Understanding Commercial Solar Leasing

July 25, 2017

 

BUSINESS BRIEF


Solar carport installation made possible by commercial solar financingIs your organization considering going solar? Are you investigating different commercial solar financing options? A solar lease may be a viable choice.

Here are three questions to ask about solar leases to help you decide if this is the right way for your organization to go solar:

What is a commercial solar lease?

Just like any other kind of equipment lease, a solar lease involves paying a monthly fee for the use of equipment someone else, usually a financier like a bank or investor, owns. Leasing the solar system is an effective way to access the benefits of solar without an upfront cash investment and without taking on the obligations of full ownership.

A solar lease can provide a variety of purchase and renewal options. You can renew the contract or purchase the system at the end of your lease term. If you’d like the option to purchase the system, make sure that possibility is written into your lease. 

What are the pros and cons of solar leases?

Leasing comes with both benefits and drawbacks you need to consider before deciding if this is how your organization should pay for solar.

PROS CONS
  • Little to no upfront capital investment
  • Fixed monthly lease payments
  • Lower cost for the energy produced by the system versus standard utility rates—leading to savings over time
  • Option to buy the system at points during and at the end of the lease term
  • May be more beneficial on financial sheets than debt
  • The federal solar Investment Tax Credit (ITC) and accelerated depreciation tax benefits are retained by the lessor
  • You don’t own or control the solar equipment
  • You take on the operating and performance risk of the system (making it important to understand what guarantees you have under the lease agreement)  

The combination of little to no upfront investment, fixed payments and lower utility bills typically leads to an immediate reduction in electricity costs and provides increased savings over the lease term. Lease agreements typically provide options to purchase the solar system during and at the end of the lease term, and they usually offer fixed or floating renewal options. 

How does leasing solar compare to other financing options?

Why might your organization choose to lease a solar installation rather than purchase the equipment outright or enter into a power purchase agreement (PPA)? Let’s compare a typical operating lease with purchasing a system or entering into a PPA.

  • An office building can install leased commercial solar panelsSolar lease vs. purchase: Buying your solar system generally leads to the best return on investment over time in terms of cost savings and tax benefits, but you need upfront capital and the ability to fully monetize any Federal or state solar tax incentives. Not all businesses are able to do this. For those organizations, leasing may be the right option. 

    When you buy your system, you are entitled to the full benefit of the federal ITC, accelerated tax depreciation and any other incentives available in your state or region. With an operating lease, you do not directly benefit from the ITC, though you will probably see pass-through savings in the form of lower monthly payments. 
  • Lease vs. PPA: PPAs are quickly becoming a very popular way for organizations to pay for commercial solar. These agreements allow companies to purchase the energy produced by a solar installation (without owning it) at a fixed cost per kWh over the term of the PPA, commonly 20 or more years. A PPA would have relatively light impact on the energy buyer’s financial statements since (very similar to a monthly electricity bill) what they pay for is based on usage. With a PPA, the system owner carries the financial risk, not the energy buyer. That’s because the buyer only pays for the energy they actually use—not the solar equipment.

    In contrast, leases are a “pure” form of financing and require a fixed rental payment, regardless of how much energy the system produces.

 

SUMMARY

Leasing is one of several commercial solar financing options. Weigh the pros and cons of solar leases carefully against your organization’s needs and priorities before deciding if it’s right for you. Then evaluate several lease options to ensure you find one that best suits your business for years to come.

 

Related links:

Understanding Commercial Solar Financing Options: Power Purchase Agreement (PPA)

Solar Incentives, Policies and Advocacy: 6 Info-Packed Sites to Save and Share

A Quick Introduction to the Solar Investment Tax Credit

How Businesses and Public Entities Can Pay for Solar

 

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