Exploring different financing options for commercial solar: Which one is right for you?
As businesses become increasingly focused on sustainability, the demand for commercial solar power is on the rise. However, the cost of installing solar equipment can be a major barrier for building owners. Luckily, there are several financing options available to help make solar power more accessible. In this article, we'll explore four different financing options for commercial solar: cash purchase, solar lease, solar power purchase agreement (PPA), and PACE financing.
Note: Third-party financing is a term often used to refer generically to solar lease, solar PPA, and PACE financing.
Cash Purchase / Self-Financing
When a building owner has enough money to buy solar equipment themselves, they can choose cash purchase or self-financing. They pay for everything upfront and own the solar system, as well as any tax credits and incentives. This means they can save money on utility bills and even make extra money by selling energy to tenants (PPA) or increasing rent.
Complete ownership of the solar system and all related incentives
Reduced utility operating expenses
Potential for additional revenue by selling energy to tenants
No interest payments or ongoing debt
In a solar lease, building owners borrow money from a financial institution to install solar equipment. The solar equipment acts as collateral, and the financial institution usually covers the entire installation cost. Owners benefit from tax credits and lower utility bills, which help pay off the lease. After 7 years (or less), the owner owns the solar system without any debt.
Reduced utility bill and monetization of tax credits
Ownership of the solar asset after lease term (typically 7 years or less)
CO2 credit advantages
Solar Power Purchase Agreement (PPA):
A Solar PPA is an agreement between an offtaker and a solar investor. The investor installs, owns, and maintains the solar system on the property, and sells energy to the offtaker at a lower price than regular utility rates. The offtaker (if they are the building owner) are also able to charge the investor roof rent in exchange for the ability to sell energy to the tenants. The PPA lasts for a specific time (usually 25 years), after which the owner can extend the contract or buy the solar system from the investor. The investor receives the tax credits and other benefits.
No upfront cost for the building owner
Lower energy prices than traditional utility rates
Solar investor is responsible for design, installation, and maintenance
Option to buy the solar system at the end of the PPA term
Property Assessed Clean Energy (PACE) or Commercial Property Assessed Clean Energy (CPACE) is a financing method to pay for energy-saving upgrades to buildings, like solar projects. PACE rules vary by state, but they generally let lenders fund up to 100% of the project cost. Building owners repay the loan through their property taxes, and the loan stays with the property if it's sold. Most financing terms are for 20-25 years and generally no less then 3 years. Although the cost of capital might be higher, accounting advantages can offset the extra cost. The building owner keeps the tax credits and other benefits.
Can fund up to 100% of the project cost
Loan stays with the property, not the owner, upon sale
Environmental and tax attributes remain with the building owner
Potential accounting advantages depending on the state's PACE rules
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