Why Shouldn't U.S. Manufacturers Wait to Go Solar?

Last year, the U.S. commercial sector installed just over 1 gigawatt of solar capacity. This added solar wasn’t just installed by California businesses and public entities. In fact, Massachusetts, New York, and Maryland joined California as being the states with the largest increase in solar adoption.

Since 2010, U.S. businesses have installed more than 32,000 solar energy solutions. Why? It’s good business. For most manufacturers, the burden of energy cost fluctuations can be alleviated with a solar energy solution. Cutting energy consumption through energy efficiency first and then implementing a solar energy generation solution to eliminate the remaining energy need is the recommended approach. Energy efficiency upgrades take care of cutting as much as 20%, while solar takes care of the rest.

New Age Industries Aerial
New Age Industries, Southampton, PA. 1MW solar roof-mounted array.

New Age Industries in Pennsylvania is a good example of combining energy efficiency and solar. The plastic products manufacturer replaced its lighting to high efficiency fluorescents, is using high efficiency compressors and upgraded windows, among other energy conservation and waste reduction efforts. New Age’s one megawatt (MW) solution, installed by Borrego Solar in 2011, provides enough energy to meet almost 45% of the manufacturers’ energy needs.

Solar makes more economic sense than ever before—especially for companies with big energy appetites. Here are five key reasons why now is the best time ever to invest in solar:

1. The Step Down of the Federal Incentive

The federal solar investment tax Credit (ITC), which has been in effect since 2006, offers solar energy solution owners a 30% tax credit for the first five years the solution is in operation. Improving the economics of solar for companies with big tax liabilities and for institutional investors looking for tax credits, the incentive is guaranteed and available to any solar installation in the U.S., regardless of location and size. Unfortunately, the ITC will be reduced from 30% to 10% at the end of 2016.

So what’s the urgency? The drop in the ITC to 10% will have a significant impact on the economics of solar, and it’s something the solar industry, Wall Street, and rate payers are preparing for. In order for a project to qualify for the full 30% ITC, businesses need to make the decision to go solar now. Ideally a system would start construction during the summer of 2016 to make the cut off. However, the rush to get installations complete and online by January 1, 2017 will impact the availability of quality solar integration resources, and projects that enter the queue too late in the game, might get pushed to 2017 and miss out on the more lucrative ITC.

2. State Solar Friendly Programs and Incentives are Temporary

Almost every state has programs in place to help residents invest in solar. These policies help improve the economics of going solar, make it more accessible within certain markets, or do both at the same time. California, Massachusetts, New York, and New Jersey are states that have made solar development a core objective and have the policy programs and incentives in place to prove it. That said, most state programs are temporary because they were designed to jumpstart the market and, in some cases, use limited public funds to incentivize early adoption of solar technology.

Businesses considering solar should look at their own state policies to see if and when they are set to expire or reach their limits, because without them, returns might be slightly less lucrative.

3. The Declining Price of Solar

The price of solar energy has fallen dramatically over the past few years. The average price of a completed commercial photovoltaic (PV) project in Q2 2014 dropped by more than 45% since 2012. The price of electricity rates continues to rise and experience volatility. However, the price of solar isn’t going to continue to fall like it has over the past few years.

The industry has made big strides in technology cost reduction and is now focused on lowering the balance of system costs, which now make up around half the cost of an installed system. However, the costs of raw materials are starting to rise as the demand for solar increases. Additionally, some foreign solar panels are now subject to trade tariffs, which significantly increases one of the major component costs of a solar energy system.

The chart below shows the inverse relationship between the increase in solar capacity installed, and the decrease in average commercial system price over the past few years. As the solar industry has matured, so too have the operations and processes of its players, but you can see the average system price is starting to level out.

Source: United States Energy Information Administration

4. Retail Rates for Electricity

The increasing costs and inherent volatility of electricity prices are an ongoing concern for businesses, and one that solar can help reduce if not eliminate all together. Average electricity rates for the commercial sector have increased more than 20% in the past 10 years (see the chart below), moving from $0.08/kWh to more than $0.10/kWh. This is an average across the U.S., so in some markets where the cost of electricity is noticeably higher, the swing has been even more dramatic. Given that the commercial sector consumes more than 1.3 trillion kilowatt-hours each year, this price increase has resulted in tens of billions of dollars in additional utility bills, according to GTM Research and SEIA’s Solar Means Business Report.

By investing in solar, manufacturers can secure a set price for their energy with zero fuel costs using on-site generation. When designed correctly, solar can also often lower demand charges too—a common fee for commercial consumers. And in the case of a third-party financing the system, the cost of electricity to the customer will be at, or more often below, grid rates.

Increasing Energy Costs

5. Available Financing 

Approximately 68% of all solar installations in 2014 used a power purchase agreement (PPA), which eliminates the upfront costs of going solar for the buyer. PPAs allow manufacturers to buy energy from the owner of the installation for a price that is lower than (in some cases equal to) utility retail rates. The third-party owner finances the installation and recoups their investment through the sale of the clean power to the host customer.

Investors have been attracted by the economics of owning a solar energy system, and in turn securing businesses to buy the energy in the form of PPA financing, in large part because of the ITC. Typical PPA owners are banks and institutional investors with a tax appetite and need for the tax credits that come with the ITC. With the impending reduction in the ITC at the end of 2016, investor confidence in markets that are still maturing is expected to falter, and more and more pools of capital that have been previously set aside for solar projects will dry up.

Take Away

If your company uses a lot of electricity, now is the time to look into solar. Along the way, you might learn that your facilities aren’t suited for the technology, or that the your state isn’t currently primed for solar, but at least you’ll know you’ve done your due diligence.

You might find solar is a relatively simple arrangement. With the various technologies and financing solutions available in the market, it’s quite versatile and there’s probably a package that will work for you. But if you are going to increase your chances of meeting an aggressive IRR or ROI hurdle, and ensuring success, start the process now and get in the queue before it’s too late.

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