The Critical Step in Making the Business Case for Commercial Solar

Posted on Oct 10 2012 - 8:10pm by Brent Hardy

Mini Storage, Storage Facility, Storage Unit, Mini Storage

It can be intimidating to begin the process of convincing the decision-makers at your business that it’s time to add solar power. However, as someone who’s gone through the process, I can tell you that if you’re successful, the end results are well worth it!


So, how do you begin? That’s a good question with a long answer. I’ve noticed that several websites, such as Triple Pundit and Green Impact, have recently published summaries of a new white paper that covers five steps to take in order to make your case for solar. The free white paper, created by Alta Energy, is called “Making the Business Case for Commercial Solar.”


Instead of offering you a summary of the white paper, I’m going to explain which step I believe is most critical for a successful solar project. And, of course, I’ll share my thoughts about all of the steps, just not in numerical order!


First, I’d like to share a bit of my background with solar to help you understand where I’m coming from. After convincing our executive leadership team to invest in solar power, I directed the efforts of our financial, operational and legal teams to help make solar a reality. It’s fair to say that my job as VP of Facilities Management at Extra Space Storage took on a whole new dimension as I not only helped lead the solar implementation efforts across the organization, but also focused on solar analytics and procurement. We’ve come a long way since we first added solar power to test properties in 2010. With the help of our solar partner, 1st Light Energy, we’ve completed solar installations at almost 100 properties in six states, including New Jersey, Massachusetts, Maryland, California, Hawaii and Ohio. We plan to continue adding solar power to more properties.


So, now that you know what I’ve been up to, let’s get into the Alta Energy white paper. Alta Energy provides solar analytics and procurement. In short, they match commercial solar customers with their “best fit” solar vendors. Their white paper offers five steps for making the business case for commercial solar:


  1. Understand your corporate goals.
  2. Determine the criteria for a viable solar project.
  3. Understand the choices involved in commercial solar projects.
  4. Analyze your portfolio to identify the best projects.
  5. Present your recommendation to company decision-makers.


Analyzing Your Portfolio (Step Four): This Is Where You’ll Win or Lose


While all of the steps for making the business case for commercial solar are important, step four is the one you must really get right to have a successful solar project. If you don’t carefully select the appropriate properties for your solar adventure, you may not be successful when it comes to solar as a financial investment. As an environmental investment, solar is often successful when appropriate meteorological information is considered before installation. However, many businesses, including Extra Space Storage, will only install solar panels when it makes both financial and environmental sense.


For a successful solar project, you must determine from a financial standpoint which properties will make the most sense for solar. To achieve this important task, you have to perform some analytics with the best data possible. Two areas are critical for including in your evaluation: utility-specific rate data and incentives at the federal, state, local and utility levels.


While the availability of incentives is crucial, utility rates also play a large role in determining where to add solar power. In fact, utility rates can sometimes be the single most important deciding factor. In the state of Hawaii, it made financial sense for Extra Space Storage to install solar panels on properties even in the absence of state incentives for solar. The reason: high utility costs!


We were paying around 36 cents per kilowatt-hour (kWh) for power in Hawaii, compared to about 17 cents per kWh in New Jersey. Neither utility rate is cheap, but the extremely high utility rate in Hawaii was the main deciding factor for adding solar in that state. In New Jersey, we added solar power because of the robust state incentives and the moderately high utility rate. In each of these cases, the return on investment, or ROI, made the choice to add solar power a no-brainer.


Determining Criteria (Step Two): Make Sure To Consider ROI


While picking the right properties for solar is the most critical step, you can’t make that decision without first knowing your minimum acceptable ROI. And considering ROI is a big part of step two: deciding what criteria will affect whether your solar project receives a “go” or “no-go” decision. From a financial standpoint, the most important criterion you’ll consider is ROI. While there are certainly other criteria to consider when making a decision to recommend a property for solar, your ROI goal should always be top-of-mind. After all, most businesses don’t like to lose money!


If you select a good solar vendor, you won’t have problems creating solar power because you’ll have chosen a good location with adequate sunshine for the project, and you’ll have a trusted partner to help with any needed repairs. However, abundant sunshine doesn’t always mean you’ll achieve your desired ROI. The cost to add solar power must be weighed against ROI and length of time it takes to achieve payback.


Incentives and utility rates will have the most impact on achieving the desired ROI and payback. To find out whether it makes business sense to add solar to a property at Extra Space Storage, I use very specific factors to determine ROI, including data on energy consumption, energy rates, cost of installation and solar incentives.


For each of the nearly 100 properties where we’ve installed solar, the “go” decision was made after the ROI evaluation showed that adding solar to the property would yield a good ROI with a payback of less than 10 years. Unfortunately, it doesn’t make financial sense to add solar power to every Extra Space Storage property. Yet, if incentives remain strong and the cost of adding solar continues to decline, it may make financial sense in the future to add solar power in areas without high utility costs.


Understanding Your Solar Choices (Step Three) Is All About Homework


Understanding the choices involved in commercial solar projects is no easy task, but you must immerse yourself in all things solar in order to make an effective business case for commercial solar. The more you learn, the better you’ll be able to communicate your solar plan to company decision-makers.


Not only are there four different ownership structures for a solar system, but also depending on where the system is installed, the incentives offered and local permit processes will vary. Of the four ownership structures available for solar systems, the owner-owned or owner-financed options are best for utilizing the various tax benefits that come with ownership of the system. However, for companies with less capital to invest, a leased option may be attractive. With the leased option, the lessor captures the incentives for solar installation. There’s also another option, described in the white paper as “perhaps the least-complicated model.” That’s the power purchase agreement (PPA), which requires no capital expenditure. Nonprofits and schools without tax liability can’t take advantage of incentives, so a PPA is the best option for them.


Obviously, ownership structures are closely tied in with the ability to take advantage of incentives. And when it comes to incentives, there’s a lot to know! Venture into the world of solar incentives by visiting DSIRE, the Database of State Incentives for Renewables & Efficiency.


Also, don’t forget to check into programs offered by your local utility company. Commercial solar installation helps out local utility companies, so they like to help you out in return. So, just how is solar power helpful to local utility companies? As your system produces excess solar power, it gives that power back to the grid, helping to deliver needed energy to your neighbors during the day! That ability to get the power where it’s needed most helps utility companies avoid blackouts.


Finally, no talk about incentives would be complete without mentioning the growing popularity of solar renewable energy credits (SRECs). These credits represent a megawatt hour of solar energy produced, and can be traded or purchased. New Jersey isn’t the only state where you can take advantage of these energy credits, but the state is a leader in SRECs. Learn more about their program at NJ Clean Energy.


Understanding Your Corporate Goals (Step One) Is Getting to the Heart of Your Company


At Extra Space Storage, we’re committed to our investors in a financial sense, but we know that they also care about the carbon footprint left behind by our company. After all, it’s not all about money!


When we select the best properties for adding solar at Extra Space Storage, the business case is clear in the financial sense. Yet, how does adding solar power fit into our corporate goals? Before we started adding solar power in 2010, Extra Space Storage investors often asked me what we were doing as a company to make sure we were taking care of the environment. Obviously, environmental stewardship is an important corporate goal.


What was I doing to make Extra Space Storage a more environmentally responsible company? I oversaw retrofits to increase our energy efficiency, which included energy-saving lighting upgrades and daylight harvesting. Yet, I knew that solar power was the next step. After months of research and preparation, I had a detailed  analysis that convinced the senior leadership team to add solar power to some facilities. The success we’ve seen means we’ll keep adding solar power when it makes both environmental and financial sense.


To make the most effective case for adding commercial solar, you should understand why your company is, or should be, interested in adding solar. Investor relations may be a primary motivation to add solar, or it could be that for your company, promoting an environmentally sustainable image is most important. For other companies, the financial aspect will be the biggest selling factor.


Whatever the main corporate goal that motivates the addition of solar power, companies that go with solar will gain greater control over their energy expenses, eliminating the need to worry about future utility rate increases. And what company doesn’t like stability?


Presenting Your Recommendations (Step Five) Isn’t a Snap, but Hang in There


As the final step in making the business case for commercial solar, you’ll present your recommendation to company decision-makers. While I’d like to say that you’ll have only one meeting, and then everyone will sign on and shake your hand on a job well done, that probably won’t happen.


You’ll likely need to spend several months convincing decision-makers to go with your solar power plan. For me, it took me about six months to build the case with our executive team. There are various reasons it may be difficult to convince decision-makers to go solar, but I suspect that most often, the primary cause is the misconception that solar power isn’t affordable. You have to show just how affordable solar power can be.


Solar Power Reality at Extra Space Storage


In reality, solar power makes good business sense precisely because it is so ultimately affordable. We’ve made smart decisions about where to add solar power, and the result is that we’ve achieved net zero consumption at some properties. That means that we give enough electricity back to the grid during daylight hours to make up for the electricity we use at night. As a result, we’re able to avoid receiving bills from utility companies at some locations.


With reduced energy costs, and taking advantage of available incentives, our payback for adding solar will be less than 10 years. After that, we expect the solar panels to keep working for us. They’re warrantied for 25 years, but may last for up to 40 years total!


Today, solar is a big part of our corporate responsibility program. It fits with our image of a company that’s “going green,” but it also makes financial sense. Overall, adding solar power makes good business sense for Extra Space Storage because of the resulting reduced utility costs and because it helps us reduce our carbon footprint.


It has been exciting to add solar power to so many of our facilities throughout Extra Space Storage. Making solar power a reality for our business wouldn’t have been possible if we hadn’t carefully built the financial case to support the decision. Although it’s exciting to have solar in our organization, at the end I know it meets our goals because we carefully selected properties where solar makes sense (that critical step 4), enabling us to achieve an excellent ROI for solar projects, while also benefiting the environment.


Which steps do you consider most important for making the business case for solar power? Have you analyzed your portfolio to see which properties are a good fit for solar?


Brent Hardy