Let’s face it. Going solar can seem 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 (power purchase agreements) are good options if you cannot utilize these tax incentives or don’t have much (or don’t want to invest 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 you’re 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)|
|Balance Sheet Impact||Heavy||PPA (Light), Lease (Heavy)|
|Customer Retains Tax Benefits||Yes||No|
|Performance Risk||Customer||PPA (Investor), Lease (Customer)|
|Renewable Energy Credits1||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 that want to go solar.
There are three main financial paths to solar, each with its own considerations: cash, lease or 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 balance sheet||Off balance sheet|
|Use of or Output from Solar Asset||Lifetime of solar asset||5 – 15 years||20 – 30 years|
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. This enables you to start saving on electricity costs immediately.
- Greatest savings over time
- Direct advantage of eligible tax credits or other incentives
- Free generated electricity for the lifetime of the system
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.
- No upfront cost of capital
- Fixed/reduced energy costs
- Hedge against volatile electricity prices
- Project financier assumes power generation risk
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 5 to 15 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.
Which should you choose?
Each financial 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.
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 as to 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.
1 Not retaining ownership of your Renewable Energy Credits (RECs) can result in your inability to make environmental claims when advertising your solar project.
2 The sample above may not represent the average customer’s experience. Customer savings vary depending upon a number of factors, including (but not limited to) the following: equipment used, system size, system orientation and shading, insulation available, applicability utility rates and rate structure, as well as customer’s eligibility for rebates, incentives and net-metering or similar programs (the availability of which may differ for each customer).
3 Incentives, rebates and tax credits vary and are subject to change. SunPower does not warrant, guarantee or otherwise advise its customers about specific tax outcomes. Consult with your tax advisor regarding the solar tax credit and how it applies to your specific circumstances. Please visit the dsireusa.org website for detailed solar policy information.