When you’re thinking about going solar, it helps to understand what commercial solar financing options are available. In fact, your entire decision might depend on what type of financing makes the most sense for your organization.
In this episode of the SunPower Business Broadcast, host Jenna Green speaks with commercial solar financing expert Alex Selowsky to discover insightful tips about the four primary financial approaches:
Jenna Green: Hello. Welcome to the SunPower Business Broadcast. I’m Jenna Green. Now, when you’re considering commercial solar, one of the first questions, I assume, that comes to most professionals’ minds is, “How would we pay for this?” Or perhaps more accurately, “How much money is it going to take in order to get a commercial solar system installed and operational so that we can start saving money?”
These are quite valid questions, considering this is an investment that you’re about to make. We are fortunate enough to have someone with us who can not only help answer those questions but he can also explain the various ways that commercial organizations, businesses, schools, public agencies, etc. can fund their commercial solar projects.
Alex Selowsky, who is a member of SunPower’s finance team, lives and breathes this stuff on a daily basis so we thought he would be the perfect person to help the uninitiated like myself better understand the ways to fund commercial solar projects. You may notice a little bit of background noise as Alex is a very busy guy and I caught up with him while he was traveling. But I think you will find what he had to say extremely educational and beneficial. Here’s what Alex had to say.
Jenna Green: Alex, thank you so much for taking time to be with us today. Welcome to the podcast.
Alex Selowsky: Thank you, Jenna. Thanks for having me.
Jenna Green: Okay, Alex. Let’s start from square one. I’m making an assumption that, given all the variables that can come into play, that no two commercial solar projects are identical. They’re kind of like snowflakes, right?
Alex Selowsky: Well, hopefully, they’re a little less fragile than snowflakes, but they’re certainly all very different than each other.
Jenna Green: Can you give us a couple of examples of how they’re very different from each other?
Alex Selowsky: Sure. The main way that they differ is sort of the type of customer that will actually use the solar system. We see customers like small elementary schools and small school districts to massive tech companies like Amazon and Apple. Those type of customers have a very different approach to financing a solar project and interacting with a solar company like SunPower. I’d say that the type of customer is perhaps the main way that a solar project differs.
Jenna Green: Okay, so there are ways to get commercial solar without having to pay for it upfront. Correct?
Alex Selowsky: Yes, that is correct. That’s actually what we see most often, is customers not paying for the system upfront.
Jenna Green: Okay. Obviously, that probably opens up options for these organizations that maybe don’t have that sort of cash on hand or who might not be willing or able to secure a loan. Before we get to those other methods, can you tell us a little bit about some of the reasons why an organization might choose to use cash or get a loan to purchase their system outright?
Alex Selowsky: Right. That’s probably the simplest way that a customer can finance a solar project, simply buying it with cash or by taking out a loan to purchase it. You can really enjoy the most kind of long-term savings over time. It’s a clean and simple type of transaction and savings are the highest over time. The reason that this is not that common of a way to finance the system is simply because most customers that are interested in a solar system just don’t have the upfront cash to make a cash purchase, or they don’t have the necessary credit to take out a loan. Those are kind of the two main constraints to either purchasing a system with cash or through a loan.
Another big constraint actually to this method is that most customers don’t have the tax capacity to monetize the tax benefits that come with a solar system. When I say that, I mean that basically a solar system has a lot of tax-based incentives. Most customers don’t really pay enough taxes to be able to count those tax benefits against their tax liabilities. That’s a third and very important constraint to this cash or loan decision.
Jenna Green: Okay. Obviously, the benefit, like you said, is if you can’t get a loan of if you’re hesitant to put that cash forward upfront, those are some of the benefits. Now, is there a flip side to it? Are there maybe circumstances where this sort of thing might not be a good idea?
Alex Selowsky: Yes. I mean, like I said before, the main reasons why a cash or loan approach would not be a good idea where it might not be feasible for a customer is, they don’t have the upfront capital or they don’t want to put that kind of expense on their balance sheet, they don’t have the credit to take out the loan, or they just don’t have the sort of tax profile that would make sense to own the solar system. There are a lot of tax benefits and tax implications that come with being the outright owner of the system. That usually wouldn’t make sense for the types of customers that are interested in solar.
A lot of the customers that we see at SunPower are school districts, universities or federal agencies that don’t have that much money upfront and don’t really have the sort of approvals to spend a lot of money and they also are tax-exempt. That kind of fulfills two of the three reasons why a cash or a loan purchase wouldn’t make sense. They don’t have the money upfront and they don’t really have the tax profile that would justify owning this system outright.
Jenna Green: Okay. We may have gotten a little bit ahead of ourselves in talking about this. There are other funding options, correct? Like solar leasing and PPAs. Can you explain each of those a little bit to us?
Alex Selowsky: Yes. In addition to the cash or loan approach, there’s three other ways. The first is a power purchase agreement, which is what we see most often. That kind of makes up the majority of the solar project sales that we engage in here, is through a power purchase agreement. The way a power purchase agreement, or PPA for short, works is, you don’t pay anything upfront and you pay for the power as it’s generated on a per-kilowatt-hour basis. The PPA rate, which is basically the price you pay per unit of energy, is almost always lower than the rate that the customer would previously have paid to a utility. We offer savings per unit of energy that we offer through the solar system.
Jenna Green: Can you tell us what the basic concept is? I mean, I know you kind of went into it but–
Alex Selowsky: Sure.
Jenna Green: If you were going to explain a PPA to someone in a couple of sentences or a paragraph, what would you tell them?
Alex Selowsky: Right. A power purchase agreement in and of itself is a contract between a solar company and the customer who wants to buy power. That contract basically dictates a price saying ten cents per kilowatt hour over a given term like a 15- or 20- or even a 25-year period. Say, a PPA, for example, might have a basic term of 20 years. The customer would buy power at ten cents per kilowatt hour.
Typically, that ten cents would be lower than the price that they would pay to a utility for power that comes directly through the grid; maybe they’re paying thirteen or fourteen cents previously. Because there’s that reduction from what they paid to a utility to what they’re paying for the solar system, that’s how they kind of realize the economic benefits and the savings from the solar system.
Jenna Green: Okay. In that instance, you’re more or less kind of hosting the system. You’re not actually leasing or purchasing. Is that correct?
Alex Selowsky: Right. There’s no ownership of the system. It might be on the commercial customer’s site or facility, but they’re really just buying power as it flows into their facility.
Jenna Green: Now, you can also lease a system, correct? You don’t have to necessarily get a loan to try to buy a system. You can lease it, kind of like a car. Right?
Alex Selowsky: Yes, that’s correct. A customer could also lease a system, which has a similar advantage to the PPA in that you don’t have to provide any capital upfront to purchase the system. It’s a fixed monthly lease rate for the system rather than a rate that is based on the amount you produce. That’s the primary difference between a lease and a PPA.
I guess one of the downsides of a lease, relative to a PPA, is that the customer pays that fixed monthly lease payment, regardless of how much the system produces. So, if the system doesn’t produce as much as you would expect, you still have to pay the same amount. Whereas, in a PPA, you only pay based on how much the system produces. In a lease, basically the customer takes on a little bit of risk related to the system’s performance.
However, on sort of an aggregate basis, if you compare the lease term to the term of a PPA, a lease would be a little bit cheaper. It’s a little bit cheaper in the mechanism, because it’s fixed and it doesn’t depend on the amount of power that’s produced.
Jenna Green: That makes total sense. Can you lease-to-own a system, like a car?
Alex Selowsky: Yes, you can. The customer always has the option. In fact, in both a PPA and a lease, the customer has the option of buying the system during any point over the course of the term. That is sort of an inherent part of either contract for a lease or for a PPA contract.
Jenna Green: Okay. Alex, the last thing that I see on the list here, as far as options go, is public financing. Can you tell us what that means?
Alex Selowsky: Yes, absolutely. We don’t see public financing quite as often as the other approaches. Public financing is exclusively used by public agencies and federal agencies. Basically, the way public financing would work is, say, a municipal government is interested in purchasing a solar project. They can issue bonds to the general public and the sale proceeds from the issuance of that bond can be used to buy a solar system.
In addition, a public agency either at the municipal, state or federal level can take advantage of grants from the government to purchase the solar system. Obviously, the type of customers is sort of limited that can use public financing; it has to be a public agency. But if it does qualify under that sort of customer description, it can certainly take advantage of some of the public financing options.
Jenna Green: I believe you said PPAs are the most common way.
Alex Selowsky: Yes. We see, I’d say, most probably around two-thirds of the projects that we see here at SunPower are financed through a PPA. It’s become a very common approach throughout the solar industry.
Jenna Green: Is it common for certain industries to choose one option over the other? As far as, if somebody’s listening and they’re in education versus in corporate, do you usually push that PPA first or are there different ways that work better for different industries?
Alex Selowsky: I guess any sort of public agency or federal agency or school district would almost always use a PPA because they just don’t really have the budget to buy an expensive system and they also just don’t have the tax profile that would make owning a system feasible. On the flip side, the types of customers that we see that maybe are more inclined to buy a system outright with cash are sort of our big corporate customers, big retail chains, big tech companies—places like that that do have large budgets. They have a lot of capital that they can spend and they also have very large tax liabilities, which means that they can actually monetize the tax benefits that come with owning a solar system. I think that’s sort of the customer segment that’s most likely to choose a cash purchase rather than a PPA—large corporate customers.
Jenna Green: You were talking about how the lease and the PPA can work toward owning the system, what is the approximate life on these systems? If you’re leasing it and you do end up purchasing the system or you’re owning it outright, do they have a pretty long life? So, by the time you own it, it’s not needing to be replaced right away?
Alex Selowsky: Yes, absolutely. Solar systems, I think conventional wisdom in the industry would tell you that solar systems can last at least 35 years.
Jenna Green: Okay.
Alex Selowsky: A lease term or a PPA term is usually capped at 15 to 20 years, so there is a lot of life and usefulness to this system after the end of the term.
Jenna Green: Yes, it sounds like it’s almost double.
Alex Selowsky: Yes. In most cases, it is.
Jenna Green: Well, is there anything else you want to tell our listeners about these options?
Alex Selowsky: Well, they’re all worth exploring. Definitely look into PPAs. They can save you a lot of money over time.
Jenna Green: Okay, great. Just to kind of wrap up for a second, if somebody is in an industry and they’re looking at these commercial solar financing projects, it sounds like there’s basically four ways that they can pay for it. They can do it with cash or a loan upfront. If they don’t have that investment or if they don’t want to make that investment upfront, you can go with a lease, which you said also you can lease-to-own. Along the same vein, just with a slightly different, a little less risky pay-for-power-as-you-go way is the PPA, otherwise known as the power purchase agreement. Then there’s the public financing option, which isn’t quite as popular. Did I get those right?
Alex Selowsky: Yes, you nailed it.
Jenna Green: Okay. Well, if anybody listening to this has any questions, I say we send them to Alex, because he certainly knows what he’s talking about. Alex, thank you so much for joining us today. I, for one, don’t know a whole lot about the different ways that this works—the different payment options that we have—so I learned quite a bit today. Thank you for coming in and sharing your knowledge with us.
Alex Selowsky: Thanks for having me, Jenna.
Jenna Green: Alright. Well, ladies and gentlemen, that was Alex Selowsky of the finance team at SunPower. We hope that you learned as much as I did today. Thanks for listening. We’ll catch you next time. Bye.