Commercial solar: why the property sector is showing caution

It seems like a no-brainer – add solar power to a commercial building and watch the bills go down, while also earning a gold star for carbon footprint reduction. In Australia, however, the rate of installations on commercial buildings including shopping centres and industrial facilities is far less than the uptake in our average suburb.

Building owners going down the solar path report there are complexities that make for a “slowly but surely” approach, such as the design of a building’s electrical systems or structural design, whether or not there’s a renewable energy target to subsidise the capital spend, and what the return on investment will be under various financing models.

At the tenant end there’s sometimes a need for a third party to help facilitate landlord buy-in, questions around leasing costs, roof rent and who really benefits – and for how long.

And for all involved there’s the price of the technology to consider versus some of the cut-throat energy deals being offered by big energy distributors.

The Australian Photovoltaic Institute Solar Map shows the price of installed systems continues to decline (now around $1000 a kilowatt for systems 25kW or greater), but despite this price drop, the growth rate in the number of installations has slowed.

The institute says that between 2001 and 2010 the growth in the market for solar PV was around 15 per cent, followed by a period of extremely rapid growth between 2010 and 2013 and then a decline in the growth rate.

For example, in June 2012 there were an estimated 59,214 systems installed; in June 2014 this number had declined to 15,304. However it has identified that while installations are fewer in number than previous years, the systems are tending to have larger capacity.

As of November 2014, the institute estimates there was just over four million kW of installed capacity across all sectors, the majority still residential rooftop systems, with just under four million kWh of these systems registered with the Clean Energy Regulator.

The dollars will do the talking

Sungevity’s Ben Waters says the industry is probably looking at a “rocky five to six next years” but that in the medium term uptake of solar is not just going to be driven by policy.

While a “sensible” energy policy that embraces decentralised generation and guides the transition of Australia to a low-carbon economy would be extremely beneficial, he says that at the end of the day, solar simply makes sense.

“Solar has been an industry that boomed with feed-in tariffs and then busted, and the ups and downs have changed the industry. Now it has a much more secure and stable approach,” Waters says.

The most-recent Renewable Energy Target review suggested support for solar PV be scaled back by making only systems 10kW or less eligible for small-scale technology certificates, rather than the current 100kW limit.

Waters says the government tinkering with the RET for 100kW or smaller systems will make a difference to perhaps one-third of the company’s customers.

The estimated payback period for a commercial system is between five and nine years, he says. The factors that can influence this include whether the customer owns the building, and what type of electricity deal they have with their distributor. The lower the rate the power company is charging for mains supplies, the longer the payback period will be for the solar.

One key element according to Waters is for systems to be optimised so all the power generated is being used onsite, rather than excess being exported to the grid. Exporting no longer earns money; it ends up costing money.

For tenants that want to initiate the installation of solar on commercial premises, there needs to be a willingness on the part of the landlord to have the discussion. The tenant may be asked to pay “roof rent”, Waters says.

Sungevity’s Shannon Everley says the company has had some successes negotiating with owners at a tenant’s instigation. Considerations include how long the tenant is likely to be in the building, and the degree of openness in the relationship.

Financing

One of the big issues with solar used to be around financing, however, the industry responded to the challenge of a decline in subsidy support for upfront install costs by developing models including Power Purchase Agreements and solar financing. A PPA generally lasts from 10-15 years, and there is a fee for breaking the contract. To protect tenants that may not have long-term security, or where buildings are sold for redevelopment sites and tenancies ended, Everley says a PPA agreement is always made with the building owner.

In the retail sector, she says there are some owners that look at solar from a tenant’s point of view, and also that the form of the agreement between landlord and tenant differs, depending on how the management costs tenants for energy. At this stage, she says, the company is not seeing scenarios where commercial building owners are retailing the energy PV systems generate to tenants.

Storage’s time to shine next

In terms of future movements in the prices of solar, she says panels and inverter prices are likely to remain fairly stable, and that the next breakthrough will be onsite storage technology so buildings can supplement or even meet electrical supply needs around the clock.

Everley says for many companies across both private and public sectors the firm has dealt with, it’s not even always about sustainability – for some, it is simply a bottom-line driven decision about saving money on power.

So what’s the word from the user end?

GPT

GPT currently has two solar systems installed on commercial buildings at Olympic Park, and one on a major retail centre at Rouse Hill Town centre. Another is being installed on a retail centre this year, with a mammoth 1.2 megawatt system going onto the roof of the Casuarina Shopping Centre in Darwin.

The Olympic Park systems comprise a 130kW integrated rooftop solar PV on a building at 5 Murray Rose tenanted by Lion, the beverage company. GPT’s national manager for safety and sustainability, Bruce Precious, says the system was designed to achieve the Green Building Council of Australia’s peak demand points as part of the buildings 6 Star Green Star Office As Built rating.

Next door, at Samsung’s new Sydney headquarters in 3 Murray Rose, a 90kW system has been installed.

The Rouse Hill system comprises 1400 solar PV panels that will generate an estimated 480,000kWh of electricity annually, which will be used to supply the centre’s base building services such as common area lighting.

Precious says GPT is confident the performance of the systems to date is meeting the design criteria of the business case for the solar projects, which have all been internally funded.

In terms of broader roll-out across the portfolio, he says it is a matter of identifying the properties that have the strongest business case and prioritising. It is not as simple as simply putting panels on the roof of every building, as part of the business case is the building’s existing wiring and electrical system design.

The skill and capability within the solar industry in terms of that design understanding is still developing, and at this stage there are few firms that have it.

“That skill base will come along as the industry learns by doing,” Precious says.

Australand

Australand Property Group has installed two solar systems to date on industrial properties it developed at Eastern Creek, and national sustainability manager Paolo Bevilacqua says there are more to come.

The first system, on CH2, was installed following a process of demonstrating the benefit to the customer in terms of lower operating costs, and a model developed of the tenant paying for the system via small and incremental increases in the rental. Bevilacqua says the figures show that the savings on power are proving to be greater than the increase in rent, so the tenant is definitely ahead.

The second project was for a speculative build, because it was thought it would be a good proposition to put to a customer that their operating costs would be lower. The building was successfully leased.

“When comparing properties, it does come down to costs, and for our customers in the logistics industry, small amounts of difference in operating costs do matter,” Bevilacqua said.

The systems are designed to make sure all the energy is used within the building, avoiding grid feed-in, and the company’s research is showing that a system of 50-100kW is most beneficial for industrial users.

This also qualifies the systems for the up-front lump sum rebate of up to $70,000 under the RET. If this goes, he says, it will be “more difficult”.

Achieving uptake from tenants in existing properties is proving to be harder, partly because many of the industrial customers already have good energy deals. But, he says, some customers are starting to ask the company about solar, for reasons including wanting a facility that is future-proofed and efficient.

“In the next three to five years solar will start to become the norm, and we will start to see more industrial facilities with solar, particularly the investor-grade assets,” Bevilacqua says, comparing it to the uptake curve that has been seen for the more energy-efficient T5 lighting.

In his experience, PPA’s are “a more difficult conversation to have with a company”.

“There is still a bit of complexity around PPAs because of the length of time of the contract,” he says.

Westfield

In the US, Westfield has made solar installations on its retail centres a key part of the company’s energy management policy. The 2013 sustainability report says five centres were already generating power from rooftop solar, and another six systems were due to come on line over 2014 and 2015.

In Australia, the Scentre Group that now owns and operates Westfield’s retail centres is undergoing major upgrades to centres across every mainland state. However, The Fifth Estate has been unable to establish if solar installations are part of the overhaul.

Federation Centres [formerly Centro Property Group]

Federation Centres is installing 40 solar panels, with approximately 10kW capacity at its new Cranbourke Park shopping centre. The solar compliments a range of sustainability elements in the design including naturally ventilated travelator lobbies that act as thermal chimneys, LED lighting and a mix of high-performance and double glazing for the facade.

The group has also installed a 40kW solar array at its Warnbro fair shopping centre in Perth.

ISPT

Chris Chuah, portfolio facilities manager for ISPT, says it is carefully examining the feasibility of solar for its properties and where the solar industry is heading, while some of the fund’s members have begun enquiring about solar being added to assets.

Considerations include the impact it could have on returns for the fund’s members, whether the ROI on the capital spend is acceptable to them, and what solar could mean in terms of future-proofing commercial property assets.

“How to maintain it in future is important for us; the long-term thing is the pathway in terms of knowing where the technology and industry skills are going,” Chuah says.

Policy also plays a part, as questions around the rates for feed-in tariffs, RET subsidies and other uncertainties make for a “moving feast” of questions that impact the financial case.

Chuah says the concept of feed-in tariffs potentially generating an income stream is being seriously considered.

“In Victoria there have been issues about embedded systems and how they connect to the grid. Most to date have been island installations, because when there’s excess going into the grid there is a cost. There is also the issue of what it means for the distributors.

“There are a lot of externalities we are moving towards understanding in terms of what it will mean to generate electricity on our sites. And what it will mean from a returns and benchmarking point of view.”

One of the sticking points in the calculations is the fact even with solar, power users are still paying high prices for the element of the bill they can’t control, in the form of network distribution and supply charges.

At the moment the fund’s focus is on energy efficiency, with a current portfolio wide average NABERS rating of 4.5 stars, and an aim to reach five stars. Chuah says that extra half star will require a major initiative to achieve.

He says NABERS has been a very useful tool for benchmarking asset performance against the market, and that it will be interesting to see where the Green Star Performance tool will lead. The crux of the matter is how assets can be optimised over time, and being aware of new alternatives to traditional building services.

“From our point of view, the opportunities and challenges for the property sector are what can we do to make our existing building stock leading edge and sustainable? And for businesses, the tenants, what is the value for them in terms of a business building in resilience and future proofing [their] business?”

The manufacturer

Byron Bay-based artisan food manufacturer Brookfarm installed 288 solar panels on its bakehouse roof in late 2014 to supply the production factory, offices and cool rooms.

Brookfarm operations manager Will Brook estimates it will deliver at least a 40 per cent annual saving on energy costs and have a payback period of within four years. The panels produce enough energy to power 25 homes using 25kW hours of electricity a day.

“Since installation the system has been producing around 500 kilowatts a day and this will increase as the days get longer to peak on December 21 [2014 summer solstice]. On average we require around 610 kilowatts of energy per day, however on sunny days the solar panels produce enough energy for us to be completely independent of the grid,” Brook says.

Brookfarm partnered with Juno Energy to oversee the installation and to purchase 1952 small-scale technology certificates, which it later traded for $71,248 to part-fund the total cost of the installation at $233,000.

The roof of the factory was initially designed and constructed five years ago with the appropriate elevation and orientation to support efficient solar. The decline in price for the technology made the business case feasible to finally proceed with procurement.

The logistics firm

The Clean Energy Finance Corporation has this year financed a 100kW system for refrigerated warehouses and cool rooms at Wangaratta for Nu Fruit, a fresh produce supplier. The company accessed a $220,000 loan through the CEFC’s Energy Efficient Loan Program.

The system will generate sufficient power to meet 10 per cent of the facility’s energy use.