Financing

The most common commercial solar energy system financing options are:

  • Purchase with a loan
  • Solar lease
  • Power purchasing agreement (PPA)

The pros and cons of each approach are outlined below:

Cash Purchase/Loan Solar Financing Options

Pros Cons
  • Your business will receive the Federal Investment Tax Credit, which reduces your gross solar energy system cost by 30%.
  • Your business will benefit from the Modified Accelerated Cost Recovery System (MACRS), which accelerates the depreciation of your solar energy installation over a 5-year period
  • Your business will receive any available state or utility solar rebates or tax credits.
  • Your business will collect the proceeds from the sale of any available Solar Renewable Energy Credits (SRECs) generated by your commercial solar energy system.
  • Interest payments on your solar installation loan are tax deductible
  • Your business will benefit from lower interest rates than those implicit in leases or PPAs because the solar energy loan is secured by your balance sheet
  • Upfront capital cost (cash, not loan)
  • You are responsible for operations and maintenance (O&M).
  • Your business will have reduced borrowing capacity, except when the project is financed

With a cash purchase of a commercial solar energy system, it is not uncommon to achieve payback in 5 to 7 years. After that, your business will enjoy decreased operating costs with free solar power for the remaining life of your solar energy installation.

These same advantages apply for a business loan, although the payback will be slower due to interest charges. However, with today’s low interest rates, your ROI and IRR on a commercial solar investment should still be substantial.

Commercial solar panel maintenance costs are minimal, requiring occasional cleaning of the solar panels and replacing the system’s inverter every 12 to 15 years. These services can be contracted to a third party.

There are a number of financial institutions that offer loans tailored specifically to solar investments. We will be happy to provide more information upon request.

Solar Lease (Operating Lease)

Pros Cons
  • No or very little upfront capital cost.
  • No need for a tax appetite.
  • Off balance sheet accounting treatment.
  • Solar lease payments can be deducted as an operating expense.
  • Faster path to system ownership and greater long-term savings than a Solar PPA. Typical lease terms are 7-9 years in length.
  • Since your business doesn’t own the solar energy system, the solar leasing company will receive all of the tax incentives. Applicable solar rebates and revenues generated from SRECs may still flow to your business, depending on the terms of your lease.
  • The solar leasing payment is fixed during the term; however Operating Leases require an end of term buyout, typically 20% of the principal balance.
  • Over time, your business will save less with a solar lease than you would with a cash purchase.
  • Reduced borrowing capacity
    NOTE: It is often argued that because leases are off-balance sheet, they do not constrain working capital. However, as a practical matter, this is not true because financial institutions typically include all long-term obligations when evaluating debt service capacity.

Solar Power Purchasing Agreement (PPA)

Solar PPAs are very similar to a solar operating lease: you still get a commercial solar power system installed for little or no cost. In some cases, the monthly payments for your solar installation can be structured to fall below your current electric bill. However, your business will not own your solar power system or get any rebates or tax incentives.

Pros Cons
  • No or very little upfront capital cost.
  • Energy expense is deductible as an operating expense.
  • Performance Guarantees (with sufficient reserve to be manageable by the third party owner) and O&M Contracts included in the price
  • Since you don’t own the commercial solar power system, the third party owner of the system will receive all of the tax incentives (Applicable rebates and revenues generated from SRECs may still flow to your business depending on your purchase terms).
  • What happens to the commercial solar system when the PPA contract expires is typically at the discretion of the third party owner.
  • Your business will be locked in to 20-25 year contract.

As with solar leases, commercial solar PPA structures can vary widely and are negotiable. Some may have a flat kWh rate for 20 years, while others may have an escalator.

At Switch to Solar, we’re experts at helping businesses decide which financing options are most appropriate for their projects. Just give us a call to find out more.

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