Switching to solar energy slashes your electricity cost considerably, but initial payment may prove to be burdensome for many. Thankfully, a variety of solar financing options is now available for both residential customers and businesses in the form of leases, loans, and power purchase agreements (PPA).
Each option has its pros and cons, depending on your financing requirements.
How does Beyond Solar help in financing?
Beyond Solar offers multiple financing options to facilitate homeowners and businesses in their journey to switch to solar power. We work with banks and financial institutions to provide you financing options, including leasing, solar loans as well as PPAs.
It is important to understand what each option offers in order to make an informed choice that is in accordance with your requirements.
A capital lease is a loan agreement under which the lesser, or the bank, owns the system. You, the lessee, however, will be entitled to tax benefits, Solar Renewable Energy Certificates (SREC) and electricity saving. Since the lessor does not get tax benefits, the monthly payment for a capital lease is higher than that of an operating lease.
If you opt for a capital lease as your financing option, you will be able to buy the system for $1 when the leasing term ends.
An operating lease, or a True Tax Lease, gives the ownership of the system to the bank, which is also entitled to tax benefits including depreciation. You, the lessee, will have to make a monthly payment to the bank and will be entitled to SRECs and electricity savings during the term of the lease.
An operating lease is most suitable for those who cannot benefit from accelerated depreciation. Once the lease term ends, you can choose to return the system to the bank or purchase it. The lease can also be renewed.
In order for an operating lease to be recognized as such by the Internal Revenue Service, you need to follow set standards of the Financial Accounting Standards Board (FASB):
- Transfer of ownership prior to the maturity of the lease will not be allowed
- No bargain purchase option
- By the end of the lease, the asset’s remaining economic life should be at least one year, or 20% of the original value
- Lesser will be bound to maintain 20% of the asset’s original value during the lease term
A majority of our clients choose an operating lease. Factors unique to this method are:
- With 100% financing, there are no out-of-pocket costs or down payments
- Federal solar tax credit and accelerated depreciation are fully monetized and result in a lower the lease payment
- Lease payments are treated as an operating expense making your overall taxes lower
- Leasing acts as an alternative source of funds and preserves other credit lines for use in running your business
Solar Power Purchase Agreement:
Another way to finance your solar PV system is to enter a Power Purchase Agreement (PPA). Under a PPA, an investor will have the ownership of the system and will sell you the electricity generated.
The basic structure of PPA is as follows:
- Typical initial power price: ~$0.07/kWh – $0.14/kWh
- Typical annual escalator: 2 – 4%
- Typical term: 15-20 year term options
If you have entered a PPA, you will have the option to buy the system on the 7th, 10th, 15th and 20th anniversaries of the Commercial Operation Date (COD) at a lower price than the fair market value at the time of signing the agreement or a scheduled value. The latter should be set before signing the agreement.
You can also purchase the system once the PPA term ends at a price lower than the fair market value. Other options include:
- Entering a new PPA
- Getting the provider to remove the system and restoring the site to its original functional condition
Benefits of Solar PPA:
The price of the electricity units sold under a PPA is significantly lower than the rate charged by a utility company, which leads to a considerable savings.
You are not required to pay an upfront cost.
You will also be exempted from maintenance and repair costs.
Another way to finance a Solar PV system is to borrow a loan. Most customers prefer to lease the system but a combination of debt and equity can also be used to finance the system.
Most financial institutions require a contribution of 20% equity.
By opting for a loan, you will have ownership of the system instead of the financial institution lending money. You will also be responsible for the maintenance of the PV system and other equipment.