The Sustainable Home Blog

With price tags ranging from $15,000 to $50,000 or more for residential PV [photovoltaic] systems, the residential market has been limited to homeowners with a strong green ethic that either had the cash or were willing to tap into their home equity to pay for the cost of a system.  Given a 15 year plus payback and an average home ownership turnover of 5 years that represented a pretty small population of potential customers.  As a result, it was only a matter of time before entrepreneur’s realized that the PV industry had reached a point where it needed more financial innovation than technical innovation.

Power Purchase Agreements [PPAs] are offered by companies that are basically independent, solar electric utilities.  They use your south facing, roof-top real estate to install PV [photovoltaic] panels at their expense and then sell that energy back to you at a pre-determined rate under a long term PPA agreement.  Solar PPA’s represent over 50% of large commercial and industrial PV installations, and if you’re a big box store like WalMart, the economics are such that you pay zero upfront cost, lock in favorable long term rates and never have to worry about how it works or the costs to maintain the system.

Until recently, the PPA business model has been non-existent for the residential market, however two California companies now offer forms of residential PPAs to qualified homeowners.  Sun Run of San Francisco offers an 18 year residential PPA that requires an relatively modest (~30% of the system cost) upfront payment by the homeowner and Solar City Inc. of Foster City offers as low as a no money down 15 year lease to highly qualified (≥720 credit score) homeowners.  Whether it’s called a lease or a PPA the end result is the same, the company owns, maintains, and profits from the system and the homeowner pays a monthly charge that is off-set by their savings in electrical costs.  It’s a win-win-win situation for the company, the homeowner, and the environment.

To answer the “what happens if I move” question, both Sun Run and Solar City offer their customers the option of buying the system at any time, transferring the PPA/lease to a new owner, or renewing the PPA/lease agreement at the end of its term.

You’ve got to love the potential for the PPA business model to expand the residential PV market to millions of additional homeowners, but what are the factors that make it technically and financially viable for a companies like Sun Run and Solar City, and why are these programs currently limited to California?   The answer lies in tax credits, rebates, and utility rates, and in the case of California all of these factors are aligned to make the numbers work.

Whether it’s a lease or a PPA, since the company owns the system they get the tax credits and any state or utility rebates.  In the case of the Federal Investment Tax Credit [ITC], because they are a business, they get the full 30% credit and are not capped a $2,000 like us lowly homeowners.  Because the Federal ITC is scheduled to expire at the end of 2008, the PPA/lease business model may fall apart if it is not renewed.  If not renewed, the economics would probably dictate that the homeowner cover an additional 30% of the purchase cost upfront making the deal considerably less attractive.

Other factors that make the model work are the relatively high California utility rates and favorable net metering laws.  Additional requirements include an unobstructed southern exposure for the panels, a roof surface that will last the lifetime of the PPA or lease, and a system that’s large enough to make economic sense for the company.

If the Federal ITC gets renewed for several more years, look for both of these companies to rapidly expand into states with relatively high utility rates and strong incentives for renewable energy.  As utility rates inevitably increase and PV panel costs decline, this business model will only get stronger.

“It has often been said that, if the human species fails to make a go of it here on the Earth, some other species will take over the running. In the sense of developing intelligence this is not correct. We have or soon will have, exhausted the necessary physical prerequisites so far as this planet is concerned. With coal gone, oil gone, high-grade metallic ores gone, no species however competent can make the long climb from primitive conditions to high-level technology.
This is a one-shot affair. If we fail, this planetary system fails so far as intelligence is concerned. The same will be true of other planetary systems.On each of them there will be one chance, and one chance only.”
Sir Frederic Hoyle, British Astronomer, 1964

Hoyle’s “necessary physical prerequisites” are not yet gone, but the extraction of our most critical non-renewable energy resources will soon reach a geological milestone, and production will peak and then decline. This will set a two to three decade clock on our last and only chance to achieve a sustainable society.

• The consensus is that the production of oil has already peaked (2006) or will peak shortly and that serious shortages will occur by about 2010
• Natural gas production in N. America will peak between 2010 and 2015
• Uranium extraction will peak in 2025 and shortages are possible as early as 2013 when we can no longer depend on the recycling of Russian nuclear warheads to meet demand.
• Coal will peak around 2025 at about 30% above the present production

“…we don’t have to run out of oil to start having severe problems with industrial civilization and its dependent systems. We only have to slip over the all-time production peak and begin a slide down the arc of steady depletion.”
Howard Kunster ,The Long Emergency, 2005

We are left with the choice of only two future paths of development. The “business as usual” path will lead us to tragically overshoot the earth’s carrying capacity, resulting in economic collapse, and a dramatic reduction in the earth’s population as we return to a pre-industrial revolution standard of living. The second path represents Hoyle’s “last and only chance” to wisely use our remaining fossil fuel resources to build a sustainable and renewable energy foundation for a new steady-state world economy. An economy and society with a stable population that falls within the limits of our planet’s carrying capacity. I fear that the greater probability lies with the first path, but know we have both the knowledge and means to forge the second.

On the supply side, the second path requires that we rapidly replace our current extractive, non-renewable energy model with renewable sources like geothermal, solar, wind, and wave power. It will be a future dominated by electrical power as liquid fuels become increasingly scarce. However, it will not be enough to reach a stable, sustainable future without major changes to the demand side of the energy equation.

As we enter this period of sustained crisis and begin the journey down the path of ecological stability, it will quickly become evident that the only reasonable standard for building design will be a standard of net zero energy consumption. Because we lack information, initially this will be part science and part intuition based on passive heating and cooling lessons from the past. Eventually we will come to know the embodied energy of every building material and component and make many decisions based on the EROIE (energy return on investment of the energy embodied) of building products like insulation, low-e glazing, PV panels, and wind turbines. Houses will become smaller and change shape as energy trumps fashion and becomes the primary design factor. A whole new industry will emerge to help homeowners convert over 100-million thinly insulated, poorly constructed homes into some semblance of energy efficiency. Pattern’s of development and zoning laws will change as the age of the automobile comes to a close. Populations will shift and migrate as the end of cheap air-conditioning makes living in many parts of the country less desirable. Home landscaping will change from ornamental to edible, and grey water irrigation will become commonplace as the energy costs to move and purify water change our attitudes about this precious natural resource. Local materials will dominate construction and the age of imported italian granite countertops will come to an end.

The longer policy makers wait to take action the lower the probability of success. When shortages become evident we may still fall into denial. Demagogues and special interests will deny the limits of geology and blame OPEC, Islam, environmentalists, or speculators. If allowed, they will cloud the issue and cost us precious time.

Our “last chance” will be a battle. It will not be an easy time.

McKinsey and & Company released a report in May titled Curbing Global Energy Demand Growth: The Energy Productivity Opportunity.   The report documented how we could reduce the world wide annual energy demand growth rate between now and 2020 from about 2% to around 1%, simply by improving energy productivity.

Not surprisingly, the report states that the “… most substantial productivity improvement opportunity is in the global residential sector, which is also the world’s largest consumer of energy with 25 percent of global end-use demand.  By implementing available technologies such as high-insulation building shells, compact fluorescent lighting, and high efficiency water heating, the sector’s energy demand growth would more than halve, from 2.4% a year to only 1.0% a year.”

The report also states that:

 “Consumers lack the information and capital they need to become more energy productive, and tend to make [decisions based on] comfort, safety, and convenience priorities.  In addition, a range of policies dampen price signals and reduce incentives for end users to adopt energy productivity improvements.”

The report argues that policy changes will be necessary before consumers will take significant action to improve the energy efficiency of their homes.  In other words, nothing will happen without leadership from our policy makers

In an example of enlightened leadership, Duke Energy filed a request (also in May) with the North Carolina Utility Commission proposing regulatory authorization to be rewarded for investments in energy efficiency much like they would for a new coal fired electrical plant.  I don’t often use enlightened and Duke Energy in the same sentence, but their Save-a-Watt program represents an exciting new business paradigm and addresses the some of the policy issues outlined in the McKinsey report.   This is a promising new development that could help pave the way to a more sustainable future.

The following bullets are a summary of benefits Duke sees is this new business model for consumers, themselves, and by extension other electric  utilities.

• Allows for the treatment of energy efficiency as a “Fifth Fuel”
• It would displace a portion of the electricity otherwise needed to meet it customers’ energy requirements with zero air emission conservation, and also reduce the amount of new generation that would otherwise be required
• It would lower costs for customers, when compared to the costs that result would from the addition of new electrical generation resources.
• It would offer the potential to substantially lower costs for customers who participate in energy efficiency programs (PV, solar hot water etc.).
• Would provide customers the opportunity to lower their environmental footprint through direct participation in energy efficiency.
• The program would provide more choices and options that help customers manage their energy costs in an environment of rising energy prices
• The program would create new energy efficiency service jobs in order to implement energy efficiency programs.
• The program would provide the Company with an incentive to make significant, sustainable investments in energy efficiency and rewards the Company for the results produced and the risks taken.

The filing by Duke explains this new “energy efficiency” business model as follows:

“The Save-a-Watt approach will encourage and compensate the ultility for investments in energy efficiency at 90% of the avoided supply-side costs.  Under traditional regulation, a utility is allowed to recover the depreciation and operation costs for a new plant and also earn a return on the un-depreciated plant.  Under the save-a-watt regulatory approach, the utility would be allowed to recover 90% of the depreciation and operating costs avoided by not building the new plant and also  earn a return.”

“The Company assumes some risk in the proposed save-a-watt approach.  Revenues collected through the proposed energy efficiency rider are intended to cover program costs and the financial impact of lost sales, but will be based on actual results achieved.  Lost sales occur when energy efficiency programs reduce energy consumption, thus reducing the revenues available to cover fixed costs between rate cases (e.g. investments in utility infrastructure).”

In perfect accord with the McKinsey report, Duke goes on to say that:

“…customers are unlikely to sacrifice comfort and convenience to participate in energy efficiency.  In addition, the initial capital outlay associated with some programs could be a significant barrier to customer participation.”

In addition to addressing capital outlay hurdle for consumers, some of the elements of proposed Save-a-Watt program include:

• discounted or free Compact Fluorescent Lamps
• discounted energy efficient air conditioning and heat pump units
• remote power management of  air conditioning and heat pump units
• PV and solar hot water systems free to the consumer (pilot program)
• energy efficiency capital cost financing through Duke (pilot program)
• monthly billing statements correlated with historical usage and weather data to facilitate ongoing improvement

If you thought PV panels where too expensive, start making room on your roof, because according to latest news from the Worldwatch and Prometheus Institutes, things are about to change.

Global production of solar photovoltaic (PV) cells, which turn sunlight directly into electricity, has risen sixfold since 2000 and grew 41 percent in 2006 alone. Although grid-connected solar capacity still provides less than 1 percent of the world’s electricity, it increased nearly 50 percent in 2006, to 5,000 megawatts, propelled by booming markets in Germany and Japan.

This dramatic growth has actually been constrained by a shortage of manufacturing capacity for purified polysilicon, but that situation will soon be reversed as more than a dozen companies in Europe, China, Japan, and the United States bring on unprecedented new levels of production capacity. In 2006, for the first time, more than half the world’s polysilicon was used to produce solar PV cells. Combined with technology advances, the increase in polysilicon supply is projected to bring costs down by more than 40 percent in the next three years.

The biggest surprise in 2006 was the dramatic growth in PV production in China. Last year, China passed the United States, which first developed modern solar cell technology at Bell Labs in New Jersey in the 1950s, to become the world’s third largest producer of the cells behind Germany and Japan.

China’s leading PV manufacturer, Suntech Power, climbed from the world’s eighth largest producer in 2005 to fourth in 2006. Experts believe that China, with its growing need for energy, large work force, and strong industrial base, could drive dramatic reductions in PV prices in the next few years, helping to make solar competitive with conventional power even without subsidies.

“To say that Chinese PV producers plan to expand production rapidly in the year ahead would be an understatement,” says Travis Bradford, president of the Prometheus Institute. “They have raised billions from international IPOs to build capacity and increase scale with the goal of driving down costs.”