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The cost of installing a solar system is one of the top perceived barriers to adopting clean energy for organizations. Operations managers, sustainability professionals, and other teams who might be lobbying their internal stakeholders to consider solar need to make a strong financial case for the technology. Fortunately, solar financing options allow businesses to install solar energy assets on their properties affordably, some with low or zero capital expenditure. In this blog post, we’ll explore some of the most popular options to help you choose which is best for your situation.
(Related: What Is Commercial Solar?)
There are numerous financing options at your disposal when implementing a solar energy system. Some solar financing solutions may be familiar to you, like traditional loans and leases, while others like C-PACE and ESAs need more explaining. Don’t worry, we break it all down for you below.
The most straightforward way to pay for a solar installation is a direct purchase through a cash sale. You purchase the system from a developer (like PowerFlex), maintain direct ownership of the asset and its energy production, and are responsible for ongoing operations and maintenance. This requires significant upfront capital, typically with multiple payments spread throughout the design and installation process: a downpayment due upon signing, a second installment when equipment is ordered, and a final payment once the project is energized.
The good news is direct purchase offers the highest rate of return, with an average payback period of 5 to 7 years. This is because purchasing the system outright saves on financing costs and enables the owner to take full advantage of solar tax credits and incentive programs that can help recoup installation costs (whereas other financing options may not qualify). The owner also retains the rights to the green benefits of their clean energy, allowing them to sell renewable energy certificates for a steady revenue stream if they so choose.
Businesses that are likely to relocate in the near future may want to consider a direct purchase, as it makes for a smooth sale or transfer of the solar asset — not to mention the system can also raise the building’s property value.
Up next is the commercial solar loan, which can provide a more affordable pathway to direct ownership for businesses, and with better ROI compared to other options. Upfront costs are slashed (or eliminated) and the system price is spread out over 5 to 30 years, depending on the loan term. Though you’ll need to pay interest on a solar loan, you'll have full ownership of the solar system.
Another benefit to solar loans is the lender can take advantage of the solar Investment Tax Credit (ITC) to claim 30% of the solar system’s total cost on their annual federal income tax. Two loan structures incorporate this one-time refund payment:
As with other loan types, solar loans come in a mix of flavors:
Besides the usual considerations when taking out a loan like principal, interest rates, and term length, customers should also be aware of dealer fees. This is a fee charged by the lender to cover the administrative costs associated with processing and approving your loan application, or as a premium to cover their risk. When choosing between commercial solar loan providers, it’s imperative to understand all the terms, including these fees.
A commercial solar lease is a third-party ownership model where a solar developer installs the system on your property with no upfront costs and retains ownership of the system. Like other common consumer lease arrangements, you pay a fixed monthly rate, typically for 6 to 10 years, for the right to use the system and its energy. To protect the solar customer, leases usually include production guarantees.
Solar leases may be attractive to some customers since all regular ongoing expenses like maintenance are covered by the developer, removing additional costs and hassle. Contracts also have a buyout option so that at the end of the lease, the lessee can purchase the system at a discounted rate and continue to utilize it for the remainder of its operational life.
It's important to note that the solar developer benefits from tax breaks and all other incentive and rebate programs under this financing model, not the solar customer. In addition, not all jurisdictions permit solar leases.
A power purchase agreement (PPA) enables a business to switch to solar with minimal risk, little to no money down, and reduced electricity bills. Just as with a solar lease, a third-party developer covers the installation and maintenance of a solar system on the customer’s property. The developer then sells the energy on a per kilowatt-hour basis at a reduced rate over a 10-to 25-year fixed contract. Depending on the local market, the solar consumer saves 10 to 30% on their energy costs by securing electricity pricing lower than the regional retail rate.
A PPA reduces the liability and long-term management required by the energy buyer because the developer is responsible for the solar system’s operation and maintenance. However, with the risk comes the reward, as the developer also receives tax credits and all other incentives for which the project is eligible. Some PPA agreements include a buyout clause so the customer can purchase the solar array at any point.
Established by states via legislation and run by local governments, Commercial Property Assessed Clean Energy (C-PACE) programs increase access to affordable, long-term financing for green projects such as solar and energy storage. Active in more than 30 states, PACE program lenders provide fixed-rate financing for up to 30 years with no upfront costs. Most types of commercial properties are eligible for PACE upgrades, including office, hospitality, retail, healthcare, industrial, and multi-family buildings with more than four units.
Once the solar installation is completed, a voluntary assessment for all the project costs, including administration and interest, is added to the business’s property tax bill. PACE programs make climate mitigation retrofits more profitable from the start by eliminating upfront investment, offering the longest payback periods, and basing liens on property value, not on the borrower’s credit score.
Under PACE financing, the third-party financier does not own the project, so the tax benefit remains with the property owner. It’s important to note that if the business owner decides to sell the property, the lien automatically transfers to any subsequent owner.
Lastly, an Energy Service Agreement (ESA) is a pay-for-performance financing model that allows businesses to upgrade their facilities for energy efficiency without any upfront costs. Under an ESA, a private provider owns, develops, and operates the efficiency improvements or equipment, billing the customer monthly service charge payments for verified savings that are set at or below their existing utility price. Energy efficiency improvements are customized for each retrofit, and common upgrades include building automation, HVAC, lighting, and renewable energy systems like solar.
During the 5-to-15-year contract, the ESA provider takes on the performance risk and gets paid less if savings are lower than expected. Meanwhile, the consumer reduces their operating expenses with little management or expertise required. The flexible contract structure allows for potential equipment buyout at fair market value at the end of the term.
Companies that choose a financing model in which they retain eligibility for incentives can take advantage of programs that recoup solar installation costs. As we touched on earlier, the Investment Tax Credit allows taxpayers and businesses to deduct a percentage of the cost of a solar energy system from their federal taxes. Here are some more details:
Extended until 2032, projects that satisfy prevailing wage requirements for construction qualify for the full 30% tax credit. Additional credit (up to 70%) can be earned if the project meets certain requirements, like being in a low-income area. Battery energy storage systems are also eligible for the tax credit at the same rate as solar. To submit a claim, taxpayers must submit IRS Form 3468 with their tax return.
Thanks to the ITC, companies essentially get a discount on the total cost of their solar system. The 30 to 70% refund translates to a lower upfront investment with increased cash flow. It’s also now a transferable credit, meaning developers can transfer the ITC to another tax-paying entity, opening new partnership possibilities.
On the state and local levels, there is an abundance of incentive programs in the form of rebates, tax breaks, and net metering policies — significantly lowering your overall project costs by either minimizing upfront investment or reducing your ongoing energy bills. To delve deeper into the specific incentives available in your area, visit our comprehensive Policy & Incentives Hub.
When you work with PowerFlex, you leverage our solar energy experts' vast knowledge and deep industry experience to navigate the complex solar financing landscape. We work collaboratively with you and other stakeholders at your company to explore all possible financial scenarios and find the best option based on your unique needs.
Plus, our dedicated incentives team is passionate about helping you get the most out of available federal, state, and local programs. We'll identify the most beneficial options in your area and handle all the application complexities, ensuring you maximize your cost savings.
Discover how PowerFlex makes solar projects affordable with our diverse ownership and financing options. Contact us today to learn more.
