The high energy demands of grocery stores make solar an ideal solution for cutting energy costs and improving sustainability. Solar offers grocers a way to lock in energy rates and, in some cases, get money back through incentives and tax credits. An investment in solar can be mutually beneficial for the environment and a company’s bottom line.
It isn't a cookie-cutter solution, either — grocers can install solar on their roofs, on parking lot canopies or on the ground. The flexibility of solar applications extends to the variety of financing options available to pay for it. Depending on whether you own the building or simply occupy it, want to own the system or just buy the power, there's at least one solution that will work for you.
Following is an overview of some basic types of payment and financing options for solar. To start, however, let's discuss the most common type of solar installations, known as net energy metering (NEM) projects. NEM is a billing mechanism that allows energy customers to receive credits on their energy bills for the energy generated by their solar energy systems, while they continue to pull and use energy from the grid to meet their electricity consumption needs.
Under a NEM mechanism, the utility debits and credits the customer's account on a rolling basis as energy is pulled from and added to the grid, settling up a final bill at the end of the year. NEM is advantageous for business because solar happens to be most efficient and produce the most energy during peak hours in the middle of the day, when energy is at its most expensive. Because credits for the generated solar energy are provided at those higher retail rates, NEM solar projects eliminate the largest portion of a business’ energy bill.
NEM works best for owner-occupied buildings, because the owner, who would purchase the solar asset, can benefit from the energy savings.
The simplest option, if you have the capital on hand, is purchasing a solar installation outright, which also offers the most advantageous economics. When purchasing a system without financing, owners are able to receive a 30 percent federal tax credit (which can be applied to tax liabilities back one year and forward 20 years), as well as other state incentives like a cash rebate or Solar Renewable Energy Certificates (SREC), when available. SRECs are awarded for every 1,000 kilowatt-hours of electricity produced, and can be traded on the local state SREC market for income.
With a cash deal, investors get all of these credits, not just one or the other, or neither, as is true with financing options.
Under this scenario, similar to a payment plan, the grocer leases a system from a solar developer or third-party owner. At the end of the lease term, the lessee owns the solar energy system outright. During the payment period, the lessee owns all of the power produced and gets NEM credits for excess power produced from the local utility. The NEM credits reduce the grocer's utility bills by the amount of the lease payments or more, making this a zero out-of-pocket investment. Here, the lessee is responsible for maintaining the system, which predominantly involves signing an operations and maintenance agreement per the terms of the lease agreement. This is similar to a bank requiring a certain amount of car insurance coverage to qualify for a lease.
Since the lessee is owned by a solar developer or third party in the beginning, the owner gets the 30 percent investment tax credit (ITC). When the ownership transfers to the grocer at the end of the lease term, it will have the ability to monetize on any available SRECs still being produced.
Power Purchase Agreement (PPA)
With a power purchase agreement (PPA), the property owner enters into a contract whereby a solar developer manages the financing of the project and takes on the design, installation, operations and maintenance costs, and then sells the power back to the property owner at a reduced and fixed rate. This method allows commercial customers to cut costs and move closer to their reduced energy goals without paying any upfront costs, while third-party investors take on the financial risks of the system. When the contract expires, typically after a 20-year period, the property owner has the opportunity to renew the agreement with the latest technology available, purchase the system outright at fair market value, or have the installation removed so it can go back to paying retail rates for electricity from the local utility.
This approach also allows for a unique relationship where the developer, as the owner of the system, can take advantage of renewable energy tax credits, resulting in a lower PPA rate for the customer. To take advantage of a PPA, the customer must have investment-grade credit. PPA-financed systems are typically larger (closer to 1 megawatt or greater), so more of the transaction costs can be consumed by a larger pool of kilowatts. PPAs work best for larger grocers or those with multiple locations going solar.
Property Assessed Clean Energy (PACE) Financing
With property assessed clean energy (PACE) financing, a property owner can receive financing for 100 percent of its solar installation from a PACE administrator, to be repaid as a property tax assessment, since the financing creates a lien on the property. The financing terms, typically a 20-year timeframe, are structured like a loan, with fixed payments and a competitive interest rate. If the property is ever sold, the upgrades go with it, along with any tax liability. Through PACE programs, property owners can add value to their properties with long-term capital and few to no upfront costs.
An attractive aspect of PACE is that one of the main criteria for eligibility is that if a potential customer's property value is high enough to cover the PACE financing amount, it's not dependent on the customer's credit. This is important for smaller solar projects for commercial entities that may be unrated or have below-investment-grade credit. PACE opens the door for them to access long-term, third-party financing that they wouldn’t be eligible for through PPAs or leases, as those latter financial products typically require investment-grade credit.
With solar prices continuing to decrease and the federal solar tax credit set to expire at the end of 2016, the time to go solar is now.