Wednesday, January 31, 2007

Solar powers business

Solar power got another much-needed boost recently when Wal-Mart announced that it would plan on adding solar equipment to a number of its U.S. stores.

The company has asked potential solar equipment suppliers to bid on initial projects and to include costs for possible build-out and expansion over the next five years. If the plans are carried out, it could make Wal-Mart America's largest user of solar power.

The Financial Times reports that a move to solar and other forms of renewable energy is taking place due to rising electricity costs and a desire to bolster corporate images:

The new US enthusiasm for solar power reflects both the impact of rising electricity bills, and concerns over reputational or brand identity issues.

Wal-Mart, for instance, says it wants its stores to be entirely powered by renewable energy, and has committed itself to reducing the greenhouse gas output from its existing global network by a fifth by 2012, while Staples has said it intends to get its emissions to 7 per cent below its 2001 levels by 2010.

This would be a great move for Wal-Mart and other big box retailers who are looking to win over some of the more environmentally conscious and higher-income shoppers who have tended to snub these stores.

But what makes these projects really interesting is their ability to overcome the problems of cost that have previously held them back.

Solar power development in the US has, in general, lagged behind Europe and Japan, where governments have been more active in encouraging it, and centralised power utilities have created initiatives such as buying back surplus power for use on the grid.

But potential users in the US are now benefiting from the emergence of a new approach to operating solar arrays. In a model developed by SunEdison, an energy services company specialising in solar power, the retailer pays for the electricity but not for the costly installation.

In 2005, SunEdison formed a $60m investment fund with Goldman Sachs and Hudson United Bank to finance the installation of 25 solar systems for Staples and Whole Foods, using the subsidies now provided by a growing number of US states to encourage the development of renewable power.

The model, says Mr Buckley at Staples, dramatically changed the attractiveness of solar power, offering companies the immediate benefit of power priced below current prices on a 20-year contract, with maintenance costs handled by the service provider.

"We looked at solar power in the past, and to own it and put it on the roof just didn't meet our standards for the internal rate of return on a capital project," he says. Under the power purchase approach, "there's no capital investment, no maintenance, and no associated costs . . . we know what our costs will be for that proportion of our load for that period of time."

Unfortunately, subsidies are still deemed necessary for getting some of these projects off the ground. Hopefully, the latest advancements in solar, combined with Wal-Mart's entry into the power business, will help drive costs lower.