While California has done much in the past 40 years to promote sustainable energy, there are now questions about what is next. Wayne Waite, policy director for the California Housing Partnership, and Lewis Milford, president of Clean Energy Group, write a detailed article in the GreenTech Media website about latest developments.
Efficiency, Solar and Storage Offer a Unique Opportunity to Bring Clean Energy to Affordable Housing
After over 40 years of promoting energy efficiency and a decade of promoting solar PV, clean energy advocates working in the affordable housing sector are considering what the next steps should be for cutting energy costs for low-income tenants.
The next steps will require more integrated strategies that enable property owners to better manage energy demands, improve the financial outcomes of energy investments, and create more resilient and sustainable affordable housing. We believe that energy storage must be a significant component of this future.
Beyond energy efficiency
Energy efficiency will continue to be the first step toward lowering energy consumption and costs. Avoiding rising energy prices triggered by deregulation has been a catalyst for energy efficiency and implementing net-zero energy building standards like those that will take effect in California for all new residential construction in 2020.
Achieving deeper energy reductions for existing affordable-housing units, which are typically older and less efficient, presents added costs — and thereby is limited to energy-efficiency-only strategies. Energy economics require more expansive strategies.
In the last five years, solar PV costs have declined to the point that standalone solar PV systems can be financially feasible for affordable housing owners and at times more feasible than deeper energy-efficiency retrofits. As a result, solar PV is increasingly credible as a way to offset electricity consumption after a first level of energy efficiency retrofitting. At a policy level, providing incentives to finance solar access for low-income communities has emerged as a second significant step for reducing energy costs for low-income renters in affordable housing.
The financial opportunity from solar PV is especially evident when owners of affordable rental housing are able to integrate solar PV into new construction or substantial rehabilitation using federal Low-Income Housing Tax Credits (LIHTC) in conjunction with Business Energy Investment Tax Credits (ITC). As shown below, since solar PV installations generate operational cost savings and can also reduce tenant utility costs, solar installations financed by LIHTCs as part of a larger construction or renovation project can actually increase capital funding sources over uses and make it possible to provide greater benefits to low-income households.
For existing properties seeking to add solar PV to an efficiency-only retrofit, the economic feasibility of solar is a bit more challenging, but can still be favorable. The growing market for third-party ownership structures and improved access to solar investment funds have enabled turnkey financial options that leverage ITCs and real estate depreciation tax benefits to provide financing without the need for upfront capital investments by the property owner.
Under third-party-ownership (TPO) arrangements, the value available to building owners and their tenants increases as the cost per kilowatt-hour decreases. Where solar incentives and tax benefits are fully leveraged to write down project costs, as in the case of LIHTC transactions, the economic benefits can be potentially larger, provided that the solar costs do not escalate after installation.
Net metering’s role in affordable housing
The economic case for all energy improvements is greatly influenced by utility tariffs and the value of avoided energy costs. For solar PV systems, the value proposition depends on utility net energy metering (NEM) policies that credit property owners for the excess solar generation provided to the grid. A project’s financial feasibility is a function of whether the NEM tariff and fees allow the property owner to cover unsubsidized costs and earn a reasonable return.
Robust utility NEM policies are of great importance to low-income affordable rental housing properties because the underwriting of these systems requires a stable and predictable source of cash flow to cover debt and operating costs. Existing affordable multifamily rental properties do not typically have capital reserves or excess operating income to cover upfront investment costs, and complex ownership structures and complicated financing stacks make it difficult to add new debt to a property. Furthermore, federal regulations significantly restrict the ability of property owners to capture solar energy credits allocated to residents to support the project’s installation.
NEM provides property owners with a cash flow from the solar generation in two ways. First, if the PV system is installed behind the utility meter, the PV generation supplies electricity to the property and replaces higher priced utility service. Secondly, NEM allows the electricity grid to act as a free battery for the PV system’s excess power generation. Solar energy production, which peaks in the middle of the day when most people are away from home, does not correlate well with peak electricity consumption.
Affordable rental housing properties and their tenants consume about 25 percent to 50 percent of the electricity their PV systems generate. With net metering, the remaining 50 percent to 75 percent of solar-generated electricity is exported to the grid. Customers then are compensated via NEM credits, which offset the electricity costs for power they purchased from their utility.
Some states have also adopted innovative virtual net metering (VNM) policies that make solar PV more accessible in multitenant buildings. In affordable multifamily rental housing, VNM allows the PV generation from a single array to be allocated to multiple utility meters at a site without separate meter hookup and inverters. This allows multifamily residents to receive a fair allocation of economic benefits from their building’s solar system.
For PV systems with a VNM interconnection, all of the solar generation is supplied to the grid (in front of the utility meter) and credited at the NEM rate, which can be financially advantageous to both owners and tenants. However, if a utility’s NEM policy compensates solar generation below the retail rate for electricity, the value proposition of new standalone PV solar installation diminishes rapidly. Worse, the lower rate damages existing solar PV financings that were underwritten with prior assumptions.
Utility threats and changing energy economics
Utility companies and their investors are concerned that they may face stagnant growth in electricity consumption due to increased efficiency and greater adoption of distributed energy technologies. As solar PV installation capacity reaches policy caps set by regulators on the level of distributed generation that can be installed, NEM rules are being reviewed and updated to address increasing demand for solar and concerns about whether grid costs are fairly shared by all customers.
The result has been a proliferation of proposals for higher fixed charges, residential demand charges, mandatory time-of-use rates, and an end to NEM as we know it — all designed to make solar less economically attractive to customers. Both Hawaii and Nevada have already dismantled their NEM programs and in the process.
While a recent decision in California largely preserved net metering policy in the state, solar customers must convert to time-of-use rates. This decision — a reasonable response to changing grid dynamics — will eventually diminish the economic returns of NEM and undermine the economic feasibility of solar PV installations. It is also a model that other states might follow.
To compound that problem, the value of standalone solar inevitably will decline in the future as solar generation capacity increases on the grid. As more solar comes on-line, there is less need for additional power at times when solar systems are most productive, driving down the value of solar energy production to utilities. Thus, increasing solar generation will likely erode the economic value of existing PV systems over time. Energy experts are now discussing the likelihood of this coming “solar deflation.”
The policies that have propelled the growth of standalone solar in the affordable housing sector are no longer a reliable economic engine for sustaining solar PV growth. To sustain growth and reach underserved markets, we must find other ways to maintain and enhance the value of the solar generation and to manage our demand and demand charges.
At a time when the declining costs of solar PV make clean energy technologies accessible to low-income households, utilities and regulators are acting to reduce the value of solar generation for this sector. Left unaddressed, the “green divide” may once again separate our communities’ access to energy by income, further compounding the challenges facing low-income households and those trying to provide them with affordable shelter.
The emergence of battery storage
Rhone Resch, the president of the solar industry’s national lobbying group SEIA, said recently that “storage is the missing piece of the puzzle” for the future of PV. As metering policies evolve, battery storage offers an important pathway for maintaining and enhancing the value proposition of energy investments like solar PV for all customers, but especially in affordable housing.
The reason is simple. Energy storage empowers solar PV owners to take control of the energy they produce, while also adding valuable flexibility to the electric power system.
This is already happening with private commercial customers who deploy solar-plus-storage to reduce electricity costs, decrease commercial demand charges, and generate revenue through providing grid services, like demand response and frequency regulation.
Battery storage will be key to capturing the economic benefits from solar. The high-end customers for solar-plus-storage systems have figured this out. Now it’s time for low-income residents, and the building owners that serve them, to benefit as well. Otherwise, they will be left with systems that fail to deliver all the economic benefits possible.
A third-generation energy strategy
Just as adding solar PV delivered a more expansive strategy than energy efficiency alone, energy storage technologies could emerge as the third-generation strategy to achieve cost reductions and extend energy benefits to low-income communities.
When installed at multifamily affordable housing with solar PV, energy storage can capture solar savings and shelter system owners and/or tenants from changes in utility rate structures and cost fluctuations. Preserving the value of solar that is installed in low-income communities is especially important for the poor and those on fixed incomes. Storage can make solar energy more valuable, and open up the opportunity for many new sources of revenue for affordable housing developers, which they can then pass on to their tenants. In addition, solar-plus-storage technologies provide clean, reliable power during an emergency.
Clean Energy Group’s Resilient Power Project recently released a new report analyzing the economics of solar-plus-storage systems for multifamily affordable housing. The report, Resilience for Free, showed how resilient power can be provided at little cost to help support those residents who need it most during an emergency.
The challenge now is to bend the technology arc of this storage revolution to serve low-income communities. To do that, we must use three technology strategies synergistically — energy efficiency, solar and energy storage — to significantly reduce the electricity costs. Indeed, the economic power of these technologies is their synergy.
But how do we turn this into real deployment?
California leads the way
In October 2015, California enacted Assembly Bill 693, which established the Multifamily Affordable Housing Solar Roofs Program. It requires that individual tenants receive the direct economic benefits from the solar systems installed, which is possible though virtual net metering. The Solar Roofs program will provide up to $1 billion over a 10-year period and will install over 300 megawatts of PV serving low-income renters. The program is expected to reach low-income households in more than 25 percent of California’s affordable multifamily rental properties.
Under the program, eligible solar systems could include battery storage. Under IRS rules, “solar energy property includes equipment that uses solar energy to generate electricity and includes storage devices, power conditioning equipment, transfer equipment, and parts relating to the functioning of those devices.” The legislation also requires projects to incorporate energy efficiency requirements as part of solar installations.
This represents the first time in the U.S. that a dedicated state subsidy could provide incentives for owners to install solar PV, storage and energy efficiency all in one package in multifamily affordable rental housing. But this will happen only if California policymakers get the right structures in place to support the delivery of a comprehensive and integrated set of energy solutions for the benefit of low-income families.
The addition of battery storage to solar PV systems is a good policy choice, and one that should be included in the implementation of AB 693. The law must now be implemented through a public proceeding convened by the state’s utility commission. Regulators must address a range of issues, including setting incentive levels to reduce system costs and maximize benefits, and determining how program benefits are allocated between tenant units and common areas.
Getting this policy right by integrating solar with battery storage and energy efficiency could create a national model to help close the green divide and enable new energy technologies to benefit all Americans.