Making Photovoltaics Pay Their Way

Lower upfront costs, more incentives, and rising electricity rates are helping make a stong business case for photovoltaic systems.
August 11, 2010

With the American Institute of Architects calling for reducing energy use in buildings by 50% over current codes by 2010, and in the context of rising oil prices and growing concern over global warming, Building Teams need to take a good look at using photovoltaics in their projects. PVs come in two basic forms: stand-alone PVs, which are typically installed on rooftops; and building-integrated photovoltaics (BIPVs), which are usually placed on top of south-facing sunshades or spandrel panels, or integrated with roofing tiles.

Based on the first 200 LEED-certified projects (and using the renewable energy credit point as a surrogate for PV systems), it is my estimate that PV systems are used in less than 20% of all such projects. Why? Too much cost for the benefits received, the argument goes.

But that's not necessarily the case today. The current PV market is vastly changed from the PV market I worked in 20 years ago, when energy was a lot cheaper and PV systems were much more expensive. Consider these points:

Costs have come down, from about $10 per watt (peak) a few years ago to about $6 per watt (peak) in 2006, for reasonably sized systems (over 20 kW).

For systems placed in service before the end of 2007, the federal tax credit for PVs has increased from 10% to 30%, with no limit on cost for commercial systems.

Many state, city, and utility programs are offering additional incentives, in the form of tax credits, subsidies based on system size, or payments for power generated.

Most experts expect the price of electricity to rise steadily in the future, probably faster than the rate of inflation, making the output of PV systems more valuable over time.

Take a look at the basic economics of PVs as an add-on power source for buildings (this is a rough order-of-magnitude approach, but not far off), as shown in Table 1.

From Table 1, it's easy to see that there is little economic justification for photovoltaics as an add-on energy supply system for public projects (those that receive no tax benefits) or for private projects (in areas with no utility credits or low peak period power rates).

Despite the poor “raw” economics of PV systems, Table 2 indicates that, in some cases at least, it may pay to look at a full range of economic and financial benefits, particularly those that will reduce initial costs. For example, some states, such as Oregon, allow public projects to “pass through” state tax credits to private entities, making this benefit realizable to public agencies. In this situation, a PV project may command a return on investment (or internal rate of return) of up to 10-12%. That's not bad, considering that future energy-generation benefits, in terms of avoided utility costs, may well be much higher.

Consider, too, the additional benefits that may come with installing PV systems, as shown in Table 3, which describes how the various features of PV systems may translate into user or owner benefits.

Based on this list of benefits, the decision whether to go with PVs passes from the electrical or energy engineer to the building owner or developer. It's important for Building Teams to recognize this, rather than simply dismiss PVs out of hand at the beginning of a project as too expensive.

Proponents of photovoltaics have to be creative in presenting the economics and financing of solar energy systems, as well as the “non-quantifiable” benefits, to design teams. Architects, engineers, and Building Team members who are PV proponents should also incorporate these benefits in presentations to owners and design review committees.

One last bit of advice: Don't do PVs as an add-on at the end of a design project. They need to be considered early in the design process, while costs and design concepts are still fluid.

Jerry Yudelson is chair of the 2006 USGBC Greenbuild conference steering committee, and serves as principal of Yudelson Associates, a green building consulting firm in Tucson, Ariz. He is the author of The Insider's Guide to Marketing Green Buildings, available at www.smps.org, and Developing Green: Strategies for Success, available at www.naiop.org. He is a frequent speaker at professional and trade conferences, seminars, and workshops.

Table 1.

Basic economics of PV systems
$300,000 (assuming $6/watt-peak installed)
75,000 kWh (assuming 1,500 kWh/kW-peak/year)
$7,500 (at 10 cents/kWh)
2.5%, assuming no maintenance costs
40 years (at 0% discount rate); never (at 5% discount)

Table 2.

Potential benefits to PV system owners
• Federal and state accelerated depreciation (for stand-alone systems)
• Federal tax credits (30% for commercial PV systems put in place in 2006 and 2007)
• State tax credits (e.g., Oregon tax credit is valued at about 25% of initial cost)
• State and local subsidies ($2-3 per watt in some places like California)
• Utility credits and payments for power produced ($.15 per kilowatt-hour or more)
• Peak period power savings, in areas where power demand is monitored “real time”
• Greenhouse gas emission reduction credits (not much)

Table 3
Additional PV system benefits


PV feature Benefit to user or owner
PV systems are visible on buildings. It is immediately recognizable to the public that you have a green building that uses solar energy.
PV output can be measured and displayed easily (see www.greentouchscreen.com). PV can be incorporated into public education about green buildings, specifically in school and college settings, as well as public buildings.
Building-integrated PV systems can contribute to the architectural design of a project. BIPVs can substitute for costly exterior cladding materials or placed on top of sunscreens, reducing their net cost to the project.
Larger PV systems are still newsworthy in most locations. Because they are visible and don't pollute, PV systems may be perceived as attractive and thus gain media attention to publicize the project.
Rooftop PV systems can be physically separated from the underlying building and owned by different entities and taxed as physical vs. real property. PVs can be part of a “micro-utility” that can be owned and operated by a private company, even for public projects, qualifying them for full tax benefits. As physical property, PV systems may qualify for accelerated depreciation.
To the public, PV systems represent a commitment to using renewable energy. PVs can be part of the branding of an office park or commercial building.
PV systems have aesthetic appeal. Architects are beginning to work with the deep blue color and other aesthetic features of polycrystalline and amorphous silicon PV panels.
PVs can be separately financed from the rest of the building. Some public and university projects may find it useful to “sell” PVs to their public stakeholders, rather than financing them out of the base building budget.
PVs can help get additional LEED project credits for energy efficiency and renewable energy, especially under LEED 2.2, which lowered the threshold for PV system output to qualify. The value of moving from a basic LEED-certified project to a LEED Silver level may be significant where there are tax credits, or where there is an owner or public policy requirement for LEED Silver.

'Solar Services Model' emerges
Installation of photovoltaic systems is accelerating in 2006 because investors and developers have figured out how to separate ownership of the PV system from that of the underlying building. This “micro-utility” model was first used in the 1980s to install solar water-heating systems in apartment buildings in California; at the time, there was a 55% state solar tax credit, a 25% federal solar tax credit, and generous depreciation schedules. When those credits disappeared in 1986, so did these programs.

In the more recent “solar services model,” a company agrees to buy all the solar electricity generated by a rooftop PV system for a period of at least 10 years, at then-prevailing commercial electrical rates. (In essence, the company is running its meter backwards.) According to a recent report in The New York Times, General Motors, Alcoa, Staples, and Whole Foods are installing such units on the roofs of their warehouses and big-box retail stores. These facilities typically have more than 100,000 sf of rooftop area to work with, as well as unimpeded access to sunlight and plenty of electrical demand.

In the solar services model, investors build, own, and operate the PV systems, while leasing the rooftop for a nominal amount. Typically, the units are larger than 100 kW ($600,000 installed cost), which helps pay for the cost of installation and all the sales and marketing expenses. In a $1,000,000 system, for example, the current federal tax credit would be $300,000, and accelerated depreciation could add another $250,000 in net benefits. In the state of Oregon, a solar tax credit would net another $250,000 in state tax benefits, as well as electricity payments of $0.15 per kWh. In California, there is a property tax exemption worth at least $10,000 a year (1%), plus $0.50 per kWh generated for the first three years, plus $2,500 per kW (as of May 2006), or about 40% of the total cost. (Note: The basis for the federal solar tax credit must be reduced by the amounts of state and utility incentives.)

Tax benefits and utility payments can almost meet 100% of total system cost. Thus, investors would not have to rely on the rather small 2-3% of capital cost generated each year by the electricity from the PV system. For example, at $0.10 per kWh payment and 1500 kWh/kW per year net power output, a 1 kW system costing $6,000 would generate perhaps $150 a year in income—a 40-year payback.

My advice to property owners thinking about investing in these programs: Be sure to consult a tax advisor knowledgeable in federal, state, and local law to make sure you can use all the tax credits and other benefits in a reasonable period of time.