Solar City

June 11, 2018

California’s Bold Solar Energy Vision

By Joseph Nyangon
How California’s New Rooftop Solar Mandate Will Build Additional Value for Its Customers

*Luminalt solar installers Pam Quan (L) and Walter Morales (R) install solar panels on the roof of a home on May 9, 2018, in San Francisco. (Credit: Justin Sullivan / Getty Images).*

The boldest new plan yet to increase electricity generation from noncarbon-producing sources has been announced by California. Highly regarded as a trendsetter and vanguard of progressive energy policies, California became the first state to require solar power installed on all new homes. The requirement makes rooftop solar a mainstream energy source in the state’s residential market. Adopted by the California Energy Commission (CEC) as an update to the state’s 2019 Title 24, Part 6, Building Energy Efficiency Standards [1], the solar mandate obligates new homes built after Jan. 1, 2020 to include photovoltaic (PV) systems.

These standards represent a groundbreaking development for clean energy. Single-family homes and multifamily units that are under three stories will be required to install solar panels. The biggest impact may prove to be the incentive for energy storage and the expected uptake in energy efficiency upgrades which could significantly cut energy consumption in new homes.

But not everyone is celebrating. Critics warn that the requirement could drive up home prices overall, further exacerbating already high housing costs in the state. For instance, in a letter to CEC, Professor Severin Borenstein of the Haas School of Business at UC Berkeley warned that such a plan would be an “expensive way to expand renewables” to achieve clean energy goals [2]. But in its order, CEC argued that the new rooftop solar mandate would save homebuilders and residents money in the long-term and cut energy-related greenhouse-gas emissions in residential buildings.

Few solar firms, homebuilders, efficiency experts and local governments fully understand the significance of the mandate. Buildings-to-grid integration experts speak of “turning residential solar into an appliance,”—the merging of rooftop solar, home energy management, energy storage, and data analytics into the next generation of high-performance buildings that is expected to usher in a new era of sustainable development.

How could this new solar mandate help improve grid management so that these ‘new power plants’—clusters of buildings integrated into the grid—can respond quickly to load signals like water heating or home entertainment and thereby contribute to better system reliability? Of course, there are a lot for stakeholders to grapple with between now and 2020 as they come up with compliance solutions to address these opportunities. But this gap, especially, poses a significant challenge in how the new California’s Title 24 codes will affect the clean energy industry.

On the delivery side, First Solar Inc.—a U.S. panel manufacturer—and Sunrun—the largest U.S. residential-solar installer—could be major beneficiaries of the new building codes considering their established market positions in the state. The U.S. Energy Information Administration’s Annual Energy Outlook 2018 puts the mid-point estimate of installed solar capacity required to meet the state’s ambitious ‘50% by 2030’ renewable portfolio standard (RPS) target at around 32 GW (Figure 1). California currently has an installed solar capacity of 18.6 GW, indicating that it has only until the beginning of the next decade to find technical, business, and policy solutions to realize a 50% increase in installed PV capacity. Considering that the core elements of the requirements are now technically locked in, greater cooperation with solar industry players is needed for the success of this bold energy vision.

Figure 1: AEO 2018 estimate of renewable energy generating capacity and emissions in California (2016-2050)

Here are suggestions of what needs to be done to succeed. The provision of today’s electricity services is fundamentally dependent on its transmission, distribution, and storage (TD&S) systems; these functions include business activities that support construction, operation, maintenance and in this case, overhaul California’s electricity infrastructure [3]. According to the 2018 U.S. Energy and Employment Report (USEER), national employment in TD&S including retail service was approximately 2.35 million in 2017, with nearly 7% growth expected in 2018, mostly in manufacturing, construction, installation/repair, and operation of TD&S facilities [4]. Using these national figures as rough benchmarks for job generation, the new solar building mandate represents a major growth opportunity for the solar industry. However, there are transmission implementation challenges that could occur in the future. Orders 890 and 1000 by the Federal Energy Regulatory Commission (FERC) require transmission providers to treat demand resources comparably with transmission and generation solutions during transmission planning. Which means that a clarification is required of whether onsite generation under Title 24 would count toward compliance with FERC’s orders.

With proper distribution and transmission planning coupled with the fact that new homes will have better efficiency overall, California could reap significant benefits from the solar mandate and pioneer in mainstreaming non-wire alternative business models associated with solar distributed generation systems [5]. Deferring and reducing costs to capacity upgrades for distribution and transmission under a distributed utility regime, is one example. For this reason, California regulators would need to anticipate and address compliance issues that could result during the implementation period, such as concerns regarding flexibility measures, the estimated number of homes that would comply with the codes, and year-on-year market bottlenecks that may occur without a rapid change in business models. Further greater stakeholder engagement and partnerships with the building industry, universities and research organizations will be needed to track progress on single–family and multi-family solar development.

Another key step is to improve the revenue model for all generation technologies to reconcile with long-term contracts. In recent years, as solar power grew in the Western Electricity Coordinating Council region, and particularly in California, future prices of solar electricity became uncertain. Today’s electricity prices are set based on the variable cost of the marginal technology. Because technologies like rooftop solar, once built have near-zero marginal costs, this could put downward pressure on long-term electricity prices. Good news for customers and the economy! But payment for TD&S may be of risk. States have been solving this problem by implementing long-term fixed pricing systems, either through power purchase agreements (PPA) or capacity mechanisms, which carry the full-price risk of the technology. California (and New York) has proposed new revenue models that balance the pace of improvement in technology cost and revenue returns [6]. Still, further adjustments to the revenue model may be required in the future.

The logic behind California’s solar mandate is to reposition the market so that the bulk of generation will increasingly come from customer-sited equipment. This is significant: rooftop solar is one of the most effective customer-sited solutions for accelerating a decentralized grid and greening our electricity supply. Apart from the anticipated long-term cost-reductions to the grid, we can infer that CEC may have been guided by the growing market potential of rooftop solar when crafting the new building code energy-efficiency standards. As to the question of the economic viability of the standards to the grid, a detailed study is needed to take into account direct and indirect impacts.

Recently, there has been mention of the mounting problem widely known as the “duck curve”—that is, the sun shines only during the day which means that the solar energy cannot meet the system’s demands when the sun goes down or cloud cover disrupts solar energy system output. This phenomenon can force utilities to ramp up non-solar generation, thereby undermining some of the benefits of a low-carbon strategy. This concern raises a question: What happens to the value of solar energy produced as new additional capacity grows? Over-generation? Because retail competition is still limited in volume to support the anticipated market growth under the new standards, the value of the additional solar generation could decline. Furthermore, the grid would need to be prepared to anticipate and handle any over-generation. CEC is aware of the duck curve problem and included a compliance credit for energy storage in the Title 24 codes to address the issue. But this may not be enough. Options for maximizing on-site solar use should be sought as capacity grows. In addition, while greater electrification of buildings is noteworthy for the utility business model, without offering incentives to residential solar producers, for instance, in the form of affordable construction materials that socializes costs overall ratepayers and introduces new products and services that guarantee long-term profitability, the latest round of CEC building codes could raise significant grid management issues and market uncertainties thus exacerbating the duck curve problem. In brief, the role of utilities in interconnecting these ‘power plants’ and managing any over-generation issues will become more critical.

Growth from the new solar mandate and steps taken to incentivize storage and energy efficiency upgrades may not produce profits for utilities in the short term. But adoption of the Title 24 codes offers utilities opportunities for greater electrification and enables them to search for cost-effective pathways to reduce carbon emissions. In a study of grid decarbonization strategies in California, Southern California Edison (SCE) found that a clean power and electrification path can provide an affordable and feasible approach to achieving the state’s climate and air quality goals [7]. While the cost of managing the grid is an important consideration for utilities like SCE, approval of the new solar mandate is an important reminder of the changing utility industry. Power companies are developing new ways to extract value from emerging distributed solar technologies and expand customer choices. The success of the Title 24 codes will depend to a significant degree on supportive regulation [8,9]. With billions of investments required for grid modernization to address the aging infrastructure issues, finding a sustainable operating model that enables utilities to recuperate costs through rates is fundamental. This is a long-term proposition and power companies should treat it as such.

Despite the challenges discussed above, California’s new Title 24 mandate represents the boldest and most inspiring building energy efficiency standards by any state to date [10]. No doubt the questions surrounding future electricity rates, grid management issues, retail competition, investments in TD&S, design of long-term contracting via PPA mechanisms, and the impact on housing prices require significant attention. But this solar mandate can be an unprecedented energy-problem solving strategy that turns every home into a power plant as solar becomes more mainstream.

Additional Resources
[1] Rulemaking on 2019 Building Energy Efficiency Standards: https://energy.ca.gov/title24/2019standards/rulemaking/
[2] Email response by Severin Borenstein regarding new building energy efficiency standards rulemaking to mandate rooftop solar on all new residential buildings: https://faculty.haas.berkeley.edu/borenste/cecweisenmiller180509.pdf
[3] Nyangon, J. (2015). Why the U.S. urgently needs to invest in a modern energy system. FREE. https://freefutures.org/why-the-u-s-urgently-needs-to-invest-in-modernizing-its-energy-infrastructure/
[4] The 2018 U.S. Energy and Employment Report was prepared by the Energy Futures Initiative (EFI) and the National Association of State Energy Officials (NASEO): https://static1.squarespace.com/static/5a98cf80ec4eb7c5cd928c61/t/5afb0ce4575d1f3cdf9ebe36/1526402279839/2018+U.S.+Energy+and+Employment+Report.pdf
[5] Nyangon J. (2017). Distributed energy generation systems based on renewable energy and natural gas blending: New business models for economic incentives, electricity market design and regulatory innovation [Ph.D. dissertation]. College of Engineering, University of Delaware. Google Scholar.
[6] Nyangon J, Byrne J. (2018). Diversifying electricity customer choice: REVing up the New York energy vision for polycentric innovation. In: Tsvetkov PV, editor. Energy Systems and Environment. London, UK: IntechOpen. pp. 3-23. Google Scholar
[7] The Clean Power and Electrification Pathway: An exploration of SCE’s proposal to help realize California’s environmental goals: https://www.edison.com/content/dam/eix/documents/our-perspective/g17-pathway-to-2030-white-paper.pdf
[8] Nyangon, J. (2015). Obama’s Budget Proposals for Clean Energy and Climate Investment. FREE. https://freefutures.org/obamas-budget-proposals-for-clean-energy-and-climate-investments
[9] Nyangon, J. (2015). Mobilizing Public and Private Capital for Clean Energy Financing. FREE. https://freefutures.org/mobilizing-public-and-private-capital-for-clean-energy-financing/
[10] Nyangon, J. (2014). International Environmental Governance: Lessons from UNEA and Perspectives on the Post-2015 Era. Journal on Sustainable Development Law and Policy 4: 174–202. Google Scholar

April 4, 2015

Mobilizing Public and Private Capital for Clean Energy Financing

By Joseph Nyangon
Innovative financing, increased capital investment and technological improvement are catalyzing renewable energy growth.

A key driver of recent renewable energy gains is cost. As a mass market develops and the technology improves solar and wind power have become more competitive. Photo: Solar Panel Against Blue Sky, Deutsche Bank

The energy market in the United States is undergoing a dramatic transformation, driven by technological advancement, market dynamics, and better policies and laws—none of which was a decade ago. Venture capitalists made huge profits from the computing boom of the 1980s, the internet boom of the 1990s, and now think the next boom will happen on the back of energy. These past booms, however, were fed by cheap energy: coal was cheap; natural gas was low-priced; and apart from the events following the 1973 Arab oil embargo and the 1979 Iranian Revolution, oil was comparatively cheap. However, in the space of the past decade, all that has changed. New resource finds, primarily shale resources from states such as Texas, Oklahoma, North Dakota, and Pennsylvania, exert pressure on the prices of oil and gas. At the same time, there is a growing concern of negative externalities associated with these fossil fuels.

Hybrid vehicles are doing more to fulfill their technological promise. Wind-and-solar powered alternative no longer looks so costly by comparison to natural gas—whose low prices due to increased shale production have shaken up domestic and global energy markets recently. Coal remains relatively cheap, however, its extraction damages ecosystems by destroying ecological habitats. Additionally, combustion of fossil fuels pollutes the air by emitting harmful substances into the atmosphere, such as carbon dioxide, methane, and nitrous oxide that contribute to global warming.

Oil spills, such as the 2010 Deepwater Horizon spill in the Gulf of Mexico and leakages at exploration and extraction points destabilize marine ecosystems, killing aquatic life. Utility firms seeking to avoid political and capital costs of the U.S. Environmental Protection Agency’s (EPA) Clean Power Plan and Mercury and Air Toxics Standard on existing plant performance have began to invest more in energy efficiency and low-carbon technologies that guarantee less harmful emissions. As a result, the industry is accelerating modernization of their generation fleet. These underlying factors, including innovative financing options, increased capital investment, and market incentives, have opened up a capacity gap from conventional plants and an opportunity especially for solar, wind, and other low-carbon technologies.

Innovative financing options: A key driver of recent renewable energy gains is cost. As a mass market develops and the technology improves solar and wind power have become more competitive. In California and New York, a surcharge paid by utility customers to help finance clean energy projects in the two states has generated substantial sums of money, which is being invested in energy efficiency and renewable projects. In Connecticut, the Clean Energy Finance and Investment Authority (CEFIA), a successor of Connecticut Clean Energy Fund (CCEF) has funded over $150 million of clean technology projects and awareness programs statewide.[1] As more states adopt these kinds of programs, they continue to subsidize investment in clean energy programs. Financing clean energy projects, nevertheless, continues to face stiff competition from non-renewable sources. The cost of fossil fuels is still relatively low, mostly because social costs and the price of ecological damage are not factored into existing market prices. Renewable energy development also continues to experience high transactions costs, such as in negotiating power-purchase agreements which can make them more risky to investors.

Capital costs: In the long run, however, real gross domestic product and carbon emissions are likely to be the primary drivers of clean energy consumption, because governments will try to prevent the price of energy from rising too fast or decreasing overly quickly as it can have negative effect on overall economic growth. Thus the price of fossil fuels could have only a small negative effect on the demand for clean energy. The main barrier to large-scale wind and solar projects is obvious—high upfront capital costs. Accordingly, some investors in certain parts of the country continue to demand high premium lending rates to offset the upfront capital risked up to fund clean energy projects than other conventional energy projects. At the same time, technology improvements, especially with regard to solar, and promising much lower future capital costs, which explains why solar energy is the fastest growing source of new energy simply in the U.S. and worldwide.²

Secondary effects: According to the Energy Information Administration (EIA) Short-Term Energy Outlook February 2015, utility-scale solar power generation in the U.S. will increase by more than 60% between 2014 and 2016, averaging almost 80 GWh per day in 2016.[2] Half of this new capacity will be built in California. The World Energy Outlook 2014 estimates a 37% increase in the share of renewables in power generation in most OECD countries by 2040.[3] However, growth in renewable energy generation in non-OECD countries, led by China, India, Latin America and Africa, will more than double, according to the report. A change in energy policy or regulations in these markets could have even wider secondary effects on energy supply: positive impacts on emission reductions, accelerated substitution effects, and improved cost-competitiveness of renewable energy.

Market incentives and carbon tax: In the absence of fossil-fuel subsidies, which in 2013 alone totaled $550 billion, renewable energy technologies would be competitive with fossil power plants.[4] The effect of fossil-fuel subsidies on renewable electricity generation is fourfold: they weaken the cost competitiveness of renewable energy; boost the incumbent advantage of fossil fuels; lower the costs of fossil-fuel-powered electricity generation; and make investment in fossil-fuel-based technologies favorable over renewable alternatives. For instance, a phase-out of coal subsidies could further limit new construction and use of least-efficient coal-fired plants, thus incentivizing investment in clean energy.

Finally, if new policy causes the marketplace to internalize the risks of climate change, there would be no need for renewable energy subsidies and mandates in order for these sources to reach market parity.

Notes
[1] Connecticut Clean Energy Finance and Investment Authority: https://www.ctcleanenergy.com/Default.aspx?tabid=62
[2] Energy Information Administration’s (EIA) Short-Term Energy Outlook February 2015: https://www.eia.gov/forecasts/steo/pdf/steo_full.pdf
[3] World Energy Outlook (WEO) 2014: https://www.iea.org/publications/freepublications/publication/WEO_2014_ES_English_WEB.pdf
[4] Ibid, WEO, p.4

April 3, 2015

Energy Dilemma of Ethical Cities and the Solar City’s Promise

By Job Taminiau, Jeongseok Seo and Joohee Lee

No one in large cities would want to have a nuclear or a coal-fired power plant in their residential boundaries. Recognizing environmental and health risks of conventional power plants, it becomes increasingly unthinkable to propose the construction of such power plants near populous areas. Instead, remote locations are sought, often at the expense of local populations, and the produced electricity is then transferred to the areas of demand.

Here ‘ethical’ cities, who are concerned about detrimental impacts of their electricity consumption on supplier communities, are faced with a dilemma: either they have to build some fossil-fueled or nuclear power plants in their cities to supply electricity they need; or they have to live with shifting health or environmental consequences of such power plants to others. Besides, building large power plants in urban centers can be uneconomical as the capital cost will likely be more expensive than remote rural areas largely due to higher property prices and O&M costs will also be greater due to higher transportation costs for fuel sources, such as coal, natural gas or uranium.

Researchers at CEEP have investigated this dilemma and proposed a reorientation of the energy supply focus to include the possibilities and opportunities that are available within city boundaries. This idea has taken shape in the form of the ‘solar city’, putting forth the notion that cities can capitalize on the incoming solar energy that is collected daily but remains unused unless it is ethically and economically captured. While solar electricity is ready-made for this purpose, other energy technology options or energy saving measures can also be considered. In effect, rather than relying on the construction of additional capacity outside the municipal boundaries, the urban fabric is transformed to become a power plant itself, empowering citizens as ‘prosumers’ through a strategic and collective application of the solar city concept. Calculations performed by CEEP researchers have shown that megacities have great potential to address the economic and inequity problems of energy supply through this strategy: for example, a carefully implemented solar city strategy can account for 66% of Seoul’s energy need during daylight hours [1]. And its supply can be affordably provided to all [2].

Now, a recent study investigating the application of the solar city model has identified a viable financing strategy that allows for the gigawatt scale deployment of solar capacity [3]. Using Amsterdam, London, Munich, New York, Seoul, and Tokyo as case studies, the results show that over 300 million square meters of rooftop area could be available for PV installation and that the city-wide deployment of PV on this rooftop real estate would yield substantial energy, economic, and system benefits. The US$ 10 billion financing cost to install PV on approximately 30% of the commercial and public buildings in these cities—the building types primarily studied in the investigation—could, meanwhile, be addressed by approaching the capital markets through bond offerings.

The investigation does show, however, that city-specific policy, market, and finance conditions influence the viability of the strategy. For instance, Seoul’s low commercial retail electricity price set by the national regulator complicates the business case for a solar city strategy and can only be bridged by a more supportive policy framework, continued falling PV system prices, and/or by increasing electricity retail prices. Similarly, the investigation shows how London would need to rely on some level of policy support to allow for a cash flow capable of providing the foundation for the investment. Importantly, however, the study finds that New York City, Tokyo, Amsterdam, and Munich are all able to already implement a solar city strategy without additional policy support which returns its debt in 10 years or less.

These results are promising and can provide an alternative path that cities can take to solve their energy dilemma. Moreover, these six cities have options available to them to further improve the business case for a PV solar city application by modifying policy frameworks or, perhaps, through collaborative bond structuring. In any case, if the PV system price patterns of the past few years continue into the future, payback periods could be under ten years for most cities without any policy support.

Now, ethical cities have an option. One is to stick to the current path, that is, they consume electricity generated from fossil-fueled or nuclear power plants at the expense of supplier communities who must shoulder the risks. Or they can choose a strategy of leadership and start construction of a distributed solar power infrastructure within their own boundaries and contribute to the sustainable energy transition. The Mayor of Seoul, Mr. Park Won-Soon, has offered an interesting name for his city – “One Less Nuclear Power Plant” [4].

Notes
[1] Byrne, J., Taminiau, J., Kurdgelashvili, L., & Kim, K. (2015). A review of the solar city concept and methods to assess rooftop solar electric potential, with an illustrative application to the city of Seoul. Renewable and Sustainable Energy Reviews, 830-844. https://dx.doi.org/10.1016/j.rser.2014.08.023
[2] Byrne, J. and Yoon S-J. 2014. Sustainable Energy for All Citizens of Seoul. Presentation at the Seoul International Energy Conference 2014. https://www.youtube.com/watch?v=HkTUrLbUt7Y
[3] Byrne, J., Taminiau, J., Kim, K., Seo, J., Lee, J. (forthcoming). A solar city strategy applied to six municipalities: integrating market, finance, and policy factors for infrastructure-scale PV development in Amsterdam, London, Munich, New York, Seoul, and Tokyo.
[4] Seoul Metropolitan Government. (2014). One Less Nuclear Power Plant, Phase 2: Seoul Sustainable Energy Action Plan

Photo credit: Forbes

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