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Here Comes the Sun

Many building owners -- some with environmental missions and others with purely economic motives -- have taken note of this new program and are wondering whether and how to get in on the action.


Many building owners — some with environmental missions and others with purely economic motives — have taken note of this new program and are wondering whether and how to get in on the action.

If they do want to install solar power systems on one or more of their roofs, the most fundamental decision building owners face is whether they want to pay the capital cost themselves, or alternatively let a third party own the system.

With the ownership option, the building owner buys the system and sells the power it generates to the government under the Feed-In Tariff (commonly referred to as the FIT). This approach normally results in a simple payback of eight to 10 years — too long for most organizations, especially when compared to faster returns for other environmental opportunities such as energy efficiency measures. For this reason many building owners are looking at the alternative of renting roof space to solar power developers eager to own and operate the systems over the long term.

A number of solar developers have sprung up in the past year, and many are now scrambling to tie up roof space for potential systems. But until the market reaches some kind of equilibrium, the big question will be how much rent they can realistically pay. Estimates vary widely, with the low end of the range potentially insufficient to justify the hassle of making a roof available, and the high end of the range potentially jeopardizing the long-term financial viability of the system owners leasing the space.

Let’s consider some of the potential costs and benefits of hosting a solar power system. Please note, however, that many of the following comments are applicable only to Ontario and not to installing systems in other provinces or U.S. states with different incentives, though the learnings in Ontario could be useful in other jurisdictions.

Ontario’s program

The Ontario Feed-In Tariff is a European-style incentive which requires the government to buy all of the electricity generated by qualifying photovoltaic (PV) systems at fixed rates — well in excess of current prices for grid electricity — for 20 years. This is the same type of incentive Germany has used since 2000, leading to that nation’s global dominance in terms of total capacity of systems installed.

Under the FIT, the Ontario Power Authority pays:

• 71.3 cents per kilowatt-hour (kWh) of electricity generated by rooftop systems up to 250 kilowatts (kW) in size;

• 63.5 cents per kWh for systems sized 250-500kW;

• 53.9 cents for systems larger than 500kW.

While these rates are high, they are fixed for 20 years with no escalators. The justification for the FIT rates is that they incentivize the generation of clean energy on a distributed basis (i.e., close to where it’s needed), helping the province keep its promise to close down its remaining coal-fired power plants and reducing the need for new power transmission and distribution infrastructure. Ontario solar system content requirements of 50 per cent in 2010 and 60 per cent thereafter are mandated in order to foster job creation.

Ontario has chosen the FIT rates very carefully, and they do not create any real windfalls for building owners or solar project developers.

Benefits for building owners

Let’s take as a standard example a building with a 50,000 square foot, unshaded roof. This is sufficiently large to host a 250kW DC system, costing approximately $1.5 million. Depending on where the building is located, the system will generate approximately 275 MWh of electricity per year, which can be sold to the government at $713 per MWh for annual revenues of $196,000. This would yield a simple payback of 7.65 years if it were not for operations and maintenance expenses, which put the payback above eight years.

Alternatively, the same building owner could rent the roof space to a third-party owner, who would use debt to leverage the equity returns to above 10 per cent — comparable to those of many other utility or infrastructure-like investments. The developer can pay the building owner somewhere between $10,000 and $20,000 annually for 20 years for the use of the roof.

While this income is essentially a windfall for the building owner, it comes with an obligation to make the roof available for the system for the 20 years, risking the payment of a penalty if plans change and the system needs to be removed. It’s also worth noting that the most attractive buildings are those whose roofs have been recently built or replaced, and that buildings with older roofs requiring replacement part-way through the life of a solar power system may not benefit from the same economics.

Important considerations

Some building owners have concerns about the solar technology itself, and think of it as somewhat unproven. Nothing could be further from the truth. Systems are solid state — most use silicon technology dating back to the 1950s — and the solar modules themselves are so well understood that they normally carry 25 year manufacturers’ warranties.

Other important questions many building owners raise include:

• Who is responsible for the roof if there is a leak?

• Where does the power go and are electricity bills affected?

• Who owns the environmental attributes associated with the clean power?

• Does the system affect property taxes?

• What happens if the building is sold or there is a need to have the system removed?

In general, solar developers work with roofing contractors to ensure that roof warranties are maintained. This means that any problems with a roof are still a matter for the roofer, unless it can be clearly shown that the solar system caused them.

The power generated is metered separately, and does not affect electricity bills. From a technical standpoint the electrons created by the system may flow into the building, but from a financial standpoint they are sold to the Ontario Power Authority (OPA). The environmental attributes are also transferred to the OPA. For marketing purposes, a building owner can say that they are hosting a solar power system to help Ontario meet its renewable energy objectives.

If the roof is leased, the value of the equipment does not affect the assessed value of the building directly, but the lease income may cause property taxes to be slightly higher when rates are re-assessed, but this is not yet certain as the income may end up being exempted from property tax, as it is in many U.S. jurisdictions.

If the building is sold, the lease agreement can be transferred to the new owner. Alternatively if the building is to be taken down or otherwise modified such that the system cannot remain in place, the building owner has the option to buy out the system, and sell the solar panels and equipment to someone who can use them at another location.

Future outlook

Perhaps the biggest question to wrestle with is whether the FIT program represents the best possible opportunity for rooftop solar, or whether a better incentive will be announced in future. If this were the case, early adopters might rue their decision to tie up their roofs for 20 years starting today. Experience in other jurisdictions, however, generally shows most incentives for solar power being reduced over time as costs are reduced and uptake by building owners becomes more widespread. That is why solar developers and an increasing number of building owners are convinced that now is the time to “take to the roofs.”

David Oxtoby is CEO of CarbonFree Technology, a solar power project developer based in Toronto, Ontario. Contact David at info@carbonfreetehnology.com


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