In September 2009, Ontario, Canada, led the North Americans in approving a FIT (feed-in tariff) Program under the Green Energy Act. If you own a self-storage facility in Ontario, this may be the answer to generating income from your roof space, or making your business more environmentally friendly, by generating solar power. This article is a financial analysis of the related investment decision.
The FIT program is designed to encourage property owners or renewable-energy investors to invest in the capital amount of photovoltaic (PV) systems. The Ontario Power Authority (OPA) will sign a contract with the system owner to purchase all the energy produced at a pre-determined price for 20 years.
System owners will be paid based on the amount of electricity produced and fed into the grid. For a solar PV system between 10 and 250 kilowatts (kW), the FIT price is 71.3 cents per kilowatt hour (kWh). Solar PV receives the highest price of all renewable-energy sources. Currently, energy consumers in Ontario generally pay 6 to 8 cents per kWh to the local utilities.
So how can self-storage owners benefit from this program? Given a rectangular rooftop space of 5,130 square feet, a storage operator could install a solar PV system up to 50 kW. Depending on the location, the system will generate annual FIT revenue of $50,000 to $59,000, or $9 (Toronto) to $11 (Thunder Bay) per square foot. The actual area required may be slightly larger, to allow extra space between panels for service and cleaning purposes.
The Income Tax Act of Canada also created asset class 43.2 to allow investors to accelerate the write-off of renewable-energy equipment at 50 percent per year (declining balance). The claim is, however, subject to the limit of the revenue it generates that year.
The first cost consideration is the technology deployed. Solar panels are available in two forms, conventional photovoltaic crystalline wafer and thin film. Thin film is a newer technology that’s cheaper per watt, as it requires much less silicon. However, its lower efficiency may necessitate twice as much space.
Bigger systems will cost less on a per-watt basis, but the domestic content requirement of the FIT program may cause the system to cost a little more. The inverters have to be replaced after their 10-year life warranty.
As a PV system can sometimes last for up to 40 or 50 years, it’s more convenient to replace the old roof before the system is installed.
Note: The numbers used and reported in this analysis are for reference only. They are not designed for exact and accurate measurement. The Income Tax Rate may be different for each business.
Revenue and Cash Flow
Different areas of Ontario generate different levels of solar electricity, as shown in the accompanying chart. Taller buildings or trees in the surrounding environment will create shading and reduce the production of electricity. If a roof is sloped, only the south facing surfaces are preferred for solar-electricity generation.
Technology and design will help maximize system efficiency. Generally, the performance of solar panel may degrade by 0.5 percent each year.
As an example, let’s consider the previously mentioned 50 kW system in Toronto. For the sake of prudence, let’s say it may cost about $400,000, or $78 per net square foot. The payback period will be around 9 years, with a 6.5 percent internal rate of return per year, on an after-tax basis (assuming a 30 percent tax rate). It will generate net cash inflow of $299,000 (or $131,000 discounted to today’s value).
When financed with debt, the payback scenario can be quite different, depending on interest rates and loan terms. For example, a loan of longer duration usually has faster payback but a smaller cash inflow. Investors should note the dynamic relationship between loan terms and payback.
The accompanying charts show the trends of after-tax cash-flow accumulation, before discounting, for two scenarios: owner financing and loan financing (70 percent loan, 10 years, at 8 percent interest). The analysis shows that investing in a PV is financially viable. In the case of other Ontario locations, or lower system costs, the return may be even better.
A self-storage operator is recommended to approach his own bank first, providing it with relevant technical and quality financial information. If a lender’s concerns on various risks are addressed, there’s good chance an operator can arrange a longer-term loan with a good rate.
Finance lease is a feasible option. The embedded interest rate tends to be higher than that of conventional bank loans, and it demands full repayment in a shorter timeframe. Several investors could pull together for joint investment. The challenge is the exit clause has to be carefully drafted beforehand.
Leasing the space is a prudent approach, as long as the property owner is satisfied with the lease terms, and the responsibilities during and after the lease period.
Among the various renewable-energy sources, solar PV is the simplest, and small enough to integrate into buildings. It also has significant impact on greenhouse-gas reduction. For example, a 50 kW system reduces more than 1,300 tons of carbon dioxide over 25 years. Having a PV system on the property is a statement of support to a sustainable future. It creates a green image for the self-storage facility.
The FIT program aims to motivate the early adopters with a reasonable return. With careful financing arrangements and the service of a suitable system developer, it can be an opportunity for self-storage owners to capture the return and the intangible benefits of installing a PV system on their property.
Isabel Chan is a certified management accountant of Canada and was the director of finance for a self-storage group of companies in British Columbia. Prior to that, she was the financial controller for iCable Communication Group and Xerox Corp. She is the co-founder of SIS Solar Ventures Ltd. in Toronto, an Ontario-based developer of solar photovoltaic systems, offering complete solutions to property owners. For more information, e-mail [email protected]; visit www.sissolarventures.com.