How to build your business case for industrial rooftop solar in the UK

The solar landscape in the UK has undergone a notable transformation in the past 10 years, shifting from a period of government-driven subsidies to one where economics reign supreme. Solar power, now recognised as the lowest cost form of electricity in many instances, has surged in popularity for commercial and industrial businesses. However, amidst the highly volatile and dynamic energy markets, energy procurement professionals face the challenge of constructing a robust business case for industrial rooftop solar. Here we explore the key factors to consider when building a compelling case for both management and energy procurement teams.

Building the business case 

Businesses typically have three core strategic drivers for rooftop solar power: financial savings, sustainability, and security, complemented by the added benefit of enhancing brand reputation. Before beginning to construct any business case, it’s important to determine which of these drivers takes precedence. “Those prioritising carbon footprint reduction will often aim to build the largest possible system, whereas optimising for savings typically involves tailoring the system size to the site’s consumption profile,” says Xander Penney, Business Development Director, UK&I, at Alight.

Strategic driver 1: Financial savings

For most organisations, creating a strong financial savings case is the number one priority. To make this tangible, we will consider a hypothetical 2 MWp rooftop solar system, with 100% of the generated power self-consumed on site and bought through a Power Purchase Agreement (PPA).

Step 1: Calculate offsetable demand

The first task is to calculate offsetable demand — in other words the amount of electricity that could be produced from installing a solar PV system. In our example, we’ll assume the system produces 1000 kWh per installed kWp each year, resulting in an annual output of 2,000 MWh. In practice, this figure would be accurately modeled by the developer’s engineering team, considering site-specific factors such as roof orientation, panel angle, and shading.

Step 2: Calculate offsettable cost per MWh 

The next step involves assessing the electricity price difference between grid-supplied electricity and solar PV-generated power for the first year. To do this, the solar developer will calculate a PPA price based on an agreed term length (10-25 years) and compare this to both commodity and non-commodity costs, sourced from the customer’s recent electricity invoices.

Commodity costs refer to the wholesale electricity cost that you pay, which today accounts for almost 80% of the total electricity price (see Exhibit 2 below), but is expected to fall significantly in future. Non-commodity costs make up an increasingly large share of the price, which include government taxes and levies, plus transmission and distribution network charges. Most of the non-commodity costs can be removed with rooftop solar, as there is no need to use the transmission or distribution network.

For our example, we will use the most recent UK government data, which shows the average electricity price in Q2 2023 for businesses (including commodity and non-commodity) was £279/MWh. Current rooftop solar PPA prices can range from £100-£150/MWh, so let’s assume a saving of £100/MWh.

Step 3: Calculate annual savings

In Step 3, we determine the year-one annual savings, which has a higher degree of certainty relative to long-term forecasting. The calculation is straightforward: the offsetable demand from Step 1 (2,000 MWh) multiplied by the electricity price difference from Step 2 (£100/MWh) yields an annual savings figure of £200,000.

Step 4: Forecasting future savings

While the year-one savings tend to be more accurate, projecting future savings introduces complexity due to the inherent uncertainties in energy markets. Forecasts extend over the PPA term, ranging from 10 to 25 years, but as the solar assets have a lifetime of up to 30 years, businesses should also consider the residual value at the end of the PPA term.

Two key considerations shape these projections: the fluctuation of commodity and non-commodity costs. “While the general consensus is that commodity prices will drop and non-commodity costs will increase, the past two years have reminded us that it is nearly impossible to predict future pricing,” says Xander.

Given the unpredictability of these factors, businesses often model base, best-case, and worst-case scenarios to accommodate varying market conditions. Inflation is typically excluded from these models, as both PPA prices and electricity rates are assumed to track inflation.

“In navigating the intricate landscape of savings, we encourage businesses to adopt a balanced approach, using market forecasts while acknowledging the inherent challenges of predicting future market conditions,” adds Xander.

Strategic driver 2: Sustainability

While solar panels operate without emitting CO2, they possess an embedded carbon footprint from manufacturing, transport, installation, and decommissioning. The sustainability evaluation involves calculating the emissions difference between the grid and solar PV (residual mix approach) to approximate carbon avoidance provided by the project. The UK grid emissions factor varies, but is roughly 200 kg of CO2 per MWh, compared to a solar PV life cycle emissions factor of 30 kg of CO2 per MWh. Based on a difference of 170kg of CO2 per MWh and our offsetable demand of 2,000M Wh per year, we would expect a reduction of 340,000 kg of CO2 per year, or 340 tonnes.

The result informs the year-one emissions reduction, a critical metric for assessing the immediate environmental impact and setting a plan to reach net-zero. Further, projections for future emissions reduction necessitate considering the expected decrease in the UK grid emissions factor over time. 

Strategic driver 3: Security

Security, a multifaceted consideration, encompasses both price certainty and resilience. A rooftop solar installation offers price certainty, enabling accurate business planning and mitigating the risk of power price spikes witnessed in recent volatile markets.

Equally crucial is resilience during disruptions, such as power cuts, especially with the increasing integration of intermittent renewables onto the grid. As a result, there is a growing appetite to co-locate storage with rooftop solar, not only to improve resilience but also to generate revenue through arbitrage and ancillary services for the UK grid.

While price security is relatively straightforward to quantify, the valuation of resilience remains challenging. Nonetheless, acknowledging its growing importance sets the stage for future assessments and underscores the resilience of a solar-powered infrastructure.

Summary

Navigating the terrain of industrial rooftop solar can seem complex and challenging. As your business embarks on this transformative path, we encourage a judicious balance between detailed projections and simplified assumptions. “It’s not merely about presenting numbers; it’s about winning the hearts and minds of stakeholders across the organisation, ranging from site managers to C-suite executives,” says Xander. 

At Alight, we work alongside our customers to construct a tailored and compelling case for rooftop solar. In a landscape where savings, sustainability, and security intertwine, rooftop energy generation is truly a no-regret move.