Installing solar at your business is one of the best investments you can make. Commercial solar financing has evolved, and there are now many options available to meet your business’ specific needs.
PHYSICAL POWER PURCHASE AGREEMENT (PPA)
A physical power purchase agreement (PPA) is often viewed as an attractive option for businesses or non-profit organizations that cannot take advantage of federal tax credits to purchase renewable energy systems on their own. Essentially, a PPA is a long-term agreement between a facility owner and a renewable energy developer. Through the PPA, the facility owner agrees to purchase a given volume of electricity from the developer at a pre-determined price for a fixed contract (typically 10 to 20 years). In return, the renewable energy developer assumes the risks associated with owning and operating the system for the length of the PPA. The PPA’s price terms are very important to project development, as the PPA allows investors to estimate the total revenue available over the life of the project. The project itself may be located on-site at the user’s location or off-site with the electricity being grid-delivered. Additionally, PPAs assign development milestones for the project. Such milestones — like acquisition of permits, execution of a contract, commencement of construction, and commercial operation — track the project’s development progress through construction. This article from the EPA describes physical PPAs in more detail.
VIRTUAL POWER PURCHASE AGREEMENT (VPPA)
A Virtual Power Purchase Agreement (VPPA) is a contract structure in which a power buyer (or off–taker) agrees to purchase a project’s renewable energy for a pre-agreed price. In this agreement, the project receives the market price at the time the energy is sold. If the market price is greater than the fixed VPPA price, the off–taker receives the difference. If the market price is less than the fixed VPPA price, the off–taker pays the project to make up the difference. In this way, a VPPA is a financial hedge against volatile electricity prices. Typically, the buyer receives the project’s Renewable Attributes, or Renewable Energy Certificates (RECs). Because there is no physical delivery of power, the VPPA is a great option for large electricity consumers with a fragmented/distributed electric load to support the development of new renewable energy resources.
Property Assessed Clean Energy (PACE) financing is a means of funding energy efficiency upgrades, disaster resiliency improvements, water conservation measures, or renewable energy installations of residential, commercial, and industrial property owners. In this model, the debt is assigned to the property, rather than the owner, and is paid via additional property taxes attached to the property and transferable at time of sale. Commercial PACE programs exist in several states, regions, and local governments.
Companies can choose to finance a project via traditional capital improvement or construction financing mechanisms available to them.
In addition to commercial solar financing, there are tax incentives that can help lessen the cost of your solar project. Currently there is a federal Investment Tax Credit (ITC) assigned to solar project development. This provides companies the ability to write off the value of solar PV systems through the Modified Accelerated Cost Recovery System (MACRS), which reduces a business’ tax burden and accelerates solar investment returns. Current tax legislation defines the timing of the step-down of ITC and makes it more advantageous to implement projects before 2022.
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