A Power Purchase Agreement (PPA) is a financing arrangement that allows businesses or government agencies to purchase solar electricity with no upfront capital cost. To achieve this, a “host” organization provides unused rooftop, land, or parking lot space as a location for a solar installation. A third party PPA provider pays for the cost of the solar installation and assumes all responsibility for ownership, operation, and maintenance once the solar project is complete.
As the host organization, you enter into an agreement to purchase the electricity produced by the system owned by the PPA provider at a predetermined rate per kilowatt-hour, the same unit of measurement on your standard utility bill.
A well-structured PPA allows you to reduce electricity costs immediately and realize increased savings over time as grid electricity prices rise. Once the PPA contract period expires (typically 15 – 20 years), you can purchase the system at a reduced price, initiate another PPA, or have the solar installation removed.
Benefits Of PPAs
- No initial capital investment since you only pay for the solar electricity that is produced.
- Fixed energy rates. A PPA provides a powerful hedge against volatile electricity prices.
- No responsibility for system operation or maintenance.
- Benefit from solar tax credits, even if your organization has no tax liability to offset. The PPA financier can monetize available tax incentives and pass these savings on to you in the form of a lower PPA rate.
Key PPA Considerations
PPAs provide access to solar electricity without the burden of owning or operating solar equipment by transferring the initial project cost to a PPA provider. Entering a PPA requires a detailed contract and thorough credit review. As a result, choosing a PPA will typically extend a project’s timeline relative to other financing options.
Property Assessed Clean Energy (PACE) is a financing mechanism that enables low-cost, long-term funding for energy efficiency, renewable energy, and water conservation projects. PACE financing is repaid as an assessment on the property’s regular tax bill and is processed the same way as other local public benefit assessments (sidewalks, sewers) have been for decades. Depending on local legislation, PACE can be used for commercial, nonprofit, and residential properties.
PACE is a national initiative, but programs are established locally and tailored to meet regional market needs. State legislation is passed that authorizes municipalities to establish PACE programs, and local governments have developed a variety of program models that have been successfully implemented. Regardless of model, there are several keystones that hold true for every PACE program.
- PACE is voluntary for all parties involved.
- PACE can cover 100% of a project’s hard and soft costs.
- Long financing terms up to 20 years.
- Can be combined with utility, local, and federal incentive programs.
- Energy projects are permanently affixed to a property.
- The PACE assessment is filed with the local municipality as a lien on the property.
Property owners love PACE because they can fund projects with no out-of-pocket costs. Since PACE financing terms extend to 20 years, it’s possible to undertake deep, comprehensive retrofits that have meaningful energy savings and a significant impact on the bottom line. The annual energy savings for a PACE project usually exceeds the annual assessment payment, so property owners are cash flow positive immediately. That means there are increased dollars that can be spent on other capital projects, budgetary expenses, or business expansion.
Local governments love PACE because it’s an Economic Development initiative that lowers the cost of doing business in their community. It encourages new business owners to invest in the area and creates jobs using the local workforce. PACE projects also have a positive impact of air quality, creating healthier, more livable neighborhoods.
The simplest path to financing a solar project is to purchase the system directly. You buy and operate the solar installation which allows you to directly benefit from any available federal, state, and local solar incentives. If you have available capital and tax appetite to absorb tax credits and accelerated depreciation, you may find cash purchases to be the best option.
Benefits Of Cash Purchases
- Faster and more streamlined processing reduces the total time required for a solar installation, allowing you to begin benefiting from clean, solar electricity as quickly as possible.
- Greater potential savings since you avoid third party expenses and interest rates.
- Protection against rising utility rates.
- Access to 100% of available solar incentives. As the system owner, you qualify for a Federal Investment Tax Credit (ITC) worth 30% of the system’s value (through 2032). When you combine this with additional state and local rebates, you can offset the cost of a solar project by 50% or more.
Key Cash Purchase Considerations
Although cash purchases transfer the entire solar installation and all associated benefits directly to you, they also transfer the added responsibility of system operation and maintenance. If total savings are your main concern, it is worth exploring cash purchases as a financing option. However, if you prefer not to devote capital to installing, operating, and maintaining a solar project, consider a PPA or solar lease instead.
A solar lease is a financing option that allows businesses to generate solar electricity with little to no upfront capital investment. Like traditional equipment leases, solar leases provide use of the solar equipment itself in exchange for a monthly lease payment. You benefit from the clean electricity generated from the rented solar installation.
The combination of known lease payments and lower utility bills typically leads to an immediate reduction in electricity costs and provides increased savings over time. At the end of the lease agreement (typically 15 – 20 years), you have the option to purchase the system at a reduced cost, renew the lease, or have the system removed.
Benefits Of Solar Leases
- Little to no initial capital investment.
- Protection against volatile electricity prices.
- Immediate savings on electricity costs since the reduction in grid electricity bills more than offsets your monthly lease payments for the installation.
- Allows you to work with your existing equipment lease financial partners.