The residential, commercial and utility scale solar financing markets are different and have their own dynamics.
If you’re really interested in learn more about financing commercial solar PV projects, I have three resources for you.
- Click here to sign up for our Solar Executive MBA and Learn how to Finance Commercial Solar PPAs from A to Z
- Check out our Mastering Commercial Solar Finance course and get hours of expert instruction, advice from a $20MM solar tax equity investor, and a downloadable guide for just $29!
- Check out Solar Action Alliance to learn more about the most bountiful and powerful energy source on earth: the sun.
The residential market is driven by 3rd party PPA providers and companies offering their own in-house financing. For example, 3rd party providers include SunRun and BrightGrid , as well as companies offering their own in-house financing, like SolarCity. The 3rd party companies provide a useful tool because it allows smaller companies to compete with the larger SolarCity types by allowing them to offer competitive financing. Each of these companies has been able to tap into large amounts of institutional capital by providing stable returns.
The utility market (20MW+) on the other hand, is very concentrated and is typically dominated by manufacturers who create or buy their own development department. In the SEIA’s last report 51% of the utility market was dominated by only 12 firms. As you can see from the list of top utility solar developers below most are manufacturers, and the majority of the independent developers, like Recurrent Energy, have been bought by manufactures. Recurrent was recently acquired by Sharp last year.
The commercial market in the built environment is a different environment from both utility and residential scale, as it requires a more technical understanding of solar, structural and roofing of the building then residential but is also heavily dependent on financing.
Now Enter John Hopkins of SunPower
A successful solar project requires careful consideration of available financing options in order to optimize savings over the life of the system. Federal, state, and local incentives are available to promote more widespread deployment of solar, provide financing flexibility, and increase the return on investment in commercial solar systems. While the types of state and local incentives can vary, compelling federal incentives remain in place to assist with solar energy development in the United States.
The two most important federal incentives are the Investment Tax Credit (ITC) and the Modified Accelerated Cost-Recovery System (MACRS) with bonus depreciation. The ITC may be taken as a tax credit or, until December 31, 2011, may be taken in the form of a cash grant, and can offset up to 30% of the cost of a commercial solar project. The MACRS bonus depreciation schedule may allow a solar system owner to recover their investment in the system at an accelerated pace via depreciation deductions. The allowable first year deduction for solar systems is 100% of the depreciable basis for systems placed in service by the end of 2011, and 50% of the depreciable basis for systems placed in service by the end of 2012. 1
There are different risk/reward tradeoffs for each type of financing structure, and a developer should help the customer choose the most appropriate structure depending on the customer’s risk appetite, cash flow constraints (if any), and existing tax liabilities. The below table provides a snapshot of three major financing structures primarily used for commercial customers. Descriptions of each structure are on the pages that follow 2:
Own All the Benefits of Solar Energy
The most simple and direct path to financing a solar project is to purchase the system directly. If the customer has available capital, existing tax liabilities, and can benefit from accelerated depreciation of the solar equipment, purchasing the system can be the best option, as a cash purchase typically offers the maximum return on a solar investment. A summary of the benefits of a cash purchase is as follows:
- Quick, Streamlined Process
Reduce the total time required for a solar project and begin benefiting from clean, solar electricity as quickly as possible.
- Attain Greatest Potential Savings
By avoiding third party expenses and interest rates, a customer can maintain complete control of the solar PV energy system while realizing the highest savings from their solar investment.
- Efficient Application of Incentives
The owner of a commercial solar installation is eligible for a federal investment tax credit, worth 30% of the system value (as previously described). When combined with additional state and local rebates, the cost of a commercial solar power project can be offset by 50% or more.
- Protection from Rising Electricity Prices
Secure a low electricity rate for the lifetime of the system and reduce exposure to volatile energy rates.
- Promote Clean Energy
Take advantage of Renewable Energy Credits (RECs) and promote an organization’s corporate social responsibility message by becoming a solar-powered company.
The Solar Lease
Lease the system, use the energy (and have the option to purchase the system in the future)
A lease structure can allow solar-powered companies to benefit from solar energy in exchange for a monthly lease payment for the use of the system hardware. Typical commercial solar lease agreements range from 8 to12 years, at which point the customer has several options (described below) including the option to purchase the system for a residual value. For this reason, a lease can be viewed as a longer path towards system ownership when compared to the cash purchase scenario.
For organizations that cannot fully capitalize on available tax incentives (e.g. tax-exempt entities) and want to avoid upfront capital investment, a lease may be the best way to facilitate the transition to solar power. A summary of the benefits of a typical lease financing structure is as follows:
- Low Upfront Cost
There are little to no upfront costs for a lease, allowing the customer to reduce their initial capital investment.
- Save on Electricity Costs
Monthly lease payments are more than offset by the reduction in monthly electricity bills and incentives, resulting in savings on total electricity costs (see below graphic).
- Protection against Rising Electricity Prices: Solar’s known cost of power (i.e. zero) per kilowatt-hour reduces exposure to volatile conventional energy rates.
- Flexible Options: At the end of the lease term the customer may choose to purchase the solar power system for a low residual value (based on the then fair market value), renew the lease, or opt to have the system removed.
The combination of known lease payments and lower utility bills typically leads to an immediate reduction in operating costs and provides increased savings over time.
Power Purchase Agreement
Buy the Energy Only
A power purchase agreement allows a customer to purchase solar energy on a monthly basis, much like they already purchase electricity from their local utility – but at typically lower rates. The PPA customer hosts the solar equipment at their site/facility, but does not have any of the responsibilities that come with system ownership (i.e. maintenance). The host only pays for clean, renewable energy at a set rate per kilowatt hour, which is the same measurement of energy seen on a monthly utility bill. A PPA provides financing flexibility and predictable future energy rates, with no upfront costs, and no operational risk. As with the lease option, a PPA would make sense for a cash-constrained organization. A summary of the benefits of a typical PPA structure is as follows:
- No Capital Investment
No initial capital investment, since the host only pays for the solar electricity that is generated.
- Fixed Energy Rates
A PPA provides a powerful hedge against volatile electricity prices with known costs (see graphic below).
- Full-Service Project Management & Maintenance
The solar provider designs, develops, and operates the solar energy system from start-to-finish. The host customer has no responsibility for owning, operating or maintaining the solar system equipment.
- Monetize Tax Credits & Solar Incentives
A host customer can benefit from solar tax credits even if the organization has no tax liabilities. The PPA financier is able to monetize available tax incentives and pass these savings on to the host in the form of a lower PPA rate.
There are several financing structures available in today’s market that are helping the rapid deployment of solar PV around the U.S. As mentioned, a developer should help guide a customer to the financing option that makes the most economic sense. Working with a partner who has deep experience in financing, designing, and constructing large solar power installations is highly recommended
NOTE: SunPower does not provide tax advice. Confirm all tax assumptions and treatment of incentives with your accountant.
- 1. Database of State Incentives for Renewables & Efficiency: “Federal Financial Incentives [for Solar]”. http://www.dsireusa.org/incentives/index.cfm?state=us&re=1&EE=1&spv=1&st=1
- 2. SunPower Corporation website: “Solar Financing Overview”. http://us.sunpowercorp.com/commercial/how-to-buy/solar-financing/
About John Hopkins:
John is a project development analyst in SunPower’s East Coast office, and has broad experience in project development, financial analysis, and complex deal structuring. As an analyst for SunPower Corporation, John is responsible for large-scale solar photovoltaic project development in North America. Since joining SunPower, John has worked on the development of over 35MW of commercial and utility-scale PV systems. Prior to joining SunPower, John spent four years in the investment banking industry at Goldman Sachs, and he holds a B.A. in economics from Yale University.