The Financial Payback of Solar Energy: A Self-Storage Hypothetical Reveals Costs vs. Benefits
|Copyright 2014 by Virgo Publishing.|
|Posted on: 08/21/2010|
By Bob Burson
Whenever I discuss a solar installation with a self-storage owner for the first time, the conversation rarely starts with how much it will benefit the environment. That’s not to say he isn’t interested, but most of the time, he’s more concerned with the practical questions: How much does it cost? How long until the installation pays for itself?
To answer these questions, let’s look at a potential solar-energy installation on a real self-storage facility in California. I’ll draw on true energy data from an existing facility, but the installation itself is hypothetical.
The most important thing to remember when looking at solar or any other energy solution is every application is unique and should be tailored to fit the specific situation. Some of the things that determine a self-storage operation’s energy profile and, in turn, the best solution are:
The Facility and Installation
Our example facility is a relatively new building less than 10 years old in North Los Angeles County. It’s a two-story building with a footprint of approximately 45,000 square feet and a combined square footage of about 90,000 square feet. It’s a concrete-block building with a standing-seam metal roof and some climate-controlled units.
Since it’s in the Los Angeles area, the facility is in the service territory of Southern California Edison. Its rate schedule is GS-2, which means General Service rate schedule for facilities that have a demand between 20kW and 200 kW. Companies on this schedule are charged for how much power they use, but not when they use the power. This facility has a combined annual energy cost of $28,131, $21,958 of which is from kW hour charges. This is important to note because solar only reduces kW hour charges, not demand charges.
For this installation, we’re looking at implementing an 83-kilowatt system. A system this size will have a footprint of approximately 7,000 square feet, covering only about 15 percent of the facility’s available roof area. With an installation of this size, you’ll see about 153,000 kW hours of production throughout the year.
Energy Savings and Other Incentives
With this installation, the self-storage operator will see a reduction of energy costs by approximately 76 percent. This will allow him to save a little more than $21,000 per year.
In addition to the cost savings, there are other incentives, including federal and state tax rebates. The most substantial is a 30 percent tax grant available to all commercial businesses. Through this program, companies installing solar can receive a tax credit or grant in cash from the U.S. Treasury Department equal to 30 percent of the system’s cost.
In addition to the tax credit/grant, commercial customers also have the ability to use accelerated depreciation to write off the cost of the installation. The IRS has categorized solar as having a five-year useable life, but it’s actually closer to 25 years. This allows businesses to use a five-year accelerated depreciation on the installation.
State incentives can vary depending on your location and utility-service territory. Your solar contractor should be able to explain the incentives for your state and how they apply to your proposed system. A great resource for information on the state programs is www.dsireusa.org.
For our installation example, we’ll apply the California Solar Initiative (CSI) Incentive, which is mandated by the California Public Utilities Commission but administered by each individual utility/municipality within its individual service territories. The CSI program is administered on a first-come, first-served basis, which means each utility or municipality will use up its allotted funds at a different pace depending on the rate of installations. At the time of this writing, the commercial incentive available for this installation is $93,117.
When considering a solar installation, it’s important to discuss the matter with your tax professional to understand how the investment will directly affect your finances. However, a few items will apply for many business owners and can be mentioned here. The federal grant for tax purposes is not considered taxable income, but can be considered taxable income at the state level.
For example, California recently passed legislation exempting the grant from state taxes; but before this bill was enacted, it was eligible for taxation. Your state’s solar incentive could also be considered taxable income, so talk to your accountant.
How the Payback Works
We now have information on the facility, the solar installation, available incentives and the annual energy savings from the solar array. So how do all of these things come together to create the payback on this system?
As the accompanying chart shows, year one begins with the total investment in the system. From there, applicable incentives are subtracted to show the net savings. The year-one end total is used to start year two. The same calculations are applied until the system is completely paid off and the self-storage operator has more than 75 percent of his power costs covered for free. With a self-storage facility, the reduction of a fixed operating cost can directly translate into more net income for the owner.
For the purposes of this article, I’ve set the price of the solar array a little high to keep the estimates conservative. Our example assumes the system was activated on June 1of year one. It also assumes a tax rate of 34 percent, an annual system degradation of 1 percent, and an annual increase of 6 percent in the cost of electricity. All of the incentives combined would allow this system to pay for itself in less than six years. This is excellent when you consider a solar array has a useable life cycle of at least 25 years.
In the end, every self-storage operator’s situation is unique, dependent on location, energy needs, facility size and construction, service territory, and applicable incentives. All will have an effect on the viability of the solar installation. However, as we have seen in the example above, the ability to install a system and have it make financial sense is a distinct possibility.
Bob Burson is the director of business development for DL Energy, an energy-efficiency and solar-integration company that provides custom energy solutions for the commercial industry. For more information, call 661.310.7245; visit www.dlenergy.net .