If College Endowments Value Profit Why Aren't They Installing Solar?
If College Endowments Value Profit Why Aren't They Installing Solar?
Recently, there's been a big push to get colleges and universities to sell their fossil fuel holdings. This divestment movement has often hit resistance from administrators who say that their endowments should be invested to produce the maximum return on investment (ROI). What if it turned out that those endowments were already not maximizing their ROI because they weren't investing in solar panels to power their schools? University endowments are hurting both the world and their bottom lines by this inaction. Read on to find out why.
How Endowments Work
Endowments are huge piles of money that colleges and universities have managed to sock away over the years. They generally came from alumni donations, and their growth is spurred by their schools' tax exempt statuses. These piles of money are invested in various stocks, bonds, etc. with the goal of getting good but stable returns. Some percentage of this return may go back into the endowments, but most is used to help fund the schools. The dream scenario for a school is to be 100% funded by its endowment so that it wouldn't need to collect tuition or beg alumni or government entities for money, but the reality is that spending will always increase well before this happens.
The Crazy Huge Pot of Money
There is a crazy amount of money in school endowments. There are more than 100 U.S. schools with over $1 Billion in their endowments and the top 10 endowments total over $200B on their own. Most schools spread their investments across a myriad of stocks and bonds. More aggressive endowments like Yale even invest directly in startups.
Yale is considered one of the top endowments with over $30B in assets and average returns of over 10% annually for decades. Other endowments look in awe at Yale's results and often try to follow their lead. Yale has innovated by really spreading their money around, as you can see in the chart on the right. Though they have less in the way of bonds and cash than many other endowments have held in the past, these assets still amount to 7% of their portfolio - over $2B - which I probably don't have to mention is a TON of money. Cash has almost no ROI and bonds offer only around 3-4%, but both provide stability to the endowment as a whole. They won't go up in value a bunch, but they won't drop either. The thing is, solar panels and other provide a greater return with even less risk.
How Solar Beats Bonds
The fact that solar panels have a higher ROI than bonds is the key thing that endowment administrators are missing. I go over the math of this for a residential home in PA in my solar ROI post. The basic gist is that if the price to install a solar panel is less than the value of the energy it will produce over its lifetime then it will have a positive ROI. This seems like a low bar, but it's reasonable considering that over $16 trillion is currently invested in bonds that guarantee they will return less than you invest in them. These bonds are invested in to reduce overall risk, but there is still a chance that they will not pay out. Solar also has risks, but they are low too.
Solar Risks
The solar panels stop making electricity
No one will buy the electricity they produce
The price of electricity drops
Luckily these risks are all very low. Most panels are warrantied to keep producing power for 25 years or more so it is very unlikely that they'll stop working. It is also cheap to buy insurance for the rare case of them being destroyed by something like a tornado and its price can be factored into the initial ROI calculation. School's don't have to worry about the risk of no one buying their power because their operations have a large power draw already. They can simply guarantee that they'll sell the power to themselves. They can even install less than 100% of their current demand to reduce the risk that they'll lack a market for their power further.
The biggest long term risk for solar panels is that the price of electricity drastically drops. If that happened the electricity that the panels produce will drop because a kwh of electricity will be worth less. This could drop their return below their cost so it is a real risk. That being said electricity prices have been rising for decades. Our increased understanding of the dangers of climate change is only going to raise prices further. In the end it's far more likely that prices will continue to rise and that solar panels will produce more monetary value in the future. Buying a bond is making a bet that the issuer will still be able to pay you in the future. While it is very unlikely that a bond issuer like Germany goes bankrupt in the next 30 years, I think that is more plausible than the average cost of electricity going down over that time frame. Solar panels are a bet smart investors should be happy to make.
A Couple Caveats
The math for solar ROI also changes for large institutional size installations. For example a big institution may have negotiated a lower electricity price than regular residential customers pay. At the same time the price to install a solar panel in a large commercial array is about 1/3 less than what smaller residential customers pay. Many universities also don't benefit from the tax breaks for solar because they don't pay taxes. This hasn't kept other smart entities from sharing the tax credit with a for-profit company and still reaping the benefit. When you add it all up solar is still likely cheaper than grid power for many large institutions which means it will have a positive ROI.
Where Are The Huge College Solar Arrays?
If solar is so much cheaper than grid power then why aren't we seeing huge arrays being deployed at a bunch of schools? Well, this is starting to happen. For example, Penn State is projected to save $14M over the next 25 years by contracting to buy 25% of their electricity from a new solar farm. This is with almost no investment on Penn State's part so the ROI is essentially infinity. If they did invest some of their endowment money to own part of the solar farm company themselves they could capture much of the profit that company is making and encourage building an even bigger array. The ROI on this would almost certainly beat the low ROI of bonds.
Over Caution = Loss
Penn State thinks they're being "cautious" with their move into solar by still buying most of their power from the grid. But, as the huge savings from solar start materializing the school will hopefully realize that their "caution" is actually leaving tens of millions of dollars on the table by not going 100% renewable. This will continue being true until policies around renewable energy become more stringent. Schools would be smart to install their large solar arrays now while the rules are still quite favorable and bank on being grandfathered in.
The Money's There
The cost of installing a solar array to replace 100% of a school's electricity with renewables is far less than the value of many school endowments. In the case of Yale it is far less than just their investments in low return bonds. Remember that Yale has over $2B in cash and bonds right? Yale is in Connecticut where the total solar investment in the entire state is only around $1.7B and that's enough to power around 90k homes.
The price to install solar has fallen so far that Yale's $2B of cash and bonds could nearly triple the amount of installed solar in the state. Of course Yale doesn't even have 13k students and they live in dorms that use less energy per person than regular houses. Yale would only have to move a small fraction of the money they have in cash and bonds into solar to get 100% of the school's electricity from renewable sources. This solar would almost certainly have a higher ROI than their cash/bonds while also helping mitigate climate disruption. So what's the problem? Are they dummies who don't know how to maximize their returns? Are they soulless ghouls who want to spur on climate change? I'm hoping it's neither of these.
Fear of Physical Assets
I think the real thing that is holding up investment in solar is a fear of physical assets. Finance people often want to just buy shares of companies. They want to read a prospectus rather than research the value of a hard asset. If they did do a bit of research into solar PV they'd realize that owning a solar array is barely more complicated than owning a share of stock. Yes, they'll want to hire a good company to install it, and pay for insurance one it but once that's done there's next to no maintenance. They could hire people to clean snow/dust off the panels, but honestly the array will probably produce a profitable amount of power without this. So what's really left to fear?
Why Doesn't Yale Start a New Trend?
The administrators of Yale's endowment have said that "what endowment investing [is] all about: perpetual institutions and their long-term health". The scientists and economists employed by Yale understand that not transitioning to renewable generation will create long-term instability for the entire planet, which obviously includes Yale. The university already has a plan to become net zero by 2050, but that is a long time away. Every day they wait to move money from bonds to solar means more carbon emitted and more dollars lost. When will the directors of Yale's endowment and others wake up to the fact that building renewable energy to power their schools will return more than their current "safe" investments? When will they start pushing the university to install renewable generation as fast as possible just for the economics of it? When this happens will it start a trend among other school endowments the way so many other Yale investment strategies do? Will some other school beat Yale to the punch and show the world how renewable energy lets them profit greenly? I don't know the answers to these questions, but if you work in school endowment investment I hope you've got a team of people looking into this now.