How building owners and tenants can create value out of crisis
Today’s electricity price crisis is fundamentally a fossil fuels crisis. Worse, the economic penalties of PG&E’s fossil fuel-based generation are disproportionately burdening the commercial businesses, offices, laboratories, manufacturers, and data centers at the heart of Silicon Valley real estate. Across PG&E’s expansive service area, 16 million customers have seen their electricity costs jump by almost 20% in the first half of 2022 alone. Unfortunately, this is not a temporary blip in pricing - it’s a trend that is set to continue for Californians for the foreseeable future. In February, after one recent rate hike, PG&E reported that they intend “to increase average electric rates for [their] agricultural, commercial, and industrial customers between 7 and 25 percent starting in 2023.“ How can that be, and what can you do about it?
The drivers behind the increases
With growing demand for renewable energy, and reduced costs to implement solar, these increases seem misplaced. The electricity that PG&E provides its customers at the meter is primarily generated using fossil fuels. In fact, 67% of PG&E’s electricity is generated by non-renewable sources, the main fuel source being natural gas. The cost of natural gas has increased nearly 100% in the last 12 months ($8.28/MMBtu versus $4.15/MMBtu) and PG&E claims this is the reason for the increase in energy costs to customers. The Russian embargo - due to their war on Ukraine - is one factor, but global demand and scarcity have also dominated the steady price increases since 2020. Costs are expected to climb another 50% over the next 12 months.
Commercial customers bear the burden
Unfortunately, the negative economic and environmental costs of PG&E’s fossil fuel-based strategy are not being borne equally among its customers. PG&E offers a clean-energy opt-in program for its residential customers, and to date 93% of residential customers have chosen that option. As a result, we can infer that the vast majority of the gas-based generations are delivered to their commercial customers - the offices, laboratories, manufacturers, and data centers at the heart of Silicon Valley real estate.
Property owners and tenants create new value out of crisis
Instead of continuing to pay skyrocketing energy costs year after year, owners and tenants can opt to design a microgrid system for their fully operational building to take their annual electric bill to net zero. Adding high performance solar PV coupled with onsite storage allows users to reduce their consumption and fully avoid peak demand charges to stabilize operating costs. For building owners, a microgrid allows them to capture hundreds of thousands dollars worth of expenses as new revenue (akin to additional rent).
In one recent Silicon Valley project, a building owner was able to increase the tenant’s rent (via electricity charges) by approximately $300,000 per year. Despite the manufacturing tenant running two 8-hour shifts per day, the building owner reduced their net energy cost by $50,000 annually. For the owner, the extra $300,000 in rent enabled the company to put a market cap rate on the property and recover not only their original costs, but capture an additional $58 per square foot of asset value. With the upgrades in place, the owner estimated the property was generating about $0.51 per square foot per month of free power.
These types of benefits are not unique to this site, but are typical of most commercial and industrial facilities in PG&E’s territory. Average performance outcomes are IRRs of >15%, simple payback periods of 4 years or less, and greater tenant attraction and retention.