Commercial Solar Energy Financing Options

Commercial Building Owners Have Five Financing Options

Corporate financing options are traditionally categorized as “Companyowned” or “Third-party-owned.” but the options provide flexibility to provide both the customer and financing organization options to maximize the benefits to each, hopefully resulting in a “win-win” arrangement for all parties. With cash and loan financing, the customer will own both the solar energy system and the power it produces. With other financing options, like leases and power purchase agreements, the solar installation will be owned by a third party, but the customer will have the right to the energy it produces.

Commercial solar panels are an efficient means of harnessing renewable energy from the sun

Whoever owns the system can take advantage of federal and state tax incentives. This includes the Investment Tax Credit (ITC), which covers 30% of the cost of the system in the form of an Income Tax Credit. However, for this to be helpful, the owner must owe more taxes than the ITC allows them to deduct (in other words, they must have enough tax liability). Customers without enough tax liability may find third-party ownership options preferable, although there are two additional options for owners. First, they can avail themselves of IRS carry-over rules that permit them to utilize the tax benefits in other profitable years. Also, “Tax Equity Arrangements,” such as “Tax Flip Partnerships,” can often solve the problem.

Systems Owned by the Building Owner

Cash Buyers

For those owners who can use cash to purchase their system upfront, an all-cash purchase is a great option. Cash is typically the cheapest method of acquiring renewable solar energy since the business is not subject to interest payments or other fees often experienced with such an acquisition. A cash financing customer needs to have enough cash to pay for the system outright.

Tax Equity

Tax Equity transactions are an essential source of capital for solar projects when a building owner or developer does not have enough taxable income to take full advantage of income tax incentives, even taking loss carryovers into account. This structure provides cash equivalents are desired over tax benefits.

Debt Buyers

Loans are a good option for customers who wish to own their system but prefer not to pay entirely upfront. A loan can be used to finance any part of the project, depending on how much the customer is willing to pay initially. As with cash deals, loans allow customers to take advantage of tax incentives directly. Typically, loan financing monthly savings from solar will be greater than the monthly loan payments so the customer can save money from the start.
Another form of solar financing is a PACE loan (Property Assessed Clean Energy). PACE loans are repaid through the homeowner’s property taxes. Some municipal governments offer these loans in states with enabling legislation.

Systems Owned by a Third Party

Leases and power purchase agreements (PPA) are like renting a solar system. The ownership and right to tax incentives are retained by the company owning the building, but the energy provided is paid to the contract lessor for a set period. In either case, the company owner is responsible for maintaining the system.

Leased Solar Systems

Under a leased solar system, the lessee pays a fixed monthly amount, which is based on the amount of electricity produced by the system. The customer is entitled to the resulting solar energy for the length of the lease, typically for 20 – 25 years.

Power Purchase Agreements

With a PPA, the contract maker agrees to purchase power generated at an agreed-upon price. This is determined on a fractional kilowatt basis. Many have escalation provisions based on utility rate increases. These arrangements are less common than any of the above options