Mazzetti’s Earth Day Bending the Climate Curve™ lecture series focused on Renewable Development in Healthcare. The lecture addressed questions such as: How might renewable energy development be part of the solution? How do you consider and assess your overall energy strategy? What’s the general process and SMEs needed to execute this strategy? How the heck do you pay for it?!
The lecture featured Walt Vernon, CEO of Mazzetti, Rame Hemstreet, Construction and Facilities Management Executive at Kaiser Permanente, Christina Sanborn, Sustainability Practice Leader at Mazzetti, and Sakis Asteriadis, Finance Advisor and Managing Member of Mazzetti’s BLUE Renewables. The following questions and answers are a result of topics addressed in the lecture:
Hospitals need to focus on delivering quality patient care and often don’t have the in-house resources/expertise to effectively explore renewables in their energy strategy, much less understanding the financing vehicles to do so. What type of expertise do you recommend soliciting at a minimum?
We recommend soliciting a team of people with experience and expertise in bringing together different aspects like technology, economics, and regulatory requirements for renewable energy projects in the healthcare sector, as it is a complex and non-trivial challenge.
Can the Inflation Reduction Act help facilitate and/or scale a renewable energy program?
Pre-IRA, many healthcare organizations had difficulties monetizing tax credits in renewable energy projects:
- Project ownership for tax-exempt organizations, as most healthcare organizations are, couldn’t monetize tax credits by statute. As a result, project ownership was practically unavailable to tax-exempt organizations.
- Even with 3rd-party ownership (PPA), smaller projects had difficulty in getting financing, because investors had to rely on complicated and expensive (mainly due to high legal costs).
The IRA introduced two options in monetizing tax credits, which help resolving these issues:
- The Direct Pay option allows tax-exempt organizations to own projects and monetize tax credits, getting paid from Treasury for the face value of the tax credits.
- The transferability option allows project owners to sell the project tax credits to taxable entities, without the need to rely on complicated tax partnerships. This is particularly helpful for smaller-size projects which cannot afford the high closing costs (legal, etc.) required by tax partnerships.
What are your thoughts on PPAs versus owned assets, and has your opinion been impacted by the IRA Direct Payment provision?
The main advantages of a PPA option are:
- No upfront capital is required for developing the project.
- The project owner is responsible for developing and operating the project – therefore, the host organization has no execution risk and performance risk for the project operation.
On the other hand, some organizations will prefer the direct ownership option, for the benefit of “free energy” and for saving the development and operating profits of a 3rd party owner in the PPA option.
In general, here are the trends we see in PPA vs. Owned assets:
- For organizations that do not have the balance sheet and the cash needed to invest in projects, the PPA is the only option.
- Even organizations with the financial depth, required to own a project, often prefer the PPA option, typically for the following reasons:
- The organization does not have the in-house technical expertise, and/or does not want to assume the construction and operating risk of the project,
- The organization prefers making long-term PPA payments than making upfront payments for the development and construction of the project. Typically, under the Direct Payment option, the owner invests 60-70% of the project costs.
Can hospitals and other healthcare facilities without strong credit ratings attract investors to develop microgrids and renewable projects?
In short, yes, with the right kind of financing in place. Typically, investors and lenders of renewable projects prefer investing in projects with PPA buyers (i.e., the healthcare organizations) which have strong credit ratings. However, many healthcare organizations which will benefit from an onsite renewable project, do not have these ratings. BLUE Renewables can help, by developing the right financing structure and bringing in the right investors. More specifically, we can qualify eligible projects to get Credit Enhancements and Subordinate Debt from state and federal programs, which may address the credit ratings issue.
Eligibility for such funding depends on the facility’s location and the type and size of project(s). Our BLUE Renewables Team can review with clients and provide an initial assessment.
How can healthcare organizations without much in-house renewable expertise, get started with planning and then developing renewable projects?
The typical process for developing on-site renewable projects is:
- Perform a feasibility study which provides the optimal project configuration, i.e., the asset classes (solar, batteries, fuel cells, etc.) and the financial benefits of the project,
- Hire a developer who will do the project design, obtain all necessary permits, and arrange financing (unless the healthcare organization chooses to own & finance the project).
BLUE Renewables can assist its healthcare clients and provide these renewable project development services. Additionally, we are able to develop a more complete assessment, including energy efficiency, and system-wide decarbonization planning including reducing Scope 2 & 3 emissions. Let us know if you’re interested to learn more!
Do you have investors lined-up with capital available for financing microgrids and renewable projects in healthcare facilities?
We partner with a couple of investors and jointly perform due diligence for qualified projects. Our investors have capital available for qualified projects. Please contact BLUE Renewables for more details.
We prefer portfolios of projects in multiple healthcare locations using template PPA and Engineering Procurement & Construction (EPC) agreements.
Can you give us some estimates of the kind of financial benefits that hospitals can expect from developing renewables?
To a large degree, the financial benefits to a healthcare facility installing onsite renewable generation projects depend on the facility’s electricity costs, which in turn depends on the facility’s location. A couple specific financial benefits:
- Under a long-term PPA (3rd-party ownership): in locations (CA, etc.) with high electricity costs ($0.2/kWh to $0.3/kWh), for a solar + battery system, facility costs can be reduced by 20% or more.
- Under Direct Pay (facility owns project), breakeven is feasible after 3-9 years, and 20-year IRR from 5% to 10% or higher, depending on project location/current electricity costs.
What’s the political risk of a repeal or reduction of the IRA?
With the caveat that Washington is not easy to predict, we believe that:
- “Red” and “Blue” states will be equally hurt if the IRA is repealed, so an outright repeal of the energy-related part of the IRA is unlikely. Historically, both Democrat and Republican administrations equally preserved tax credits in the past.
- Some asset classes, such as EV, and tax credit bonuses such as Domestic Content and prevailing wages may be vulnerable in case of a change in the administration, but we don’t think the mainstream renewables will be affected.
- We also think that the incentives for less established asset classes, such as hydrogen, may be affected regardless of the type of administration as development costs and fuel prices become clearer.
- Any change in IRA incentives will very likely “grandfather” projects under construction. There is no precedent otherwise.
How feasible, really, is a renewable energy microgrid as an emergency source?
The California Energy Commission (CEC) funded a demonstration project at Kaiser Permanente Ontario Medical Center – a renewable energy microgrid is spanning the normal and emergency sides as a potential replacement for diesel generators during outages.
Some people say that all this stuff about microgrids and all-electric buildings is just for sustainability fans. Why do the rest of us need to care about this?
Well first, of course, climate change is a global issue, so the need to change course is not limited by country, region, state, or political belief system. We have to stop burning fossil fuels wherever we can as soon as we can.
There is no doubt that the current carbon benefit of electrification varies regionally because of regional variation in energy sources. But even the worst electric power in the country releases less carbon per unit of heat at the end use than the typical methane boiler. Methane releases 499 lb/MWh at 80% efficiency. With a COP 3.0 heat pump, the worst grid region in the continental US emits 493 lb/MWh – but the best grid region (hint: it’s not California) emits only 91 lb/MWh. In Texas, it would only be 257. You can check the emission rate for your grid region at www.epa.gov/egrid/power-profiler.
But, that’s just today. With most major power companies pledging to work toward cleaner power, when you electrify, you get to ride the improvements they make.
The economics of electrification also vary due to regional power cost differences, but again, you have to include the heat pump COP in your calculation. You get 3 units of heat out for every unit of power input, as long as there is somewhere to move heat from.
Another factor in the economic calculation is the effect of regulatory changes. Many jurisdictions are starting to ban or severely restrict the use of combustion for building heat. That’s not just California – it’s happening in Washington, Massachusetts, Vermont, and other states and many cities. So, even if your area has not yet restricted the use of gas equipment, it is reasonable to assume that gas will be banned or become very expensive during the life of the building systems being installed today. Why install soon-to-be obsolete equipment?
As engineering consultants and sustainability consultants, the advice we give is the same: don’t invest in combustion equipment. Don’t build new buildings that rely on combustion. Make a plan for electrifying existing buildings so that you don’t have to invest in combustion equipment when your boilers fail.
What are Kaiser Permanente’s thoughts on community solar? Has it considered being a solar host site (presuming it has the onsite space)? Why or why not?
Kaiser Permanente does participate in community solar projects as an off taker in states like Colorado and Oregon, although not on-site. In other states, they purchase 100% renewable energy from utilities that engage in community solar projects. Has Kaiser Permanente looked at supercapacitor storage as opposed to battery storage? Or a combination of both to optimize onsite storage? Kaiser Permanente has not looked at supercapacitor storage yet, but they have done an interesting project with sodium bromide batteries at their Ontario hospital through a grant from the California Energy Commission. In California it is pretty easy to justify a project delivering $0.30/kWH since we generally pay more than that. In most of the rest of the country, they pay less than that as noted in the second slide Walt showed us. What are your thoughts on delivering projects to the rest of the country from now until the cost per kWH goes up for them? Electricity prices of $0.30/kWh (including demand charges) in California, Northeast etc. are making renewables development financially attractive for healthcare organizations, developers, and investors. Renewable projects in other parts of the country, with lower electricity costs can be equally feasible economically, by:
- In addition to the IRA incentives, getting state and local-level incentives, such as cash grants and/or credit enhancements from the DOE, EPA and Energy Commissions, rebates from local utilities.
- Using appropriate financing structures. For example, a portfolio approach, i.e., “bundling” multiple projects together, may allow financing projects which are less attractive financially, if combined with projects which have better financial returns.
With the current energy prices and the opportunities with renewables does it make sense to start replacing gas powered boilers etc. as they reach end-of-life with electric units with the goal of taking campuses to an all-electric future?Kaiser Permanente is doing exactly that – they have 56 projects replacing gas hot water heaters with heat pumps, are investigating replacing larger stationary combustion assets with electric alternatives and are constructing their first all-electric hospital in California. Please discuss the advantages/disadvantages of natural gas reaction rather than combustion. Is the use of natural gas to generate energy without combustion considered environmentally sustainable or help with decarbonization?That’s one of the tough questions for fuel cell systems today. They produce less carbon per MWh than many, but not all, electric grid regions. Coupled with a heat pump, they are substantially better than gas combustion for heating. Better is still a long way from zero, but there are other reasons to consider fuel cells. Distributed generation is a net positive for the electric grid, as it will strain under the load of electrification. They also provide a degree of independence from the utility grid and improve reliability. We see methane-source fuel cells as transitional technology. The goal is to skip the methane reformation step and move to green hydrogen. It is not clear how long that will take, but building electrical systems to plug in hydrogen fuel cells will make the transition easier when the time comes. In the end, it will take a mix of energy sources and forms of energy storage (electrical and thermal) to make real progress on carbon reduction and maintain or improve reliability for our critical buildings.