By Casey McGrath
Some see renewable energy as the most recent fad, embraced by hippies and environmentalists, but the reality for many self-storage owners is solar just makes economic sense. Climate-controlled units that produce obscene electricity bills mixed with an abundance of roof space create an ideal environment to invest in solar energy. Throw in federal, state and utility-based incentives, and you can generate a pretty nice return on investment.
The hurdle for many, however, remains the upfront capital costs and the question, “How am I going to pay for this?” With costs in the hundreds of thousands of dollars, occasionally approaching millions, it’s difficult to imagine funding such a project with cash. Alas, not to worry storage owners, there are several ways to either forego capital expenditures completely or finance the installation using traditional debt and equity.
Power Purchase Agreements
The most common structure for storage owners is to set up a power purchase agreement (PPA), a contract by which the property owner agrees to purchase all the electricity produced by the system at a set price. Under this structure, a third-party PPA developer/installer funds the installation in full and is entirely responsible for the maintenance of the system. From an owner’s perspective, this situation is nearly ideal because no capital is being deployed to install the system, and there’s no production risk if the solar panels do not produce electricity as advertised. In a PPA structure, all of these risks fall on the developer.
A typical PPA structure will price the solar-generated electricity below the retail rate charged by the local utility. This is a win-win for self-storage owners. Not only do they avoid any capital expenditures, they’re able to decrease their monthly utility expense, however subtle that may be. Of course, the rate offered by the developer is dependent on varying factors including local solar incentives and the level of competition among PPA developers.
Some states such as New Jersey offer generous incentive programs that allow PPA developers to aggressively compete for business. Furthermore, because PPAs must compete against local utility rates, states with expensive electricity rates—California, Hawaii and the northeast United States—are prime territory for PPA developers. In other parts of the country where electricity is particularly cheap, such as in the South and Midwest, it’s more difficult for PPA developers to compete.
Generally, PPA contracts include an annual rate escalation of 1 percent to 2 percent. This is in line with historical retail electricity-rate inflation so, theoretically, PPA rates should parallel retail electricity increases. It’s important to note that most local utility rate structures are very complex, sometimes with tiered rate structures or region-specific rates, and it’s necessary to have a good understanding of your current electricity rates before signing a PPA contract.
PPAs are long-term contracts, varying from 10 years to 25 years, with the norm being 20 years. There are several areas of negotiation to consider when signing the PPA including but not limited to annual rate escalators, early purchase options, and minimum kilowatt hour (kWh) production limits by the developer.
Some of the largest PPA vendors are SunEdison Solar Electricity (who created the PPA structure in 2003), MMA Renewable Ventures, SunPower Corp., Regenesis, Solar Power Partners, Tioga Energy and Recurrent Energy. Generally speaking, there are more active players in markets where solar typically works including Arizona, California, New Mexico, the Sun Belt states, Utah, and the Northeast (especially New Jersey). Finally, for owners contemplating a PPA structure, it’s critical to shop around, since per-kWh prices can vary dramatically among PPA contract providers.