Over the past decade, privatization of solar energy production has slowly become economically viable. Solar developers are capitalizing on a solar market that has a history of being fragmented and under-serviced. The process of going from an empty roof or vacant lot to an energy producing solar system has become much easier. Large companies like Google, Amazon and Wal-Mart have received positive publicity for going solar, and reducing their carbon footprint.
While being green is enough incentive for some business owners to purchase a solar system, others will be more interested in the cost/benefit analysis. Generally, the financial viability of a solar system rests on three key numbers: (1) the local cost of energy, (2) the useful life of solar panels, and (3) the federal investment tax credit.
Local Cost of Energy
The higher the cost of electricity is in your area, the more beneficial adding a solar system becomes. When the cost of energy goes up, energy-producing (or saving) measures become more valuable. Today, solar energy markets have exploded in the north east and on the west coast. This explosion isn’t a result of these places having more sunny days than the rest of us (that’s especially not the case in the north east), but it’s more the result of the extremely high cost of electricity in these areas. Buying a solar system is simply a good business decision when it saves businesses considerable sums of money on their energy bill.
The Useful Life of Solar Panels
When evaluating solar panels, you want to look at their useful life and their degradation rate. Almost all commercial solar panels have a useful life of 20 years or more. Modern solar panels (produced after 2000) usually have a degradation rate (the rate of declining output) of about 0.5% per year.
That means solar panels installed today will last for at least 20 years, and at the end of year 20, the panels will still generate electricity at a rate between 80% – 90% of when they were new. In addition, most manufacturers provide performance warranties, guaranteeing at least 90% energy production at year 10, and 80% production at year 20.
Simply put, there is relatively little risk in solar equipment or its performance, even over long periods of time. This allows banks and finance companies to give businesses extended terms on loans and leases for solar systems. The extended terms combined with the federal investment tax credit (discussed below) often makes buying a solar system very attractive.
Federal Investment Tax Credit
Under 26 USC § 48, tax payers who purchase a solar energy system are eligible for a tax credit equal to 30% of the cost of the system. This 30% investment tax credit (ITC) is available until December 31, 2019. Beginning January 1, 2020, the ITC percentage is stepped down to 26%, and it drops to 22% after that, eventually base-lining at 10%.
A tax credit is a dollar-for-dollar reduction of your income tax liability. For example, if you have a federal income tax liability of $10,000, and you purchase a $33,333 solar system, your ITC would be $10,000. The tax credit would nullify your income tax liability, and you would owe zero income taxes for 2018. If your tax liability is less than the ITC, you can carry the unused portion of the ITC forward to the next year.
The ITC is a primary factor in making solar systems affordable. To utilize the full value of the ITC, the business claiming it must have a substantial income tax liability to be offset by the ITC. However, businesses with small income tax liabilities can also take advantage of solar energy and the ITC with sale-lease back financing.
In these situations, the bank will purchase the solar system and lease it back to the business. The bank is the solar system owner, and is eligible to claim the 30% ITC. The bank then incorporates the 30% ITC into the lease pricing, giving the business a highly discounted lease payment (the lease payment is based on only ~70% of the cost of the solar system). In addition, these leases are often structured with a Fair Market Value end-of-term purchase option, which will reduce the monthly payment even further. The net result being a solar system that provides 100% of a business’s energy needs, and a monthly lease payment that is less than what the energy bill would have been without the solar system.
Free Energy, Is That Something You’d be Interested in?
Regardless of whether a business pays cash, finances or leases the solar system, the real benefits of solar usually arise after year 10. Solar systems usually pay for themselves by year 10 and the typical solar system will produce reliable energy for 20 or more years. A solar system owner will typically benefit from 10 years or more of free energy. Over a 20 year period, the return on investment, especially in high-energy-cost areas will be very high.
Land Lords and Vacant Lot Owners
While the primary benefits of going solar energy usually go to the business getting the energy, many property owners have turned empty rooftop space and vacant lots into income-producing properties. In areas where energy costs are high, solar developers are eager to place solar systems on any available empty space. Property owners benefit from long-term ground or rooftop leases, and in the process, turn empty space into an additional stream of income (while also reducing their carbon footprint in the process).
Solar Has Gone Mainstream
Privately owned solar facilities have become a viable means of reducing or eliminating a business’s energy bill. Property owners with empty roofs and empty land can turn that empty space into income-producing property leases.
Going solar is no longer only an environmental decision. Solar is now a smart investment, allowing businesses to lock in the cost of energy today, and benefit from free energy tomorrow.