So you’re finally convinced that solar is going to save your company a lot of money, but how will you make this kind of un-budgeted capital investment when you’ve grown so accustomed to paying for electricity on a monthly basis? There are four basic ways of paying for your solar project that we want to help you understand.
The answer is fortunately very straightforward and simple to answer because there are many options available now for you to pay for your solar system or the solar energy produced by it in much the same way as you currently pay the utility. It is widely known that there is a 30% investment tax credit available to the owner of a solar power system, but sometimes assumed (incorrectly) that if you are unable to use the tax credit then the benefits of the tax credit can’t be realized. As will be explained further below, a third-party can build the system for you and utilize the tax credit, then either lease it to you or sell you the energy produced by it at a discounted rate due to the fact that they are able to claim back 30% of the expenditure in constructing it as a tax credit. Discussed below are the most common ways to finance the purchase of a solar power system.
PPA (Power Purchase Agreement): This most closely resembles the arrangement that you typically have with your utility. A third-party system owner will pay for the engineering and construction of the system and will sell the energy produced by it to you on a per-kWh basis in the same way that the utility does. Since your project will be net metered and your utility bill will be credited for every kWh exported to the grid, the sum of your bill for solar electricity and your remaining utility bill for electricity will be less than the amount you paid to the utility before the installation of the system. This cost differential can range from 10% savings up to 50% savings in some cases. Also, PPAs are available at fixed prices per kWh for up to 25 years. This means that as utility rates rise over that period, your cost of electricity will remain fixed. Generally, you will have the option to buy the system at it’s fair market value at different periods during the PPA term. This ability to hedge against rising electricity rates makes the PPA an economical choice for most businesses.
Lease: Your system could be built and paid for by a third-party owner and then leased back to you for a fixed monthly payment. This is similar to the PPA in that a third-party will own the system and utilize the tax benefits, but it is different in that you are not actually paying for the energy itself but are instead paying for use of the system that produces the energy. If the system produces more energy in one month than another month because it’s sunnier, then under the PPA the payment would be different but under the lease it would be the same. One benefit of the lease over the PPA is that IRS rules allow the lessee to buy the system from the lessor for a pre-agreed price at the end of 10 years, whereas under the PPA the transaction has to be done at fair market value.
Loan: A bank loan is a great way to finance the purchase of a solar project. The solar industry is now mature enough and the value created for your business by the increase in net operating income from the cost savings generated by a solar project is now well-enough understood by the lending community that 100% of the cost of a system can be financed at favorable interest rates with 10 to 15 year terms. If you take out a loan, investment tax credits equivalent to 30% of the development and construction cost will accrue to you, as will the 5 year MACRS depreciation benefits. Ask your banker about their experience with solar lending to see if they have a loan product that could work for you.
PACE Loan: PACE stands for Property-Assessed Clean Energy and is a unique form of financing that allows the purchase of a solar energy system to be paid for through an increase in the assessed value of property which is then repaid over a 10 to 20-year term along with semi-annual property tax payments. There is no balance sheet impact of this form of financing and all tax benefits accrue to the borrower/assessee. If the property is sold during the term the new owner simply continues paying for the assessment along with property taxes at total amounts well lower than what the utilities bills would be if the property owner had continued to buy electricity in the traditional way.
Whether your business is cold storage, warehousing, dairy or production or processing of citrus, almonds, pistachios or any other type of agricultural of manufacturing business, solar can begin to save you a lot of money from day 1 with no required investment. ImMODO has worked with providers of each of the forms of financing explained above and can help you determine which of these is the best fit for your needs.