How to determine the right method for funding commercial solar projects

December 6, 2017

Learn more about SunPower commercial solar financing

 

BUSINESS BRIEF


Two executives discuss solar financing optionsLet’s face it. Going solar can be complicated. With several ways to pay, and each with its own advantages and disadvantages, it can be difficult to know what’s right for your organization. This guide to solar financing should get you pointed in the right direction by exploring some basic questions. 

Should you own or finance?

Owning solar by paying cash or getting a loan typically offers the best long-term return on investment. This assumes you’re paying taxes and can take advantage of any available solar tax incentives. Commercial solar leases or PPAs are good options if you cannot utilize these tax incentives or don’t have much (or any) upfront capital.

Here’s a simple rule: If your organization’s tax bill exceeds half the solar project cost, you may benefit by owning the system and paying via cash or loan. But if the energy buyer is a non-profit, a government entity or a commercial enterprise that pays no or few taxes, a third-party-owned system financed by lease or commercial solar PPA may be a better fit.

  Direct Ownership Third-Party Ownership
Owner Customer Investor or Financier
Available Options Cash, Loan, PACE PPA, Lease
Impact on Energy Cost Depends on tax position and capital cost PPA (Higher), Lease (Lower)
Upfront Investment High Low
Balance Sheet Impact Heavy PPA (Light), Lease (Heavy)
Customer Retains Tax Benefits Yes No
Performance Risk Customer PPA (Investor), Lease (Customer)
Renewable Energy Credits Optional Optional

What financing options are available?

Figuring out the best way to pay for solar can be one of the more challenging parts of the process for businesses and other organizations who want to go solar.

There are three main financial paths to solar, each with its own considerations: cash, lease or PPA.

  Cash Lease PPA
Ownership Direct ownership Third-party owned Third-party owned
Payment Upfront (or over time depending on how cash purchase is financed) Periodic (monthly/quarterly) rental payments Pay for kWh generated
Upfront Costs One-time cost None None
Accounting On balance sheet On or off
balance sheet
Off balance sheet
Use of or output from solar asset Lifetime of solar asset 15 – 20 years 10 – 25 years

Cash

The simplest path to financing a solar project is to purchase the system directly. You buy and operate the solar installation, which allows you to directly benefit from any available federal, state and local solar incentives. If you have available capital and the tax appetite to absorb tax credits and accelerated depreciation, you may find a direct purchase via cash or loan to be the best option.

Average retail electricity prices in the US from 1990 to 2015

BENEFITS

  • Off balance sheet
  • Fixed/reduced energy costs
  • No upfront cost of capital
  • Hedge against volatile electricity prices
  • Project financier assumes power generation risk

PPA

A solar power purchase agreement (PPA) is a financial agreement where a solar developer builds a solar project on your property or somewhere in your region (called offsite solar) and then sells the electricity to you at a prearranged fixed rate that is typically lower than the local utility’s retail rate. The rate your organization pays is “subsidized” by the tax incentives retained by the project owner.

The solar project owner (financier) assumes the risk because you, the energy buyer, only pay for kilowatt hours that are actually produced by the solar system. Additionally, since your organization does not own the solar project, it is not held on the balance sheet.

Savings over time with PPAs

BENEFITS

  • No upfront cost of capital
  • Fixed/reduced energy costs
  • Hedge against volatile electricity prices
  • Project financier assumes power generation risk

Lease

Commercial solar leases can be a great answer if your organization is trying to determine how to afford solar. A lease allows an organization to rent a solar system in return for a regular fixed payment. The combination of known lease payments and lower utility bills typically leads to an immediate reduction in electricity costs and provides increased savings over time. At the end of the lease agreement (typically 15 – 20 years), you have the option to purchase the system, renew the lease or have the system removed.

Organizations with long-term procurement strategies can see higher savings with a lease than a PPA because of process efficiencies gained from standardized contracts and lower cost capital. Also, the project operating risk resides with the lessee, but it can be mitigated through performance guarantees and operations and maintenance (O&M) services.

Benefits of solar leases

BENEFITS

  • Little to no upfront cost of capital
  • Reduced energy costs
  • On or off balance sheet options

Which should you choose?

Each model has its own benefits and drawbacks to consider. For example, when you purchase a system, you have control over the equipment, but you need to account for ongoing operations and maintenance. When you lease your system, someone else usually takes care of maintenance and repairs, but you must make the lease payment whether or not the equipment is optimally producing electricity.

With a PPA, you’re not renting equipment, you’re buying electricity. Instead of buying electricity from your utility, you are buying from the PPA financier. You get a locked-in price that protects you from volatile energy price changes, and if the system doesn’t produce energy, you don’t pay for it. But if the system doesn’t produce the expected output, you will have to purchase remaining electricity needs from the grid.

CASH

PPA

LEASE

  • Offers greatest savings over time
  • Requires access to capital
  • Takes advantage of tax credits and accelerated depreciation
  • No upfront capital required
  • Pay only for the power that’s generated
  • Lock in energy rates typically lower than utility
  • Higher buyout fees than lease
  • No direct ability to take advantage of tax and depreciation incentives
  • No upfront capital required
  • Pay lease payment whether system is working or not
  • Typically, a savings over original electricity bill
  • Lower buyout fees than PPA
  • No direct ability to take advantage of tax and depreciation incentives

SUMMARY

As you can see, there are many paths that can lead your organization to clean, renewable commercial solar power. Hopefully, you now have a better idea about which route may be best for your situation. And remember—you don’t have to be alone on this journey toward sustainability. Working with a reputable solar equipment provider or qualified energy consultant can also help you navigate the many choices available.  

Learn more about SunPower commercial solar financing

 

Related links:

The mystery of financing solar power: Which option is best for you?

How solar power can increase your commercial property value

Is commercial solar right for your organization?

Understanding why businesses go solar

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