of it is just to figure out, how do you cut through the landlord-tenant issues. I do think that what's going to happen, as we move to these second and third-tier customer classes, is that you might see a wrapping of a new roof with solar. A lot of these shopping malls are owned by doctors, lawyers and dentists, and they just want as much money back as they can get every year, so they're constantly just abusing their tenants as much as they can, but at some point, the roof will be really leaking and you might destroy the building if you don't fix it, and the landlord will say, I don't really want to come $800,000 out of pocket, and what we will say is we'll cover the $800,000 for you if you sign a 20-year PPA on the solar piece, because the solar is going to cost $2 million, so we can absorb $800,000 and do it all at the same time, and there are efficiencies because the workers that are doing the roof can add the solar at the same time, etcetera. So you might entice people by giving them a new roof, so there's some models that way, in financing. The second model is there's this bundling concept, mostly, I would say, around deferred maintenance, because that is, by definition, a pain point for building or facility owners. So you could easily see how you could wrap that in with solar, and then take some things off their deferred maintenance list.
So you're saying you could do this, bundle in a solar installation, with boilers, or a high efficiency HVAC, or other types of systems that need upgraded?
Yes, but you have to be careful about IRS rules. You have to make sure that 100% of all the profit, for all of the upgrades, is on the solar. The other things have to have no profit to them. So if the roof normally costs $800,000 with profit, you might do it for $400,000 without profit, and we'll increase the cost of the solar by $400,000, and then I'll cut you a marketing or sales and marketing check out of the solar piece, to cover the extra $400,000 you're giving up, but now I get the 30% tax credit from the solar, which I don't get on the roof. So you just have to be mindful of the rules.
A lot of companies have made commitments, whether it be through RE100 or on their own, to power themselves with 100% renewables, and we keep hearing that folks are running into regulatory problems that limit third party ownership of generation that are preventing them from getting where they need to be to reach those targets. Is that a concern you see?
In some states you can't, specifically link all the legos together, specifically. But you can still link them virtually. You could still build a wind farm in North Carolina, and you basically sell all the power into the PJM Interconnection balancing area, any generator can do that, because you aren't selling to a 'customer.' So Apple, who has a data center in North Carolina that uses up to 200 MW worth of power, would say to the wind farm, we'll guarantee you this price for the PPA, let's say 3 cents per kWh. But in point of fact, that wind farm is selling the power into the wholesale market, into PJM, so that power is not really going to the data center, it's just being netted out on their books. Additionally, if the power prices end up balancing out at 2.5 cents per kWh, then Apple lost a half a cent per kWh every year on that trade. And then if the power prices and the wholesale price markets net out at 3.5 cents per kWh, then Apple gained a half a cent on that contract for differences trade. So that's what they're doing no, and that's not illegal in any state. Certainly in some states it's harder to do, in states that don't have power markets.
How prevalent is that, where large offtakers use that route to overcome that regulatory challenge?
It's certainly increasingly prevalent, and the Rocky Mountain Institute has done work around that, where everyone can get together and talk about it. Kaiser Permanente has done a deal like this, Microsoft has done deals like this, so there's certainly plenty of folks doing it, and every state is a little bit different.
And in California, you actually can link the chains together, and it's more expensive but Kaiser thought it was really important to link the chains together, so they have utility-scale projects, and they hired a third party energy services provider, in this case NextEra Energy, to actually wheel the power to their hospitals, and their hospitals are actually using that power. It probably costs about an extra half a cent per kilowatt hour, compared to just doing a netting out on the books, but they thought it was important to be able to say to their customers, 'look, we bought this solar farm and we're paying for the power to technically be sort of wheeled into our hospitals,' so they're really physically doing that.
In terms of carbon reductions by commercial and industrial corporations through energy efficiency and renewable energy sourcing, what do see as the biggest opportunity out there that is not being tapped into?
I think the answer to that question is generally HVAC, that's my sense, because it's something businesses really hate spending money on unless they have to.
But that sort of creates a problem, and so the way that I would answer that question is really, is what way are we going to be successful in making reductions? The answer to that first question doesn't really matter all that much; the fact that it might be HVAC, great, but the people who are currently working in HVAC are Trane and Carrier, and they have a certain style of selling, and they're not doing to change that style. They want you to pay through the nose for whatever you're buying, a chiller plant or whatever it is. They have established ways in which they do things. So when you talk to technology companies at the ASHRAE conference, for instance, it's all these people who have these extraordinary approaches to saving the customer something like two-thirds on your energy bill, from HVAC, and yet they have no access to market. So they all work through Trane and Carrier, Trane and Carrier basically buries them and never actually sells them, and then when they do actually sell one of their units because it just happens to be the right unit for that particular customers, it's marked up like 300%, so of course it doesn't look very cost effective.
So the right answer is, those technology companies actually need a new channel to market. They have to figure out another way of approaching customers that's not going through Trane and Carrier. But Trane and Carrier, they're like IBM; no one gets fired for hiring IBM, no one gets fired for hiring Trane and Carrier. So if you're a building owner, you're like, 'you want to use this new guy that you met at the ASHRAE conference to do our HVAC, and if the air conditioning doesn't work in our hotels rooms go empty because of that, you're definitely getting fired.'
So the transformation in HVAC, it's not likely to get solved any time soon. So then the question is, how would it get solved? Well, commercial solar already has 5,000 sales people that are focused on the C&I space. So the question becomes,
Because with solar, the C&I sector doesn't really need net metering, because the vast majority of commercial establishments are operating during the times of day that solar is really going strong, so the total amount of kilowatt hours you might need to net meter is something in the eight percentage points range, mostly on Saturday and Sunday but also potentially during the week depending on the curve. So the best way to prevent any power going to the grid is to do demand response and load control.
So you control their HVAC, with companies like eCurv or some of these other companies. So now you can say, 'the sun is shining so brightly, let's turn on the air conditioner, because we won't have any demand charge impact because we're getting so much solar production'. So you want to actually contort the way the demand profile looks in the building to match the solar profile so that you can reduce your demand charges. That takes software, so you add a software layer in, which is pretty easy to do these days. But then you could go the next step, and then you can do storage. And instead of battery storage, you can do ice storage, and then you really can maximize the demand savings in the building. So there is a logic to the solar guy selling other things, so that the solar is worth more. The thing with those other solutions, in isolation, is the demand response and load control stuff may only be able to do certain things, but you still need it, so in isolation it may make financial sense, but combined with the solar, it makes huge financial sense. Because it can become like an insurance policy against clouds going overhead and destroying your demand savings for the month. So you can see how the 5,000 people who work in the solar industry on the sales side, for C&I, could actually be a better sales force than Trane and Carrier for HVAC solutions and software solutions.
SED's take: Jigar Shah remains one of the most influential thought leaders in the industry. His latest thoughts on the coming convergence of solar and energy efficiency solutions for businesses may prove to be the next innovation to trigger broader adoption of proven technologies. We're excited to have the opportunity to share his thoughts with our readers. Stay tuned for future editions of "Views from the top," only in Smart Energy Decisions.
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