In 1985, I got out of the Air Force to make my fortune in commercial real estate and real estate limited partnerships. Unfortunately, because the tax laws changed drastically shortly afterwards, I found myself working in a dead market. The elimination of lucrative tax incentives for real estate was only partly to blame for the real estate market crash. The underlying reason was that deals were being put together that made perfect sense from a tax stand point, but didn’t make economic sense.
Today, our commercial electrical contracting company is leading an effort to bring solar energy to Central Texas. Even with the tax incentives, it’s been a hard sell. The reason? Because it appears that solar is not economically feasible. So how can we, as an industry, make solar energy become a good deal in the eyes of our potential customers?
Here are some ideas I’d like to share. First, we need to find a way to make renewable energy economically competitive without the tax incentives. We do this by answering the question: “What is the opportunity cost of not using solar to decrease your energy bill?” For us Texans, we have been blessed with relatively “cheap” energy for over a century in the form of natural gas and oil. We have seen base electricity prices increase only 3.9% a year (based on the base rate of a mid-range distributor for the month of September — however, this is just the base rate of electricity and doesn’t include all the added on fees).
When you consider such things as fuel recovery charges, delivery charges, fees for investment in power plants, and so forth, the rate of increase on our electric bills has gone up dramatically. Based on the US Department of Energy oil price data, a barrel of oil has increased from $23.61 five years ago to last week’s price of $88.03 (and rising) — an annual increase of over 50% a year! Chances are, as natural gas and oil prices go up, there will be a corresponding jump in your monthly electricity bill. So, instead of promoting a solar power system based on today’s savings in electricity, we need to have easily understandable projections on what the savings will be over the life of a system. These numbers need to reflect what’s really happening to the cost of energy!
There’s something interesting I’ve found. There’s a direct correlation among electrical rates, the cost of air conditioning a building, the heat index and the amount of sunshine on any given day. In other words, on the hottest, sunniest days, we use more electricity that costs more per kilowatt. So, why do we continue to promote average hours of solar production, when in fact (at least down here in Texas), we produce far more solar power per day during the heat of the summer when energy costs are highest, than we do in our temperate winter months when energy costs are lowest. A sound marketing approach would be to evaluate solar energy in “dollars” of production per year instead of in kilowatts. I’m sure there are some smart people out there who can match kilowatts of solar production on any given day of the year to what the rates will be (based on the projected costs of electricity).
Secondly, we should stop trying to sell a solar package as a “cost.” In real estate, there is a principle that says anything affixed to real estate becomes an integral part of the real estate. Once a solar package is installed, it immediately increases the value of a property. So how can you predict how much more a building will be worth in 5-10 years with a package as opposed to without one? In the real estate appraisal business, there are three approaches to appraising a property. The market approach (what are comparable properties selling for), the reproduction cost (the cost of creating an identical building at current construction and material prices) and the actual original cost adjusted for inflation. In all three methods, there’s a strong case that a system installed today will make the building worth more today and in future years.
We need some realistic numbers to predict how much more a property will be worth in the years following installation. I believe that if you sell a building 5-10 years after installing solar, you should recoup all of your investment in the system plus an added bonus. If the rumors are true, a residential system (using the market approach) adds $20 of value to a home for every $1 it saves on the electric bill.
For commercial appraisals, you would divide the income (savings) by a cap rate (which was about 8% at last report). A system that saves $1000 a year then would be worth $20,000 on a home or $12,500 on a business. But if the cost of electricity goes up (if that is remotely possible), then wouldn’t the value of the solar power system increase as well? In reality, we are not selling something that costs — we are actually offering a financial investment that grows comparably with other forms of energy.
In short, we need to market solar as an investment that will save money while you own it and return most or all of your investment when you sell the building it’s sitting on. In commercial real estate, they use a “Cash Flow Analysis” form as the tool to evaluate a building’s value using the income approach. We need a similar tool for putting a value on solar. If solar makes sense with this approach, then just think of how much better the systems look when you add the tax advantages!
James A. “Hoss” Boyd is president of Premier CIRE Systems, Inc, a commercial electrical contracting and solar installation company based in New Braunfels, Texas. Immediately before and after 9-11, he served a three-year active duty tour as an Air Force Reservist working on a special study in partnership with the RAND Corp. At the conclusion of the tour, he retired from the Air Force Reserves as a Lieutenant Colonel. He also has a white paper published in the “Defense Acquisition Review” and a book in it’s second printing called “The Path of Truth and Courage” written under the pen name J. Arthur Holcombe.