Solar is Good for Business – a White Paper on the strengths and weaknesses of Commercial & Industrial Solar in the United States
Solar power is the fastest growing source of electricity generation in Texas, the United States, and across the globe. Solar continues to increase in popularity because it provides businesses with reliable investment returns. It is the only enduring means of dramatically reducing electricity costs.
The most compelling interest in solar comes from saving money on operating expenses. Companies considering investing in solar have many funding options to assist the substantial initial capital investment required. Given the substantial capital outlay and lengthy timeline of solar investment, care should be taken in selecting systems that are reliable and meet performance expectations. There are also many important choices to be made in terms of design, energy storage, and structural integrity.
The most ready return on solar comes from the generated power the system makes. This power replaces the cost the owner would otherwise need to purchase from the utility. It is used as soon as it is produced. Typically this is the most valuable power of each day, during peak demand. By offsetting the most expensive electricity, and the time of use demand charges which accompany it, solar provides premium production. When surplus power is made beyond the building’s immediate needs, the business earns a credit to be used when the sun goes down. Essentially, businesses accrue credits during the day and use them at night. The value of these credits depends upon their contract and the terms of the utility company delivering power.
Another compelling driver for solar is the 30% tax credit. Unlike a deduction, the tax credit provides a full dollar for dollar return on the entire project cost, inclusive of all the elements involved (equipment, engineering, labor, etc). In addition, solar is eligible for MACRS 5 year accelerated depreciation. So within 5 years effectively half the system is recovered in tax benefits.
Figure 1 shows the rapid return on investment, modeled as a cash purchase. Figure 2 demonstrates the efficacy of funding solar through a payment plan, generating immediate cash flow and Net Operating Income.
The upfront cost of installing solar is considerable, as is the cost of electricity for a business over the next 25 years. Businesses do not often consider how much they will spend on electricity each month, year, or indeed over the next 25 years. The amount is usually staggering. For this reason, most businesses purchase solar through bank loan, lease, or power purchase agreement. Other than cash purchase, a bank loan provides the greatest investment return as the business leverages tax benefits to operate the system on a positive cash flow basis.
In the alternative, a lease or Power Purchase Agreement (PPA), the financier captures the tax advantages, enabling the Lessor/Purchaser to acquire cheaper, cleaner power without the capital expense of purchasing a system. Innovative programs like Property Assessed Clean Energy (PACE) also enable organizations to fund solar if they have a short term lease or operate a not for profit entity.
PACE projects are paid through annual additions to property taxes. By attaching the payment to the land owner, the cost of solar can be stretched out and treated as an operating expense so that solar does not affect an organizations capital structure. It is especially helpful for tenants with short term leases so that the costs and benefits of solar can be shared by the tenant in the form of reduced operating expense, and landlord in the form of increased building value.
The upshot of these tax benefits and generation value are increased Net Operating Income and positive cash flow for 25 years. A business can expect to treble their original investment over that time, thereby providing a considerable competitive advantage and freeing up funds for other initiatives.
Some common concerns regarding solar economics are the long term duration and capital commitment. Companies considering solar should also take care to fund the project in a manner that suits their interests. Cash and carry provides the greatest yield and most committed funds. A lease makes for the least commitment, but also the lesser return. This is why many companies prefer to leverage property equity to assist in the funding of solar, as it provides an immediate return, alleviates capital intensity, and increases the value of their building without increasing property taxes.
For companies who take a long term view and understand the value of property appreciation, solar provides a reliable hedge to operating costs. Much like the choice between buying or renting a house, going solar essentially boils down to choosing to continue purchasing power from and enriching the utility company or purchasing it for oneself.
A handful of solar manufacturers have been around for 30 years or more. . These companies substantiate the industry standard 25 year production guarantee. .
Solar power is not a science experiment. Well built solar installations have been shown to survive hurricanes, tornadoes, and hail storms. However, shoddy workmanship or subpar equipment can lead to problems like panel fracturing, leaking roofs, silting, and melting wires. It underscores the importance of working with companies with a track record of proven excellence. Quality equipment installed by quality companies is essential to provide credible warranties.
There is some hesitancy to invest in solar now, expecting efficiency or cost to dramatically improve. It is true that solar continues to improve. However the improvement is not revolutionary, rather, it is evolutionary. Installed costs continue to go down incrementally, yet the value of waiting is less than the cost of waiting. Businesses will spend thousands waiting to save hundreds.
Some of the limitations of solar should be taken into account. Perhaps the greatest disappointment of grid-tied solar is the lack of access to solar generation when power from the grid ceases. Put another way, grid-tied solar systems (which 99% of solar power systems are) deliver no power when the electrical grid goes down. This is not a shortcoming of solar, but rather a shortcoming of how the grid is designed. Battery systems are comparable in cost and capability to fuel cell systems, however they both pose significant costs. Off-grid storage systems can be added to solar, making for a strong and reliable combination.
While solar technology continues incremental enhancements, energy storage is poised for the next great technology shift. Batteries paired with solar and demand response management devices are the emerging changers in energy technology. These devices are not just important for solar but also for wind, nuclear and even gas generation. Now, energy storage is primarily used for demand response and off-grid operations. Combining solar with storage and fuel cell generation makes for a resilient energy mix, capable of enduring prolonged power difficulties.
Not all solar is created equal. There are distinct solar and inverter manufacturers providing superior technology solutions. Perhaps it is most important to invest in companies with credible warranties. Any panel worth its salt has a 25 year production guarantee. The most reliable warranties come from manufacturers that are well established, leaders in research and development, and profitable. It is also of critical importance to select an installation partner with similar qualities, namely, a track record of credible performance. As the age of existing solar power systems advances, problems are emerging in the form of maintenance, roof decay, and warranty claims.
Expert installers maintain awareness with the evolving technology landscape, understand engineering options and electricity markets, matching systems to client needs. Furthermore, the increasing proliferation of battery storage systems limits the number of companies capable of competently integrating these systems. These considerations underscore the need to think about the cost of ownership, beyond the initial cost of purchase.
How Soon is Now
The Solar Investment Tax Credit has been extended for three years, after which time it will take a precipitous step down to 10%. A word of caution, Congress giveth and it taketh away. Anyone watching the elections with even a momentary glance understands that the political future is uncertain. The political risk makes the continuation of the tax credit tenuous. While it has been a mostly popular program on both sides of the aisle because of the thousands of job solar has created (1.2% of all new jobs created), the annual budget horse trading means the solar credit could end abruptly. Just a few months ago, the UK abruptly ended their solar rebate program, making this an existential risk.
Solar is good for business because it provides reliable returns for a necessary operating expense from electricity. There are legitimate concerns that need to be navigated in terms of funding, equipment selection, and design. It is critical to work with companies that can deliver on credible promises regarding their equipment and installation. Innovation will continue to make solar more easily accessible, however the nature of durable infrastructure investment makes it initially capital intensive with a long term payback. Investment advisors generally advise that time in the market is more important than timing in the market. That said, the time is advantageous between having lower installed costs, favorable borrowing terms, and substantial tax credits. Solar has been popular with both Republicans and Democrats, however the uncertainty accompanied with the new Presidential administration puts the survival of the tax credit in some doubt, increasing the urgency to go solar now, or risk losing thousands.
Marshall Harkins develops solar projects at Texas Solar Outfitters. He also assists clean technology startup companies developing into viable businesses with Cleantech Open. Before working in solar his career was in banking and law. Based in Houston, he is working to change the culture in the energy capital of the world.
Daniel Cohan is an Associate Professor in the Department of Civil and Environmental Engineering at Rice University. His research specializes in the development of photochemical models and their application to air quality management, uncertainty analysis, energy policy, and health impact studies. Dr. Cohan is a recipient of a National Science Foundation CAREER young investigator award and a member of the NASA Air Quality Applied Sciences Team.
Cal Morton is the Vice President of Strategic Relations for Texas Solar Outfitters. A native Texan, he spent a large part of his professional career in private banking services in London. He also co-founded Natural Energy Wind & Solar.