16 Mar Why is Commercial Solar a Good Investment?
Solar energy is increasingly an excellent investment for commercial and industrial electricity users. When your current electricity rates exceed the costs for solar electricity, then it’s time to consider the solar energy savings opportunity. Locating a solar energy system on your property is a viable way to reduce your operating expenses and add value to your customers.
After your site has been pre-engineered and optimized for the installable solar capacity, the next step is to produce a financial analysis to help you make informed financial decisions.
Measuring Your Investment
Our goal for a customer is to maximize the economic return for a given commercial solar or industrial solar project. While there are several ways to measure the value of a solar investment, we believe the Net Present Value (NPV) provides the most clear and straightforward understanding because it measures a direct financial benefit in present-day dollars. Its very simple to understand NPV and quite straightforward to see if project makes money.
While NPV provides a good basis, for many businesses, the Internal Rate of Return (IRR) over a specified period of time is a standard metric because it is used to compare a project’s compounded return compared to other potential investments. If you are going to use IRR as your investment measure, it is always important to understand over what period of time the IRR is measured. Is it the lifetime of the project which is around 25 years? Or some other period of time like the frequently used 10 year time horizon? Financial analyses for a particular project will show the solar project’s NPV and the annual IRR in a clear and visual format which is easy to understand.
Five Key Factors
There are 5 key factors which determine a solar project’s value:
- Solar Cost
The solar electrical system costs include labor and materials plus taxes and other expenses such as permitting fees. The total cost for a commercial solar or industrial solar facility should be all inclusive from a turn-key solar installer. We work really hard with our commercial solar customers to help define the project and price with all potential scenarios included. We will navigate the many challenges where unexpected costs can occur. It is not uncommon to encounter utility interconnection upgrade costs, geotechnical challenges, environmental expenses, or building/parking lot expenses that would be difficult to predict without some significant preliminary engineering time. More initial engineering effort means fewer surprises during solar project implementation.
- Avoided Cost
We will ask for the latest 12 months of historical electrical energy bills to fully analyze the current expenses. This will help us look at the various components which make up your electrical bill such as a tiered rate structure, time-of-use charges, demand expenses and other potential components we can help reduce. We call this determining your “avoided cost of energy”. By knowing your avoided cost, we are able to model the financial savings per kilowatt-hour generated by solar. We will also look at all opportunities to move your facility or building to a new rate structure to further improve your financial returns. When we switch rate structures, we are often able to boost the solar investment returns because solar production often coincides with the highest time-of-use electrical expense per kilowatt-hour.
Low interest loans can magnify the economic returns for commercial solar electric system. We call this leverage. Leverage means buying the solar asset by using borrowed funds, with the expectation that the income from the asset will be more than the borrowing costs. When solar projects are levered with low-interest bank loans the return on investment can realize a very pleasant increase.
- Energy Generation
Next, we will determine just how much energy the solar system generates in your specific geographical location and with all site and regulatory limitations included. Because every site and utility regulatory environment varies, we will perform a specific study for each site to determine the amount of energy the site or sites will produce.
There are various forms of solar production incentives and rebates available across different jurisdictions. Chief among these are the 30% Federal Investment Tax Credit (ITC) which is expected to reduce to 10% on January 1, 2017. Some states or utility companies offer rebates for energy produced or capacity installed. Other locations pay for Solar Renewable Energy Credits (SRECS) in addition to allowing the consumer to enjoy the benefits of the avoided electricity consumption. The bottom line is that the United States exists in a complex regulatory environment and your specific location requires a detailed evaluation to comply with the laws and to also potentially tap into available incentives.
In our dreams, closing a solar deal is as easy as showing a large NPV or a double-digit 10 year IRR. But installing solar is a very personal decision and affects the financial decision makers, the facility personnel and many others in most organizations. We work closely with all types of commercial solar customers such as retailers, water agencies, public entities and major technology corporations. While we ultimately strive to close the deal and build a solar facility, we realize going solar has to make sense for our customers in every respect. We look forward to working with you through your solar next analysis.