Businesses Rush to Cash in on Solar Power

Jay Cooper considers himself a conservative businessman, yet he has blackened the roof of his Auburn Honda dealership with one of the priciest green energy technologies: solar panels.

Hundreds of them.

"Obviously, it came down to dollars and cents," Cooper said.

After decades as a small-is-beautiful technology aimed largely at virtuous homeowners and off-the-grid types, solar is suddenly going large and at a price that makes business owners salivate.

Cooper’s Pacific Gas and Electric Co. bill used to average about $8,000 a month. With the solar panels, which began generating electricity last fall, his power costs dropped instantly to $5,000.

That bargain is made possible by federal and utility subsidies, the sale of green energy "credits" and, critically, the recent development of financing schemes backed by big institutional investors. Together, those can drive down the effective price of solar-generated electricity more than 70 percent, developers say.

But the sort of deal that Cooper got could be short-lived. The federal tax credit that made it possible, which went into effect in 2006, is set to expire Dec. 31, though it may be renewed by Congress. Without the credit, those in the industry say, solar power will again be uncompetitive with grid electricity and sales are almost certain to plummet.

"For commercial solar, the … tax credit is the reason solar happens. It’s totally required," said Todd Michaels, director of business development for Solar Power Partners, a solar developer based in Mill Valley.

For now, Northern California solar installers are reporting orders jumping fivefold or more in the last year. Safeway Stores Inc. plans 23 solar systems for its California supermarkets this year, up from zero in 2007. Wal-Mart has 22 similar projects in the works. Dozens of smaller businesses are piling on.

Rising costs for material and demand for solar systems have pushed panel prices to a five-year high. But sales aren’t slowing.

The Sacramento Municipal Utility District says businesses, nonprofits and governments have registered to install 17.1 megawatts of solar power in the utility’s service area in 2008, more than 30 times what’s been built in any previous year.

On the gravel roof of the Safeway store off Missouri Flat Road in Placerville, a 250-kilowatt array of panels wraps around the building’s big air-conditioning units, covering nearly every square foot of unshaded space. On summer afternoons, the system will meet nearly half the store’s power demand.

Safeway buys grid electricity at a discount, so the store’s panels won’t yield the huge savings that Cooper is seeing.

Still, said George Waidelich, Safeway’s vice president for energy operations, even if Safeway pays a slight premium today, the panels are a good deal because the company has locked in a predictable monthly payment for its electricity for the next 15 years, regardless of what happens to the price of electricity from the grid.

What’s more, the project allows Safeway to accumulate carbon credits, which it is using to help meet a self-imposed target for reducing greenhouse gas emissions.

The role of big investors in the solar boom illustrates the importance of financial sophistication in making green technology viable. Here’s why:

The chief federal incentive for solar power provides a tax credit equal to 30 percent of the cost of a non-residential installation, which ranges from about $1.5 million to $20 million and up.

However, for a variety of reasons, many businesses can’t take full advantage of such a large tax credit. And a government or school that pays no income tax gets no benefit at all.

But big investors — the Citigroups and Wells Fargos of the world — have a virtually bottomless appetite for tax credits. And starting in 2006, several California firms began to figure out how to package solar projects to be attractive investments for Wall Street.

"In 2007, the floodgates opened," said Matt Cheney, chief executive of MMA Renewable Ventures in San Francisco.

Through such arrangements, the solar panels on the rooftop of a business actually belong to a bank. Mark Frederick, managing partner for Auburn-based Pacific Power Management, which built Cooper’s system, said financial giants are ready to fund more projects.

"We have a $250 million open line with Morgan Stanley," Frederick said. "That lets us go out and sell a lot of projects."

Frederick said that with some luck, he’ll do 10 times as much business in 2008 as he did last year.

Individual homeowners generally don’t get such a good deal on solar because they aren’t eligible for the largest federal subsidies. The tax credit for homeowners is capped at $2,000, often only 5 percent to 10 percent of a solar system’s cost, though subsidies are available from electric utilities. Economies of scale also favor large, commercial-scale projects.

A key reason Frederick and others are finding it so easy to sell big solar projects this spring is the prospect of the federal tax credit expiring at the end of the year. A solar project must be generating power by Dec. 31, or it becomes ineligible for the entire subsidy.

"It’s forcing people to decide," said Michaels.

In addition, the state-mandated utility subsidies that add to the savings for solar projects are set to decline over time. Whoever builds first gets the most savings. These subsidies, totaling $3.3 billion over 10 years, are funded by a surcharge on ratepayers’ electric bills.

The solar industry is lobbying Congress for an extension of the tax credit, which it estimates would cost the treasury $700 million over 10 years. Monique Hanis, spokeswoman for the Solar Energy Industries Association, said the extension has bipartisan support in concept, but funding it will require cuts to other programs. A bill passed by the House would pull money from oil and gas subsidies, but the Senate has yet to agree to a funding plan.

"We really don’t know what’s going to happen," Hanis said.

Within the next decade, the combination of improved technology and manufacturing efficiencies should begin to make solar electricity competitive with grid electricity, even without subsidies, according to a recent report by UBS AG, the Swiss investment bank.

Solar will first beat the grid in sunny regions with high electricity prices, like Italy, the report said. If current trends continue, areas in the Sacramento Valley served by PG&E won’t be too far behind.

Solar costs would have to fall further to be competitive in SMUD’s service area, since the municipal utility’s rates are lower than PG&E’s.

The development of a low-cost solar industry in the United States, however, would likely be significantly delayed if the federal tax credit is not extended.

"A lot of people will be laid off," Cheney said. "It would be hugely disruptive."

Even if the tax credit disappears, though, the 198 kilowatts of panels on Cooper’s dealership will continue to quietly generate power, and the monthly bill he pays would be unaffected.

Cooper said he’d been thinking about solar energy ever since he moved to Auburn from the Pacific Northwest and opened his dealership nearly 30 years ago.

"I was a kid from Seattle," he said. "Moving to this area, it’s amazing how much sunshine there is."

But, he said, it took the type of deal that Frederick offered to make solar a reality for his business.