By Jon Powers and Kevin Johnson This article was originally published in NAREIM Dialogues – Spring AR2017 issue.
Serving in Iraq as part of Operation Iraqi Freedom, we both had life changing experiences that have led to careers focused on continuing our service to our country. It was those experiences that led us to personally understand the high price that our country pays in blood and resources to secure oil supplies, from protecting desert fuel convoys to keeping international shipping lanes open for oil tankers. It was also these experiences that led former Commander of the 1st Marine Division, and the new Secretary of Defense, General James Mattis to famously comment on the need to “Unleash us from the tether of fuel.” Like many veterans, we both left the service to enter the clean energy sector with a commitment to secure our nation’s energy future and combat the impacts of climate change.
Prior to co-founding CleanCapital, we continued our service in different ways. Jon was appointed by President Obama to join the White House as the Chief Sustainability Officer of the Federal Government. This is a role many in the real estate sector and private sector would recognize immediately. Kevin, a West Point graduate, left the military and lead M&A and business development for several of the world’s leading renewable energy companies. We both realized that we could continue to serve our country by making the case for clean energy innovations here at home. But, it also became apparent that many in the private sector like WalMart, Apple, and Google were recognizing the global trends and beginning to take action in this sector. We will explore the changing landscape of energy and look at how leaders in the real estate sector can take action.
Landscape of changing energy markets The world is at a transformative moment in terms of how we produce and use electricity. Global powers are experiencing a major shift in how their electricity is being produced. The traditionally fossil fuel dominated electricity marketplace is being replaced by new low carbon sources, and many developing countries are also capitalizing on these innovations. Development of distributed clean energy solutions are allowing nations to leapfrog generations of outdated technologies. Clean, distributed energy now allows solar panels to sit on a residential or commercial rooftop that powers storage batteries in the basements no matter how remote a community may be. The development and policy implications of these types of advancements are truly significant.
Market demands are clearly the driving force accelerating the rapid deployment and adoption of clean energy in both developed and emerging markets across the world. American leadership and engagement has been instrumental in demonstrating the transformative market potential that clean energy technologies offer to create local jobs and mitigate the impacts of climate change.
For instance, the solar market continues to grow and prove that solar is economically successful and a force that has value across markets, from the DoD to commercial real estate. For the first time ever, in 2016, solar ranked as the number one source of new electric generating capacity additions on an annual basis. This growth in solar has been led by falling prices. The cost to install solar has dropped by more than 60% over the last 10 years, leading the industry to expand into new markets and deploy thousands of systems nationwide. As the solar industry has matured, the decline in costs has been fueled by a number of factors. For example, the supply chain trimming costs helps cut risk premiums on bank loans, and pushed manufacturing capacity to record levels. By 2025, solar may be cheaper than using coal on average globally, according to Bloomberg New Energy Finance.
Better technology, the economies of scale, and better manufacturing have been key in boosting the industry as each generation of more efficient solar panels provide more cost effective systems. Five years ago, a solar panel cost over $5 per watt with 15% efficiency. Today, you can buy the same panel for $0.45 cents per watt with 20% efficiency. The trends are clear, solar is getting cheaper at an accelerating rate.
Lastly, stable and predictable policies have also been driving down costs. President George W. Bush signed the Energy Policy Act of 2005 with tremendous bipartisan support and ushered in solar, along with other renewables. It established the Section 48 Investment Tax Credit (ITC), providing a lucrative 30% tax credit for solar projects. Over the course of the next few years, other policies aligned at the state level, and then a combination of the ITC and appropriate technology advancements mentioned above bolstered the solar industry, while driving down costs.
Depart of Defense (DoD) - Leading By Example
If our Federal Government were a corporation, given the size and scope of its operations, it would be the biggest business in the United States. The DoD alone has over 500 major installations around the world and manages more 500,000 buildings with over 2.2 billion square feet. That is over three times the square footage Wal-Mart currently operates. Energy touches every part of the military’s mission, and domestically it must ensure energy security and reliability to fulfill that mission. For example, drone flights over the middle east piloted out of Air Force hangars in Nevada, vital communications systems supporting Naval fleets in the Pacific, or cyber security operations all need to be able to operate regardless of how the local grid is up and running.
The military facility energy budget alone is $4 billion, just to keep the lights on. As such, to better manage costs and ability to always meet its mission, the DoD has been strategically evaluating strategies to fundamentally reduce its energy footprint.
For the military, having such a large installation footprint can be a challenge, but it can also be an incredible opportunity. These installations display many of the same characteristics as a university campus or small city or town with residential, industrial, and business sections that all require different levels of energy demand. The military asked for a study of the energy production capability on its bases by the Department of Energy’s Pacific Northwest Laboratory which estimated that 90 percent of the critical power needs could actually be met by renewable energy resources
To tackle these challenges, the military is turning more and more toward renewable energy. For instance, each of the branches (Army, Navy and Air Force) have been pursuing a 1 GW renewable energy goal, and the Navy met theirs years ahead of schedule. They are also looking to drive efficiency and sustainability within their buildings. This is an area where the military is learning from the innovations within industry and using systems such as the US Green Building Council’s Leadership in Energy and Environmental Design (LEED) standards to design and certify more sustainable buildings.
They are relying on a variety of solutions that look similar to what is happening in the commercial and industrial real estate market. This includes distributed generation solutions like rooftop solar arrays, microgrids, onsite storage, but they are also executing long term power purchase agreements. One key development over the last few years is the emphasis in using third party financing to fund these initiatives. Congress provided the DoD with a variety of authorizations to utilize alternative financing by allowing the private sector to invest in military bases to own and operate projects. This allows the DoD to reap the benefits of project ownership without needing to overcome the sometimes impossible hurdle to provide the upfront capital required for construction.
The military’s leadership and progress is commendable, but it is also key to recognizing the many in the private sector who are also leading by example. Hurricane Sandy was a major instigator to these efforts. According to CNN Money, the total cost of property damage from this super storm is estimated to run between $10-20 billion, but the cost of business interruption can go as high as $25 billion. Major operations up and down the East Coast were shut down. Local utilities in places like Delaware, New York, New Jersey and Connecticut could not provide reliable power to customers for weeks. Whether it was big box stores, office buildings, or data centers, finding the fuel to put into their diesel generators was nearly impossible as they competed against hospitals and military operations during the clean up.
As a result, many companies stepped back and re-evaluated their operations. Companies like Wal-Mart, Google, and Prologis set significant goals like utilizing nearly 100% renewable energy for their operations, and also looked at critical measures for reliability. Google is on track to reach this goal in 2017, while receiving serious cost savings along the way. Prologis reported in 2015 that it has over 149 MW of solar generating capacity. Being a mega-corporations should not be a requirement to be a part of this effort as commercial and industrial real estate comes in all shapes and sizes. There are some key lessons though that can be learned from the military and these corporations.
They include some of the following:
These lessons have many applications. For portfolio managers, they can look to take steps in addressing their energy needs. For investors, there are real opportunities as well. The key to continued growth of the clean energy sector will be investment. President George W. Bush’s former Secretary of Treasury, and former Goldman Sachs CEO, Hank Paulson points to the opportunity in “green investing” in his latest op-ed in the New York Times. $90 trillion is a large price tag, but it should not be seen as a bill, rather a worthy investment. The good news is clean energy proves to be a great investment and is already outpacing capital in fossil fuels thanks to large institutional financial backing. Despite this rapid growth, there is still a dramatic funding gap, and in order to bridge that gap, we need to be able to access the collective private capital available and capitalize on the clean energy revolution.
At CleanCapital, we look at solar and other clean energy projects as an asset class similar to a real estate asset, our due diligence and underwriting is similar to what is widely practiced in private equity funds, and our asset management resembles what is done by REITs. Solar is a great investment because the yields are real. This is the unique opportunity that operating, cash-flowing solar projects provide, and they can be a great investment for a broad set of investors. Data models now provide significant clarity on the revenue coming in over the life of solar projects that comprise these deals. Institutional investors, family offices, or even individuals, who may not like the risk exposure of new build projects can now get into solar through operating assets. This is the evolution of solar finance.
CleanCapital is accelerating clean energy by creating an online marketplace that provides opportunities for investors and access to capital for project developers, through a FinTech platform that is simple, safe and secure. CleanCapital is reaching the next phase of solar energy by providing everyone access to these lucrative investment opportunities and funding the clean energy economy. Learn about upcoming investment opportunities by contacting us at CleanCapital.
Jon Powers is an Iraq Veteran and Co-Founder of CleanCapital. He also served in the White House as the Chief Sustainability Officer of the Federal Government and also as the US Army’s First Special Advisor on Energy.
Kevin Johnson is an Iraq Veteran and Co-Founder of CleanCapital. Kevin, a West Point graduate, transitioned from the military and lead M&A and business development for several of the world’s largest renewable energy companies.