Solar – it made sense for our white collar business in a leased building
For many businesses, the question of energy efficiency is an economic decision. More than ever the environmental consideration is now in the mix. Self-generation through solar or other method has become top of mind.
In our case, we had a strong motivation to go solar from an environmental viewpoint (it really is a ‘no-brainer’). But… the ‘numbers had to stack up’.
We’ve all heard the ‘beanies’ (and yes, I have a finance background) talk about ROI. This can be frustrating at times but we all need to understand what they really mean. Why do finance people always want an ROI of 3 years or less? It is rarely spoken out loud but what they are really doing is placing a value on risk. What is the likelihood of return of this investment vs an alternative investment?
Here is a simplified version of our thought process. The ‘numbers’ (go the beanies!) including an evaluation of risk and how that affected our thinking.
A little background:
- We are a white-collar business.
- Our business occupies approx. 550 sq. metres of the top floor of a 3 story building.
- We rent our business premises on a 5 + 5 lease basis.
- Our electricity spend (at the time of evaluation – prices have risen since) was $13,000 pa.
- Our spend covers lighting, air-conditioning (cool & heat) and kitchen equipment. We have no IT equipment on site as we operate all systems in the cloud.
Factors we considered:
From experience we knew that it is crucial to approach energy in the right order:
Step 1) Look at all possible efficiencies:
- Lighting – 98% fluorescent tubes. The rule of thumb is if you have 50 or more fluorescent lights it’s worth considering the change over to LED lighting. We have 45 fluoros + a few halogen lights in the foyer. Bottom line – not worth the effort to change. Particularly with limited ceiling access, our changeover would be even more problematic.
- Kitchen appliances – refrigerator, microwave and coffee pod machine. Not a lot of savings there.
- Hot water – a very small system (50 litres) … no savings there.
- Air-conditioning – programmed to start at 8:30 am and off at 5:30 pm Mon-Fri. Off Sat-Sun. An old system so a real energy ‘guzzler’.
Rent. We negotiated hard with the landlord as the air conditioning unit was old and expensive to run. Timing is everything as the market was in a slump. We ended up with an excellent rate per sq metre at a site that is less than 10 minutes drive from Parramatta CBD. We tried to negotiate but the landlord was unwilling to replace the air conditioning.
Step 2) Consider solar (the only self-generation solution available to us at the time):
- Consumption. Our usage follows the sun. We have very low consumption overnight. This ruled out the need to even consider a battery storage option.
- Cost of solar. Rule of thumb is approximately $1,000-$1,100 per KW. The cost varies due to the market prices of solar rebates.
- Size of solar. Calculate optimal size based on our consumption (our building uses 3-phase supply). This process will be undertaken by any solar supplier as part of the quotation process.
- 30 KW system. We could have gone slightly higher but it would have required a second inverter. Not worth the differential cost in our view.
- Quality of equipment. No doubt that there are cheaper panels and inverters available. Our view was (and is) go for quality in the hope that we will have less operating problems and longer operational life. Time will tell!
- Approach the landlord to co-invest. It is obvious that the asset adds to the value of the property. We ended up with a combination of a rent holiday plus bringing internet fibre to the building. We had another project running that required reliable and stable internet bandwidth. That is a story for another time!
- Calculate the ROI. The quotes delivered an ROI of 3.4 years. But, both assumed an increase in energy prices of 10% over the period of calculation. At the end of the day 10% is probably conservative.
Making the decision
We settled on an ROI of 3.5 years. We took a conservative view. At the end of the day, suppliers have a vested interest in making the ROI look as attractive as possible. The ‘rule of thumb’ for business is ROI needs to be 3 years or less for capex. Here are some of the points we debated:
- Energy prices were on the rise (long-term trend).
- Going solar would effectively lock in our energy costs for up to 15 years. If we stayed in the same premises.
- We agreed that we would most likely see out the 5+5 lease.
- Solar would represent our small contribution to carbon reduction.
- Marketing – it demonstrates to our trading partners that ‘we walk the talk’. We want to be both an environmental and socially responsible business.
Yes it was an easy decision at the end of the day. That was once we had done the due diligence.
Step 3) Look at energy plan (price):
This step is important and it is important that it is the last step. Why?
There are many variables in the whole energy equation. Thus it’s easy to be ‘on the target’ but not so easy to hit the ‘bulls-eye’ i.e. make the optimal decision.
Now go to market with your usage if you are a large energy consumer. It is critical to do so after you’ve completed all your efficiency initiatives. This includes solar installation. Why? So you can negotiate a price based on your (post-efficiency) usage. Otherwise, the supplier may come back at you if your usage is much lower than at the time of negotiation.
If you are an SME then you will be negotiating with a retail energy supplier. It is no surprise that the range of retail plans is broad and requires some analysis. Look closely at their offerings:
- A lower price for supplied energy may also attract a lower price for solar feedback.
- Some offer a high solar feedback rebate but also charge a higher rate to supply energy.
Which plan is best?
Energy usage from smart meters sends usage back to the energy wholesaler on a daily basis. If you have installed solar you must have a smart meter installed. Retailers collect usage information at least weekly. Some retailers provide secure websites which display energy usage and solar feedback credits. Some websites will also forecast your bill at the end of the billing cycle.
Choose a supplier who supplies this information or you can extract it yourself from your onsite meter (we chose the former!).
Look at your usage (import) and feedback credits (export) on a hot sunny day and then on a cloudy or overcast day. Look at the average no. of sun days per year and you will soon understand your own pattern of usage and export.
After we examined the usage and feedback the best option was obvious. Take the highest feedback tariff combined with an increased rate for imported energy. At the end of the day it is the arbitrage between import (buying energy) and export (selling energy).
The Bottom Line
In our case, the bottom line was difficult to determine. We discovered another ‘curve ball’ later in the piece. The downstairs floor of our building was on our energy circuit. Not fault of the landlord as he couldn’t have known the issue when he purchased the property 12 months earlier.
After the dust settled we ended up with an ROI of just over 3 years. We negotiated a rate for the energy consumed on a monthly basis by our fellow tenants downstairs. Generated by our solar system, of course! In the end a great result despite the ‘twists and turns’.
The most important message of all on your energy journey is to follow the steps in the process:
- 1 – Look at efficiencies
- 2 – Look at energy generation
- 3 – Look at energy pricing