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The Solar Panels Are Free, as Long as You Pay for the Power

How to get photovoltaics on your company’s roof without putting them on the books.
January 5, 2011

Five years ago, Staples made it a corporate priority to cut its carbon dioxide emissions. The executives at the office supply giant decided, however, that whatever methods they chose—improving efficiency, changing operations, or buying low-carbon energy—the effort also had to make financial sense. At the time, no one could argue that buying solar panels was a good investment, as payback periods for recouping capital were typically measured not in years but in decades.

No money down: SunEdison has installed solar arrays on top of three dozen Staples locations, including this store in Ontario, California. Staples only pays for the electricity it uses.

But a startup called SunEdison came along and made an offer Staples couldn’t refuse—employing a financial model that could give solar the edge it needs if it’s to provide a significant portion of the world’s energy. Under SunEdison’s plan, Staples would get solar panels on its retail rooftops at no upfront cost and without any monthly equipment fee. Instead, it would agree to pay SunEdison a preset rate for the power the panels generate over a period of 20 years. “The bottom line is that we’re able to purchase solar energy off our rooftops for less than electricity off the grid,” says Mark Buckley, Staples’s vice president for environmental affairs.

Staples has now installed about 10 megawatts of solar capacity at more than three dozen sites—the equivalent of 2,000 typical household solar installations. The advantages of SunEdison’s plan go beyond the monthly savings relative to the cost of grid electricity, in that it also eliminates the typical risks of ownership. Staples doesn’t have to worry that the panels will underperform or be damaged. “If our solar system is a lemon, then you don’t have to pay,” says Jigar Shah, SunEdison’s founder.

SunEdison takes the gamble. “You’ve dumped almost all of the risk onto a third party, while receiving the only attribute that you probably really want, which is the clean energy that results ideally in a lower power bill,” says Nathaniel Bullard, lead solar analyst at Bloomberg New Energy Finance. But since the amount of sunshine over a 20-year period in any given location is highly predictable, the risk isn’t as big as it may appear.

The plan also helps Staples limit its exposure to increases in electricity rates and utilities’ distribution charges. SunEdison’s customers pay a rate that increases but does so predictably and more slowly than grid electricity historically has. Grid prices typically rise along with the rate of inflation, according to the U.S. Energy Information Administration. But the pattern could change and rates could swing upward independently, especially if carbon regulation is imposed at some point. “We’re looking at solar as providing a long-term hedge with price certainty,” says Buckley of Staples.

One more aspect of the plan is what Shah calls “the hook that gets me in the door” to see the CFO. Not only do clients avoid upfront capital costs, they also avoid fixed lease payments, which according to accounting rules are equivalent to a capital cost. When CFOs are weighing where to spend capital, they want to know they’re going to get a sizable return on their investment. Some CFOs require that investments return at least 25 percent—significantly more than the savings that solar power can provide. SunEdison skirts this issue entirely, enabling companies to take the cost of solar panels off the books and treat them as an operating expense, just like utility bills.

The model has been doing well in the marketplace. SunEdison has installed over 125 megawatts of solar power for companies such as Anheuser-Busch and Kohl’s and government entities such as the U.S. Department of Energy. Staples, meanwhile, now wants “to scale it in a way that’s meaningful,” says Buckley. “Eventually, we’d like to have solar on most of the roofs” of the company’s retail and business operations.

Based on this promise of growth, Jigar Shah sold SunEdison in 2009 for $315 million to MEMC, a Missouri-based maker of semiconductors and solar wafers. Shah has moved on and now leads an organization called the Carbon War Room, founded by Virgin Group chairman Richard Branson.

SunEdison’s success has already spawned rivals. Solar City, a company chaired by the famed entrepreneur Elon Musk, has taken the model forward another step by aggressively applying it to homeowners and small businesses. The concept can look even better for small businesses than for large ones, since they have more trouble attracting cheap loans and have fewer staff available to process the often large amounts of paperwork needed to collect government subsidies. “We’ve removed most of the barriers to the adoption of solar,” says Solar City CEO Lyndon Rive. The thousand-employee company has installed solar panels in more than 10,000 locations, with about 25 large installations under way at Walmart stores.

To be sure, solar is still far from competitive with conventional electricity in most markets, especially in locations where it’s not sunny and cheap power is available from dams and coal power plants. Yet this financial model has made it easier for solar to attract funding. “There’s more money chasing solar projects right now than there are solar projects to finance,” Shah says. That in turn could lead to better loan terms and cheaper solar power that no longer requires any government incentives. “We’re damn close,” Shah predicts. “In a year you will hear from the lips of Warren Buffett that solar is a good investment.”

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