Why Solar Power is a Great Investment for Holy Cross
It is no secret that solar photovoltaic installations have recently become increasingly common in the United States. This is not without good reason: the cost of installing solar power has been plummeting for years, and many have begun to capitalize on this opportunity to reduce their energy costs. For me personally, this trend has been difficult to ignore. My hometown of Belmont, MA, just recently finished a “Go Solar” campaign which saw over 260 households install solar panels. Every time I drive to Holy Cross, I pass by multiple solar fields on I-90 West. Even on the short drive from campus to the Shoppes at Blackstone Valley, I see the new, massive solar field next to Route 146, which produces over 8 MW of electricity.
The proliferation of solar projects throughout Massachusetts begs the following question: could (or should) Holy Cross invest in solar power? This question was part of the reason that Alif Kanji ‘18, Daniel Murphy ‘18, and I pursued a grant from Holy Cross’s Weiss Summer Research Program to investigate the potential of bringing renewable energy to Holy Cross’s campus. The most promising finding of our research was that it is both technically and financially feasible to install solar power at Holy Cross.This article presents an in depth analysis which proves why this is the case. (A thorough review of our entire research project can be found here).
The first reason that a solar-powered system could work at Holy Cross is, simply, the size of our campus. The cost of installing solar-powered systems is typically measured in $/watt, with larger systems receiving a better $/watt rate than smaller systems. This is due to the concept of economies of scale. Solar companies can decrease their cost of production by increasing the quantity they produce, and these savings are then passed on to the consumer—in our case, Holy Cross. This is the reason that a typical, residential solar installation may cost about $3/watt while a utility-scale installation can cost as little as $1.50/watt. Our research indicates that Holy Cross has sufficient rooftop space to install approximately 2,051,100 watts of solar capacity. This system size is not large enough to be classified as a utility scale system, but it is significantly larger than a residential system (<5,600 watts). Due to the importance of this metric in estimating total cost, our research used the average of many quotes from professional solar installers.
We found that Holy Cross would be able to install a large scale solar system for about $1.91/watt, which translates to a total installation cost of $3,917,601.00. This figure is obviously nothing to sneer at; it is a substantial amount of money. The good news, however, is that this represents the overwhelming majority of the total cost of the system. Besides this initial investment, the College’s solar system would require only two other costs. The first of these is annual maintenance expenditures, costing around $32,818/year. The second and larger of these is replacing the electrical inverter—a machine that converts DC electrical current produced by the panels into usable, AC current. Fortunately, this cost is only incurred every 10 years, or twice in the 25-year life of the system. The first replacement of the inverters is estimated to cost $335,180, while the second replacement is predicted to cost $273,866 because of the consistently falling prices of solar power. Compared to the revenues produced by a solar system, these costs are negligible.
Solar systems create two revenue streams, or cash inflows: displaced electricity costs and the sale of Solar Renewable Energy Credits (SRECs). Displaced electricity costs are a rather straightforward concept. For every unit of electricity (kwh) of solar power produced, the College buys one less kwh from a power company. Working with the Facilities Department, we were able to obtain Holy Cross’s electricity bill, which indicates that the College currently pays about $2.6 million per year on electricity, or $0.12533/kwh. Therefore, for every kwh of solar power produced, Holy Cross would save $0.12533. We estimate that a solar system would produce 1,999,711 kwh of electricity in year one (meeting 9.4% of the College’s electrical needs), which would translate to $250,624 in savings.
The other revenue stream—the sale of SRECs—is a bit more complex. The Commonwealth of Massachusetts has set up a program which awards credits to households, businesses, and institutions that produce renewable energy. These credits can then be sold in an auction-style market to institutions that produce excessive emissions, such as fossil fuel power plants. In order to promote the financial viability of renewable energy and discourage carbon emissions, the Commonwealth sets the bid and ask prices of the auction. This essentially means that the state sets the minimum and maximum prices for which these SRECs can be bought and sold. We were able to obtain a spot price (the prevailing market price of an asset) of SRECs at $0.275/kwh. However, given the potential size of Holy Cross’s solar system, our SREC generation would be given a factor of 0.9, essentially reducing the price for which we could sell SRECs to $0.2475/kwh. If this figure is multiplied by year one’s electricity generation, SREC sales produce $494,928. Combining SREC sales with energy savings provide us with a total year one revenue of $745,552. It is important to notice that SREC sales produce significantly more revenue than displaced electricity costs. In order to avoid subsidizing an industry for too long, the Commonwealth has mandated a 5% decrease in the bid-ask price of SRECs per year. Therefore, if Holy Cross wants to maximize the financial gain of installing a solar system, it must act sooner rather than later. Ideally, it should act now.
If revenues and costs continue on this trajectory for the 25-year lifespan of the system, it would produce $14,067,524 in revenue and a net profit of $8,720,438. These figures are misleading, though, because they are in nominal terms. In order to paint a more accurate picture, it is necessary to understand a few financial concepts. First, the “time value” of money.
Even if you aren’t an economist, you’ve surely heard of inflation—the idea that prices rise over time. For example, gas is never below $2/gallon nowadays, but your grandparents talk about how it was $0.25/gallon when they were your age. This gradual inflation of prices happens naturally in the economy, and is not typically problematic, but it does mean that a dollar today has more value than a dollar would 20 years from now. To fight the effects of inflation, most people put their money in a savings account at their local bank, which pays interest on that account. A large institution like Holy Cross, however, which has a lot of money (capital) lying around, would like to earn a higher return than the interest from a savings account can provide. Therefore, Holy Cross invests most of its capital with a financial manager. This is relevant when considering the installation of solar power at Holy Cross because, at minimum, the College will want to earn the same return on a capital investment that it would from investing with a financial manager. Otherwise, solar would not be worth the investment because the College could earn a higher return on capital by placing that same $3.9 million in a fund with a financial manager. This dilemma is referred to as the opportunity cost of an investment. To account for inflation and the opportunity cost of investing in a solar system, it is necessary to “discount” future revenues so that they reflect the value of today’s dollars. To do this properly, we contacted the Holy Cross Investment Office and asked them for their expected rate of return on capital. They told us that they use a 5% discount rate for endowment planning purposes. Applying this to financial analysis, we get a much more accurate understanding of the financial feasibility of installing solar power.
In real terms, the profit the College could earn from installing a large scale solar system is $3.7 million – this is also known as the “net present value.” This analysis indicates that an investment in a solar system at Holy Cross exceeds the returns from investing in the market because the it accounts for the opportunity cost of the investment. Another way to understand the value of this investment is through internal rate of return. This is defined as the discount rate at which the net present value is equal to zero. In other words, it is the annual return the College would need to earn from investing in the market in order to match the return of a solar system. The return on installing solar power throughout campus would be 14.62%—well above the 5% rate that the College expects to earn from a typical investment.
Shockingly, it is even possible for this financial situation to improve. The Commonwealth of Massachusetts is very environmentally friendly, and it subsidizes solar through its SREC program, maintaining a 0% sales tax on the purchase of renewable energy equipment. The federal government also offers incentives that can be added to the Commonwealth’s programs. The most notable of these incentives is a Solar Investment Tax Credit, which grants a tax credit equal to 30% of the total installation cost of a renewable energy system. Given that the installation cost of a solar system is estimated to be $3,917,601, this credit could be worth $1,175,280.30. The only issue is that Holy Cross is a non-profit institution, and therefore does not pay taxes on most of its revenue. This makes capturing this tax credit difficult, but certainly not impossible.
To ensure its eligibility for this tax credit, the College could utilize a tax equity financing structure. In this model, Holy Cross would need to find an investment partner that would own the solar system. The system would still be installed on Holy Cross’ campus, but it would be legally owned by a private, outside investor. This investor would have to be an individual with a large enough taxable portfolio to maximize the utility of a 30% tax credit. In exchange for giving this investor the 30% credit, that investor would provide roughly 30% of the capital needed to purchase the system. In the most simplistic terms, Holy Cross would find an investor that would like to give $1.1 million of capital to purchase a solar system in exchange for the 30% tax credit (which would, for the investor, have a value above $1.1 million) that will result from installing a solar-powered system. This allows a non-profit institution like Holy Cross to capture the tax credit and reduce the cost of the system from $3.9 million to $2.8 million. This would have a profound impact on the profitability of this investment.
The main reason this credit was not originally included in the financial analysis that we performed is because there is a high level of uncertainty with tax equity financing structures. Holy Cross would need to find a willing and able partner, and this investor would also need to be compensated with slightly more than $1.1 million to account for risk and the time value of money. Holy Cross could easily give the investor a percentage of SREC sales, however it is impossible to know exactly how much an investor would desire. Lastly, there would be legal costs associated with setting up this partnership that are difficult to estimate. While much of this is complicated, it is important to understand that tax equity financing is commonly utilized in solar development, both by private and public institutions. At a bare minimum, it is a legitimate option that Holy Cross should consider.
Holy Cross should invest in a solar system because it is a environmentally friendly, socially responsible use of the College’s $681 million endowment. The urgency to act on these incentives is only exacerbated by Laudato Si!—Pope Francis’ encyclical that calls Catholics, and all people of good faith, to act to mitigate the devastating effects of climate crisis we face. As a Jesuit institution committed to serving the world’s poor and powerless, the College of the Holy Cross has a special incentive to act swiftly and substantively, for these are the people who have been and will continue to be the victims of climate change. By continuing to sit with indifference upon hundreds of millions of dollars while those who cannot help themselves and did not cause the problem suffer terribly, needlessly, the College shames and degrades its esteemed Jesuit moniker. Long have the Jesuits pioneered change and served courageously when others sat back and would not. When we consider that action is not only obvious from a moral standpoint but also obvious from a financial standpoint, Holy Cross has absolutely nothing to lose from installing a solar system. In fact, it has everything to gain.
Holy Cross, this is your student body acknowledging injustice. We eagerly await your response.