4 - Ownership & Financing
Public and private entities in California can finance renewable energy projects through direct ownership or 3rd party financing.
Under this scenario, the customer finances and owns the generating assets. There are a number of financing options that can be used individually or combined to achieve full project funding. The simplest means is for PV systems to be purchased outright using funds available for facilities purchases, also known as Cash Purchase.
Public agencies can take advantage of low interest loans and public bond programs to purchase solar (see right).
In general, if the customer can secure funding through one of these mechanisms, the PV project will provide the maximum financial benefit over the lifetime of the system.
Bonds and Loans for Public Agencies
- The federal government and State of California sometimes offer low or no interest loans or loan guarantees for qualifying energy projects. In California, the Energy Commission manages low interest loans of up to $3 million for public agencies.
- General Obligation (taxpayer funded), Municipal tax exempt revenue bond, and any federal public bond programs such as Qualified Zone Academy Bonds (QZABs) and Clean Renewable Energy Bonds (CREBs) are often utilized by schools and governments to purchase solar PV and battery storage systems.
Third Party Financing
Increasingly common, the solar customer pays a third party to install, own, operate and maintain the solar PV system and purchase energy at an agreed upon rate. This method is often utilized to avoid large upfront capital expenditure to go solar.
Power Purchase Agreement (PPA)
Under a PPA contract, the customer enters into an agreement with a private company who installs, owns and maintains the PV system for a set contract term, typically 20 to 25 years. The customer is obligated to lease the space needed for the installation of the systems and purchase the energy generated. Most PPA contracts offer a base price for the electricity with an annual escalation that is modeled to be lower than future expected utility costs.
Buyout options are an important part of any PPA contract. The customer will typically be offered a buyout option at the end of the contract term. Early buyout is often offered once the PPA vendor takes full advantage of the Federal Tax benefits offered for renewable energy projects, typically after six years. Buyout before the end of the contract can make economic sense if the customer anticipates issuing bonds in the future to purchase the system. Often, the RECs produced by a PPA system are owned by the system owner, not the entity purchasing the energy.
The primary benefits of a PPA contract are that the customer does not need finance the project, a third party maintains the installation (and has a financial interest to maintain it) and, if carefully executed, energy costs are reduced. The primary drawback of PPA contracts is that they don't perform as well financially as direct ownership options. PPA contract terms should be evaluated closely, especially with respect to energy cost escalation, requirements to purchase energy, system sizing, buyout options, and ownership of RECs.
Leasing equipment is a common way for public agencies to finance certain hard assets. There are three different forms of leases: capital, operating, and municipal. Financing for each of these can be structured in a number of different ways.
Given the existing federal tax credit incentives available (ITC and MACRS depreciation), the vast majority of solar PV leases are operating leases. An operating lease is equivalent to renting the solar facility. The lessor retains ownership and all tax benefits. The lessee has use of the facility for the term of the lease. At the end of the lease the facility can be purchased by the lessee for fair market value of the facility. Lease payments are fixed independent of the performance of the system, so the lessee bears the risk of system underperformance.
In capital and tax exempt lease/purchase agreements, the customer enters into a lease agreement with a private company who constructs and leases the solar PV facility to the customer. The primary benefits of this arrangement are that the customer, or lessee, does not need to finance the project, and owns the asset at the end of the lease for a nominal value. However, as opposed to a PPA, the customer must pay the lease payments "hell or high water" - independent of the functionality of the PV system. Thus, the customer bears all risk for operating and maintaining the system. As with PPAs, lease contracts should be evaluated closely to consider financial and legal implications for the customer.