Reduced Operating Costs
Given the rising cost of electricity from utilities and the lower costs of solar panels and equipment, going solar can mean significant savings to a business’s bottom line.
A Hedge Against Energy Cost Volatility
Business owners know: Certainty is good, uncertainty, bad. Solar power provides the business owner with the advantage of knowing what his or her electrical costs will be regardless of energy market volatility and seasonal utility rate swings.
Solar power systems have virtually no moving parts and require very little maintenance. That means high reliability.
Going “green” means lowering your carbon footprint, which is good for the environment. It can also be good for your business as more and more customers become drawn to “green” companies.
This guide will help you decide if it’s time to take your business solar, with lots of useful information on the various financing options currently available for commercial solar power systems. Do you own a business and want to save money? Keep reading.
How Much Does a Commercial Solar Array Cost?
According to the Solar Energy Industries Association, the average price of a commercial solar PV project in the U.S. has dropped almost 30 percent between 2013 and 2015, with continued substantial price drops expected. That’s an intriguing statistic for any business owner. But business owners are practical people. They want the answer to this question first: What is it going to cost? Let’s start with a look at the components of a commercial solar system:
Solar PanelsSolar panels are the main component of any solar system. They consist of photovoltaic (PV) cells that convert sunlight into direct current (DC). Solar panels account for approximately half the total cost of the solar system.
InverterThe inverter converts the DC electricity from the panels into alternating current (AC) electricity. Inverters account for about 25 percent of the total system cost.
Balance of SystemBalance of system refers to all other components making up the solar array, including cables, wiring, electrical panel, etc. Costs for this category run approximately 17 percent of the total system price.
InstallationThe remaining costs are taken up with the physical installation of the components and hookup to the business’s current system and the utility grid.
Average Commercial Solar Cost Breakdown
Now that you know the parts of the solar system, it’s important to understand that the costs to get a new photovoltaic array don’t stop with the equipment. From permitting to labor to taxes, the average per watt cost of varies by state, but the 2015 average is $2.15 per watt, according to the National Renewable Energy Laboratory.
An average 200 kW commercial solar system in the United States will cost about:
200,000 watts x $2.15 = $430,000
While that looks like a lot, it’s important to note that commercial solar system costs have been dropping steadily for years:
ROI Factors: Will Solar Panels Be Worth It?
The cost of components is, of course, just the starting point, and makes up only one of the factors influencing the return of investment for a commercial solar system. The value of each factor depends on the specific needs and working conditions of a particular customer. Here are the things you’ll need to consider as you assess your commercial solar financials:
Simply put: Does the proposed site have good access to sunlight? The reality is that if a site doesn’t get much sun, it’s not going to generate much electricity. Variables that influence site suitability include facing direction and slope of roof, unobstructed sunlight (i.e. no trees, other buildings, etc. to obstruct throwing shade on panels) and area climate.
The first factor to consider. There are two parts to the energy consumption factor. First, what is the business’s electric load? Second, what amount of that load can a PV system meet? The answer to the first part requires the business owner to simply know how much electricity his or her facility is consuming now and is expected to into the future. The answer to the second part will depend on the values of the other factors discussed in this section.
Local Commercial Utility Rates
The relative costs of electricity between what a solar system can provide and what can be purchased through a local utility is a fundamental factor in deciding on whether a solar system is a good investment. While the costs associated with producing commercial solar power remain relatively stable and predictable, the costs of electricity provided by local utility companies change constantly, with a consistent long-term upward trend. Utility costs also vary significantly from region-to-region, state-to-state and provider-to-provider.
A solar array requires space on the roof of a facility or elsewhere. And the amount of electricity that can be produced by any given system is directly dependent on the total space available for solar panels. The more room for panels, the more electricity that can be generated.
Rebates and Tax Incentives
Government incentives like tax credits and accelerated depreciation, along with other incentives like rebates, play a huge role in making commercial solar systems cost effective.
The values for each of these factors are not only necessary to determine whether or not a solar system is right for a particular business, they also play an essential role in deciding on which financing option works best.
Types of Commercial Solar Financing
A lot of times a business owner says, ‘I understand that there are big tax credits and accelerated depreciation of the system, but I reinvest most of my earnings into the business and I’ve got a bunch of equipment that I’m already depreciating, so I’m not really one who can benefit from the tax incentives.’ And that’s seldom the case because even if they don’t have the big tax liability, they have an opportunity to take advantage of third-party owned financing options.”
Now we’re down to the nuts and bolts of commercial solar financing. There are a lot options to get a business up and running with solar power, each with its own terms and conditions, as well as advantages and disadvantages, depending on the unique business needs of the individual customer.
Here are the key benefits of the most common financing options, with a detailed look at each below.
Cash Purchase and Loan
While third-party options remain the most popular methods of financing commercial solar systems, plummeting equipment costs and continued attractive tax incentives have resulted in many commercial customers choosing to purchase their systems outright, either through a cash purchase or bank loan.
A purchase or loan is a common choice of for-profit companies and businesses with a substantial tax appetite who wish to take direct advantage of the current (30 percent) federal Investment Tax Credit (ITC), and are looking at both short-term ITC utilization, long-term returns on investment and energy cost stability. With this option, however, companies should be comfortable with taking on the additional risks of ownership, including the responsibility of system operation and maintenance, and potential issues with downtime due to bad weather.
For business solar in the market segment that I call light commercial – ranging from 100 kW to 1.1 MW – I’d say about 65 percent of our clients opt for an ownership scenario.
With an operating lease, the lessee (the business owner) does not own the system and the lessor (third-party entity) retains ownership along with the utility rebate and tax incentives. All or part of the cost savings from rebates and tax incentives are then passed on to the lessee in the form of lower lease payments. At the end of the lease, the business can usually have the panels removed, enter into a new lease agreement, or purchase the system.
In most cases, the operating lease is relatively short-term (typically 10 years, but may be as little as five) which makes this a good choice for companies with little tax appetite (thus no need for the tax incentives directly) and who plan to own their system in the long-term. Advantages to the operating lease include low upfront (and off balance sheet) costs to the lessee, stable energy costs and system ownership at the end of the lease term.
It’s not a question of dependability, it has more to do with weather conditions allowing for power generation. For example, I’m here in Texas and over the past few months we’ve gotten more rain than we have had in years. Obviously, that’s going to effect the production of a solar system. So, with the operating lease, the client is taking that risk.
Power Purchase Agreement
Currently the most popular option, the PPA is a great choice for most businesses with little tax appetite, and for non-profit and other tax-exempt organizations. With a PPA, the financier pays for the system equipment and installation, and maintains ownership of the system throughout the agreement’s term, often 20 to 25 years. The customer (facility/business owner) then purchases the power generated by the system at an agreed-upon, lower-than-utility rate for the agreement term.
Advantages for the business or tax-exempt organization include no upfront or maintenance costs, and no performance risk if the system breaks down or fails to work properly due to lousy weather. Long-term, stable energy costs are another plus. The major disadvantage to the business/tax-exempt organization is that at no time will the business own the system.
We’ve definitely seen more interest in solar over the past year or two, but most customers come in without knowing a whole lot about the industry and the financing mechanisms involved. The financing [for solar] is so different than with traditional financing. A PPA is not something that a business is going to use in its everyday operations.
A lesser-used option is the pre-paid PPA. With this option, the business/tax-exempt organization pays the entire lease cost upfront (typically equal to 85 percent of the total turnkey price of the system.) The financier retains ownership of the system for a relatively short period of time (five or six years,) long enough to reap the tax incentive advantages, then sells the system to the business/tax exempt organization for a nominal amount (often 1 ½ percent the original system cost.) The customer often takes out a loan or employs a revolving line of credit to make the upfront payment.
The benefits of the pre-paid PPA include no maintenance costs during term of the agreement, savings of approximately 12 to 13 percent of the system cost compared to purchasing the system outright, and ownership of the system at the end of the agreement term.
Property Assessed Clean Energy
Property assessed clean energy (PACE) plans have been around since the early 2000’s, but have only recently begun to have a substantial impact on the solar energy industry. PACE plans are mechanisms through which energy efficiency and renewable energy improvements (such as commercial solar systems) can be financed by means of a loan that is repaid via a property tax assessment. They allow state and local governments, and other inter-judicial authorities, to fund the upfront costs of projects which are then paid back over term periods of 10 to 20 years, or more.
The key to PACE is that a PACE assessment is a debt on the property itself, not the property owner, which means that the repayment obligation is normally transferred to a new owner along with property ownership. In the case of commercial solar, this feature encourages the business owner to make the leap to solar power even if they think they may not stay in the property long enough for the savings of the PACE plan to cover the system’s upfront costs. Additionally, financing through a PACE plan does not require expensive credit qualification. And the longer repayment period means smaller monthly payments, although at a somewhat higher interest rate.
Commercial PACE programs are enacted through state legislation and are currently authorized in only 32 states and the District of Columbia. Also, rules governing PACE (types of improvements that are covered and how plans operate) vary significantly by jurisdiction.
Solar Renewable Energy Credits
SRECs are credits that can be earned by homeowners and commercial businesses with solar systems that are then sold for cash. SREC programs are available in some states with a Renewable Portfolio Standard (RPS). Enacted through legislation, RPS regulations mandate utilities to produce a specific percentage of their electricity from renewable sources such as solar. To meet RPS requirements, a utility purchases RECs, including SRECs, which act as evidence that it is meeting its renewable energy mandate. In some jurisdictions, RPS laws include specific “solar carve-out” language the requires a minimum percentage of electricity be produced through solar.
SRECs are earned at a rate of one for every one Mwh of solar electricity produced. How much does that mean in actual cash? That depends. SRECs are a commodity and are bought, sold and traded on the open market like any other commodity. Supply and demand rule here and prices for SRECs can fluctuate wildly. The price for a single SREC can normally be found between $50 and $300.
The purpose of RPS regulations and RECs is to encourage utilities to provide more electricity from renewable energy sources, which benefits everyone. The benefits for homeowners and businesses earning SRECs are especially sweet because they result in more cash on the bottom line.
Commercial Solar Federal Investment Tax Credits
Here’s where all of the big action is: the federal Solar Investment Tax Credit. The Solar Investment Tax Credit, or ITC, is part of the federal government’s Business Energy Investment Tax Credit program. The ITC, as it applies to commercial solar, allows a solar system owner to deduct 30 percent of the cost of purchase of equipment and installation of the solar power system from its federal taxes. There is no cap on its value. The purpose of the Solar ITC is simple: to encourage the investment in and operation of new solar power resources, thus decreasing the nation’s appetite for non-renewable, polluting traditional energy sources such as coal and oil. The ITC has proven to be the engine with which the boom in U.S. solar energy industry is powered.
How does the ITC work?
The ITC is claimed on a business’s federal corporate income taxes. As the federal law is currently enacted, solar systems on which current construction has begun on or before December 31, 2019 are eligible for the 30 percent credit. The credit rate steps down after that to 26 percent in 2020, 22 percent in 2021, and to 10 percent thereafter. Commercial projects commenced before December 31, 2021 may qualify for the ITC as long as the system is put into service before December 31, 2023. Unused tax credits may be carried back one year and forward 20 years. After 20 years, only one-half of unused credits may be deducted.
Eligible equipment related to a solar PV system includes: solar PV panels, solar curtain walls and associated sales and use taxes; mounting equipment and installation costs; inverters, circuit breakers and other associated equipment; energy storage devices and power conditioning and transfer equipment. Only new equipment is eligible.
Who is Eligible?
Eligibility for the ITC rests with the owner of the commercial solar system, regardless of who consumes the electricity it produces. Understanding this point is extremely important because it means that a business whose system is installed under a PPA or lease agreement is not the legal owner of the system and cannot take advantage of the ITC, at least not directly. Savings generated from an ITC may be passed on to the consuming entity from the system owner in the form of lower electricity rates. For more detailed information on ITC eligibility, see the descriptions for various types of commercial solar financing, discussed above.
Claiming the ITC
Businesses and others claiming the commercial solar ITC will fill out IRS Form 3468 and submit it with their annual corporate tax return.
“You want to look at how long you plan on being in your facility. If you think you are going to move out in five years, then [solar] is probably not the solution for you. You really want to have the expectation that you are going to be in that facility for at least eight to 10 years. It will be well worth the investment and the effort if you plan to be in your facility for more than five years.”
How a Business Can Depreciate a Solar System
The Modified Accelerated Cost Recovery System (MACRS) is another important factor in the astounding growth of commercial solar. Under U.S. tax law, the MACRS is the proper depreciation method for most types of tangible property, including commercial solar equipment. In most cases, the entity that claims the ITC on a commercial solar system is also eligible to employ the MACRS.
Under the MACRS, 85 percent of qualifying commercial solar equipment is depreciated at an accelerated rate over a five-year period. In other words, a larger portion of the overall deduction is taken out in the first two years, providing a major reduction benefit early on. However, system owners may claim a bonus depreciation of half of their solar equipment for the first year of its placement in service. MACRS rates then apply for the following five years.
The yearly depreciation percentages are indicated in the following chart, which uses an $800,000 solar project as an example:
Depreciation basis after bonus depreciation: $340,000 ($800,000 x 85% ÷ 2 = $340,000)
|Percent of Depreciation
The depreciation bonus of 50 percent is available for systems placed into service between January 1, 2008 and September 8, 2010, or between January 1, 2012 and December 31, 2017. Systems place into service between January 1, 2018 and December 31, 2018 will be eligible for a 40 percent depreciation bonus. Systems put into service between January 1, 2019 and December 31, 2019 will be eligible for a 30 percent depreciation bonus.
“The best piece of advice I would have is to do your research. Figure out what your needs are as a business and compare them to the different financing options out there. It’s not a one-size-fits-all situation.”