Navigant Research Blog

How Green Is My Casino?

— December 21, 2014

On a recent trip to Las Vegas, I found myself wondering just how much energy is being consumed compared to other cities around the country.  It doesn’t take much research to grasp the enormous amount of energy needed to power all the neon, slot machines, sound systems, sportsbook TV screens, and massive air conditioners required to make the desert city an international tourist destination.  While recent efforts by resorts to “green” their operations have made an impact, they don’t address the root of the problem.  Sin City is unique in its geographic location – which provides both challenges and opportunities to operate a sustainable energy system.

Can’t Take the Heat

Las Vegas’ desert location would be very uncomfortable throughout the summer without modern air conditioning.  This presents significant challenges to resort designers who must overcome the desert sun to provide comfortable environments across millions of square feet.  At the scale of an individual hotel room, this challenge is easier to understand.  Large floor to ceiling windows are quite popular in the city but allow tremendous amounts of heat to enter the room.  Simply installing automatic blinds or smart glass windows could dramatically reduce this effect.

Although HVAC systems have been a target of recent conservation efforts, older hotels rely on outdated systems.  The New York, New York hotel I stayed in had only a very basic analog thermostat with simple controls and no ability to schedule.  Innovations to improve the efficiency of commercial HVAC system are discussed in Navigant Research’s report, Advanced HVAC Controls.  Perhaps the most effective addition to this hotel would be the installation of advanced occupancy sensors.  Visitors in Las Vegas often spend long periods of time outside of their hotel rooms.  In many cases, lights are left on and cooling systems set at full blast while a room is unoccupied for hours.  Occupancy sensors, integrated with a more intelligent building management system (BMS), could dramatically reduce the amount of energy used by each hotel room.  This could be an extremely beneficial investment for hotels that must absorb the cost of energy used by their guests.  Solutions to improve efficiency in hotels are explored in detail in Navigant Research’s recent report, Energy Management in the Hospitality Industry.

Untapped Resources

While the natural environment of southern Nevada poses challenges to conserve energy, it also provides vast untapped potential to generate it.  The Hoover Dam has enabled dramatic growth in Las Vegas over the years, although it currently provides barely 20% of the city’s peak energy needs.  As noted in a recent blog by my colleague Mackinnon Lawrence, recent droughts threaten the reliability of this resource, as well as the viability of fossil fuel plants requiring large amounts of water to keep cool.  A quick glance out my hotel room window revealed a massive casino roof – a perfect spot for a solar array totally unutilized.  Satellite images of the city show that this is very common and little to no solar power is installed on roofs of power-hungry mega-resorts.

For a city that receives intense sunshine nearly year-round, this is a huge opportunity to generate clean and affordable power.  And efforts are underway to take advantage of the clean energy resource available to the city.  This past summer, MGM Resorts announced a partnership with NRG Energy to install a massive rooftop solar array at the Mandalay Bay Resort.  The 20,000 panel, 6.2 MW installation is expected to generate nearly 20% of the Mandalay Bay’s power demand.  This project represents an important step in the right direction; hopefully, it will inspire others in the city to fully utilize the natural resources available to them.

 

Residential Solar Market Roiled by Proposed Rate-Basing Scheme

— November 3, 2014

There is a growing debate about the financing and subsidies of residential solar PV systems.  How this turns out could have a significant impact on the market’s future.  At the center of the discussion are Arizona Public Service (APS) and Tucson Electric Power (TEP), two regulated utilities that have proposed new rate-based solar programs for residential customers.  Such a move threatens private solar installation-financing companies such as SolarCity and Sunrun, which currently lead the growing market by offering no-money-down leasing schemes that have attracted thousands of new customers.

The private solar companies argue that allowing the utilities to sell rate-based solar systems would create an uneven playing field.  They believe the regulated utilities should set up their own separate, unregulated companies and compete for rooftop solar business with the independent installer-financing companies.  That’s precisely what electricity providers operating in other states have done.  For instance, NRG and Edison International have entered the rooftop solar market by establishing unregulated business units that operate in the Northeast and California, thus avoiding the controversy.

Keeping the Playing Field Level

This is a thorny question for Arizona, and both sides have convincing arguments, as my colleague Taylor Embury pointed in a recent blog post.   The solar installers argue that permitting the Arizona utilities to go ahead with their rate-basing plans would set up unfair competition because of their monopoly status.  The utilities say they just want to expand into solar because of customer demand for distributed generation (DG) and because it helps the utilities meet mandated goals for DG.  But the solar installers and their financiers have advantages they can leverage as well, in the form of the 30% income tax credit and a depreciation method called Modified Accelerated Cost Recovery System (MACRS) that can make the investments quite attractive.  A decision on whether to allow the utilities to move forward with their solar programs is pending before Arizona’s utility regulator, and a ruling is expected before the end of the year.

This topic is certain to be part of the upcoming discussion during Navigant Research’s The Home as Micro Power Plant webinar, which takes place on November 11.  Besides the rooftop solar issue, panel members will examine the potential for residential energy storage, how plug-in electric vehicles could be used as grid assets, and whether residential combined heat and power can gain market traction.  To register for the webinar, click here.

 

Solar Subsidies Attract Financial Schemes

— October 20, 2014

Arizona Public Service (APS) and Tucson Power have recently come under a lot of scrutiny for their proposed rate-based solar programs.   The complaint from private sector companies is that rate-basing (i.e., the utility practice of raising funds for capital investments by increasing electricity rates) would create an uneven playing field in the solar industry, because rate-basing a capital expenditure gives utilities a guaranteed rate of return.  As SolarCity’s vice president, Jonathan Bass, put it, “If there were ever a reason for a regulatory body to exist, it would be to stop a state-sponsored monopoly from unfairly competing against the free market in an entirely new industry.”

That’s hard to argue with.  However, I would add that another reason for a regulatory body to exist is to stop the free market from abusing the subsidies that are so crucial to an entirely new industry.  In the spirit of fair-minded analysis, let’s take a closer look at the solar industry and at how level the playing field actually is.

Pump and Dump

First, let’s examine the solar developers (SolarCity, Vivint, SunRun, Clean Power Finance, etc.) whose solar lease and solar loan programs are responsible for catapulting the industry into the period of rapid growth we’re seeing today.  Critics argue that solar developers base their business models around building solar arrays on the cheap and claiming an inflated fair market value (FMV) of the systems.  The FMV is supposed to reflect the fair price of a system, and it’s ultimately used by the government to determine the monetary value of the 30% income tax credit (ITC) that goes back to the owner of the system.  Ironically, the FMV is becoming increasingly difficult to determine as more solar companies are vertically integrating, which has made the true system costs less transparent.

For systems that are being leased (which are most systems), the owners and thus recipients of the ITC are actually third parties.  These third-party owners tend to be financial institutions, such as Morgan Stanley, Goldman Sachs, Credit Suisse, Google, and Blackstone, that are constantly looking for tax credits, and they have found a slam dunk as financiers of residential and commercial solar arrays.  Typically, the developers bundle a group of solar customers together into a tranche (essentially a bucket of leases), which is then backed by the third-party ownership groups.  The financial firms own the leased systems for 5 years and then dump them, but not before taking advantage of the Modified Accelerated Cost Recovery System (MACRS), which is a method of depreciation that allows third-party owners to recoup part of their investment in the solar equipment over a specified time period (5 years) through annual deductions.  Basically, MACRS represents an additional subsidy, with a net present value of 25% of the initial investment.

The Treasury Steps In

So between the 30% ITC and the 25% MACRS, the owners should be getting a 55% subsidized investment; but with the inflation of the FMV, it turns into a much larger subsidy, on the order of 80%.  Then consider the high rate of return (up to 15%) that investing in solar offers on top of all these subsidies, and it starts to sound pretty good to be a solar financier.  Solar developers readily admit that their business models are dependent on government subsidies, but this sounds like manipulation of those subsidies.  Indeed, this practice is currently under investigation by the Department of the Treasury.  While the developers claim they haven’t done anything wrong, if the government tightens the rules around the ITC or tries to recoup the inflated subsidies, it could be a major blow to the solar industry.

What’s more, the developers themselves don’t seem to be reaping the rewards of their innovative business models that have brought solar to the masses.  If anything, they seem to be bearing all the risk while the third-party owners reap most of the profits.  Is there some merit to rate-basing solar?  In my next blog, I’ll examine this question.

 

In Colorado, a New Solar Model Takes Root

— September 26, 2014

A few years ago the Yampa Valley Electric Association, the rural cooperative that serves communities across northwest Colorado, including the Steamboat Springs ski resort, signed an agreement with a company called Clean Energy Collective to build a community solar garden in the valley.

Headquartered in Carbondale, Colorado, Clean Energy Collective (CEC) has helped pioneer the community solar model, in which individuals and businesses can buy shares in solar power generation facilities rather than owning or leasing the solar panels themselves.  Paul Spencer, the founder and CEO of the company, calls it “solar for the masses.”

CEC signs a power purchase agreement (PPA) with the incumbent utility then pre-sells solar generation capacity in the form of subscriptions and finances construction using the PPA and the subscriptions, essentially, as collateral.  Subscribers don’t necessarily get the actual power flowing from the solar array; those electrons go onto the local power grid and appear as renewable energy credits on the customers’ bills. CEC makes money by charging subscribers a slight mark-up over the cost of producing the power.

Under the Smokestacks

As a way of shifting away from the antiquated, centralized, and coal-dependent power grid, community is a powerful model.  Founded in 2010, CEC now has 45 facilities spread across 19 utilities in 9 states. Spencer expects the number of facilities to double by the end of 2015.

In the Yampa Valley, though, CEC had a problem.

Craig, about 40 miles west of Steamboat in the mesa country of far west Colorado, has always been a coal town.  Most of the solar customers would certainly be in Steamboat, at the eastern end of the valley. But land in Steamboat is not cheap, and CECs business model is based, in part, on building solar arrays without paying too much for the land. Proximity to customers was a lesser concern.

As it turned out, there was an ideal site in Craig – literally in the shadows of the Craig power station’s smokestacks. CEC quickly signed up enough people to take 30% of the solar power the garden would produce. That’s when the problem arose.

The land the solar garden was on was owned by the city of Craig, but the mineral rights were held by Tri-State Generation & Transmission, the operator of the Trapper Mine outside town.  Tri-State officials said the rights were unlikely to be exercised — but they declined to formally cede them.  What’s more, some city council members were against the idea in principle, believing that it was harmful to the interests of the coal industry.  Spooked by the mineral rights issue, the title company on the land deal washed its hands of the deal. For a time, it appeared that the solar garden was dead.

Bridging the Divide

Paul Spencer and Terry Carwile, the mayor of Craig, weren’t ready to give up. “We begged, borrowed, and stole,” Spencer told me, chuckling. “We had to find a way to work around the mineral rights issue, and the town helped us do that.”

By the fall of 2014, a new, more amenable title company had been found, the deal was back in place, and CEC had resumed signing up customers.  In coal country, a truce had set in.

“Solar is not the replacement for coal,” said Spencer. “It’s another power solution that helps build a low-carbon future. In some small way, this project is an initial way to bridge the divide between Craig and Steamboat – between the coal-producing world and the renewable energies of the future.”

 

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