Commercial solar installations are what gets noticed the most in our industry. It's "bragging rights" to say "We did the largest commercial ground mount in the Portland jurisdiction" (true) or "We installed the largest ground mounted solar array for Washington County's Public Safety Training Center" (also true).
But the question that lingers (when thinking about a solar array for your company or business) is whether or not it's "worth it".
What do you get out of it as a business owner? Well...it seems that the most common thing we see our customers doing is bragging about being "green" or "energy independent".
Both of those points are valid, but if you've read any of our previous blogs, I like to say:
"Math wins MOST arguments" - because it's true
So, I think the real questions we need to be asking ourselves (as business owners) are:
1) Is owning my own power generation WORTH IT? (answer: typically, yes - but not always)
2) What impact can I expect from covering my property with solar panels? (answering this question really indicates your intentions - green power OR financially motivated)
3) What is the Internal Rate of Return of a Solar Project? (this starts the conversation in the fall about CapEx for the following year's projects).
4) What are the tax implications and benefits of a solar installation for my company?
So, let's take these one at a time:
Question 1) Is owning my own power generation WORTH IT?
Answer 1) Almost always, yes, it is worth owning the power generation equipment for your company. Many of our recent commercial customers are farming operations (hops, wine, apples, etc). Each of these ownership groups all had the same goal in this regard: Stop paying so much to the electric company. Their goals ranged from 50% offset to 105% offset of their current electrical bills. So, why is this so important? Well, in general they all recognized that the electric company doesn't plan on lowering their costs to their customers anytime soon. In fact, each project owner knew they could expect to see at least a 7% cost increase each year for the next three year from their electric company (public records for this can always be found by researching rate increases requested by each electric company at the state's public utility commission - the electric company doesn't get to raise your rates without first asking the state for permission). Because of these rate increases, the cost of operation for many of our commercial companies is going to be impacted (negatively - it's going to cost them more to perform the same tasks). Unfortunately - electric rate increases for corporate America are always regressive - meaning that the cost ultimately rolls down-hill to the customers of each respective company. It cost them more to make their widget, and the consequence to the retail side is: a more expensive widget.
By taking control of their energy future, each of these companies have done a very non-regressive thing: they've locked in their electrical costs permanently (at their current size and production capabilities). They re-invested their profits into the company to facilitate two things: 1) cost control of their production and by a consequence, 2) they keep their product pricing (to their retail market) at their current rate - for longer. Other outside influences will always increase the retail cost of their widget (like wages, insurance rates, benefit packages, etc) - but in keeping the fixed costs of production locked down (by owning their own power plant) these companies will have a viable business model for longer than their non-solar competitors who are at the whims of their electric companies price hikes.
Generally speaking - companies who adopt solar are usually doing so for many reasons beyond "being green" - and in doing so, they are able to take their saved money (from not paying electric bills) and grow their company in different ways - hiring more help, increasing advertising budgets, buying upgraded equipment that is more efficient, etc. These companies are progressive in a way that isn't always as obvious as it might seem. This leads us to:
Question 2) What impact can I expect from covering my property with solar panels?
Answer - this truly depends on what your energy demands are. And with that in mind, adding solar to your company's energy portfolio might end up being more environmentally motivated than economically motivated. Your company's culture (publicly) might incline you to add solar to your property even though your total energy offset is less than 2% of your annual consumption. If your electrical consumption is large (like a steel mill or a server farm), then having solar as part of your energy portfolio might simply "check a box" that your corporate leadership wants checked. I've been involved with projects where the power consumption of one facility rivals the power consumption of (literally) 10,000 households - annually. When companies like this install solar on their properties, it makes financial sense (mathematically) as we are building these folks their own power plant - but the true impact towards their operating costs feels a little lack-luster (if I'm being honest). These types of customers are usually "checking the renewable energy box" for their corporate culture and goals. But herein lies the irony - these companies might not be seeing the same percentage of reduction (to their energy portfolio) as different kinds of companies, but when they are saving hundreds of thousands of dollars per year on their electrical costs, it starts to feel a lot more significant, huh?
So, what kind of adopter (of solar energy) are you? Are your goals to prevent rate increases (from the electric company) and in effect - lower your operating costs? Or will this project have an impact on your energy portfolio, but more so be in line with your corporate culture to reduce your carbon footprint (permanently for the power you're producing)? Only you can determine what your motivations are.
Question 3) What is the Internal Rate of Return of a Solar Project?
Answer 3) First let's establish what "internal rate of return" for a solar project MEANS. In general, when you calculate internal rate of return, you are estimating (over time) what amount of "interest" or "yield" your investment will provide you with. For instance - when you buy a new piece of equipment that is more efficient than its predecessor, you're going to run the numbers to see if the costs (associated with buying, installing, and operating the equipment) will result in more profit for the company. Now the fun part: should you buy Brand X or Brand Y (of this equipment)? When you run the numbers for Brand X and then run the numbers for Brand Y, you'll quickly see which of these pieces of equipment will give you the greatest return.
a) Brand X might have a 7.5% Internal rate of Return (when all things are factored in: cost of acquisition, cost of operation, maintenance and repairs, increased productivity, etc.).
b) Brand Y might have a 8.0% Internal Rate of Return (when all of the same things are factored in).
By analyzing these things, it becomes apparent Brand Y is the better investment (even if it is the more expensive brand).
DPI Solar provides this analysis for you in regards to the expected yield (internal rate of return) for your solar project. So, should you choose a solar installation over a different capital expenditure? You've been waiting for it, so here it is: Math wins MOST arguments! When you look at the yield for a solar installation and compare it to something else you're considering (instead of a solar installation), the internal rate of return of each investment should be compared against the other and in general, you should pick the better performer.
In general, the Internal Rate of Return for a Solar Project/Installation hovers anywhere from 13% all the way up to 20%. These numbers are truly exceptional. And they are bolstered by local and federal incentives that help drive down the acquisition costs for these projects - incentives that might not be available for other CapEx projects. This can make solar projects jump to the head of the line for your CapEx planning: some of these incentives are decreasing each month and will soon be gone for good. Consider your internal rate of return for a solar project when you run your numbers and in general, you will be hard pressed to find a higher yield project for your company, regardless of how much of the total energy portfolio your solar project will impact.
Finally, we have question 4) What are the tax implications and benefits of a solar installation for my company?
As of the writing of this article, the tax benefits and cash incentives that come with a solar project are:
1) local incentives - usually shown as cash discounts given by a third party for your project
2) state incentives - some of these are not monetarily quantifiable - like Oregon's tax abatement of Property Taxes associated with a solar improvement.
3) Federal Incentives - currently the U.S. the Federal Government is giving solar adopters a 30% Federal Tax Credit (used against taxes owed by the business) that rolls unused credit forward up to 20 years.
4) 100% Depreciation of the Asset in the tax year it was installed (this is effectively similar to a deduction that you'll use to lower your claimed taxable income).
The big news to come out this year (2022) is for non-profit organizations (ie: 501c3 corporations). This includes state and local governments, charitable, religious, and educational groups. Historically, these groups could make use of the depreciation (it can help them lower any claimed revenues and keep them in "non-profit" status) BUT they could NOT use a tax credit (as these groups don't have a tax liability). As such, these tax credits were typically lost or went unused by these groups if they did choose to adopt solar for their organizations.
Not anymore! The great news for these groups is that the U.S. Treasury will now write these groups a check equal to the amount they would have received in tax credit. These are the types of changes that help move this tech further into adoption. To be clear - this option is only available for the above mentioned groups. If you're not a 501c3 organization, you'll have to go the long way around and use the tax credit to offset your owed taxes at the end of the tax year.
So, this is just a small taste of the what and why a business would invest in solar power, but if you want to learn more, give us a call!