How to Overcome the Barriers to Solar Energy for Manufacturing Facilities
Energy is one of the highest operating expenses for manufacturing plants. As such, plant managers from a variety of industries have tapped solar energy as a means to reduce operation costs, protect against rising electricity costs and achieve sustainability goals.
Solar is an effective solution for a number of reasons. Manufacturing plants typically demand the most energy during the middle of the day, when energy prices are at their highest. But because solar energy production is also high during this time of day, solar offsets some of the highest energy costs a manufacturing facility typically incurs. Manufacturers also generally have large, unused rooftop space, adjacent land and/or parking lots, all of which are ideal for housing a solar project. Furthermore, solar installations can put a high-profile face on a company’s sustainability initiatives in a way that smaller-scale efforts cannot.
Despite these benefits, the initial upfront investment and the daunting prospect of maintaining an entire solar energy system are still considerable hurdles. Financing, policy, rebates and incentives, and the local cost of energy should all be considered before moving forward with a solar installation.
Outright Purchase vs. Power Purchase Agreement
For facility managers with some cash on hand, the best option, made possible by local, state and federal incentives and tax credits, may be purchasing a system outright. In this case, paybacks can be completed within as few as four years with a 20-percent internal rate of return over the lifetime of the system, which is 30 to 45 years.
Many facilities without access to capital, however, have elected to go the route of a power purchase agreement (PPA) to finance solar energy projects. A PPA is a mechanism by which a third-party investor pays for the installation of the solar system, taking on all finance, design, installation and ownership and maintenance costs, and then pays the savings forward by selling the power back to the plant manager at a predetermined, economical rate.
PPAs allow manufacturing facilities to enjoy the immediate cost savings and environmental benefits of a renewable energy system with zero upfront costs, while third-party investors bear all financial risk and maintenance costs associated with the system. At the end of the agreement, the facility has the opportunity to renew the PPA, purchase the system outright at fair market value, or have it removed at no charge.
As an example of an organization that took advantage of a PPA to go solar, California’s San Diego County Water Authority (SDCWA) was able to install 2 MW of solar energy capacity spread out among three sites: one on the roof of its Kearny Mesa headquarters, two smaller ground-mounted systems in the parking lot of its operations center in Escondido, and a system on top of its storage structures at its Twin Oaks Valley Water Treatment Plant. Although not a manufacturing facility, the SDCWA’s operations mimic those of manufacturing facilities: they have high energy costs throughout the day, large flat rooftops, etc.
The systems generate enough renewable energy to meet 60 percent of the power needs for the Kearny Mesa and Escondido facilities, and more than 25 percent of the power needs for the treatment plant. Under the PPA, Borrego Solar designed and constructed the solar electric installation on the three SDCWA locations and will continue to operate and maintain the solar energy systems for the 20-year contract term at no capital expense to SDCWA. SDCWA purchases the clean renewable energy the installations produce at a predetermined below-the-grid rate. Based on the grid-rates at the time of the installation, SDCWA will save ratepayers more than $1.7 million without spending a dime.
Renting Roof Space or Land to a Solar Tenant
Aside from owning or leasing a solar energy system, another option is “renting” a manufacturing facility’s rooftop to a solar project developer. For example, in California, there are a number of energy procurement programs administered by the big-three California investor-owned utilities: Pacific Gas & Electric (PG&E), Southern California Edison (SCE) and San Diego Gas & Electric (SDG&E). Many municipal utilities such as the Los Angeles Department of Water and Power (LADWP) and the Sacramento Municipal Utility District (SMUD) also offer similar programs known as feed-in tariffs (FITs). These programs give utilities an incentive to purchase energy directly from wholesale distributed generation (WDG) projects, which are small, wholesale generators feeding energy directly to the grid, instead of following the typical solar structure of delivering energy to the user to credit a specific utility bill or meter.
Prime WDG locations are near an existing point of interconnection to the grid, such as on top of or near a building already tied to the utility’s infrastructure. So, for manufacturers that own their property, this provides an opportunity to rent out their rooftop, carport or other unused spaces. A facility owner can lease available roof space or adjacent land to a solar project owner, or “tenant,” who installs the solar energy system.
WDG mechanisms align the interests of the tenant with those of the building owner: the tenant obtains a contract to sell the energy to the local utility through one of the aforementioned energy procurement programs, then installs the system, generates revenue from selling energy to the utility and pays rent to the building owner for use of the space. The arrangement has no impact on operations.
By renting out facility space, property owners are guaranteed an additional stable revenue stream. For example, a property with more than 100,000 square feet of usable roof space could receive an extra $40,000 to $60,000 a year, at no cost whatsoever to the property owner. In addition, a solar energy system’s lease revenue increases the property’s resale value: whoever buys the building steps into the existing lease agreement—the equivalent of buying an occupied building with tenants underneath the roof.
It’s important to find a solar partner who has shown success developing WDG projects, as not all properties are a good fit for this program, and working with the utilities on permitting and interconnection can be difficult for the inexperienced. The solar partner you choose should have a long track record of installing rooftop and ground-mounted, commercial-scale solar energy solutions; immediate access to project financing; and should help address any site and permit issues through a properly drafted lease.
Incentives Can Sweeten the Deal
Lastly, it’s important to consider which federal, state and local incentives are available to you. At the federal level, all solar projects qualify for a 30 percent tax credit that can either be carried back to the previous tax year or used against the company’s current tax obligation. The federal government also allows 50 percent bonus depreciation for solar projects completed before the end of 2013.
There also are state-specific incentives. Some states offer upfront cash rebates based on the size of the prospective solar energy system, while other states spread rebates out over a five-year period based on the system’s actual energy production; the more kWhs produced, the greater the subsidy.
Linen manufacturer Matouk & Co., for example, installed an 84-kilowatt solar energy system on the roof of its Fall River, Massachusetts manufacturing plant after the company retrofitted its roof and learned that the large, south-facing rooftop was perfect for a solar installation. The system, designed and installed by Borrego Solar, generates about 35 percent of the power needed to run the factory and with government incentives, will pay for itself in five to six years. After that, the energy used will be free of charge. Partial financing for the system—about $300,000—came from Massachusetts’ Commonwealth Solar Program.
As another example, plastic tubing manufacturer NewAge Industries was awarded a $1 million solar energy program grant from Pennsylvania’s Department of Community and Economic Development, in addition to federal grant dollars. The grant funded the purchase and installation of a 1-MW solar energy system made up of more than 4,000 solar panels covering three-quarters of the building’s rooftop. Borrego Solar’s installation crews worked through the winter to meet incentive program deadlines. Thanks to state and federal grants, NewAge purchased the $4.2 million solar power installation for 52 percent off and is recouping more of that investment through the sale of renewable energy credits. The system now contributes more than 50 percent of NewAge’s energy needs.
Solar has proven helpful to plant facility managers working to achieve sustainability goals, differentiate their products, reduce costs and tap into resources that many facility managers don’t realize they have. With the right analysis of the opportunities and hurdles associated, solar can help many others.
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