In keeping with his commitment to create jobs by funding clean technology, President Obama announced last month that the Department of Energy was awarding nearly $2 billion in conditional commitments from the Recovery Act to two solar companies. One recipient of the funds, Abound Solar Manufacturing, is building two new plants which will produce millions of solar panels each year. As more and more business and home owners start considering the installation of solar panels on their facilities, office buildings and homes, these energy consumers often wonder how best to finance a solar installation.
There are basically three choices for financing solar power systems: capital purchases, leasing arrangements or power purchase agreements.
- Capital Purchases – A capital purchase simply means that an individual or entity uses his, her or its own money to purchase the solar power system and then operates and maintains the system. Some of the benefits of this approach are that as an owner of a solar power system you may be eligible for certain tax credits, utility rebates, renewable energy credits and other incentives in addition to recouping costs from utility savings over time. Additionally, there is no added cost in dealing with a third-party lessor or developer/investor as there would be in leasing arrangements and power purchase agreements, i.e. attorneys fees incurred to draft documentation reflecting these more complicated relationships. The obvious downside is that a capital purchase requires up front cash and requires that the owner pay for all of the system’s maintenance going forward. Some of the benefit of owning the system may be decreased by the costs paid out to a consultant or entity equipped with the specialized knowledge to maintain these systems going forward.
- Power Purchase Agreements – Power purchase agreements (“PPAs”) are financial arrangements in which a third-party developer owns, operates and maintains an energy system, e.g. a solar power system, which is located on the energy consumer’s property (e.g., the roof of their home) and typically the consumer purchases the energy output from the developer for a predetermined period of time. The purchase price can be a set rate or based on actual usage. The developer is responsible for the system performance, operations and maintenance. The advantages to this approach are that the developer or investors secured by the developer pay for the construction of the system on the property and typically handle all aspects of the maintenance. Additionally, the rate paid by the consumer is usually lower than the rate paid to the consumer’s existing utility provider. The downsides to this approach are that there are added legal costs to drafting and reviewing these documents and the developer/investors typically get the tax credits and incentives associated with the system.
- Leasing Arrangement – With a lease, the business or home owner is responsible for the performance, operations and maintenance of the system and typically pays the lessor or owner of the system a set rate for the energy produced. The advantages to this approach are that it is potentially less complicated than a PPA and the set rate may be more beneficial than an actual usage rate (the rate structure more commonly seen in PPAs). Additionally, there may be more room to negotiate ownership of the tax incentives and credits. The downsides to this approach are that, unlike, a PPA, the owner is still responsible for the performance, operations and maintenance of the system.
Solar PPAs and leasing arrangements have been used to finance power projects for quite some time, but as the solar markets in California and elsewhere have grown these arrangements have become more commonplace. Although PPA providers were once hindered by a shortage of solar panels, projects such as the Abound Solar Manufacturing plant provide assurances that availability of solar panels will not be a stumbling block going forward.
Given that each project has a unique set of facts and circumstances, business and home owners should evaluate which approach is a better fit for their situation and seek the advice of counsel before moving forward with a capital purchase of solar panels or similar systems, solar PPA or solar power system lease.