Financing Commercial Solar: What is the Best Option for Your Business? (Part 2)

February 12th, 2020 |
Financing onsite solar, energy storage and other sustainable energy solutions can be complicated. This is part 2 of our series on trends and what’s currently shaping commercial solar financing for the future. See part 1 in this series here.
solar financing trends

Interested in commercial solar financing options?

If so, you’re in luck because there are more options than ever before to improve your return on investment (ROI) for commercial solar and integrated solutions, such as energy storage or electric vehicle (EV) charging. Today, commercial solar financing companies are expanding their offerings beyond solar energy generation. Many companies will now finance energy storage as well as backup and resiliency to further lower energy spend, justifying the additional expense by analyzing the potential lost revenues and productivity resulting from energy grid outages.

Comparing Commercial Solar Financing Options

1.) Cash
Balance sheet or traditional loans from a financial institution.

2.) Third-party finance via a power purchase agreement (PPA)
Agreements that can be either physical (on-site) or virtual (VPPA).

3.) Third-party-lease agreements
Solar PPA vs lease agreements typically apply in geographies where PPA finance is not allowed by law or not otherwise available.

Things to Consider: Third Party Financing

DECIDING FACTORSPPALEASECASH/LOAN
UPFRONT COSTNoneNoneFull cost
OWNERSHIPFinancerFinancerCustomer Owned
TAX CREDITS*Given to financerGiven to financerGiven to customer
MAINTENANCECovered by financerOfferedOffered
INSURANCECovered by financerOfferedCustomer owned
RELIABILITY FACTOROfferedOfferedNot offered
PERFORMANCE RISKFinancedFinancedCustomer owned
TERMTypically 10-15 years7-10 years*Customer owned

PPAs and leasing are both popular and well-established financing models that can provide the basis for a low-risk, low-cost approach to procuring solar.

Emerging Trends: Hybrid Solar Leases

The City of Anaheim developed license agreements to build solar generation at nine schools. The creative solution provides the benefits of zero-emissions energy for low-income residents who might not have been able to afford it otherwise. In this case, the financing was provided by the developer, Duke Energy Renewables | REC Solar.

Financing through leasing and PPAs provides powerful benefits including:

  • No or little up-front capital required, freeing up investments for core business
  • Add energy price predictability for 10 to 25 years (typical solar PPA terms)
  • Immediately reduce energy costs through self-generation
  • No operational risk (project owner or financier can operate and maintain)
  • 1-5% more savings when financier “owns” tax credits, such as Federal ITC
  • Reduce or avoid performance risk if system underperforms
  • Immediately reduce emissions

Add Energy Storage and Resiliency to Your Financing

Add energy storage to an existing PPA can lower costs even further. The key is leveraging solar generation with load shifting when additional electricity is required from the grid. Learn more about lowering Usage and Demand Charges — and significantly lowering emissions as well — when combining solar plus storage.

For an incremental investment on software and operations and maintenance, you may be able to add resiliency and basic energy backup to your finance agreements. These additional offerings are likely to become a valuable investment as both planned and unplanned grid outages increase. The Public Safety Power Shut-off or PSPS events started in 2019 are a prime example of the need for more energy resiliency. Check with your solar commercial finance partners to see if they can add resiliency solutions to an existing PPA.

Focus on Simplifying Procurement

A solar PPA is often provided by the developer but can be financed separately as well. Consider the complexity that working with multiple organizations can add to your procurement efforts, as illustrated in the model below. This is particularly important when financing multiple sites or considering the addition of future products or services. It is also a critical consideration for already complex relationship agreements, such as those found in community solar projects and/or aggregating purchases between multiple organizations or companies.

solar procurement models

Solar Financing Trends for the Next Decade? It’s All About Reducing Risk.

Whatever the new technology or infrastructure investment, reducing risk is crucial to renewable energy and commercial solar PV finance. To ensure project success, the price and terms need to make sense for your business. Let’s take a look at how flexible financing options can help lower the barrier to new projects for both new and experienced buyers.

1. Do your homework — compare all of the available financing options.
Third-party owned systems provide a host of benefits, as does owning the system outright. NREL’s System Advisor Model (SAM) is a free online modeling tool that can help decision makers model system financing and ballpark savings.

2. Understand the real-and-complete value.
Financing solar to achieve lower monthly utility bills is the right place to start. However, the real value extends to the added resiliency (avoiding losses due to grid shutdowns and power outages), brand reputation, and customer satisfaction value of dramatically cutting greenhouse gas emissions and adding assets that put more control in your hands for the future. For example, electrifying transportation and delivery or service vehicle fleets is becoming a strategic play. Keeping these long-term goals in mind when financing today will eliminate many headaches in the future..

3. Consider renewable energy aggregation.
Sometimes, going it alone doesn’t pencil out. If there are companies that are partnered or affiliated with you (or even neighboring organizations) that are also seeking solar, solar plus energy storage, and/or resilient solar microgrids with energy backup, there may be ways to gain greater buying power together. Keep in mind that it will complicate the contract and financing terms, and not all solar vendors are capable of doing aggregations. It’s a good question to ask when developing your strategy.

4. Know that the contract length can be negotiated.
Solar PPA term lengths are up for negotiation. You can drive shorter or longer contract lengths for financed renewable projects.

5. Negotiate reliability into the contract.
Contracts for PPAs and commercial solar lease financing can have reliability factors incorporated into the terms so that if the system underperforms, you –the customer — pay less or have other advantageous terms.

6. Don’t forget insurance.
When considering all the risk factors, do not overlook liability insurance. The owner of liability insurance can be negotiated in the contract development process.

7. Select a partner for the long term.
Remember, reducing risk is not only about cutting costs. Knowing that a financer will be there for the long-term is essential.

Solar Financing for Your Business

If you’re considering adding commercial solar to your energy mix today, know that the numbers can work. Projects can be highly customized and developers offer many commercial solar financing options. You’re better positioned today than ever before to drive the terms and reduce the complexity of adding solar. So move your project ahead with confidence. Look at renewables financing as a program that cuts costs now and pays significant dividends, including greenhouse gas emissions reductions, over the long haul. Plus you can embed greater energy resilience that is crucial to operations, all within the same financing.

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