Thinking about financing solar power? You don’t have to be a detective to uncover which option is best for your organization—you only have to think like one. Just follow the five W’s (and sometimes H)—a line of questioning used in any basic investigation. The answers can help determine how to pay for commercial solar using the best option for your organization.
Let’s open the case file and get you thinking like Sherlock Holmes (or Nancy Drew, if you prefer).
Who are you? Is your organization a company? A school? A government office? Do you pay taxes? As you will see, the type of entity pursuing this clean energy source often narrows the solar power financing options available.
What type of commercial solar system are you planning to use? How much does solar power cost based on that decision? Different types of installations come with different price tags—and that can have a dramatic impact on financing choices.
Where is your organization located? Are there state or local tax incentives available? Is net metering an option to send unused solar electricity back into the power grid? Where you are can have a major influence on how your project is financed.
When do you need access to this clean, renewable energy source? If your solar power needs are time sensitive, your financing choice could be important. For example, buying a commercial solar power system with cash is likely to be the quickest, least complicated path.
Why are you choosing commercial solar? Is it to lower energy costs? Meet corporate sustainability goals? Improve your corporate triple bottom line? Knowing your ultimate objective(s) can also influence the financing choice you make.
Keep these basic questions in mind as we delve deeper into our financing investigation. How well you understand your organization’s situation and objectives can help determine your best way of financing solar power.
Likely suspects for solar financing*
The mystery before us is not uncovering the different ways of financing solar power. By now, you’re probably familiar with how solar projects can be funded:
- Third-party loans
- Property Assessed Clean Energy (PACE) loan
- Commercial solar leasing
- Power purchase agreement (PPA)
- Public financing
The real question is: Which (perhaps a sixth W?) commercial solar financing option is best for your organization? While any of these options can help you reach your corporate sustainability goals and enjoy other benefits (such as access to clean electricity and lower utility bills), how you achieve those goals can vary. As a result, you will need to dig a bit deeper in your investigation.
*If you’re a bit hazy about specific features of some of the financing options listed, you can do a quick background check by following the links provided above.
Identifying characteristics: Specific cases
Unfortunately, deciding which solar power financing option is best for your organization is not a linear process. Every situation is unique. Even when goals for different organizations appear to be the same, the importance attributed to each influencing factor may be vastly different, leading to different funding decisions. Now that you’re thinking like a detective, the good news is you can view different considerations more critically. The following questions illustrate how financing choices are impacted by different scenarios.
Are you a taxable entity?
The primary benefits of direct ownership are the associated tax credits. If your organization does not have the tax appetite (i.e., the capacity and desire) to fully take advantage of these incentives, owning a system might not be the best option. So, what about leasing a system or entering into a PPA (where an organization agrees to buy the energy produced, but someone else owns the system)?
For leases and PPAs, the system owner receives the tax advantages and often passes those along in the form of lower electricity costs or reduced lease payments. While tax-exempt organizations can technically enter into leasing agreements, it would be considered a “disqualified lease”—meaning the system owner would forfeit any tax benefits that would otherwise be available. In other words, no tax advantages to pass along. That’s why, for many non-taxable organizations, PPAs are an attractive option.
Likewise, public entities enjoy a wide range of funding options not available to the private sector. These can include bond elections, block grants, tax-exempt municipal leases and more. There may also be opportunities for public-private collaboration.
Do you own or lease property?
The question is relatively moot for most of the financing options listed. While it could be a factor for those seeking loan financing (property may serve as collateral in some cases), property ownership is not required for most. The exception is for those seeking PACE loans. Because payments to retire these obligations are built into property taxes—ownership is required. (Renters interested in solar power for business will need to work with the property owner before moving forward with any installation.)
Do you have capital available?
If you want to buy your commercial solar power system installation with cash, you obviously need sufficient capital on hand to make that happen. Certain third-party loan agreements may also require a down payment. PPAs and commercial solar leases, on the other hand, generally don’t require significant upfront investments. Keep in mind that having available capital does not necessarily make a cash purchase the best option.
For example, if your organization lacks the capacity to take advantage of all available tax credits associated with ownership, buying might not be the best choice. Or perhaps your organization isn’t comfortable taking on the operation and maintenance (O&M) responsibilities that come with owning a solar power system. Then again, owning can give you the fastest return on your investment and the best long-term value. As you can see, there are many factors at play. Understanding the different sides of these variables can help you make the best choice.
Does your organization have good credit?
While not applicable for cash deals, having good credit is required for any company hoping to enter into a PPA or solar lease agreement. Good credit is also needed to find the best third-party loan support. (With PACE loans, the need for good credit can be offset by using property as collateral.)
Are you interested in owning the solar equipment?
Buying with cash or through a loan leads directly to ownership. If it’s an investment in high-quality solar equipment from a reputable provider, you can expect decades of low-maintenance sustainable energy. However, “low” maintenance doesn’t mean “no” maintenance. Owners are responsible for O&M either directly or by hiring an outside service to oversee these duties. Buyers also need to be comfortable accepting the operating and performance risk associated with the ownership of the solar power system.
Even if your organization does not purchase initially, there can still be a path to later ownership. PPAs and lease agreements often include options to buy the solar equipment at a fair market value price.
Where are you located?
Location can be a key differentiating factor for financing. PPAs, for example, are not available in all states. And a PACE loan is only possible if the local municipality is participating in the program. While traditional loans or cash purchases are not geographically restricted, if the goal is to take advantage of tax credits or other incentives available to solar power system owners—location is important. Knowing what incentives are available in your area can help point you to the best solar financing choice.
Just the facts
Knowing the Who, What, Where, When, Why (and sometimes How) of your organization’s situation can help frame your exploration of financing solar power. Working with a reputable solar equipment provider or qualified energy consultant can also help inform your choice. Let the investigation begin!