While the number of solar installations completed every year is higher in the residential sector, commercial solar systems (excluding utility-scale, which generate almost 50% of the capacity) are much larger and generate close to 30% of the total amount of solar power every year. This makes commercial solar a significant and lucrative market for any solar company to be involved with.
That said, commercial solar can also be much trickier to finance than your typical run-of-the-mill residential system. In this article, we’ll be breaking down all of those differences, as well as highlighting every financing option available for commercial solar installs.
Differences Between Residential and Commercial Solar Financing
When it comes to residential solar financing, homeowners and solar installers usually have four options available to them – paying in cash, loans, leases, or power purchase agreements (PPAs). All of these options are generally relatively easy to access for most people and cover pretty much every possible financial scenario your typical solar customer might need help with.
On the other hand, commercial solar is often much more complicated and has many different factors that could influence the type of financing required on a project-per-project basis. While many in the commercial sector have more money to spend on their solar project, not everyone wants to or can pay cash,, and it isn’t always the best option anyway.
Commercial Solar Financing Options
Even though residential and commercial solar projects share the four most common financing options available: cash, loans, leases, and PPAs, commercial projects are also eligible for other types of financing options, including tax equity financing and energy service agreements.
Here’s a breakdown of each financing option available for commercial properties, how they work, and what kind of project they may be best suited for.
Power Purchase Agreement (PPA)
PPAs allow homes, businesses, and other institutions to benefit from solar panels without owning their system. Essentially, the system is installed somewhere on the property, but is owned and maintained by a third-party PPA provider.
PPA agreements usually last around 10 – 25 years and will often lock the purchaser into a better rate than they would get by buying their power from their local utility. During the term of the PPA, the system will be maintained by the third-party responsible. After the contract ends, the person or company buying the power will usually have the option to extend the agreement or purchase the system for themselves.
PPA agreements can be set up without any upfront costs associated with them, making them an excellent choice for buildings like schools, charities/non-profits, or churches. They are also an excellent option for any tax-exempt organization, such as a school that isn’t eligible for incentives or tax credits like the Federal Solar Investment Tax Credit (ITC). In a case like this, the actual system owner would qualify, while the organization can benefit from the lower costs associated with the credit.
Leases and PPAs are very similar types of agreements, in the sense that people or entities leasing a system also don’t own it, but the main difference lies in the fact that while the cost of PPAs can vary, leases are set up on a fixed term at a fixed cost.
With a PPA, the customer buys the actual power generated by a specific system, while someone in a lease agreement just pays a previously agreed-upon amount of money with no fluctuation based on the actual power generated by the panels. If you want a trick to remember this difference, consider that with a PPA, you’re buying power, while with a solar lease, you’re renting equipment.
After the first few years, usually around five to seven, the leasee will have the option to either extend the lease or buy the system outright, similar to how someone would lease a car.
Commercial businesses are best suited for solar leases if they want to simply decrease the amount they pay for electricity, as the discount they receive usually covers the cost of leasing the system to begin with. Solar leases also provide a lower upfront investment, freeing up even more corporate funds for other business needs and expenses, leaving the company with more cash in hand to spend on growth.
When looking at whether to offer a PPA or a lease, consider that with PPAs, there are still ways to claim tax incentives and credits, while this isn’t a possibility with loans.
Loans and Cash
Solar loans and cash payments fall under the debt financing portion of commercial financing. Solar loans, much like any other type of loan, allow the customer to own and pay for their own system, but in monthly installments, rather than upfront.
The downside of using a loan to pay for a solar system, however, is that loans include interest rates which can vary a lot and which will also make the system more expensive over time, which can decrease the ROI on the investment.
Just like PPAs and leases, loans free up capital upfront for other business activities, which is great for any commercial entity looking for growth while also benefitting from solar. Unlike a PPA or a lease, however, the system owner can benefit directly from the solar ITC or other incentives or tax credits that may be available to them since the system is theirs upfront.
Loans are also easily accessible to most people and companies since they’re available from most banks, solar companies and manufacturers, other lending institutions, and even municipalities.
Cash deals, on the other hand, are very simple and don’t really require much explanation – the business simply purchases and owns its system straight from the get-go. With a cash deal, the entire system is paid for upon installation, requires no monthly payments, includes no interest rates, and the business can qualify for any incentives available to them.
Loans and cash payments are great for any company with a lot of capital to invest in a solar system upfront who wants to directly benefit from incentives and use their solar panels as an asset.
Energy Service Agreement
Energy Service Agreements (ESAs) are similar to leases, but the contracts are performance-based rather than set on a fixed term. In an ESA, the building owner pays the provider back through the electricity bill savings they receive through the solar energy system.
The ESA provider can also provide maintenance to the system as well as any upgrades or improvements throughout the term of the agreement if included. Once the ESA term is over, the owner of the building continues to benefit from the low costs and continues to benefit from all the savings incurred through the system.
ESAs are great agreements for commercial entities looking for a low-cost, high-benefit agreement that will continue to increase the value of their building without any of the responsibilities of maintaining their systems themselves. Energy Service Agreements can also be transferred over to any new building owners, increasing the sell value of the property.
Tax Equity Financing – Partnership Flips, Inverted Leases and Sale-Leasebacks
A lesser-known means of financing your commercial project is through Tax Equity Financing. Tax equity covers around 35% of the cost of the solar system, while the rest must be covered with debt and/or equity. Tax equity financing is available in three structures – partnership flips, inverted leases, and sale-leasebacks.
With a partnership flip, solar companies will involve a tax equity investor as a partner and own a renewable energy project together. The tax equity investor will own 99% of the project until their internal rate of return is met. After that point, the majority ownership will flip, giving the solar developer that ownership.
In an inverted lease, the tax equity investor and the developer form two partnerships, an LLC partnership, and a tenancy partnership. The investor leases the project from the solar developer and realizes the tax incentives through the LLC.
Finally, with a sale-leaseback, the solar developer sells the solar project to the tax equity investor, who then leases it back to the solar developer, who can then receive the revenue generated through the system.
These types of agreements are great for pairing solar projects that qualify for incentives and tax credits but can’t use them with investors who can and are interested in investing in renewable energy.
Commercial Property Assessed Clean Energy (C-PACE) Program
Last on the list, C-PACE is also a great commercial solar financing option. Currently available in 36 states such as Colorado, Florida, and Ohio, the C-PACE program allows for property upgrades, including renewable energy installations, to be affordably financed with low upfront costs.
C-PACE is different from the other financing options above in the sense that the project is paid for through a property tax assessment since the project increases the value of the property. Building owners borrow money for the project and then pay it back on their property tax bill.
Using C-PACE to help finance a commercial solar project is a great option for a property owner looking for long-term financing with low payments, as well as those with an interest in going solar for environmental reasons who also want to be able to transfer their financial obligations when they sell the building.
When it comes to commercial solar financing, there isn’t a one-size-fits-all option. Every commercial solar contractor needs to know what’s available to help their clients finance their solar projects in a way that makes sense for their specific needs and intentions.
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