By: Pivot Energy
May 27 2021
Companies worldwide have started to recognize the numerous benefits that solar energy brings: a decrease in long-term facility costs, access to market incentives, and an increase in property value, to name a few. Therefore, it is not about deciding whether or not to install solar for many facility managers but instead knowing the right time to do so.
It might be tempting for facility managers to delay installing solar panels today in order to take advantage of the sector’s growth and inevitable cost reductions down the road. In addition to technological advancements, policy innovation has paved the way to take advantage of solar without ever needing to physically install panels on properties. Community solar is a shining example of this – commercial businesses across 40 states in the U.S can subscribe to a portion of an off-site solar project’s output without actually having to install a solar energy system on their facility.
Understandably, this constant technology and policy development cycle can make it confusing to determine when is the right time for a business to choose solar. However, the solar technology industry is just like any other; there are periods of high growth and innovation, and slowdowns at different points in time. This article aims to provide facility managers with a better understanding of why it is financially advantageous to take advantage of solar now.
The solar technology industry has experienced unprecedented growth in the past decade – and as the market has expanded, technology has improved, and costs have dropped considerably. Ten years ago, the average power output of a standard module was 290 watts. Today, we can anticipate an output of at least 345 watts at a mere one-tenth of the price.
The graph below clearly shows this steady increase in solar module power output over the last ten years. Driven by an expanding market and high manufacturer competition, solar modules have never been more powerful than they are today.
If the past trends of innovation in the solar industry are extrapolated to the next ten years, it may appear that it will be much more cost-efficient to consider solar in the future. However, this is not necessarily the case for all commercial businesses across the globe. Due to expiring solar incentives and limited community solar deals, it is best to minimize the cost of installing solar by starting the process today.
In the U.S, facility managers are at risk of running out of time to maximize the solar Investment Tax Credit (ITC), the country’s most generous solar incentive. The ITC is a federally mandated policy that allows companies to receive a one-time 26 percent tax credit for installing solar. The ITC is widely credited with contributing to U.S. solar growth, but it will soon be much less beneficial for anyone going solar in the future. It is scheduled to step down to 22% in 2023 and permanently drop to 10% thereafter.
Let’s say a solar energy system costs $100,000. If the installation process starts before 2022, the company could deduct $26,000 from its corporate income tax. If the same installation is done in 2023 or 2024, the tax credit would be $22,000 and $10,000, respectively—a significant decrease from today’s savings.
To take full advantage of the ITC, it is best to act as soon as possible. While it seems like there is still considerable time until the ITC steps down, there can always be unanticipated project setbacks, like getting permits from the government, that delay construction one or more years.
Even cash rebates that were very common a few years ago are running out of funding. Rebates are typically offered by investor-owned utilities and state or municipal governments, and they can reduce solar system installation costs by another 10-20 percent. They are generally available for a short period and expire once solar capacity in the region has been filled. Hence, as the number of solar projects across the U.S has been growing, the availability of rebates has been decreasing.
For facility managers outside of the U.S, unfortunately, government solar incentives are also slowing down. For example, China—a country that accounted for 50 percent of the world’s total solar demand until 2017—significantly reduced its feed-in-tariff policy¹ for solar projects. When feed-in-tariffs were first enacted in China, this incentive led to incredible growth in solar installations across the country, but came at the cost of a high deficit for the government. Therefore, since 2018, lawmakers have placed stricter measures on which projects can qualify and also decreased the value of the feed-in-tariff. In November 2020, the French government also indicated that it plans to reduce its feed-in tariffs for certain solar installations in the future.
Companies can still benefit from lower electricity expenses by subscribing to a community solar project. Community solar is preferred by businesses when installing onsite solar may not be an option due to a myriad of reasons, like being on a shared property, having a curved roof, or not having the budget to pay for the installation costs. Commercial entities can save up to 10 percent on their monthly electricity expenses by subscribing to community solar.
Right now, the concept of community solar is quite new, so dozens of solar developers are offering competitive deals to attract new subscribers. As the community solar market matures, these deals will naturally become sparser. Additionally, similar to one-off commercial or residential solar installations, states have allocated special financial incentives for community solar projects. These incentives can also be expected to go down as the capacity of projects around the country fills up.
Lastly, many states have maximum limits on the number of subscribers each community solar project is allowed to enroll. Companies that are unable to install solar panels on their properties physically are increasingly recognizing the flexibility and ease of subscribing to community solar. Therefore, the earlier a facility subscribes to community solar, the more likely that it will receive a competitive price or additional benefits today.
As mentioned earlier, one of the key advantages of installing solar is the long-term financial benefits. Thanks to a policy framework known as “net metering,” solar energy system owners across 41 states in the U.S (plus Washington, D.C., U.S Virgin Islands, Puerto Rico, and American Samoa) can send the excess energy produced by their system to the grid. In exchange, they receive credits from the utility that can lower their monthly electricity bill.
While electricity expenses are one of the most substantial budget line items for facility managers, they are expected to rise 2-3 percent every year. While this may not seem like a lot now, this can cumulatively become significant over the long run.
Therefore, the opportunity cost of waiting to install solar later is significant. Delaying procurement of solar energy means continually paying your utility when you can otherwise turn this expense into an asset. After all, this is no return on monies paid to your electric company.
Some facility managers might be thinking that it is best to delay getting solar now to wait for more efficient and advanced solar technology to become available. The hope is that the technology will produce a higher output of solar energy, thus will lead to a more significant increase in electricity savings. While there is no question that solar efficiency will continue to rise in the future, commercial access to these technologies can be delayed due to policy issues and regulatory hurdles (tariffs on foreign panels, approvals from the government, etc.) Today’s upgrades are incremental and it’s important to keep in mind a watt is a watt. Sure you can get the newest solar module next year, but that translates into another year of lost operational expense savings.
The growth of solar power and the technological innovation in the sector did not happen in a vacuum. Many factors played a role, such as tax incentives, rebate options, special funds from governments, and more. The value of these incentives is expected to decrease or expire as the cost of solar becomes more comparable to other traditional energy sources, such as coal and/or natural gas. The impact this will have on the rate of innovation in the sector is still unknown, so it is better to take advantage of today’s momentum and benefits.
¹Under a feed-in-tariff framework, the government places a fixed price for every kilowatt hour (kWh) produced from the solar energy system for a specific period of time. The value of the price is competitive enough that businesses that install solar are able to receive credits at or near the retail price of electricity.