By Daniel O’Brien
What if you could dramatically slash your electricity bills and power your facility with clean, renewable solar energy without spending millions of dollars upfront or navigating the complexities alone?
Thanks to explosive growth in commercial solar installations across the United States, and strong financial incentives powered by legislation such as the Inflation Reduction Act (IRA) of 2022, it’s a reality all companies can tap into.
According to the Solar Energy Industries Association (SEIA), more than 18 gigawatts (GW) of solar capacity have been installed in the U.S. to serve commercial and corporate customers — and more than half of that has come online since 2020. In the third quarter of 2023 alone, the U.S. solar market added 6.5 GW of capacity, representing a 35% increase over the previous year. Prices of commercial installations even declined 6% during that span.
With numbers like these, driven by the IRA’s Investment Tax Credit covering between 30% to 60% of project build costs, it’s no wonder more organizations are committing to source renewable energy and achieve carbon-neutral operations. If you don’t know where to start, you’re not alone: More than 90% of commercial and industrial companies want external support for on-site solar benefits, according to research by PwC.
Once you decide which type of solar contract makes the most sense, you’ll find that securing the power and cost advantages of solar energy for your facility is much more in reach than ever before. Partnering with a provider well-versed in the latest solar advancements ensures your investment aligns with efficiency and sustainability standards.
Turning The Sun Into Savings
Before selecting the best type of on-site solar contract for your business, you first must understand your options.
In a traditional purchase agreement, you pay to own the solar system outright and take responsibility for upfront capital expenses and ongoing operational costs. Your company will hire a firm, or firms, to handle the system’s design, procurement, construction, and annual maintenance.
If you’re seeking to avoid a major capital outlay along with ongoing operational responsibility, but still want solar power’s environmental and financial perks, you can opt for a power purchase agreement (PPA).
If you’re seeking to avoid a major capital outlay along with ongoing operational responsibility, but still want solar power’s environmental and financial perks, you can opt for a power purchase agreement (PPA). In this model, a solar developer develops, builds, finances, owns, and operates the solar array installed on your property for a term length between 10 and 25 years. You pay for the clean electricity generated at a fixed, predetermined rate per kilowatt-hour (kWh) that is typically lower than the market price for electricity. After the initial term ends, you may extend the contract, purchase the system, or have it removed.
A similar option is an operating lease agreement. Here, a developer still installs a solar system on your property, but you lease it and make a set payment regardless of how much electricity the system generates. While the developer still owns and maintains the project, your savings are more predictable, given the constant terms of the lease. This agreement also ranges from 10 to 25 years, with end-of-term options comparable to a PPA.
You can also opt for a community solar project. This generates electricity that’s shared through a subscription-based model. It can be located on or off site, and you can finance and build it yourself or offload that responsibility to a developer. Multiple organizations (and households) sign up to receive electricity from the system. Contracts tend to be for shorter terms and more flexible than an on-site PPA or lease. You can also rent a portion of your property to a developer who builds the community solar project, then use the income from that land lease to pay for a subscription, add as net operating income, or use as additional capital for other projects on site.
Another option for facilities to support renewable energy without onsite installations is a Virtual Power Purchase Agreement (VPPA), which allows them to contract solar power from large, offsite solar systems. This is suitable for companies looking to invest in renewable energy without the need for physical infrastructure on their premises. These contracts hold a varied risk, as most are contracts for “differences” in your current wholesale rate and project development and construction lifecycles are long. Likewise, these contracts are less flexible than community solar contracts.
There are significant nuances to these different models, and specific terms can often be negotiated with project developers. However, understanding how each approach aligns with your company’s goals and facility’s operations will help you make the best decision regarding your energy transition. Understanding financial incentives, including solar renewable energy certificates (SRECs) and tax credits, while staying informed on regulatory changes, can significantly boost your solar project’s economic viability.
Clarifying Your Solar Priorities And Property Pplans
With the range of solar options now clear, deciding which agreement structure best meets your needs requires insight into your facility’s operations, budget restrictions, and short- and long-term plans.
Start by reassessing your reasons for considering solar power in the first place and evaluating how your building consumes energy. If you’re running an industrial warehouse with large, open spaces, with a low electrical load you’re probably pivoting to solar for the financial return instead of emissions reductions. If you’re running an office building or a retail store, you may have sustainability goals you’re trying to reach — or may simply wish to be a model for the community.
Every executive wants to maximize savings, but determining which financial targets you want your solar project to accomplish will guide your decision.
Consider how long you intend to own or manage the building, too. Will you be switching tenants anytime soon? Will growing production needs require the facility to be expanded, or are there any other renovations in store? The future of your property and who’s working inside it will also determine which type of solar project offers the greatest value.
Every executive wants to maximize savings, but determining which financial targets you want your solar project to accomplish will guide your decision. If you’re seeking budget stability, you will want a to hedge your electricity costs and to not be subject to variable terms. If you want to increase your net operating income (NOI) and property valuation, a community solar project that includes a ground or rooftop installation may be more appealing.
You must also think about how much you wish to reduce your carbon footprint and what portion of your energy supply you want to come from renewables. Once your priorities are clear, you can focus on selecting the right contract structure. The model that can fulfill your most critical facility, economic, and sustainability needs will win out.
A New Opportunity For Energy Efficiency
As with any investment, there are inherent risks in opting for an on-site solar project — but you can mitigate them if you’re diligent. Ensuring your contract includes provisions for comprehensive monitoring and maintenance is crucial for optimizing the performance and longevity of your solar installation.
Weather variability, underperforming equipment, or even unrealistic targets create the potential for your system to deliver less electricity than anticipated. Likewise, changes in regulatory frameworks at the state or national levels could disrupt the financing mechanisms, tax credits, net metering, or other incentives you may rely upon while planning your project. Remember, too, that installation and construction can impact facility operations by limiting access, reducing parking spaces, or simply being noisy.
Those reasons, among others, are why so many respondents to PwC’s survey want a trusted partner to help them maximize the advantages of on-site solar generation. Combining that professional insight with your requirements and constraints will help you get the right type of solar system off the ground.
Once you sort through the spectrum of agreements and choose the one that best meets your facility’s needs, you can look forward to a bright future of energy benefits for years to come.
