Solar Sacramento

There can’t be many people who have seen Jon Bertolino’s map. Not that it’s any secret— in fact, it’s a public document. Nor is the map anything rare or extravagant. It’s merely a map of Sacramento County as served by its electric utility, the Sacramento Municipal Utility District (SMUD), for which Bertolino works. There’s no X marking the spot where the treasure’s buried.Instead, this map of the county marks out a different kind of treasure, flecked with more than a thousand green and red dots. Those simple green and red dots tell an important story about Sacramento and about the global energy transition now under way. Each of those dots represents a solar electric system now operating on a homeowner’s or business’s rooftop or property, generating electricity fueled by sunlight. Clean, nonpolluting, free sunlight.

By all accounts, these thousand-plus green and red dots make Sacramento the No. 1 community in the nation with solar electric installations. In an era of deregulated utilities; volatile, skyrocketing electric prices; and global warming caused by fossil fuels, these solar electric panels place Sacramento as the premiere solar region, leading the way in creating an important part of the energy system of the 21st century.

Sacramento’s pioneering status as a solar model is soon to be followed by the rest of the state, as the California Public Utilities Commission (PUC) readies to unleash a $3 billion incentive program to achieve a million solar roofs, or its equivalent in electricity production, over the next decade. When there’s that kind of money and that kind of goal involved, it’s a signal of a momentous change in solar electricity’s role in the economy and in people’s lives. This is not the 1970s’ solar energy of granola-munching, patchouli-oiled, rainbow-wearing, Earth First-ers cooking hot dogs in solar cookers as an Earth Day demo on the Capitol steps.

Instead, the rapidly maturing solar industry is made up of Harvard grads and MBAs, scientists and Wall Street financiers, marketing specialists and multinational corporations. Not only has solar come of age; it’s boom time. “Unlike other technologies still in R&D [Research and Development],” says an October 2005 report from leading investment firm Piper Jaffray, “solar energy is proven, business models have been validated, and the solar industry is enjoying tremendous growth as the prime beneficiary of worldwide alternative energy subsidies.” In fact, the report goes on to state, “Solar power demand will exceed supply for several years” and will grow from a $4 billion market in 2004 to a $12 billion market in 2010.

Solar demand exceeding supply is a new situation for the solar market. That’s never happened before. It’s an indication of a renewable-energy industry taking off to a new level of market penetration and consumer desire rather than an indicator of dour times as suggested by a recent Sacramento Bee story with the headline “Solar power dims.”

“The Bee article seems to reflect what’s going to happen next week, rather than next year and over the next decade,” said SMUD’s Bertolino, superintendent of the utility’s renewable generation assets.

The temporary shortage of solar electric panels is largely due to the demand for solar in other countries, particularly Germany. Last year, Germany installed 840 megawatts of solar electric panels—compared with just 110 megawatts in the entire United States. Japan also has a vigorous market, and Spain, Italy and Canada are moving aggressively as well. The result is an extremely tight supply of solar electric panels, at somewhat higher prices, conditions expected to be alleviated by investments in new plants processing the silicon needed for solar cells. Jesse Pichel, the analyst who wrote the Piper Jaffray report on the solar industry, told SN&R that the new silicon-processing plants are slated to come online by the end of 2007. “The new plants utilize machinery to produce more solar cells out of the silicon. But any problems with the prototypes for those plants could delay expansion into 2008,” he said.

But that doesn’t mean solar modules aren’t available. Typically, it means that there’s a three- to six-month wait. “While the shortage of panels is having a little bit of a price impact,” said Bertolino, “we haven’t had one project slip because somebody couldn’t get panels. It just means that the solar contractors have to be a little forward-thinking in their logistics and purchase commitments.”

Bertolino says that every year there continues to be greater demand for the SMUD solar electric rebates than the annual total rebate budget of around $400,000 for residential systems and $700,000 for commercial ones. A survey of local utility solar programs, solar manufacturers, financiers and installers bears out Bertolino’s experience, with homeowners and businesses in Sacramento and California lining up to become part of the new solar economy.

Big-picture solar
There can’t be many better places to get the big picture of what’s happening with solar energy than Sharp Electronics, the world’s leading manufacturer of solar electric panels. Last year, Sharp produced 428 megawatts’ worth of solar electric panels, more than twice the amount of its nearest competitor, Q-Cells.

And there can’t be many people who can provide better insight into the solar market than Ed Smeloff, senior manager for Sharp USA Solar Project Sales. Now based in Huntington Beach, Smeloff has dedicated a good part of his professional life to the solar transition. Starting as a community activist on energy issues in Sacramento, Smeloff went on to a decade’s service as an elected SMUD director from 1987 to 1997, leading the campaign to shut down the utility’s inefficient Rancho Seco nuclear plant, recruiting renewable-energy advocate Dave Freeman as then-general manager and helping to set SMUD on the trajectory on which it continues today.

After leaving SMUD, Smeloff directed a New York energy-policy think tank before becoming the assistant general manager for power policy and development in San Francisco. While there, he oversaw the installation of a 690-kilowatt solar electric system on the Moscone Center and a 250-kilowatt system on the city’s wastewater-treatment plant, in addition to helping to pass a $100 million solar municipal-bond initiative.

On a day in early April, Smeloff was particularly ready to reflect expansively with SN&R on solar electricity’s prospects. He’d just gotten news that a large Silicon Valley software company had agreed to a major solar electric installation, in which its facilities and surrounding carports will have Sharp solar electric panels by the end of the year.

Another project he’s excited about is an installation now under way at the massive headquarters of Tony’s Fine Foods in West Sacramento. A family-owned deli and bakery wholesale company started in the 1930s, it is the largest commercial solar electric system in California. Smeloff is particularly pleased with the system’s mounting structure, which allows it to be installed and operated without requiring any drilling into or penetration of the rooftop to secure it. The system’s structural design and an adhesive do the job.

“So much of the demand right now for solar electric systems is outside the home, in the commercial and industrial sector,” Smeloff observed. That’s due in large part, he said, to the need for businesses to achieve predictable electric costs. “We’re seeing a lot of volatility in energy prices across the board, particularly in natural gas, which underlies the price of electricity,” he said. “So, people who are smart about electricity pricing would want to lock in a price and have predictable escalation. If a customer buying a solar electric system can achieve the current price of electricity and be guaranteed that it will only escalate at 2 percent a year, they’re placing a bet that they’re going to be better off than if they had to simply take the market price of electricity.”

Economics of the sun
When Smeloff refers to electric prices depending on natural gas, he’s telling a significant part of the story of the new world of deregulated electricity, one of the major forces propelling solar production forward.

Back in the 1970s and ’80s, there was actually a federal law prohibiting the production of electricity with natural gas. But when that was repealed, and the deregulation of natural gas prices occurred, “almost 95 percent of new power plants that were ordered were natural-gas-based,” he said. A bubble of optimism about cheap natural-gas reserves and the relative ease of setting up gas-powered electric plants positioned natural gas as the lead fuel in electricity production.

But the bubble burst, beginning with the California energy crisis of 2000. “Prices have doubled and then tripled, and last winter, after Katrina punched out 20 percent of all domestic natural-gas production, they quadrupled,” Smeloff said. Still, for now and as far as can be seen into the future, the market price of electricity is set by what’s going on with natural gas. No one is currently predicting that the price of natural gas is headed downward.

Suddenly, the economics of a solar electric system made a whole lot of sense. Though the upfront costs of solar panels are high—about $15,000 to $20,000 for a typical home system—that’s the total cost for systems that are guaranteed to work for at least 25 years at a minimum 80-percent efficiency. The fuel for that electricity—sunlight—is free. The systems typically produce a third to a half, and sometimes more, of an owner’s electric use, depending on the size of the system and the efficiency with which the home or business and its appliances use energy.

With utility programs offering to buy down one-third to one-half the cost of solar systems, and the federal government now offering a 30-percent tax credit for solar costs, the economics of the solar electric systems have become viable for much wider segments of residents and businesses.

But businesses also have a slew of incentives unavailable to homeowners. First, the 30-percent federal solar tax credit is capped at $2,000 for residences, while there is no cap for business systems. Second, businesses are able to obtain additional tax benefits from the depreciation over the life of the system. Third, a variety of means for financing the systems are available to businesses that individual homeowners can’t tap into. Fourth, businesses generally pay higher utility rates, with most on “time of use” rates, whereby they pay more for using electricity during the “peak” hours in the middle of the day when there is the greatest total demand for electricity.

This peak use matches precisely when solar electric panels are producing the greatest amount of electricity. In other words, the time of the costliest electricity for businesses is exactly when solar panels do their job best. “For peak electricity,” Smeloff said, you can see prices at 25 to 30 cents per kilowatt hour, and solar is already competitive with that in parts of California.” Even large electricity users in the residential sector can see 30-cents-per-kilowatt charges in some utility areas.

But both business and residential users of solar benefit from the state’s net-metering law. Under net metering, whenever a solar electric system produces more power than is being used by the home or business, it feeds those kilowatts back into the utility electric grid, and the system’s owner receives credit from the utility company on his or her bill.

Boomers get with the program
Certainly, the experience of Roseville Electric (RE), a municipal utility like SMUD serving the city of Roseville, seems to confirm Smeloff’s perspective. When RE experimented with a commercial solar incentive program last year, it began with a total of $300,000. Those funds, said RE’s solar-program manager, Marty Bailey, were used up within six months. A gas station owned by Nella Oil, a True Fitness spa and gymnasium, and a self-storage firm were among the first solar takers.

“It’s a forward purchase of power,” said RE’s Bailey. “The price of electricity on the wholesale market has climbed 290 percent in the past six, seven years. The solar buyer is saying, ‘I want to be out of that cycle. I’m going to make my own forward hedge against a future price increase.’”

While Bailey says many businesses and homeowners installing solar like the environmental benefits, “the amazing ones are the opposite. The solar installers go in and show these commercial users a straight cash-flow analysis now. They don’t go in and sell anything warm and fuzzy. They say, ‘Here’s your cash flow. Here’s your tax credits. Here’s how it will impact you.’ And the commercial owner goes, ‘This makes sense to me. I’m going to do that.’ That’s the transformation that’s really occurring now.”

Homeowners as well are looking for electric price stability, says SMUD’s Bertolino. “We’re going to see a whole new class of customers drawn to solar electric systems for the energy-hedge benefit,” he said. “Especially as you look at baby boomers as they start to move into those fixed-income years, it’s a comforting thing to be able to guarantee the cost of a certain percent of your energy needs.”

Making the solar transition
The transformation of solar into a good economic deal is also showing its face in how commercial and government buildings’ solar systems are financed. Nothing could be more indicative of the solar revolution under way than the June 2005 announcement that the Wall Street investment firm Goldman Sachs had provided an initial $60 million line of equity for a company called SunEdison to go out and finance solar electric systems. SunEdison gets businesses and government buildings to agree to have solar electric systems placed on their rooftops, with SunEdison owning the system and selling the solar electricity at a set price to that business or government. The price is always lower than the local utility price and has a guaranteed low inflation rate. SunEdison then passes the financial rebates and tax incentives on to its investors.

The attraction and success of the SunEdison model is that it completely removes the high front-end costs. The solar users pay for the power on a monthly basis just as they do on their regular utility bills. SunEdison also usually takes care of installation, maintenance and operation. “Simplifying Solar” is the SunEdison motto.

Operating in select states throughout the nation, in California SunEdison has a project under way on a Caltrans building in Stockton and other projects coming soon with California State University, Chico; state prison and mental-health facilities in Southern California; and projects completed on Staples stores in the southland. SunEdison has already submitted projects using up the first round of $60 million in financing, and more is on the way. The company also has had discussions with SMUD.

“The beauty of where solar is today compared to where it was in the 1970s,” said SunEdison CEO and President Jigar Shah, “is that we don’t need as many symbolic projects. Solar really has become a matter-of-fact way of life for thousands, if not hundreds of thousands, of people in California. Anyone probably has one degree of separation from somebody who owns a solar system.”

Still, when it comes to analyzing why one firm or homeowner or government makes the decision to go solar, Shah says leadership remains crucial. “Generally speaking, the process through which people decide to go solar comes down to having a champion. You have a single person or a group like an environmental committee or a city manager or mayor who says, ‘I really want solar.’”

Sharp’s Smeloff agrees. “There’s always a champion. It’s always human agency and leadership. Why has California jumped out in front? If it was just something wending its way through the Legislature or the bureaucracy, it would be much smaller. Schwarzenegger really did jump out in front and say, ‘This is something I want to do,’ and pushed it.”

There are other conditions that make for a successful solar market, Smeloff asserted. He ticked them off: “A community that is experiencing growth, like Sacramento, so it needs to bring in new power. An environmental ethic: If there are air-quality problems or awareness of climate change or other issues related to power plants, such as water pollution. An attitude of innovation or interest in new technology: California and New Jersey are high-tech states, and that’s why its occurring here first rather than in states that are heavy manufacturing.”

Meet ‘Team Solar’
Some of those conditions certainly applied to Tony’s Fine Foods of West Sacramento, which is just now completing its installation of a 1.2-megawatt system. “The reasons for installing it are pretty obvious,” said Scott Berger, executive vice president and chief financial officer of Tony’s. “From a long-term-investment perspective and from an environmental view, it makes sense. This gives us a long-term cost advantage in the market. Our family’s owned the business a long time, and we plan on owning it a long time. It’s also important to do something useful for the community, and the state really.”

The Sacramento firm installing the solar system at Tony’s Fine Foods is another indicator of the maturing of the solar market. Rick and Angela Lavezzo both grew up in Susanville, and both of their families were in the building-construction business. The Lavezzos were building custom homes when they took a vacation to Mexico during the summer and fall of 2000 and stayed in a house powered by solar.

“Rick and I were kind of tired of doing custom homes,” said Angela Lavezzo, the partner who spoke to SN&R for this story, “so our attitude was ‘What the heck?’” They began figuring out how to connect with the SMUD solar program and ended up with a half-million-dollar contract. “We installed about 200 residential systems over the next two years and then were able to move into commercial as well,” she said.

Though it started as a four-person company, the Lavezzos’ Team Solar company now has 27 full-time employees and leases a 14,000-square-foot warehouse in the McClellan Park, exclusively designing and installing solar electric systems all over Northern California. The Lavezzos have succeeded by running a kind of one-stop shop, where they handle the paperwork, design and pre-assemble the system in their warehouse, install it and provide an annual maintenance check.

“We’ve probably installed about 7 megawatts of commercial solar in the area,” Lavezzo said, including the Franchise Tax Board on Butterfield Way; Amy’s Hardware; the California Public Employees’ Retirement System headquarters; and Natomas High School, the largest high-school solar system in the nation. Lavezzo estimates that 2 megawatts of that has been in the SMUD territory.

She said she maintains a waiting list of SMUD customers who want solar electric systems, given the cap on the total amount of rebates SMUD offers each year. “We’ve never really reached the total rebate limit in PG&E territory,” she said, “though we’ve come close.”

Lavezzo sees the realities of the housing market as well as the energy market driving homeowners to go solar. “Until 2000, most of us never thought about electricity. Unlike other countries, we’ve all had pretty inexpensive power until now. Meantime, the average-size home has gone from 1,600 square feet to 1,800 square feet and more, all the way to 6,000-square-foot residences. It’s not unusual now for many homeowners to have a $300 to $600 monthly electric bill, especially during summer.”

One of the shifts that she sees occurring in the solar market is the arrival of solar electric panels designed like roof tiles, so that they are integrated into the roof structure rather than sitting on top of it. “That’s now the most cost-effective way for homes to go. New construction—that market is really going great guns.”

Roseville Electric also is sculpting its program with the new residential sector in mind. Its goal is “to establish solar homes in Roseville as a city policy rather than just a rebate program,” said RE’s Marty Bailey. “We’re expecting to see 20,000 new homes here in the next five years, and we’d like to see at least 20 percent of those be solar homes.”

No one in the solar or utility industry, though, favors mandates. For now, there’s a consensus that incentives and bringing the building industry along as a cooperative partner are the way to go.

Finally: the solar decade
From Ed Smeloff’s experience, the key to California’s solar future is the 10-year commitment of the new PUC program and similar long-term programs by municipal utilities like SMUD. “It’s similar to the Japanese approach, where the country’s long-term commitment then triggers investment in the industry and in solar electric-panel production. Companies feel comfortable that this is going to be a growing market, so they invest in expanding production.”

As early evidence of this in California, Smeloff pointed to a German company, Solar World, last month buying out a solar manufacturing facility in Camarillo that was owned by Shell. The recent big news was the startup of Sun Power in Silicon Valley, whose IPO raised hundreds of millions of dollars. According to Smeloff, it’s the fastest growing U.S.-based solar company, though its solar modules are being manufactured in the Philippines.

The 2016 termination date for the PUC solar rebate program also coincides with the cost curve when solar electric panels are expected to be competitive without a need for subsidy. “The costs of solar electric systems are coming down at a fairly regular, predictable, 5 percent per year,” said SunEdison’s Shah. “And utility rates are going up at an average of about 3 to 4 percent per year on a long-term basis. So, my feeling is that similar to California’s timeline, solar will be cost-effective without rebates in 2016.” Of course, given the global instability on energy supply, that crossover point for solar could occur sooner.

But there is also always the threat of instability that could come from the state Legislature. Last year, when Governor Schwarzenegger tried to pass a Million Solar Roofs Initiative, the politics of warring special-interest groups killed the bill. As a result, the governor moved the solar program, now known as the California Solar Initiative, administratively through the PUC.

A bill now moving through the Legislature, Senate Bill 1, enacts statutes needed to assist implementation of the PUC program. Because the PUC program, whose goal is to add 3,000 megawatts of solar-generated electricity by 2017, applies only to private utility companies like PG&E, language has been included in S.B. 1 mandating that municipal utilities like SMUD and RE match the PUC program. Whether the law ultimately requires SMUD or RE to expand the amount of funds available for their solar electric programs is not yet clear, though SMUD’s Bertolino says that planning discussions about the impact of S.B. 1 are already under way at the utility.

But solar-industry representatives such as David Hochschild of PV Now, a consortium of the major solar manufacturers based in San Francisco that supports S.B. 1, also fear that S.B. 1 opens an opportunity for legislative moves against the PUC program, or solar skeptics who want to reduce the size of the program, which could retard progress. “Protect this program, expand the amount of solar electric panels mandated for each utility area, and we have a trajectory for wild success for a solar California,” Hochschild said.

The potential for that “wild success” certainly seems to be reflected in the feedback that Team Solar’s Lavezzo says she consistently receives from those who have already chosen solar. “I’ve never had one customer—and I contact them all yearly—I’ve never had one come back and say, ‘I wish I hadn’t done this.’ If anything, a lot of times people wish they could have gone a little bigger with the size of their system.”

Solar resources:
SMUD solar Web site: www.smud.org/green/solar

Roseville Electric solar Web site:

www.rosevilleelectric.org/programsRebates/renewablePrograms/solarPvBuydown.html (residential)

www.rosevilleelectric.org/programsRebates/renewablePrograms/solarPvBuydownCommercial.html (commercial)

PUC solar Web site: www.cpuc.ca.gov/static/energy/solar/_index.htm

Industry/Department of Energy Web site for preliminary evaluation of solar electric systems for homes and small business and locating installers: www.findsolar.com