A recent study by Deloitte demonstrated just how interested business owners are in going solar. The study, “Resources 2017 Study – Energy Management: Sustainability & Progress,” found that half of the businesses surveyed said they’re looking to procure more electricity from renewable energy. Yet, these renewable energy enthusiasts often fail to take action when faced with the capital costs associated with installing renewable energy projects.
Those who balk at these capital costs have a number of innovative financing options available to them. They include shared savings, leasing, on-bill financing and PACE.
Because these options were all pioneered for energy efficiency projects, it’s possible to combine energy efficiency and renewable energy projects in a way that allows efficiency savings to help pay for the cost of the renewable energy project.
This works well for commercial enterprises, particularly those that can use the tax benefits associated with renewable energy—the ITC and MACRS. And in some cases, non-profits can take advantage of combining the two types of projects, for financing purposes.
“However, combination projects are tricky because the more successful the energy efficiency project, the smaller the renewable project,” said Christopher Lord, managing director of CapIron Inc., and expert instructor for HeatSpring’s intensive 6-Week Solar Executive MBA Training.
Shared Savings for Solar
Shared savings is a financing agreement in which a private company offers to implement a solar or efficiency program in exchange for a portion of the energy cost savings.
The third-party financing entity covers the up-front costs of the equipment, and in return customers repay a negotiated percentage of the initial cost through the savings on their monthly utility bills. This means that customers don’t need any up-front capital and only pay a portion of the savings on their bills, making it an attractive prospect for the risk-adverse. This frees up capital to be spent in other important areas.
A lease is a contract that conveys equipment or capital intended for energy-related and other improvements in exchange for periodic payments over a specified time. The up-front cost of a lease is much lower than buying the equipment, meaning businesses can use the resulting energy savings to pay leases off over time. This is yet another way energy savings can pay for equipment upgrades. Leases are faster and more flexible tools than bond financing and many other options, according to the US DOE’s Office of Energy Efficiency and Renewable Energy.
Public entities such as schools and local and state governments can take advantage of tax-exempt, lease-purchase agreements, says the DOE. These organizations can pay for upgrades by using money already set aside in an annual utility budget.
“A tax-exempt lease-purchase agreement, also known as a municipal lease, presumes that the public sector organization will own the assets after the lease term expires,” explains the DOE. “Further, the interest rates are appreciably lower than those on a taxable commercial lease- purchase agreement because the interest paid is exempt from federal income tax for public sector organizations.”
The lower interest rate for a tax-exempt lease purchase can help keep costs down for municipal entities and other non-tax paying entities. On the downside, the tax-exempt lease structure loses the ITC and MACRS. In other words, under a tax-exempt lease-purchase structure, the municipality or tax-exempt lessee/purchaser loses the benefit of the ITC and MACRS because it is not a taxpayer. When the value of the ITC and MACRS provides higher benefits than the lower interest rate in a tax-exempt lease-purchase structure, a municipality may be better off entering a PPA with a taxable (commercial PPA) provider that can then create an operating (taxable) lease. It’s important to run an economic model to see which method produces the lowest life-cycle cost to the client.
For companies that opt for commercial leases, the commercial entity holds the lease and pays taxes on the interest. Commercial leasing is a good idea when the company or organization wants to cut costs, generate positive cash flow and preserve capital. The lessor can claim the tax incentives. States and local governments, on the other hand, as public entities can’t claim tax incentives.
Companies interested in leasing can look into single-investor leases, also called private-placement agreements, which, according to the DOE, are attractive for smaller projects. Another leasing option is a Certificate of Participation, which involves obtaining financing from more than one investor. Because the costs are spread across numerous investors, the costs can be lower than those of private placement leases, according to the DOE.
On bill-financing allows companies to avoid the up-front costs of solar projects by repaying the costs in their monthly utility bill. According to the American Council for an Energy-Efficient Economy (ACEEE), on-bill financing might be more reliable than other traditional financing options, including unsecured loans or lease agreements.
“The theory is that people and businesses tend to pay their utility bills; because of this, an associated charge on a utility bill may have a higher repayment rate than an equivalent charge not on the utility bill,” ACEEE says. “Given this potentially higher repayment rate, on-bill may lead to better financing terms than are available for unsecured consumer or small business loans.”
While this option is traditionally used for energy efficiency projects, it’s available in some areas for renewable energy. For example, NYSERDA says that customers who participate in the NY-Sun Incentive Program can utilize on-bill financing.
PACE: Property Assessed Clean Energy Financing
PACE is a program that funds clean energy initiatives and is sponsored by state and local governments to create jobs, protect the environment, and promote economic development. Thirty-three states and the District of Columbia have passed legislation that supports PACE, and 40 PACE programs are currently in effect in 19 states. PACE pays for the entirety of a project’s costs and is repaid for up to 20 years with an assessment added to the property’s tax bill. PACE funding can go toward a variety of projects, solar projects. To learn more PACE and which states fund it, visit http://pacenation.us.
Non-Profit Options: No Up-Front Costs for Solar Project
Willy Street Co-op is a natural foods grocery store in Madison, Wisc., whose mission is to be environmentally and socially sustainable. When the company’s small solar installation was damaged during a storm three years ago, members were unsure they would be able to afford a new one. Fortunately, the co-op was able to find a third-party financer.
The third party was an anonymous “angel donor” who received a tax credit in return, along with investment solar bonds offered by Legacy Solar and purchased by Willy Street members.
The bonds offer a 3- to 5-percent return per year, using the money the co-op would otherwise have had to pay the utility for electricity. After six years, the co-op can buy the solar array minus the price of the tax credit.
The arrangement allowed for the installation of solar much more quickly and easily that would have been possible if the co-op had to pay all the money up-front, according to an article in Midwestern Energy News.
“We got to do a solar project without a huge capital outlay, and we will be able to buy the equipment in the future. So it benefits us, it benefits the investor, it benefits our owners, it benefits the environment,” said the co-op.
While you’re investigating these financing options, keep in mind that the challenge, as with any financing arrangement, is that the smaller the project, the less money available to pay transaction costs. For that reason, it is important to keep the structures simple and use pre-existing financing infrastructure with standard documentation (PACE, for example) wherever possible.
“An unfortunate truth of all energy projects is that attorneys always make money, but the vendors are lucky to cover costs,” said Lord. “For that reason, it is important to keep financing arrangements as simple as possible, and easily replicable from one deal to the next.”
Solar Finance Masters Series Training
This article is sponsored by the Solar Finance Masters Series which includes our top two solar finance courses taught by experts Chris Lord and Keith Cronin. Students who complete the full series earn a Solar Finance Masters Series certificate. Enrollment in the Solar Finance Masters Series includes enrollment in two separate courses: Solar Executive MBA Training and Financial Modeling for Solar PV Projects and each course can also be taken individually. Related support article: Compare: Solar Executive MBA Training VS Financial Modeling for Solar PV Projects.