May-June 2010

Financing Lean Times

Now's the time to capitalize on new funding opportunities for energy efficiency and smart grid projects, courtesy of the ARRA.

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With the financial meltdown in the fall of 2008 and the disappearance of about a dozen financial institutions, lending for distributed generation—in particular solar and wind—and energy efficiency projects virtually dried up, the American Recovery and Reinvestment Act (ARRA), signed into law early in 2009, has reversed this situation to a certain extent. Dollars for energy efficiency retrofits are being funneled through the states, and federal grants have recently been awarded for smart grid projects.

James Resor, the chief financial officer at GroSolar, testifies to the difficulties surrounding funding opportunities. He says identifying these opportunities is part of the job as GroSolar develops projects with its clients. The job became immeasurably difficult starting in late 2008 and throughout 2009 as the recession forced banks and other financial institutions to cut long-term credit availability. This hurt commercial projects tremendously, Resor says. 

Companies two years ago could be perceived as having good credit, but, while the environment has been improving since late 2009, there are fewer financing entities and those banks still in the business of lending are using higher credit standards.

As a result, Resor says “We’re seeing commercial clients self-funding projects and monetizing their tax credits.” Specifically, companies can take advantage of federal tax credits to reduce future taxes and this can be quite profitable for the company, he adds.

Photo: Keystone Heritage One of the five Capstone microturbines being installed in Keystone Heritage’s Bridge Business Center

Photo: Rhett Miller, Auxilliary & Plant Services, UCSD Heritage is working to develop a platform strategy for a microgrid.

However, if a company cannot take advantage of federal tax credits either because its profits are low or it is a non-profit institution, the solar system or other distributed generation project can be financed and installed by an independent party, which can take advantage of the tax credits. The project is designed to assure these costs are lower than the traditional utility bills and the company makes monthly payments for the energy it consumes.

For instance, Resor says a third-party owns the solar systems installed on seven low-income and senior housing communities in Connecticut and Massachusetts owned by Winn Development. GroSolar installed solar systems totaling 821.5 kW at the seven sites.

Mariani Packing Co. in Vacaville, CA, signed a solar power services agreement with SunEdison, which financed the 1.1-MW solar system now installed on Mariani property. SunEdison had partnered with GroSolar and Integrated Energy Systems, which engineered and constructed the system. Mariani purchases the solar energy at a long-term predictable rate equal to or less than retail energy rates. The system supplies about 23% of the facility’s electricity.

US Treasury grants, created by the ARRA, provide an alternative funding choice. They became available in August 2009, and awards were announced later in the year. They mimic the benefits of the federal tax credit. If the company cannot monetize the tax credit, it can take advantage of the grants. Resor says two of his company’s solar projects were installed in December for clients that had already submitted applications and met the criteria.

Credit Worthiness Critical
SunPower’s managing director Mac Irvin had further insights. “What happened in late 2008 and the first quarter of 2009 is unprecedented,” he says. “But we’re coming back from the precipice.” Financial institutions are making profits again, but the question is with the key players who had big investments in toxic assets, which haven’t played out yet, he adds. 

“We’re still in the tax equity form of investment, and the US Treasury grants are working well,” says Irvin. There will be a return to a greater quantity of financial institutions, but it is unclear how aggressive in pricing they will be, he says. And these institutions will be less eager to add leverage, he adds. In other words, they will be choosy in how many individual loans they will take on.

Irvin explains that SunPower’s role is to provide capacity as engineering procurement contractor and later in operating and maintaining the solar systems they install. “We also work in financial circles to find third-party owners. We collaborate with financiers to find what makes acceptable credit out there.”

“Some factors fall out of favor,” explains Irvin, but the chief factor now is assessment of credit. “We’re selecting those parts of the community that can meet credit standards. Financiers are very interested in the credit worthiness of customers.”

SunPower has continued to do commercial business throughout this period and with institutions such as the University of California, Merced, and with utilities. Before the financial crisis, it had been doing a lot of multi-site retail installations and had leaned heavily on power purchase agreements (PPAs). Those had diminished, but cash sales continued. “Now our ability to offer PPAs is increasing.” 

SunPower develops projects by working with project hosts and understanding whether they will purchase the system with cash or whether they will sign a PPA, says Irvin. A commercial customer paying cash may value the hedge of owning the system.

Those clients who want PPAs will get documents that are pre-negotiated, with price, financial details, and aspects of sale spelled out. Irvin says the project host will look at the utility bill and the bill SunPower offers, to analyze whether it provides savings to the company or institution. Once signed, the documents are then placed with a financing facility, such as Wells Fargo, GE Financing, or Morgan Stanley.

Wells Fargo financed the $100-million sale leaseback financing of UC Merced’s 1-MW solar system in collaboration with SunPower. The campus in Merced is buying the electricity produced by the system from SunPower at prices competitive with retail rates. This will provide UC Merced with a long-term hedge against rising power prices with no initial capital investment.

The 1-MW SunPower T20 Tracker(R) system is expected to produce two-thirds of UC Merced’s electricity on summer afternoons and 20% of its annual electricity needs through the use of net-metering. Under the terms of the PPA, UC Merced will be entitled to all the project’s environmental attributes and associated reporting rights.

DG Integral to Microgrid
Pike Research, headquartered in Boulder, CO, released a research report on microgrids in September 2009, in which it identifies distributed generation as a key element in microgrids. It predicts microgrids will grow in importance throughout this decade.

Pike defines a microgrid as an integrated energy system consisting of distributed energy resources and multiple electrical loads operating as a single, autonomous grid either in parallel to or islanded from the utility power grid. The report continues, “Microgrids can be viewed as the building blocks of the smart grid or as an alternative path to the much hyped smart super grid.”

There are several microgrid projects in demonstration mode in the US in addition to the two described below, including at Texas A&M, the University of New Mexico, and the Illinois Institute of Technology. Mark Ascolese, chairman and CEO of EDSA, which specializes in power engineering and analytics, believes there is much interest on the commercial side as well, “because they need control of their own destiny to manage costs and reliability,” he says.

Photo: Rhett Miller, Auxilliary & Plant Services, UC San Diego Solar trees on Hopkins parking structure, UCSD

Photo: Rhett Miller, Auxilliary & Plant Services, UC San Diego Power reliability was crucial to UCSD’s two hospitals.

But this year will be the year of justification, says Ascolese. To win the trust of the commercial and industrial community, not only will microgrids have to prove to be more reliable than the utility grid, it will have to be proven the power network with its multiple generation resources can be managed.

UCSD’s Microgrid
The University of California, San Diego (UCSD) is served by a microgrid built on 26 MW of cogeneration, 1 MW of solar photovoltaics, and 60 generating sets, totaling 32 MW, while operating in parallel with San Diego Gas & Electric’s distribution network. It also has a cooling system that relies on a 3.8 million-gallon chilled water storage system that shifts about 14% of its load off-peak.

UCSD’s microgrid is based on the ability to locally produce its own power and to produce central chilling and heating at lower prices than it can buy from the grid. The microgrid also brings the opportunity to have higher reliability while using the utility grid as a backup system, says Byron Washom, director of strategic energy initiatives at UCSD.

In partnership with SDG&E, Viridity Energy, and EDSA, UCSD applied to the US Department of Energy for smart grid funding under the ARRA. The purpose of the funding was to install both EDSA’s microgrid controller software and Viridity Energy’s software for power dispatch optimization.

Unfortunately, the partners were not successful, but Washom says he has received funding from the California Energy Commission’s Public Interest Energy Research program. These funds allowed EDSA’s microgrid controller software, Paladin Smart Grid, and the first phase of Viridity’s software to be installed earlier this year. Washom will continue to search for other funding to complete the additional phases of the project.

Viridity Energy, a company founded in 2008 by former east coast grid interconnection executives, has devised a software technology platform that will optimize UCSD’s distributed resources and demand side management capabilities and transform its portfolio of buildings into a unified dispatchable energy asset in the electricity market.

Viridity CEO Audrey Zibelman poses a question a plant manager might ask: “How do I figure out how to use the resources to optimize what I’m buying from the grid?” Adding intelligence on electricity pricing, which varies from hour to hour in the wholesale market, and weather data could turn a campus microgrid into a virtual energy generator.

Washom explains further. “Depending on market prices, we will generate more electricity or less electricity and reschedule assets accordingly.” Currently, the campus systems generate 80% of the electricity the campus uses, but Washom says this generation could definitely be increased by optimizing their operating schedules as Viridity Energy promised. The 20% imported from SDG&E’s distribution system makes the campus the utility’s third largest customer. These imports could be reduced by 30%, he says.

EDSA’s Paladin software offers rigid and strict power engineering control and Viridity software provides advisory information, explains Washom. This relationship guarantees that “reliability and power quality take precedence over any action we take based on market signals from the grid,” he says. “Optimizing economics and power reliability is what we’re after. [But] we don’t let temporary prices affect reliability and quality,” says Washom.

Washom explained that power reliability is critical because not only does UCSD have two hospitals, but it also supplies cooling to nearby Scripps Institute where ice core samples are preserved and stored. “We have strict power reliability standards. Even momentary lapses are unacceptable,” he says.

“We’ve been interacting with Viridity and EDSA for over one year,” says Washom, and planning how the system could be optimized in real time. Because it is a software-driven project, finding funding is a real challenge, he says. Some funding sources are hardware oriented, and some are software oriented. “We have to find [a funding source] who is willing to fund a software-driven project.”

Customers Want Choice
Ascolese describes EDSA’s software as serving as an intelligent interface between the various distributed generation systems on the microgrid and the utility grid, without compromising the power reliability coming from the utility grid. The goal of the master controller software is to optimize cost, operations, and reliability,” he says.

Zibelman says customer loads are becoming very complex with the advent of real-time pricing, especially those customers who have to manage the energy usage in multiple buildings and who have an onsite power system, chilled water storage and an energy management system. “The challenge is ... to use the resources of these smart buildings and integrate them into a real-time market,” she says.

Zibelman foresees that large consumers like UCSD will want choices to generate their own power, shift it (through storage), supply some power to the grid, and buy from a utility or other supplier. The Viridity software, with its algorithms, can predict what the system loads will be every hour and turn these resources into an economic resource and use that ability for the grid to stay in balance. “Our business objective,” she says, “is to help entities who have made these choices achieve economic value. This is a true transformational element.”

Photo: Rhett Miller, Auxilliary & Plant Services, UCSD UCSD’s cooling system relies on a 3.8 million-gallon chilled water storage unit to shift 14% of its load off-peak.

Keystone Heritage—Bridge Business Center
Peter Krauss describes a very different development at the Bridge Business Center, a new building complex for life science companies in Bristol, PA. He is vice president of Heritage Consulting, part of the Keystone Heritage Group, a real estate developer of brownfield sites and redevelopment in urban environments. Keystone Companies Group is the corporate owner.

Krauss says the first 50,000 square feet of the Bridge Business Center has been built with five 65-kW Capstone microturbines installed to provide power and steam for heating and cooling. The complex will eventually be built out to about 400,000 square feet.

Heritage is working with Viridity to develop a platform strategy for a microgrid, and is exploring solar and geothermal project options, Krauss says. It expects to build out another 100,000 square feet of buildings in the next year, and will look to public and private financing.

The total cost of the current project, including the turbines, a four-pipe distribution system and a secure natural gas line, was $2.5 million. Heritage secured $1 million in grants through the Pennsylvania Energy Development Authority (PEDA), which received funding for the grants from ARRA. It is financing the remaining $1.5 million and will be able to use a 10% tax credit.

Heritage was first turned down for the grant because the state was focused on developing solar and wind projects. However, working with the Secretary of the Department of Environmental Protection, Heritage was able to convince PEDA that it had lower upfront costs and benefits would be realized sooner. Furthermore, Heritage had its private money in place unlike solar developers, Krauss says.

Krauss says the tenants in the business center are in the research, testing, and manufacturing phases of product development. In the biotech industry, big pharma is farming out research to much smaller firms, creating a burgeoning market for real estate developments like the Bridge Business Center.

Krauss says to suit the needs of life sciences companies, the business center has very expensive and sophisticated air handling systems to handle the companies’ air exchange demands. Waste heat generated by the microturbines is used to provide heat to the building in winter months and cooling from an absorption chiller during the summer months.

The microturbines were producing all of the power needed in the business center in the winter months after the building was occupied, and it was also sending power back to the grid. Heritage has a net metering agreement with PECO Energy, which is paying Heritage eight cents per kilowatt-hour. During the shoulder months, roughly July through September, the business center will have to purchase power at about 13 cents per kilowatt-hour. The system was started up in December, so a record of electricity deliveries has not yet been established.

Krauss says the reason Heritage installed the turbines lies with Pennsylvania’s electricity tariff. The cap comes off the 13 cents per kilowatt-hour at the end of 2010, and rates are expected to increase 20%. “We believe we will have the market edge with our tenants,” he says.

With the development of the planned microgrid, “We hope to be a model for robust energy systems,” he continues. “An awful lot of energy can be saved in the country.”

In Summary
Pike Research believes the institutional/campus segment is the most viable in the microgrid market in the near term, because it does not face the same regulatory obstacles facing the other segments. Pike’s market forecast assumes 40% of the microgrid market in North America over the next five years will fall into this segment, representing almost 1,000 MW of installed capacity valued at $2.75 billion. The commercial/industrial sector will represent 19% of the market, the community/utility microgrid sector another 19%, the military 8%, and off-grid microsystems 7%.

The need to upgrade the utility grids, which are growing ever more obsolete, plus the passage of the federal stimulus funding packages in 2009 that earmark funds for smart grids, places microgrid technology in the right position to grow substantially in the coming decade, should institutions and private companies choose to seize the opportunities available. 

Author's Bio: California-based Lyn Corum is a technical writer specializing in energy topics.