Commercial Solar Financing: Leasing Your System vs. Owning It
One of the biggest concerns of anyone going solar is the upfront cost and/or how to finance it. With commercial solar systems, you basically have four main options: Purchase with Cash or a Loan; Solar Lease; Solar Power Purchase Agreement (Solar PPA); or Commercial Property Assessed Clean Energy (PACE).
We’ve discussed PACE financing in a recent post, so let’s go over the other three:
Paying for Commercial Solar PV with Cash or a Loan
If you have the capital, paying for a commercial solar system with cash can be the most cost effective way to go solar. REC Solar’s commercial financial analysis tools can give you specific numbers, but it’s not uncommon to achieve payback in 5 to 7 years. After that, you’ll be decreasing your operating costs with free solar power for the remaining life of your solar installation. Since solar PV systems last 25 years or longer, those savings could be significant.
The other advantages of a cash purchase:
- You may be eligible to receive the Federal Investment Tax Credit (ITC), which reduces your gross system cost by up to 30%.
- You may be eligible for another IRS tax deduction in the form of Modified Accelerated Cost Recovery System (MACRS), which accelerates the depreciation of the solar installation over a 5-year period.
- You may be eligible to receive any available state or utility rebates or tax credits.
- You may be eligible to collect the proceeds from the sale of any available Solar Renewable Energy Credits (SRECs) generated by the solar system.
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 should still be substantial.
Aside from the upfront cost, the only real down side of the cash purchase is the fact that your business is responsible for operations and maintenance (O&M). The good news is that solar maintenance costs are usually minimal, requiring occasional cleaning of the solar panels and replacing the inverter every 12 to 15 years. If you’d rather not handle these issues, you can always contract with REC Solar for O & M services.
Paying for Commercial Solar with a Solar Lease
There are two common types of commercial solar leases. The first, a Capital Lease (aka Finance/Non-Tax/Buyout), is similar to a long-term loan with a small buyout payment, typically $1, at the end of the term. The second type, an Operating Lease (aka Tax/True/FMV), is the most common type, so we’ll focus on that:
The Operating Lease’s biggest advantages are that there are no or very little upfront costs for installing the commercial solar system and the client does not need tax appetite. Therefore, your business cash flow will stay fluid, and you can use your capital for other investments. On top of that, you may be able to save 10% to 15% off your electric bill with a solar lease. Other advantages:
- Off balance sheet accounting treatment and 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.
A solar lease is a great deal if you want to save working capital or don’t have the necessary tax appetite to take advantage of the ITC and depreciation. However, there are some caveats:
- Over time, you’ll save less with a solar lease than you would with a cash purchase.
- Since you don’t own the system, the solar leasing company will receive all of the tax incentives; however, applicable rebates and revenues generated from SRECs are still enjoyed by the customer.
- The leasing payment is fixed during the term; however Operating Leases require an end of term buyout, typically 20% of the principal balance.
Paying for Commercial Solar with a Solar Power Purchase Agreement (Solar PPA)
By far, the most common type of commercial solar financing today is the solar power purchase agreement (solar PPA). Solar PPAs are very similar to a solar operating lease: You still get the solar system installed for little or no cost, and the monthly payments are typically less than the current electric bill. However, you don’t own the system or get any rebates or tax incentives.
The greatest difference between a solar PPA and a solar lease is how you’re billed. Instead of a flat monthly lease payment, your solar energy production is precisely metered, so your business only pays for the amount of power that your solar panels generate that month. More importantly, the solar rate is always designed to be lower than the utility’s electric rates.
Other differences between a solar PPA and a Lease are the length of term and service. While solar lease terms range between 7-10 years, PPA’s are often 20-25 years with Performance Guarantees and O&M Contracts included in the price.
As a simple example, if your utility is charging you an average of $.25 per kWh for its power, the solar PPA company may charge you a rate of just $.20 per kWh, saving you 20% of your electric bill for the next 20 years.
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.
Whether you choose a purchase, lease, or solar PPA, we maintain relationships with many solar financing companies, and we have excellent financial analysis tools to discover the most cost-effective financing method for your business. Click here to get a free estimate and specific savings numbers for your business.