After a steady, if uncertain, 2020, commercial solar stands poised for a strong rebound this year and beyond.
Developers and EPCs havevast opportunities available for commercial solar projects. Plus, pent-up demand from plans placed on hold in 2020 due to the pandemic should drive additional deals as businesses move to get back on track.
Companies without upfront capital need to overcome the cash crunch of the initial investment, which can be a big stumbling block getting these projects off the ground. Thankfully, there are many options available for financing commercial solar projects.
Between PPAs, Commercial Property Assessed Clean Energy (C-PACE), leasing and lending options available, it’s important for developers and EPCs to know which financing tools work best with which types of companies. Developers and EPCs well-versed in financing options - and how they apply to various corporate entities - can potentially find more success in guiding prospects toward a workable solution.
Let’s break down some of the more viable commercial solar financing options available.
PPAs have historically been one of the more common funding mechanisms for commercial solar projects. In this scenario, a third party buys and owns the PV system, while the solar customer purchases the power generated from that system. A PPA typically has a 10 to 25-year term length.
Developers should understand where these would be good funding options, and where they might not make sense. For tax-exempt entities, such as schools, municipalities, churches and nonprofits, PPAs can be an attractive option because these entities cannot take advantage of the Investment Tax Credit (ITC). These are also useful for companies that do not own property, and therefore cannot use a property tax assessment option.
However, since PPAs are tied to the property where they’re installed for 10-25 years, companies that plan on moving to a new location within 10 years or so wouldn’t capture the full value from this type of deal.
Companies have two options for solar leases: capital or operating leases.
Operating leases are not held on the company’s balance sheet, and work more like renting equipment. Capital leases are kept on a company’s balance sheet and are akin to a loan. This makes operating leases more preferable for companies, since they want to keep as much financing off their balance sheets as possible.
While some leases have terms of up to 25 years, the majority fall into a range of 7-10 years. These can be a good option for companies with short-term leases on their office or manufacturing spaces and are uncertain on whether they’re going to renew the property lease.
Despite its many benefits, commercial property assessed clean energy (C-PACE) remains a relatively underutilized financing mechanism.
In C-PACE-eligible states, once the commercial project has final approval, the company can obtain a tax assessment on the property while the financier provides project capital. After the contractor completes the PACE-eligible commercial solar installation, the property owner pays for the completed work via a property tax assessment. These payments are then remitted back to the lender.
Unlike the typical 7-10 year repayment schedule of a traditional commercial loan, C-PACE terms tend to be much longer at around 20-30 years. They also tend to have much more competitive interest rates since the tax assessment mechanism carries a low risk.
Companies that own their property and have no plans to move operations in the foreseeable future are prime candidates for C-PACE financing.
Currently, 38 states have passed legislation allowing PACE financing for commercial solar projects. Unfortunately, many of these states have low C-PACE adoption levels. This largely stems from a general lack of familiarity with this revolutionary financing mechanism among electricity consumers and public officials.
A major consideration developers and EPCs should remember when pursuing financing is that commercial projects with the lowest potential for risks and the highest value may have the best odds.
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(Ed. note: The statements in this article should not be construed as professional tax advice, and consumers and business owners should consult with their tax professionals.)
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