By Ted O’Shea Vice President ABM Energy
Over the last 18 months, the solar industry has undergone a radical evolution from a feel good environmental story to a source for a competitive financial advantage. Many of the top Fortune 500 Companies are leveraging the financial advantages of solar to stay ahead in ever competitive markets. The advantages of solar are
not limited to larger businesses; many smaller businesses are also taking advantage of solar installations to potentially:
- Reduce their energy spend;
- Generate revenue;
- Stabilize electricity costs;
- Improve their bottom line; and
- Gain a competitive financial advantage.
While many organizations want to adopt a solar program, sometimes the challenges associated with financing and entitling solar projects prevent them from doing so. However, there are two primary solutions –Power Purchase Agreements (PPAs) and Solar Lease Agreements – that enable facilities to receive the benefits of adopting a solar power system, without having to assume the risks associated with the design, installation, financing and management of these systems. Our experience shows us that clients that install solar PV panels on their property can either use the electricity generated to offset or eliminate their utility bills (Power Purchase Agreements), or sell the electricity generated to the grid – creating a revenue producing asset (Solar Lease Agreements).
Power Purchase Agreements (PPAs)
The PPA financing model is a “third-party” ownership model, which requires a separate, taxable entity (“system owner”) to procure, install, and operate the solar PV system on a facility owner’s property. The facility owner enters into a long-term contract (typically referred to as the PPA) to purchase 100% of the electricity generated by the system from the system owner.1 Figure 1 illustrates the financial and electricity flows between the facility owner, system owner, and the utility. Roles and responsibilities depicted in this diagram can vary market to market, but this is the general concept.
- No/low costs for the life of the project
- No asset management responsibilities
- Reduced energy and operational costs once the system is commissioned
- Protection from utility price volatility
- Potential increase in property value
- Visible environmental/sustainability commitment
For many companies, electricity costs represent the single largest operating expense. Over the last 18 months, the continued decrease in solar system prices (see Figure 2 below), industry standardization and the adoption of innovative financing models that can reduce up-front costs, have enabled solar to become a viable option for companies of all sizes to dramatically reduce energy expenditures. In a growing number of markets, companies can either generate or purchase solar energy at or below local retail electricity rates, saving businesses money from “Day 1”.
Utility price volatility presents a challenge to businesses’ long-term budgets; with the average PPA being a minimum of 20 years, solar allows companies to lock in fixed energy prices for decades. Whether the system is purchased up front or financed through a PPA, solar offers long-term price visibility and a valuable hedge against rising and volatile conventional electricity rates. Companies are learning that they can offset tax liability using the federal investment tax credit while generating electricity for their facilities as well.
According to the US Energy Information Administration (EIA), over the last 20 years the cost of Commercial & Industrial (C&I) electricity in the United States has increased at an average annual rate of approximately 2.5%, which results in a 58% increase over a 20 year period.3
Figure 4 illustrates the significant cost advantage a PPA has over market-based electricity rates and includes the following assumptions:
- Cost of $0.12/kwh for electricity during daylight hours; and
- The annual increase in electricity costs is going to be 2% over the next 20 years5, which is 0.5% lower than actual increases experienced during the previous 20 year period;
- In 20 years, electricity costs will be almost $0.18/kwh or an increase of 50%.
The market price trend forecasted and the benefits of a fixed PPA rate are shown below.
It is also important to mention the fact that many utilities charge higher electricity rates during high demand, peak time consumption. These peak hours of expensive grid electricity coincide with the peak production of solar power. Figure 5 shows how PG&E (a California utility) charges significantly more for electricity during the afternoon hours when demand is high, and how a solar array can produce a lot of electricity during those peak hours6. The benefits of a solar PPA (with a flat rate during the day and slight escalation over the years) are even greater in such conditions.
If a C&I facility owner were to fix the price of their electricity for the next 20 years using a Solar PPA, they could:
- Immediately reduce electric utility costs
- Achieve significant future utility cost savings
- Protect themselves from the volatile utility market
- Position themselves as an environmental leader
Solar Lease Agreements
Some utilities and other solar programs do not allow the facility owners to directly benefit from a Solar PPA, as the electricity must be sold to the local utility. However, it is possible to leverage solar to generate an extra revenue stream by leasing areas of the property such as rooftops, parking lots, and open land to be developed for hosting solar power assets.
By leasing areas of its property (roof or land), the facility owner can still take advantage of the benefits of solar without investing any money. The facility owner receives a lease payment that will be paid on a scheduled basis, generating revenue from undervalued areas of their property. Generally speaking, roofs and parking areas are cost centers for facility owners; solar leases allow these areas to become revenue generators.
Facility owners can also opt to be paid in a single lump sum instead of scheduled payments. The sum of the annual lease payments would be totaled for the 20 year term and discounted to allow for a single lump sum payment in year 1 of the solar project.
In addition to providing revenue from the lease payment, the solar array can have other financial benefits. During warm weather, solar panels shade the roof and decrease heat from the sun. Studies have shown that rooftop solar panels can reduce a building’s cooling load by as much as 40% and reduce ceiling temperatures by as much as 5 degrees Fahrenheit.8
Moreover, solar plants designed on a parking lot as a solar carport can provide a huge benefit. Solar carports provide free shaded parking to the tenants accessing the site, as well as a shelter from rain, hail and other inclement weather. If the facility owner decides to charge for the covered parking spaces, they can generate new revenue streams for the facility as well.
Finally, the facility owner hosting a solar plant on its property contributes to the generation of “green energy”. With no capital outlay the facility owner can reap the benefits of solar, create value for its activity and contribute to the generation of natural, safe and clean power.
If a C&I facility owner were to reap the benefits of solar by leasing their facility for the next 20 years, they could:
- Generate a new income stream or benefit from a lump sum of cash to invest as they see fit
- Reduce utility spend from cooling costs
- Improve tenant satisfaction by providing free solar carports
- Generate revenue by charging for covered parking
- Benefit from a marketing campaign and Corporate Social Responsibility platform
- Position themselves as an environmental leader
No matter if organizations choose to go with a Power Purchase Agreement or a Solar Lease Agreement, an investment in solar can enable facility owners to gain a competitive financial advantage by reducing energy costs, generating revenue and reallocating resources to their core business operations.
How to Determine If Solar is a Good Fit for Your Facility
A preliminary solar assessment of your facility can be completed without even having a solar company visit your facility. By simply providing your physical address, brief description of your facilities and basic data on your daytime electricity rates, a capable solar developer can provide you with preliminary feedback on solar applicability. If solar appears to be a good fit, then a brief site visit can be planned that will be followed by
a more detailed analysis and proposal for services. Depending on a variety of variables, the process from assessment through construction completion should take no more than 4-12 months.
1 National Renewable Energy Laboratory, Power Purchase Agreement Checklist for State and Local Governments, https://www.nrel.gov/docs/fy10osti/46668.pdf
2 Solar Energy Industries Association (SEIA), Solar Means Business 2013: Top U.S. Commercial Solar Users
3 US Energy Information Administration, Electricity Data Browser, https://www.eia.gov/electricity/data/browser/
5 US Energy Information Administration, Annual Energy Outlook 2013, https://www.eia.gov/forecasts/aeo/pdf/0383(2013).pdf
6 John Farrell, How Distributed Solar Can Reduce Electricity Prices, https://www.ilsr.org/how-distributed-solar-can-reduce-electricity-prices/
7 PG&E rates, 2012
8 UCSD Jacobs School of Engineering, Solar Panels Keep Buildings Cool, https://www.jacobsschool.ucsd.edu/news_events/releases/release.sfe?id=1094