Are energy costs eating your margins? Solar might be the answer
Energy costs make up about 19% of office expenses in the U.S. In the UK, the story is similar. Energy UK and the CBI jointly reported that electricity prices for medium-sized UK businesses are around double the EU median of about €0.15/kWh.
This is because the countries are significantly exposed to gas and its price volatility. A few decades ago, problems such as this could leave us no choice but to accept the reality as it was. Today, investing in renewables, such as solar, is considered a bold solution for the future.
In 2024, renewables helped avoid USD 467 billion in fossil fuel costs globally. About 91% of newly commissioned renewable power projects delivered at lower cost than the cheapest newly installed fossil fuel-based alternative.
This is actually a good example for the businesses to follow. Adopting renewables, especially on-site solar, could be one of the most practical options, as it doesn’t require the land acquisition that wind or hydro projects need.
Another advantage is that the price of commercial solar hardware has fallen steadily over the last decades (Figure 1), which means the payback periods even with increased electricity rates has favourably shortened.
For years, solar panels were mostly advertised from a sustainability perspective. But today, it has increasingly become a part of financial decision, as much as an environmental one. For businesses, it has become an important strategy to bring down the energy costs.
How solar can solve the energy cost problem
Geopolitical tension in oil-producing regions, unpredictable fossil fuel supplies and shifts in government policy are not new to us anymore. For businesses, the ripple effects are undeniable. These forces increase energy costs, which limits company's ability to invest in growth.
But the solution to this is already with us. Generating a portion of our electricity on-site is one of the most efficient ways to manage these uncertainties. Through this system, every unit of electricity our panels produce is a unit we don’t have to buy from a supplier.
This means the electricity will be at wholesale price or even cheaper sometimes. For businesses, solar could therefore be a long-term energy asset sitting on the balance sheet.
But it is also commendable that public perception of solar energy continues to become strong. Figure 2 shows the total global solar capacity added each year. In the figure, gross measures the total new solar capacity physically installed in a year whereas net measures the new installations minus retirements.
The trend has shown huge improvement since we had the energy crisis in 2022. Figure 3 represents the total annual solar capacity added each year in selected regions since 2020.
Solar delivers stability that fossil fuel can’t
Although there is a concern that solar is weather-dependent, modern solar technology performs reliably across variable climates. Business can also forecast annual generation with real confidence, making it far easier to plan budgets and project returns.
Read: 7 disadvantages of solar energy
The important thing is to understand that, adopting solar on-site reduces dependency on grid power. This requires buying less from a supplier, which protects a business from sudden price increase in wholesale rates.
Solar also offers a degree of protection from policy shifts and future carbon costs. As governments tighten carbon targets, businesses that rely heavily on fossil-fuel-based supply may face higher compliance costs down the line.
Read: Renewable energy investments call for stronger commitment to net-zero initiatives
How much do solar panels cost today?
Now, lets focus a bit on the levelized cost of electricity (LCOE), which is the average cost to build and run a solar power over its entire lifetime, divided by the total electricity it produces.
The LCOE fell from USD 0.460/kWh in 2010 to just USD 0.043-0.044/kWh by 2024, according to IRENA. That is a huge 90% decline.
Figure 4 shows how much the LCOE compares across different energy sources. Wind is definitely cheaper than solar but for businesses, on-site solar is more practical from a logistical perspective.
Solar power is a massive investment for many businesses, and its payback period and how much you will save depends heavily on factors, such as the number of solar panels needed, energy consumption, and site conditions.
The main drawback is of course an expensive upfront installation costs that can make solar less attractive to many businesses. But once the payback period is over, they can save a lot for decades.
Read: Wind turbine vs solar panel: which is the ultimate winner?
Is your business ready to switch to solar energy?
An increasing number of businesses have already recognised the advantages of solar energy and have leveraged government financial incentives.
For example, PUMA adopted 100% renewable electricity for its global operations. In 2021, the company achieved an 88% reduction in its carbon emissions compared with its 2017 baseline.
IKEA offers another concrete example: in 2021, the company completed its first solar carpark at its Baltimore, Maryland store. Within just its first few months of operation, the store saw an 84% decrease in the amount of energy it needed to purchase from the grid, translating to a 57% reduction in its energy costs. IKEA now operates 54 rooftop solar arrays across 90% of its U.S. locations.
The solar energy sector is flourishing. With cost-effective pricing and numerous benefits, commercial solar panels are now a feasible energy solution for small to larger businesses.
But today, businesses that are getting the most value from solar are those treating it as the way they’d treat any other major capital decision. Choosing the right site, understanding the financing options, and working with incentive timelines in mind rather than against them.
