How a Solar PPA Improves the Performance of Energy Efficiency Measures

6th Sep 18

Written by James Doyle

When you want to reduce the electricity bills of a residential  or commercial building, there are two main options: reducing energy consumption directly, or generating electricity on-site to reduce the net consumption measured by the power meter. Upgrading to LED lighting is an example of the first approach, while deploying a solar photovoltaic system is an example of the second approach.

Renewable generation and energy efficiency should not be viewed as competing options, but rather as complementary measures that can achieve synergy when deployed together. A building upgrade project that combines both options is likely to achieve a higher return on investment, compared with a building where only one approach is used.

This article will provide a simple example of how energy efficiency and commercial solar power work together to achieve a significant reduction of your electricity expenses. Keep in mind this is a simplification of reality, since energy efficiency and renewable generation projects involve plenty of engineering work. However, you can get a general idea of what to expect.

Deploying Energy Efficiency Measures Alone

Assume you manage a commercial property with a monthly electricity consumption of 30,000 kilowatt-hours (360,000 kWh per year), with a tariff of 24 cents per kWh. You are getting a monthly power bill of $7,200 on average, which adds up $86,400 per year, and have decided it is time to cut down the building’s electricity expenses.

After getting an energy audit for the building, the following energy efficiency measures are proposed:

  • Upgrading from fluorescent bulbs to LED lighting.
  • Upgrading to modern air conditioning units with a higher energy efficiency rating.
  • Adding smart controls for lighting fixtures and air conditioners.
  • Replacing a resistance-based water heater with a heat pump of superior efficiency.

Let’s assume the energy efficiency project has a total cost of $100,000, but it can reduce your electricity expenses by 25%. This is equivalent to 90,000 kWh per year, saving you $21,600 on power bills. The return on investment is 21.6%, and the payback period is less than 5 years.

From the business standpoint, the energy efficiency measures proposed are an excellent investment. However, the outlook can be even better if you combine them with solar power. That way, your building is consuming less electricity, while also reducing the average cost of each kilowatt-hour.

Adding a Solar PPA to the Building Upgrade Project

Assume the building in the example above can host a commercial solar array with an average output of 7,500 kWh per month. You are offered a solar Power Purchase Agreement (PPA), where this electricity will be sold to you at only 16 cents/kWh, which is one-third lower than you normal electricity tariff.

Let’s summarise how your electricity consumption profile will look like after the energy efficiency measures and the solar PPA:

  • The original electricity consumption was 360,000 kWh per year.
  • The energy efficiency measures save you 90,000 kWh per year.
  • As a result, the consumption is reduced to 270,000 kWh.
  • The solar PPA can deliver another 90,000 kWh at only 16 cents/kWh.
  • Your net consumption at the original tariff of 24 cents/kWh is now 180,000 kWh.

Before the proposed upgrades, you were paying $86,400 per year for 360,000 kWh of electricity consumption. After the energy efficiency project and the solar PPA, you are paying $43,200 to the utility company and $14,400 to the PPA provider, which adds up $57,600.

To summarise, the combination of energy efficiency measures and a solar PPA saves you $28,800 per year. The overall project yields a return on investment of 28.8%, and a payback period of less than 3.5 years. Compared with the scenario where only energy efficiency was deployed, the financial performance has improved significantly.

Managing the Project with Limited Access to Funds

An investment of $100,000 in energy efficiency measures can be significant for a small company. However, the building upgrade is easier to afford if you start with the solar PPA, which has an upfront cost of zero.

In this example, the solar PPA by itself saves you $7,200 per year. This way, your company can afford the energy efficiency measures gradually. Electricity savings add up as more measures are added to the project, freeing up capital to deploy the pending upgrades.

Ideally, you should start low-cost efficiency measures that have a quick payback period, since this boosts your monthly savings and provides more capital for the other measures. LED products and building controls have a much lower cost than air conditioning equipment and heat pumps. However, heat pumps in Australia are eligible for the same incentive program that makes solar power so affordable – Small-Scale Technology Certificates (STC).

Another option that simplifies project financing is getting a loan, deploying the energy efficiency measures with the bank’s money, and using the combined savings to pay off the loan. This way, the entire building upgrade project is completed without a single dollar of company capital.

If you can get the $100,000 through a loan, having an interest rate of 6% and a term of 10 years, the monthly payment is $1,110.21, which adds up $13,322.46 per year. Considering that the complete project saves $28,800 per year, it can pay the loan by itself while still leaving over $15,000 in net savings in the first year of operation.

Final Recommendation

The technology used by photovoltaic systems and many energy efficiency measures has already been deployed successfully in millions of projects around the world. From the technical standpoint, a project that improves the energy performance of your building is completely feasible, and in many cases the main challenge is financing the project in a way that does not hurt the cash flow or your company.

This article provides a very simplified example, but it demonstrates how a solar PPA can be used not only to reduce your power bills, but also to help finance other building upgrades. Businesses rarely find opportunities to achieve savings at zero upfront costs, and solar PPAs are an excellent example.

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    power purchase agreements 7 things you must know when dealing with PPA

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    power purchase agreements 7 things you must know when dealing with PPA