So your organization is considering going solar, but there’s concern about how to pay for it and a bit of confusion about the solar financing options available. That’s pretty common, so here’s a quick primer on the main ways a business, educational institution or public organization can pay for solar, including purchasing or leasing a system, entering into a Power Purchase Agreement (PPA) or obtaining public financing. This brief will clearly explain the most common solar funding options.
The most common ways to get solar are:
- Power Purchase Agreement (PPA)
- Public financing
Purchase solar panels
Buy your solar panel system outright—with cash on hand or by getting a loan—to own the solar equipment and directly benefit from all the associated federal, state and local renewable energy tax credits and incentives for which you may be eligible. Paying cash and operating your own solar installation is the fastest path to project completion because you do not have to wait for credit checks, approvals, funding and involvement from an additional third-party stakeholder. If you have available capital and the ability to absorb solar tax credits and accelerated depreciation, you may find a cash purchase of your solar system to be the best option.
If you don’t have cash on hand, you may be able to a get capital improvement loan from your bank or obtain financing from the solar company itself. When you speak to a solar company’s consultants, ask them to connect you with their solar financing partners early in the process to learn about your options and eligibility.
However, note that if you buy a solar system outright, you will be responsible for its operation and maintenance, so consider ongoing capital costs and take product warranties under careful consideration when making your decision. More than likely your solar provider will have maintenance options; there are also a number of operations and maintenance companies available.
Lease a solar system
A solar system lease can provide a variety of purchase and renewal options. There are two kinds of solar leases you might consider: a capital lease or an operating lease. An operating lease is like renting the equipment, while a capital lease functions more like a loan since the asset is treated like it’s owned by the lessee. Like traditional equipment leases, solar operating leases provide use of the solar equipment itself in exchange for a monthly lease payment. You benefit from the clean electricity generated from the rented installation, and you do not have to operate or maintain the solar panel system yourself. With a capital lease, you could be responsible for some operations and maintenance, but you may also be able to directly take advantage of the significant federal solar investment tax credit (ITC), which might make it worth the extra commitment.
The combination of little to no upfront cost, known lease payments and lower utility bills typically leads to an immediate reduction in electricity costs and provides increased savings over time. Lease agreements typically last 7-10 years (sometimes as many as 15), and you may have the option to purchase the solar system at the end of that time at a reduced cost, renew the lease or have the system removed.
Enter into a solar power purchase agreement (PPA)
A PPA is a financing arrangement that allows businesses, government agencies and educational institutions to purchase solar electricity with no upfront capital cost. You buy the energy, not the solar equipment. It’s a great way to boost your green profile without having to take on the responsibilities of being a solar system owner-operator.
A third party PPA provider pays for the cost of a solar installation on or near your facilities (like a rooftop, parking lot or unused land). The provider takes responsibility for ownership, operation and solar panel maintenance. You simply enter into an agreement to purchase the electricity produced by the system at a predetermined rate per kilowatt-hour (kWh), the same unit of measurement as your standard utility bill.
A typical PPA agreement might run 20-30 years and may include a variety of purchase and renewal options. A pre-paid PPA (PPPA) with a large percentage of the PPA payments provided at the beginning of the agreement is another variation of this funding method.
Since PPA rates are defined over a long period of time, they can offer a hedge against high inflation to the cost of energy from the grid. They’ve become the most popular way to acquire solar energy. In addition to no initial capital outlay and providing lower-priced energy at a pre-determined fixed rate, PPAs are also a convenient way to monetize tax incentives and shift system performance risk to the PPA provider. They are not treated as debt or liabilities on your balance sheet, so they will not negatively affect your debt to equity or other leverage ratios, if that’s a concern.
Obtain public solar financing
Public entities, including government agencies and educational institutions, can often pay for solar systems through numerous financing options not available to typical businesses, including government-subsidized bonds, block grants, tax-exempt leases and special incentives.
Some examples of ways public entities pay for solar:
- Bond elections – A K-12 school system might raise the amount needed to buy a solar panel installation by asking taxpayers to approve a bond for the purchase amount.
- Block grants – A large natural history museum might win a federal or state grant to install renewable energy and green building initiatives.
- Tax Exempt Municipal Lease (TEML) – A city’s wastewater facility could finance a solar energy project to power its pumps by entering into a low-cost lease agreement with a traditional lender.
- Public-private collaboration – A state agency might allow a nearby office highrise with insufficient land or roof space of its own to build a solar installation on publicly-owned land in exchange for sharing the energy it produces with the state.
- Community solar – A public utility might enter into a PPA for the output of a centrally-located local solar farm that the community directly commits to funding. In lieu of PPA proceeds, the utility’s customers receive a prorated kWh credit on their monthly electricity bill that accounts for their share of power generated from the solar installation they helped fund.
- Special incentives – There are a wide variety of incentives available at the federal, state and local levels that are meant to encourage organizations of all kinds to increase the percentage of their energy that comes from renewable sources. These might include tax credits, rebates, research grants, penalty avoidance and so on. You can start by reviewing this list of solar policies and incentives that might benefit your organization.
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. The benefits, in terms of both sustainability and long-term cost savings, can be tremendous—but getting buy-in for the investment from stakeholders within many organizations can take quite some time and effort. People want to be good stewards of the planet, but they also must be good stewards of the company’s or taxpayers’ money. Make it easier for them to say “yes” by understanding the financial options and making a solid case for the economic and social benefits of going solar.
This post originally appeared on the SunPower Business Feed.