Self-storage companies can experience many financial downturns and unanticipated costs. Decreasing residential rents, increased competition, and uncertainty in demand can lead to a lot of variability in the business. For example, even though COVID-19 drove up demand for self-storage businesses, the national average price of storage units was down by 4% in June 2020 compared to the same month the year before. With long-term demand uncertainty due to the pandemic, self-storage owners offered lower rates to attract tenants.
To protect your self-storage company against these risks, it is important to consider financial resiliency. Financial resiliency measures a business’ ability to withstand a crisis or an economic slowdown. A company that is financially resilient is able to ride out uncertainty instead of being overcome by it. One way your self-storage company can become financially resilient is by going solar.
There are two methods customers typically use to purchase solar panels: purchasing the system upfront or entering a Power Purchase Agreement (PPA). If your business decides to go the purchasing route, you can directly receive the federal solar Investment Tax Credit (ITC) and other solar energy incentives. This means you can pocket the extra money instead of having a solar company monetize it and pass it through as a lower electricity cost. Purchasing a system can sometimes simplify the process of installing solar by removing the need for financing or additional parties that may require credit checks, however, you may need to manage incentive applications or arrange long-term operations and maintenance.
A PPA is a framework whereby a commercial or residential customer agrees to buy electricity from an energy provider. In return, the provider installs solar panels on the customer’s property and sells the energy produced by the panels to the customer at a predetermined rate. This rate is fixed over the length of the contract (generally 20-25 years) and is typically lower than the rate the customer is currently paying to their utility. After the contract expires, the customer has the choice of either renewing, purchasing the solar equipment, or removing the system all together.
Electricity cost uncertainty
The ability to lock in the electricity rate is advantageous because it offers the customer price certainty over the long term instead of the risk of inflating energy prices. In the past decade, utility prices in the U.S have risen by a total of 15%, or approximately 0.2 cents per kilowatt-hour (kWh) each year. While this may not seem like a lot, it adds up over time. For example, if your self-storage property uses about 2,000 kWh of electricity per month, your utility bill now is likely much higher than what it was 10 years ago.
The trend in rising utility rates is predicted to continue. According to the Energy Information Administration (EIA), the electricity price is going to increase at least until 2040. Changes in the rate reflect fluctuations in energy demand, fuel costs, and availability of generation sources. Prices are anticipated to rise due to increased demand from hotter temperatures, higher prices for generation, and increased fuel costs over the next few decades. New generation capacity is also needed to meet this growing demand, potentially causing further price increases to be passed through to residential and commercial customers.
Solar as an energy cost hedge
What all of this means is that if your self-storage facility chooses to install solar through a PPA, your electricity rate will likely go down instead of up the next 15 to 20 years. In many markets, solar energy is available at an immediate discount to grid power, plus the rate is locked in over the long term. This is all possible without having to invest in the system – a unique opportunity for property owners.
Even if you were to purchase a system outright, the typical payback period is 5 to 12 years, depending on install complexity and the cost of grid electricity. The result is a significantly lower electricity bill for the remainder of their solar energy system’s life. The savings each month contribute to your return on investment (ROI) for the solar installation costs.
Figure 2: Electricity savings with and without PPA over a 20 year period
Reducing risk with solar
Circling back to the idea of financial resiliency, solar PPAs can be a great way for your self-storage business to reduce risks and hedge rising energy prices. By locking in your energy prices, you are simply enacting a financial resiliency measure to protect yourself over the next two decades. It also frees budget space for more important aspects of your business, such as capital investments, customer services, or new employees.
For many companies, the motivation to install solar goes beyond emissions reduction and energy independence and instead focuses on cost benefits. Commercial customers in the U.S can now leverage the unique PPA framework to adopt solar energy with no upfront cost. Additionally, if commercial customers decide to install the system with cash up front, they can maximize their benefit from the ITC. The result is a predictable electricity rate so your self-storage business can protect itself from cost uncertainty.
That’s financial resiliency.
Ask an Expert
Deciding on a renewable energy strategy for your self-storage company can be challenging. The Pivot Energy team is ready to support your business in choosing what approach is best to achieve your solar goals. Reach out to speak with a member of our team.
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