How to mind your bottom line with commercial solar systems
We often hear from business leaders who are curious about installing commercial solar systems. That reflects a nationwide trend toward renewable energy.
Commercial solar installations are growing, and some major companies like Target and Apple are jumping on the renewable energy boom.
But onsite solar systems are only meeting 1% of the demand for commercial electricity, according to the Solar Energy Industries Association. That means there are challenges, as well as plenty of opportunities in the commercial solar sector.
In our experience, all kinds of businesses can benefit from commercial solar systems. We’ve installed panels for a veterinary clinic, a food co-op and manufacturer. And businesses aren’t the only “commercial” groups that can benefit from solar — nonprofits and governmental entities have successfully added panels to their roofs.
In this blog, we’ll break down the reasons why businesses should consider commercial solar as a viable way to produce their own electricity.
Commercial solar costs
Businesses come in all shapes and sizes, and their energy needs differ widely. But the costs to keep the lights on, along with all of their other machines, can be steep.
Commercial entities in Minnesota pay more than $650 a month for electricity, according to federal statistics. In Wisconsin, they pay $590 monthly.
Like residential solar customers, businesses can cut down on those energy bills by installing solar panels. Every kilowatt-hour of energy produced by solar panels on a business’s roof reduces their power bill.
But commercial entities typically pay a lower rate for electricity, which means commercial solar has been less competitive than the residential market, according to PV Magazine. Residential customers in Minnesota pay an average of 13.04 cents per kWh, while commercial entities pay 10.34 cents per kWh.
That means homeowners have a slightly bigger incentive to go solar and offset their power usage. And because businesses use more power than homeowners, the system sizes and upfront installation costs are higher.
But installation costs, when expressed as “cost per watt,” are typically lower when it’s a bigger project. That’s where businesses can leverage economies of scale and commission a large project to get a good value on their installation.
Meanwhile, Minnesota and Wisconsin have laws granting local jurisdictions the ability to offer a financing tool “that allows a property owner to finance 100% of the cost of solar and/or energy efficiency upgrades as a voluntary property tax assessment on a commercial building for to 10-30 years.” It’s known as C-PACE, or Commercial Property Assessed Clean Energy.
Many local governments, including Duluth, Ely, Virginia, as well as Saint Louis, Lake, Carlton and Cook counties, have signed PACE agreements.
No one knows what the future holds. Will we be contacted by alien life? Will the Vikings win the Super Bowl? Good questions.
The same could be said for electricity rates. Any basic return-on-investment calculation relies on the current price of electricity. But if electricity prices increase, solar becomes more financially feasible.
Commercial electricity rates have increased by 4% between 2011 and 2020, according to federal data.
That’s not a large increase, but solar panels can last for two decades or more. With major changes in store for the grid, it may be a good idea to use solar as a sort of insurance policy against any potential rate increases during that time.
Business leaders are likely familiar with demand charges. This is the part of the monthly power that accounts for a commercial customer’s peak electricity use.
“By basing a portion of a customer’s electricity bill on their highest level of electricity demand, the utility is attempting to distribute more of the costs associated with building and maintaining the capacity of its power system to those who use it most,” according to this memo from the National Renewable Energy Laboratory and Clean Energy Group.
The NREL says utilities receive about a quarter their commercial sector revenue from demand charges.
Commercial solar systems can help tame demand charges if the “generation occurs at the same time as the host building’s peak demand,” the NREL explains. So if a factory can schedule its production during the day, when the sun is shining on its panels, it can help.
That may not be possible for every type of commercial entity. The NREL document above shows how a hotel’s peak demand wasn’t reduced because it occurred at night, presumably because that’s when its guests were in their rooms and using power. A school, however, saw demand reductions because kids were gone by the time the sun went down.
The NREL says it’s impossible to predict exactly how much demand charges will be affected by solar, but it offers a process for estimating savings on page three here.
Another major expense for businesses comes from Uncle Sam.
Like residential solar customers, businesses can take advantage of a major federal tax break, at least for the next few years.
That tax break equals a certain percentage of the system’s installation costs. Until the end of 2022, it’s 26%. So if you install a solar system that cost $150,000, your corporate income taxes would drop by $39,000.
That can be a major benefit that helps reduce the upfront costs of installing solar panels. Unfortunately, the tax credit will slim down in the future. In 2023, it’ll be 22%, and then it’ll stay at 10%.
Another tax advantage of solar: accelerated depreciation. This helps businesses recover their solar installations even quicker, according to the Solar Energy Industries Association.
“The Modified Accelerated Cost Recovery System (MACRS), established in 1986, is a method of depreciation in which a business’ investments in certain tangible property are recovered, for tax purposes, over a specified time period through annual deductions,” the SEIA explains.
We’re no tax experts, so make sure you talk to a trusted financial advisor to see how these programs can help you.
Electrical generation remains the second-leading driver of greenhouse gas emissions in the U.S. Coal and natural gas remain major sources of power, even as utilities increasingly turn to renewables like wind and solar.
Businesses have a major role in fighting climate change, as they use a lot of power. By installing solar panels, businesses can show off their commitment to sustainability.
More and more, consumers are concerned with societal ailments, including climate change. According to IBM, more than half of consumers say “environmental responsibility is very or extremely important when choosing a brand.”
Businesses are always looking for ways to improve their bottom line. Power bills can be a major expense for commercial entities, and solar offers one way to offset those costs.
Every business is different and their needs vary. So give us a call or send us a message if you’re interested in solar for a free analysis to see how we can help you.
Read more from Northland’s solar energy experts:
- Solar tax credits and you: What’s in the new climate change bill
- Designing a new home with solar panels: A guide to maximizing your system
- Is my roof good for solar? Find out here
- Hiring a solar panel installer? Here are some tips
- How long do solar panels last? What consumers should know