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Solar Projects: How Cost Effective Are They?
January 10, 2019
December 2018 Edition: Solar Projects: How Cost Effective Are They?
Solar continues to become more affordable year over year. Financial incentives, decreased prices and financing options are the main motivators. If your business is considering solar, in this edition of Customer Insights, we’ll explore these motivators and more to help you in your decision making process.
Solar Projects: How Cost Effective Are They?
Solar use has been increasing year over year and continues to become more affordable. What’s driving this growth? Financial incentives, decreased prices, and financing options are the main motivators. There are a number of options available to finance an onsite solar project, including those that don’t require upfront capital. We’ll explore those including other options such as off-site solar structures.
Solar Market Trends: Growth and Affordability
Increased solar energy use has been gradually transforming the electricity industry. During the first quarter of 2018, the U.S. installed 2.3 gigawatts (GW) of solar photovoltaic (PV) capacity to reach a total installed capacity of 58.3 gigawatts (GW)—enough electricity to power 11 million American homes. Total installed U.S. PV capacity is expected to more than double over the next five years, and by 2023, over 14 GW of PV capacity will be installed annually. California has nearly half of all U.S. solar generating capacity, followed by Arizona, New Jersey, and North Carolina.
What’s the reason behind the continued growth in solar energy and its improved cost effectiveness? Tax incentives, decline in solar system prices, and technology have made solar more cost effective for businesses to consider investing in.
The federal solar Investment Tax Credit (ITC) has played a key role; allowing solar owners to reduce their federal income tax liability by 30% of the cost of their solar energy systems. Congress renewed the ITC in 2015, and the Trump Administration tax reform bill from December 2017 preserved it.
Solar system installation costs have steadily declined primarily due to decreased cost of PV panels, the main component of solar systems. Today’s wholesale price for a solar panel is about $0.35-0.40 per watt (W), compared with $0.75/W in 2015 and $4.00/W in 2008. During the past ten years, solar installation costs have dropped by over 73%.
Advancements in technology have contributed to lower construction costs. As a result of innovations involving less racking, wiring and installation hours, solar PV systems have become less complex thus less expensive.
To encourage the continued expansion of solar, federal, state and local governments and utilities have offered tax breaks and financial incentives. Key incentives in effect are:
- Solar Investment Tax Credit: The Investment Tax Credit (ITC) is a U.S. federal corporate tax credit that is applicable to residential and commercial properties. This incentive has been the catalyst for the growth in solar and its popularity as it provides a 30% tax credit on the total cost of a solar system. The ITC is set to remain at 30% through 2019, and then will decrease incrementally through 2021 before remaining at a permanent rate of 10% thereafter. Click here for more information on the ITC.
- Net Metering: Net metering is a solar incentive that allows you to send back to the grid any excess solar electricity generated by your solar system. By net metering this excess electricity, your utility will provide credits towards your next bill. To learn about the net metering policies in your state, the U.S. Department of Energy maintains a great resource at www.dsireusa.org
- Solar Renewable Energy Certificates: Renewable Energy Certificates (RECs) are tradable commodities representing the environmental attributes associated with energy from renewable sources such as sunlight, wind or water. In some markets, RECs generated by a solar system—known as Solar Renewable Energy Certificates (SRECs)—can be traded on the open market or sold via a contract for a lump sum or an annuity payment. If your project is in a qualifying area, solar energy system owners are entitled to receive one SREC for every one megawatt-hour (MWh) of electricity produced.
On-Site Financing Structures
There are two ownership structures for business customers in the solar market—direct ownership and power purchase agreements. When considering a solar system project, it’s important to understand available financing structures. Let’s look at three financing structures:
- Direct Ownership
When you finance the system yourself, you purchase the solar system outright and assume all costs and risks associated with its operations and maintenance. You retain all the associated energy offsets and behind-the-meter savings as well as the federal and (and in rare cases, state) tax credits and tax depreciation benefits. Click here to read more.
- Power Purchase Agreement (PPA)
Third-party ownership through a PPA is a medium- to long-term agreement in which you commit to clean energy purchases without incurring the capital expense. With a PPA, you can lock into a fixed electricity price for the solar system’s production during the contract term. Click here to read more.
- Leases: Capital versus Operating
A solar operating lease is similar to a PPA, but instead of paying for the power generated, you are “renting” your system. In other words, you would pay a fixed monthly lease payment during the term of the contract. Under a capital lease, the lessee acts as the owner of the solar asset for tax purposes; the lessee is able to capitalize all the tax and depreciation benefits. Under an operating lease, the lessor owns the solar system and lessee makes monthly lease payments (expenses are off the lessee’s balance sheet). The ITC belongs to the lessor. This lease option is best for businesses that cannot utilize the tax and depreciation benefits.
With an off-site solar option, the electricity generation can be delivered to your site from a remote solar facility. Below are off-site options to consider for your business.
- Virtual PPA
A virtual PPA (VPPA) is a financially-settled arrangement available in regulated markets. Under a VPPA, you enter into a contract with a solar project owner to pay for the solar electricity generated by the project at an agreed upon contract price. The project owner then sells the generated electricity into the local wholesale market on a merchant price basis. This market sale of generation, combined with the market purchase, acts like a financial exchange—creating a virtual PPA. Click here to read more.
- Community Solar
Community solar has emerged as a simplified off-site solution for those customers that are seeking solar energy but are unable to do so due to location or financial issues. Community solar involves building off-site solar arrays that produce enough electricity for dozens or even hundreds of homes and/or businesses. Households and businesses can become subscribers where they receive credits on their utility bill for their respective share of electricity produced. This bill crediting system is known as virtual net metering (VNM).
Businesses, municipalities, and nonprofits are increasingly selecting solar solutions as associated costs continue to decline—allowing this technology to be cost effective. A solar solution can help businesses stabilize their future energy costs, reduce their carbon footprint and achieve corporate sustainability goals.
The process to evaluate and execute a solar solution can be a challenging task, especially if you are considering solar for the first time.
AEP Onsite Partners has helped many businesses evaluate and implement solar energy solutions that create stability for the future of their organizations. To date, AEP OnSite Partners has developed over 115 MW of solar projects.
About AEP OnSite Partners
AEP OnSite Partners provides behind-the-meter services and solutions to help customers reduce energy costs and risks.
We collaborate with your team to understand specific operational needs and develop customized services and solutions to improve your energy positions using our market knowledge, technical expertise and investment capital.
Are you interested in learning more about how a solar solution can benefit your organization? Reach out to Juan Alvarez, Business Development Director for AEP OnSite Partners, at email@example.com or contact your AEP Energy sales representative to learn more.
Market Overview – AEP Energy Trading
- During the month of November 2018, natural gas and power significantly rallied as below normal temperatures throughout the month stoked fears of an already tight storage situation heading into winter.
- With natural gas storage about 20% below 2017 levels, and strong demand in November, prompt month natural gas at Henry Hub (January 2019) catapulted $1.351/MMBtu to close at $4.612/MMBtu.
- Most of the significant strength occurred through March, as all of 2019 was up $0.363/MMBtu to $3.204/MMBtu, while Calendar 2020 was actually down almost a penny to $2.669/MMBtu.
Power PJM – Ohio
- Similar to natural gas, power saw huge gains up front as January AEP – Dayton Hub on peak gapped up $9.72/MWh to $56.50/MWh.
- All of Calendar 2019 was up $2.56/MWh to $40.20/MW, and Calendar 2020 was up $0.73/MWh to $36.61/MWh.
- PJM ComEd zone November 2018 day-ahead on-peak power rose $4.87/MWh closing the month at $39.38/MWh.
- MISO Illinois.Hub November 2018 day-ahead on-peak power gained $0.68/MWh closing $39.59/MWh to end the month.
Any references made to prompt month natural gas will normally be associated with a range starting the first day of the month through the final settlement of the respective prompt month natural gas contract. Other references to forward natural gas prices and all power prices will be based on a range starting the first day of the month through the final day of the month.
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