Within the past few years, solar energy has become more competitive with brown power, or power from the electric grid, thanks to falling solar panel prices and more favorable state and federal incentives. The viability and value of a solar project can vary depending on the state in which the project is built. When researching solar for your commercial, industrial, or institutional property, investigate what incentives the state provides and what solar options are best for your organization. By researching state Renewable Portfolio Standards (RPS), Solar Renewable Energy Certificate (SREC) prices, net metering policies, state incentives, and financing options, you can begin defining the best course of action for your business.
Businesses can receive 1 SREC from the local utility for every 1 MWh of electricity their solar system generates. If your system generates 1000 MWh in a year, the organization will receive 1000 SRECs from the utility. The value of an SREC depends on the state that the solar array is in and can range from $5/MWh to as much as $450/MWh. The money earned from SRECs can help pay off the solar installation.
- Net Metering
Some solar systems generate more electricity than is used during the day and, through net metering (where available), the local utility may provide credits for the excess electricity that solar systems generate every month. Net metering policies differ by state, but generally 1 credit is equal to what is paid for 1 kWh of electricity from the utility. Excess credits can rollover every month and can be used to offset electricity bills in later months.
- Federal Tax Incentive
Investing in solar energy can help reduce the amount of income tax businesses pay, thanks to the federal investment tax credit (ITC). When installing a solar array, 30% of the project cost can be claimed as a tax credit. For example, if the cost to install a solar system is $100,000, the amount of income tax businesses pay would be reduced by $30,000. It’s important to act fast on the incentive, as the tax credit will be decreasing to 26% in 2020, 22% in 2021, and 10% in 2022.
Some states provide additional incentives that can help make solar more affordable. Maryland offers the Maryland Commercial Clean Energy Rebate Program, providing rebates to customers who purchase solar, depending on the size of their system. New Jersey offers a full tax exemption from the state’s sales tax for all solar energy equipment. The solar panels, as well as any equipment used to install the system, cannot be taxed under this state incentive.
Owning Solar vs. Acquiring Through a Third Party
Organizations should also consider what solar option is most financially beneficial. The three common options are: purchasing the solar system, acquiring a solar system through a Power Purchase Agreement (PPA), or leasing a solar system through a third party. Though all three options have financial benefits, organizations that wish to own a solar system must have enough upfront capital to purchase the system. A PPA or leasing agreement are great options for businesses that do not have enough upfront capital.
Purchasing a Solar System
Businesses that purchase solar systems are able to take advantage of federal and state incentives, monetize SRECs, and offset federal taxes via the ITC, all while generating clean energy and satisfying their sustainability mandate. Most organizations will need to remain connected to their local utility company to supplement their energy need if the solar array is not large enough to produce all the required electricity for the property or when solar production is low such as overnight and on cloudy days. A solar loan is a great option for businesses that do not have the upfront capital to purchase their system, but still want to maximize the financial incentives. Many institutions offer solar loans, from traditional banks to solar manufacturers. Solar loans work like traditional loans. As the loan is paid off, companies are still able to receive the SRECs, federal tax incentives, rebates, and other state incentives with this option.
Power Purchase Agreements
Power Purchase Agreements (PPA) are another great funding option for organizations that do not have the capital for an outright purchase. In a PPA arrangement, the solar system is on the buyer’s property but owned by a third party that maintains the array and sells the electricity produced by the system to the property owner. The electricity is sold at an agreed upon rate between you and the third party and is generally a lower rate than what the local utility would charge. The rate also may have a fixed, annual escalator, but that must be agreed upon in advance. For example, if an agreed upon rate between parties was $0.05/kWh with a fixed, annual escalator of 2%, payments of $0.051/kWh($0.05/kWh*2%) would be paid during the 2nd year of the contract. When investing through a PPA, SRECs, state incentives, and the federal tax credit are recognized by the PPA provider rather than the property owner.
Leasing Solar Panels
Another option for businesses that choose not to pay the upfront cost to purchase solar is leasing solar panels through a third party. Leasing is like a PPA, because an agreed upon rate to purchase electricity from the 3rd party supplier is defined with a fixed escalator. Similar to a PPA, the third party would also be responsible for maintaining the system and would accept the incentives, SRECs and tax credit. In addition, there may be a monthly fee or a small upfront cost to lease the panels.
In order to take advantage of these great incentives, businesses must qualify for solar energy. To qualify, the last 12 months of utility bills and 15-minute interval data from the utility are typically needed to properly size the system. The next step is to work with a solar developer to decide what options are best for the organization. Once an option is chosen, the developer will create a design detailing how many panels will be installed and in what configuration, as well as the shading of the roof, the direction the sun travels during the day, and the capacity of the system.
A site survey is then conducted to analyze the electrical system, study the shading throughout the day, and to check the exterior and interior condition of the roof. Typically, if the roof is 15 years or younger it will qualify for solar. Older roofs may need to be replaced.
According to the Solar Energy Industries Association, the cost to install a solar system has dropped by 70% over the past decade. Solar has also ranked 1st or 2nd in new installed capacity the last 6 years. Installing solar reduces your organization’s energy costs, improves the financial bottom line, increases the cap value of your property, and helps build a sustainable future.
Andrew Beckett is an Energy Analyst at Evolution Energy Partners and an active participant in the Renewable Energy Practice at Evolution Energy Partners. Contact us to learn about Renewable Energy requirements and projects for your firm.