In 2016, 47 percent of new residential solar customers chose cash deals with their new systems as opposed to signing a power purchase agreement (PPA), in which a third party builds and owns the system and agrees to sell power to the customer at a fixed price. For homeowners, the decision to buy and own your solar energy system is a relatively straight-forward decision guided by relatively simple questions. Do I have enough money? How long will I live in the house? What is the cost of my monthly electricity bill? What does my state’s SREC market look like? (Maybe that last one is not so simple).
For commercial customers, however, these questions are not so simple, and there are many factors that may drive customers to purchase their solar energy system outright rather than pursue a power purchase agreement. If a prospective customer lacks credit-worthiness, or third-party ownership is illegal in their state, PPAs simply are not an option.
In our experience, a customer’s notion that they should own their solar system often is a function of their knowledge, or lack thereof, about the scope of ownership and/or what financing options are available. They figure that if they have the capital, the investment will be better long-term without a third-party. While that is sometimes the case, there are several factors that a prospective commercial solar customer should consider when weighing the decision to pursue a cash deal instead of a PPA.
When Cash Deals Work
Before purchasing a solar energy system, a prospective customer must first consider if they have the capital available upfront; the cost will vary depending on a given state’s solar incentive program, property tax treatment, labor costs, and other factors. A 500kW system in Massachusetts, for instance, will likely price out to a little over $1 million while in Maryland, a system of that size would price out closer to $750,000. A PPA requires no cash upfront from the host customer.
To purchase a project outright, host customers must have the ability to monetize the federal Investment Tax Credit (ITC), as well as any state tax credits (if applicable). Generating your own electricity to offset your bills will yield some return, but one’s ability to monetize the ITC will be vital to realizing high returns faster. This is why banks and insurance companies with large tax-appetites tend to be some of the industry’s largest tax equity providers, and why tax-exempt entities such as municipalities and schools favor PPAs; they will experience lower electricity costs if another entity is monetizing the tax benefits.
In addition, entities must consider how they will handle depreciation of their investment.
Why You Still Might Want to Consider a PPA
If a prospective customer can monetize the tax credits and has the capital available to purchase a solar energy system, they should then consider the construction and maintenance of the system. With a PPA, customers do not have to worry about the maintenance of the system, as that responsibility falls on the investor. When a customer goes cash, the burden of maintenance and upkeep of the system falls on them. Some customers have found themselves caught up not only with the financial loss with system repairs, but also, a big headache. Customers that have experience owning and managing assets, such as construction companies, are generally better positioned to handle system ownership.
Additionally, PPAs provide customers with a predictable, stable price of electricity for 15 – 25 years.
Consider the Size of Your Solar Energy System
There is one area in which cash deals may certainly be best: for smaller solar energy systems under 500kW in size. Given the fixed nature of transaction costs associated with these relatively smaller project opportunities, third party investors tend not to favor these one-off smaller project opportunities unless they can be grouped into a larger portfolio of at least 1MW or more. In contrast, larger one-off solar energy systems that can reach economies of scale, generally around 1MW or more, will be palatable for investors and customers both.
Due to these complexities and high transaction costs, small commercial has experienced sluggish growth year-over-year. Because sub-500kW projects will compose roughly a fourth of non-commercial installations over the next four years, there are few financing options available. Buying the system is likely the best idea for projects of this size – especially those that can monetize the tax benefits – until the market develops better financing solutions for this market sector. In addition, because costs are based on dollars-per-watt, a smaller system will require less upfront capital.
Make Your Pick
The decision to go cash or sign a PPA is a decision that requires careful consideration. Among other factors, it is critical that prospective customers consider their ability to monetize the investment tax credit, and if the size of their individual project will warrant third party investment.
Prospective commercial solar customers wondering which route to pursue may contact email@example.com or call us at 202-349-2085 to talk through; we’d be happy to help you navigate the decision. Developers in need of financing for commercial projects may contact our team at firstname.lastname@example.org.
This is an excerpt from the April 2017 edition of The SOL SOURCE, a monthly electronic newsletter analyzing the latest trends in renewable energy based on our unique position in the solar financing space. To view the full Journal, please subscribe or e-mail email@example.com.
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Sol Systems, a national solar finance and development firm, delivers sophisticated, customized services for institutional, corporate, and municipal customers. Sol is employee-owned, and has been profitable since inception in 2008. Sol is backed by Sempra Energy, a $25+ billion energy company.
Over the last eight years, Sol Systems has delivered more than 595MW of solar projects for Fortune 100 companies, municipalities, universities, churches, and small businesses. Sol now manages over $650 million in solar energy assets for utilities, banks, and Fortune 500 companies.
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