If you are a facility manager that is thinking of installing solar on the property you manage, you might be wondering how to pay for it. How much are the costs? Are there financing options? What are the other opportunities available out there?
The cost of installing a 350 kilowatt (kW) solar system can cost approximately $600,000 before any state or federal incentives are applied. This can be a relatively expensive investment for some companies, so the solar market has developed financing options so that businesses can adopt solar energy without the steep out-of-pocket expense.
The good news is that if the company you work for does not have the budget to directly purchase the solar system upfront (the best option if you want to take the most advantage of all the federal and state solar incentives available), several solar panel financing options are available for the commercial market. Each option has its pros and cons, and making a decision depends on your company’s budget, location, and financial goals.
This blog does a deep dive on three solar financing options for businesses across the U.S, including a power purchase agreement (PPA), a solar loan, and a solar lease. Let’s break down what each financing option entails and which one may be the most suitable option for your company.
Solar Power Purchase Agreement (PPA)
PPAs are what we consider a “third-party ownership model” in the solar energy sector. PPAs have become one of the most sought-after financing methods for commercial solar projects. In addition to this option providing companies a way to install solar without paying significant upfront costs, another major plus is that the third-party owner manages all ongoing operations and maintenance for the arrays.
Under a PPA, your company would enter a long-term energy contract (typically between 15-20 years) with a solar developer like Pivot Energy. The developer would own and maintain all the solar equipment on your facility, and you would have to pay a predetermined dollar per kilowatt-hour (kWh) rate for the electricity produced through the solar energy system. The PPA rate for solar is typically lower than what you pay your current utility company, which means you can start saving money on your electricity expenses from day one of having solar on your property.
Moreover, the advantage of entering a PPA is that it provides your business cost certainty over the duration of the contract and a hedge against higher energy costs in the future. This can be particularly beneficial to you as a facility manager, as you can start seeing improvements in your property’s net operating budget over time.
There are some factors that you need to consider before entering into a PPA. Since your company would not have direct ownership over the renewable energy system, the developer reaps the benefits of all incentives available for installing solar. This outcome may not be the best option for companies with an extremely low cost of capital or desire to earn incentives, such as rebates and tax credits. However, public institutions, such as schools and nonprofits that do not have a tax liability, may want to opt for a PPA because it allows them to “monetize” the credits in the form of a lower PPA rate from the developer.
Overall, the PPA is a great way to adopt solar quickly without facing the upfront cost burden. All incentives are monetized in the form of a lower electricity rate, providing savings from the day you start producing energy through your facility’s solar system.
Solar loans are similar to any other loans that companies take to do retrofits, infrastructural upgrades, and property improvements. After taking a solar loan, the company that you work for remains a direct owner of the solar system. However, the financing institution holds a lien on the solar equipment itself—similar to other loans for real estate or a new car. The interest rate, term length, and credit requirements depend on many factors, such as your facility’s location, the lender type, and how much you are willing to pay for the monthly installments.
However, what makes solar loans different from other property improvement loans is the fact that your company can start generating a significant financial return from them. Unlike aesthetic improvements to your facility, solar results in an improvement to your balance sheet in the form of reduced electricity bills to your local utility. As the system owner, your company would also reap all solar policy incentives, including the federal investment tax credit (ITC), state rebates, and income from the sale of solar renewable energy credits (SRECs).
In addition to traditional banks, many other lending institutions offer solar loans, such as solar panel manufacturers, utilities, and credit unions. Many municipal governments across the U.S also offer Commercial Property Assessed Clean Energy (C-PACE) financing. C-PACE provides commercial entities loans to conduct energy efficiency and clean energy retrofits on their property. After the solar system is installed, the loan can be repaid with an annual assessment of the property’s tax bill. C-PACE eligibility is relatively easy, and it is an excellent option for companies that have historically faced a low credit history.
It is important to consider that while your business can significantly benefit from the solar loan option, the monthly savings and return on investment (ROI) will be based on the difference between your loan installments and the savings from adopting solar. The target is to have a monthly electricity bill impact greater than your loan’s monthly cost after incentives. By combining the positive effects of net metering, state and federal incentives, and SRECs, the average commercial solar energy system owner can start seeing a positive ROI within 8.5 years.
As a facility manager, it is important to note that you are responsible for all future maintenance and operational costs for the solar arrays under the direct ownership model. If your facilities management team does not have the resources, budget, or desire to manage this over time, a solar PPA or lease may be the more suitable option for you.
Under a solar lease, also known as an operating lease, companies pay a fixed monthly fee or lease payment to a developer in exchange for the right to use the solar equipment on their facility. This monthly rate is determined by the solar system size, complexity of the installation, and expected production.
The main difference between a solar lease and a PPA is that the fee being paid under a lease option is a fixed total amount each month, whereas a PPA is a kWh rate based on your building’s energy consumption. Solar leases are considerably less popular than PPAs for commercial solar customers as it can be more difficult to compare apples to apples with utility costs. Instead, the solar lease is generally more preferred by customers in the residential solar market, though it is an attractive solution in certain markets where PPAs are not offered.
However, with both options, businesses can avoid paying high installation costs and would not have to spend any additional money on maintenance for their system. This creates an opportunity, like with a PPA, to reap savings on monthly electricity costs from the moment the solar system becomes operational.
Contact a Solar Expert
Pivot Energy has a proven track record of helping commercial clients decide which solar financing option is best for their business. Our finance expertise rivals our energy capabilities. Of the 450+ commercial and industrial solar projects completed to date, nearly half have had a financing component. From C-PACE to PPAs – our team has experts on it all and can help walk you through the numerous options. To learn more about how Pivot can support your solar targets, reach out to speak with a member of our team today.