I never used to listen to very many podcasts. But lately I've started doing it while heading to/from meetings, either in the car or on the train. This past week I listened to a Bankless podcast talking about crypto and AI, and one of the arguments that was made was that it's probably a safe bet to assume that we're going to need dramatically more compute and electricity in the future.
This seems obvious enough. If you recall, there's no such thing as a wealthy, low-energy nation. If you're a wealthy country, you consume a lot of energy. And that's why Build Canada recently argued that we need a kind of energy revolution. By 2050, it's likely Canada will have 2-3x the electricity demand that we have today. So today I thought I would share a few related charts.
Here's electricity production by source across the world. Coal dominates.
Looking at renewables more closely, we again see that wind and solar are making a run for it. And if you consider that solar is one of the fastest growing energy sources, it's not inconceivable that it will start to become a more dominant source in the near term. In the US, solar PV projects make up the largest share of new planned generation capacity.
But the US is not winning this race today. Right now it's China. (Chart below sourced from here.) They have the largest cumulative solar capacity, followed by the EU, and then the US. That said, coal still forms a dominant part of China's energy mix, and the country continues to construct coal-fired power plants to meet its short-term energy needs.
It's unfortunate that Canada is not on this list. That needs to change.
Cover photo by Benjamin Jopen on Unsplash
Ordinarily, solar panels make the most sense on the roof of a building. This is often where you can harvest the most solar energy. But sometimes it can make sense to install them vertically, like in the case of the above building in Scuol, Switzerland. I am by no means an expert on solar, but I am told that this can make sense in snowy climates (where rooftop panels are likely to get covered) and in northern locations where the lower angle of the sun means a vertical position actually catches the sun more effectively (especially during the winter months). It could also be the case that you just don't have any available roof space. Either way, you have to look at and model out the entire year when it comes to solar.
I have a very close friend (Peter Vogel) who is in the solar business. He runs business development for a company called Otter Energy. And by volume, I believe they are the largest in Ontario. Since 2009, they have installed over 350,000 panels.
So when Peter and I hang out, I get the benefit of learning about solar. And he is great at reminding me that installing panels on the roof of buildings in Ontario makes a ton of sense from both an environmental and financial standpoint.
Generally speaking, the amount of benefit you will see depends on the building's ratio of roof area to overall building area. Low-rise buildings with a lot of roof area (think industrial assets), are absolute no brainers. But it can also work very well on many other asset classes, including mid-rise multi-family.
Here are some high-level figures that he recently walked me through:
As a rule of thumb, solar in Ontario typically generates between 12-14 kWh's per year per square foot of roof area (usable flat roof).
The average payback period for an install is usually somewhere between 4.5 to 7 years.
However, on income producing properties, the permanent decrease in operating expenses and the corresponding increase in net operating income (NOI) will increase your asset value on day one.
Consider spending $100k on solar panels to increase your NOI -- through lower electricity costs -- by $10k. If you were to then capitalize this increase in NOI by 5%, it would mean your asset value has right away increased by $200k. If the cap rate for this asset is even lower, say 4%, the increase goes up to $250k.
These multiples can get even better with larger installs. Here are some numbers from a real-world 100,000 sf commercial building in Ontario. In this case, the solar system cost about $800k (net) and resulted in annual operating cost savings of about $140k. This means, that at a 5% cap rate, the owner spent $800k to increase the value of their asset by $2.8 million on day one.
Of course, in addition to all of this, you get long-term energy cost certainty. That's worth something too.
The business case is compelling. So I think more building owners should be looking at solar. We are certainly looking at it from a development perspective. If you're interested in learning more, feel free to reach out to my friend. There are a lot of details that help strengthen the case for solar, including depreciation allowances and tax credits.