As popular as solar energy is today, the process for determining whether a solar project is a sensible investment can be a black box that many facilities’ managers and chief financial officers would prefer to avoid. In this blog post, we will equip you with basic tools to complete your own internal solar feasibility analysis before contacting a developer or installer. We’ll review three major areas of consideration:
- Electric Bill Analysis
- Financial Approach
Before you invest time and effort analyzing the potential for a solar installation, you should first review where you are likely to locate solar panels on your property. Here are a few questions to consider depending on the type of solar project you are pursuing:
- Roof Solar Installation
- Is your roof free of shade from trees or adjacent buildings?
- Is there enough room on the roof to accommodate a solar project? Most commercial roofs support HVAC equipment. Depending on the size of the roof, there may be enough space to host solar panels.
- Is the roof in good condition? This can sometimes be a difficult question to answer especially for flat roofs or metal pitched roofs. One way to gauge the condition of the roof is by its age. When was it last replaced? Are there leaks or known structural problems? Later in the process, a structural engineer can confirm the roof’s structural integrity. For the purposes of this discussion, you are looking for any obvious signs that may disqualify the roof as an option for solar.
- Ground Mounted Solar
- Is the ground location of the potential solar installation relatively flat? Extremely steep terrain can be developed, but this may adversely increase the cost of installation.
- Is the location in a floodplain, or are there any known water retention issues with the area?
- Does the location have ample access to the sun?
- Is the ground mount location within 500 feet of your building? Installation can be completed at distances much greater than 500 feet; although, distance affects the cost of installation.
Electric Bill Analysis
For your solar project to be financially sustainable, your electric bill savings will need to cover most of the costs. Understanding the impact of solar panels on your electric bill is critical to a successful project. Here are some things to consider:
- Energy Supply Contracts: In markets that allow energy supplier choice, like Pennsylvania, most businesses have a third-party energy supplier instead of defaulting to the electric distribution company. As a part of your solar feasibility analysis, review your energy supply contract to make sure you aren’t precluded from installing solar. Most contracts will also state that the supplier may be entitled to payments if your energy use changes by 25 percent. If you aren’t sure how to interpret your agreement, you can call the energy supplier and inquire about installing solar panels onsite. Most energy suppliers are experienced with solar and can guide you through your rights within the contract.
- Avoided Costs Calculation: As a part of your bill analysis, identify your avoided cost of energy. An avoided cost is the portion of your electric bill that can be offset by electricity produced with solar. This exercise can be a bit technical and cumbersome. If you manage your electric bill with software, you may already have the figure calculated within the program. Alternately, most developers will be able to properly determine your avoided cost. You can wait until you engage developers to identify your true avoided costs. If you opt to wait, it is important to ask for a step-by-step walkthrough of their determination, so you understand how the avoided cost numbers were generated.
Once you’ve determined the feasibility of your project location and considered your current energy usage and cost, it is time to think through financing options for the solar project.
For some businesses, the most sensible way to approach funding for a solar project is to self-fund. Consider this approach if:
- Your firm has the tax appetite to take advantage of the Federal Investment Tax Credit (FITC) and Modified Accelerated Cost Recovery System (MACRS) depreciation that is available in a solar project.
- You have access to the capital required to develop a commercial solar project. Typically, a commercial solar installation can cost $100,000 and up. Naturally, the larger the installation, the higher the cost.
Certain solar developers have established relationships with lenders who are familiar with solar economics. In some cases, these lenders offer better rates and terms than traditional business debt instruments. It is worth reviewing funding options with your developer or installer of choice.
Third-party Financing Approach
Even for businesses with a strong balance sheet and an abundance of cash, third-party funding can be an attractive approach to going solar.
There are two primary options to consider:
- Power Purchase Agreement (PPA) – A PPA is an agreement between a solar developer and an energy user in which the user purchases power from a renewable energy project that is installed and owned by the developer. The energy user does not own or operate the solar panels but buys the power produced by the panels at a fixed, known rate for a term of 20 to 30 years. The developer is responsible for maintaining and operating the solar panels for the full term.
PPAs are popular on large solar projects because they represent a lower risk to the energy user and require little to no money upfront. Within the model of a PPA, there are several unique funding approaches that developers can use to make a solar project more beneficial to a business. For example, developers can structure agreements for businesses that want to use third-party financing but prefer an early exit in five to seven years. Contact us if you’d like to learn more about the various approaches we take to make projects viable for our clients.
- Solar Lease – A solar lease works much the same as a PPA except that the energy user leases the solar panels from the developer rather than purchasing the power produced. Leases are less common in large solar projects because they tend to have an adverse effect on the balance sheet. Nevertheless, solar leases are an established way to go solar without the high upfront installation costs.
To learn more about third-party funding options, read our blog post on how to go solar with no capital expenditure. It is a great resource to review if this approach is of interest.
As beneficial as this project assessment can be, it can take some time. That is why we offer a no-cost feasibility study for businesses considering solar energy projects. We are happy to perform an analysis and provide you with a report of our findings that will help you determine the best approach for your solar project. If you’d like to use this free service, contact us, and one of our project consultants will be in touch with you.
To learn if solar is the right move for your business, contact us for a free solar feasibility report.