Solar is an attractive energy option because of its predictable nature and strong long-term return on investment (ROI). These characteristics are particularly appealing in the current financial climate, and the adoption of solar is growing rapidly.
There are several key factors that need to be understood on the front end to ensure that you are satisfied with a solar array investment. The most important factors that determine your solar ROI include: the rate you pay for electricity (cost-per-kilowatt hour), the cost of your solar array (often quoted in cost-per-watt) and how you monetize the tax benefits.
Calculating your true cost-per-kilowatt hour and how it will change over the next 30 years is fundamental to knowing your true ROI. If you take a close look at your electric bill, you will notice a variety of line items that might not make immediate sense. For commercial electric consumption, these typically include “usage charges” and “demand charges.”
To make sense of these charges, I like to envision a water pipe. Usage charges are tied to how much water flows through the pipe, and demand charges are tied to how big of a pipe is needed to serve your largest instantaneous usage. Solar energy will offset usage charges, and in some cases also has the capacity to offset demand charges.
Questions you should ask include:
• Did you assume a reduction in demand costs? If so, how and why?
• Are there any minimum charges that will show up due to reduced usage charges?
• What inflation rate have you assumed in usage charges over the next 30 years? Anything over 2 percent is aggressive and likely will unrealistically inflate your return.
One of the first questions people ask when talking about solar is, “What does it cost?” Unfortunately, every system is unique, and there isn’t a straightforward answer. For commercial systems, pricing in Arkansas currently ranges between $1.30/watt to $2/watt, largely dependent on size and the site. Hardware has a standard pricing window, but the cost of utility upgrades, trenching and labor can vary tremendously.
Questions you should ask include:
• Is the price “turnkey,” or are there charges not included? Some installers quote prices without utility upgrades or interconnection costs, which can be significant.
• What remote monitoring and warranties are provided by the installer?
• Is the hardware from a well-known manufacturer who is expected to remain in business long-term to support the warranties?
Solar installed over the next few years is eligible for an Investment Tax Credit (ITC) and accelerated depreciation. In short, you receive an ITC and can depreciate the entire amount of solar minus half of the ITC. In 2019, this meant a 26 percent ITC and 87 percent depreciation in the first year. The ITC is a credit which is straightforward, but modeling the depreciation benefit is highly individualized.
It is common for installers to assume you can take the full tax benefits in the first year (it makes the ROI higher), but it must be done at the proper tax bracket. Your ROI will look a lot higher taking depreciation in the 37 percent federal tax bracket than the 22 percent federal tax bracket. There are even more subtleties for nonprofit entities looking to take advantage of the new leasing/service arrangements in Arkansas.
Questions you should ask include:
• How have you modeled the tax benefits, and what tax bracket did you assume?
• Are there any expenses in the quote that are not eligible for the ITC?
A well-designed and properly installed solar array will generate value for your business for the next 30-plus years. Unfortunately, predicting the exact ROI is a challenge, and the industry doesn’t have a standard when it comes to assumptions. Over the years, I have witnessed annual electric escalators ranging from zero to 5 percent and proposals with 43 percent (federal and state) tax brackets.
Some businesses in the solar industry will inflate the projected ROI with the goal of making a sale rather than ensuring an accurate forecast for your business. This is not healthy for the market in the long-term, and the best way to combat it is by arming yourself with the information needed to make an informed decision.
I wish that I could provide a cleaner checklist, but a one-size-fits-all approach doesn’t work. There are dozens of utilities in Arkansas and a limitless number of tax situations. But here’s a general rule of thumb: Be wary of electric inflation rates over 2 percent, quotes that aren’t turnkey or a quote with the starting assumption of the highest tax bracket. At a minimum, get a second quote to compare options. I have seen it save a business more than 25 percent on the upfront cost by shopping around.
Don’t let the complexity of solar energy deter you. The investment of solar energy is commendable and can provide extremely attractive financial return.
