Intro to On-Site Generation:
Primer on Best Practices

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Explainer

Intro to On-Site Generation:
Primer on Best Practices

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The business case for customer-sited generation has never been more compelling for corporate energy users. Inclusive of technologies like solar PV, battery storage, combined heat and power (CHP), fuel cells and more – these installations can help companies reduce utility costs, improve reliability and operate more sustainably.

In this primer, our team explores the factors influencing the rise of on-site generation and explains how companies can evaluate and implement projects with attractive economic returns.

5 Trends Driving Growth in On-Site Generation

There are five key trends driving the value proposition for on-site generation:

  1. 1. Rising Utility Rates

    While wholesale power prices remain hard to predict, the cost of delivering electricity is clearly on the rise. As grid investments are passed onto consumers through rate increases, companies can avoid rising costs by installing on-site generation and buying less power from the grid.

  2. 2. Falling Installed Costs

    Maturing business models and manufacturing expansions have driven down the cost of equipment and installation across many technologies. Falling costs have improved the economics of customer-sited generation, which can often be cash flow positive in Year 1, when funded through a third-party.

  3. 3. Increasing Incentives

    Regulators at the federal, state and local levels are rolling out powerful incentives for distributed renewables. Ranging from expanded tax benefits in the Inflation Reduction Act to state REC programs and utility rebates, these incentives commonly cover over 30-50% of the total system cost.

  4. 4. Grid Reliability Issues

    Grid reliability concerns are increasing due to factors including aging infrastructure and climate-related extreme weather events. Many forms of on-site generation can be used to protect against costly grid disturbances and outages, making such installations necessary to ensure resiliency.

  5. 5. Sustainability Mandates

    Companies seeking to improve sustainability will not find a better option than installing on-site renewables. The unquestionable “additionality” and unmatched proximity to load results in RECs of the highest quality – while the parallel benefits of cost savings make such projects uniquely attractive.

 

While rising utility prices and falling costs have improved the financial returns of on-site generation, companies still must determine how to fund these projects. Buyers may consider purchasing the system directly, thereby receiving tax credits (read more on Tax Credits) and a typical payback of 3-8 years – however such investments may not be approved in light of competing demands for capital.

For this reason, customer-sited generation is often funded through third-parties, eliminating the need for an upfront investment and enabling the company to pay for the project over its lifetime. One common funding solution, the Power Purchase Agreement (PPA), allows companies to pay for power as a service, as it is produced, often resulting in positive cash flow on day one – assuming the purchase price is lower than what was previously paid to the local utility.

Companies should evaluate all available funding options and may pursue a portfolio of solutions tailored to the circumstances of each opportunity. See Exhibit 1 below for a simplified cash flow comparison of two common funding options, exemplifying this type of assessment.

Exhibit 1

Projects can be funded with internal capital or through third-party financing solutions, including Power Purchase Agreements (PPAs), which enable immediate savings with zero upfront cost.
Funding-Options
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How to Evaluate On-Site Generation

Although the business case for on-site generation is improving across the country, many companies lack a proactive approach to pursuing high-ROI projects. Without a centralized planning process, local team members are approached by nearby vendors and left to evaluate and negotiate proposals in a vacuum – often leading to hidden cost premiums and misrepresented savings estimates.

    Instead, companies should take a top-down approach to evaluating, prioritizing and implementing the most compelling projects across their portfolio. When assessing your operational footprint to rank opportunities, there are at least 5 common considerations that Buyers should understand:

    Consideration #1: Cost of Power

    The current cost of power paid by the facility to the local utility and/or supplier is the primary factor that drives project economics. Your portfolio assessment should prioritize energy-intensive locations that pay a high price per kilowatt-hour, as these sites have the highest potential for cost savings.

    Consideration #2: Regulatory Policies

    Local regulations and utility tariffs can vary for each site and are the second-most important driver of project economics. Fragmented local policies, ranging from favorable net metering tariffs to the prohibition of third-party ownership (e.g., PPAs), can make or break the economic feasibility of projects.

    Consideration #3: Suitable Development Area

    The physical constraints and available space for installation are critical screening criteria in determining technical feasibility. Technologies like Solar PV require suitable area, whether on the ground, rooftop or parking lot, that can support the installation of an asset with 25+ years of useful life.

    Consideration #4: Resource Potential

    Resource availability can have significant impacts on project economics and feasibility, specific to the type of technologies under consideration. For Solar PV, greater solar resources results in higher production and improved returns. For CHP or fuel cells, access to affordable fuel can determine feasibility.

    Consideration #5: Economic Incentives

    For most technologies, there are a variety of economic incentives provided at the federal, state and local-level that should be identified upfront to inform prioritization. In addition to federal and state tax credits, local governments and utilities may provide rebates and incentives that influence economics.

Only once a company has prioritized its locations and determined its preferred funding option(s), can it identify the right commercial solution and partner(s) to deliver a given project.

If a company prefers to fund a project with no upfront cost (i.e., third-party ownership), it should engage a Project Developer that specializes in asset financing and operation. However, if a company intends to purchase and own a system directly, it should engage an entirely different set of vendor businesses – otherwise it may significantly overpay for the project.

    On-Site Generation Advisory

    PerpetualGrid provides affordable services leveraging proprietary technologies to accelerate the evaluation, prioritization and implementation of on-site generation. Our experience across the Fortune 500 enables us to accelerate the planning process and manage implementation in a manner that ensures a cost-effective solution with maximum performance and transparency.

    Get in touch with our team to learn more about our process and previous client results.