Financing for Commercial Solar: Pros and Cons to 4 Common Options
As businesses increasingly prioritize sustainability and look for ways to reduce their carbon footprint, commercial solar has become a popular option. However, finding the right funding option for a commercial solar system can seem daunting with the numerous choices available. Fortunately, there are several financing models that businesses can consider to make their clean energy goals a reality. By creatively combining state and federal tax incentives, grants, and innovative financing models, commercial solar customers can realize an immediate and positive impact on their bottom line.
The four most common commercial solar financing options are cash and loans, leases, and PPAs. These different financing options each have their advantages and disadvantages; some offer better tax incentives in exchange for a slightly larger upfront investment, while others minimize upfront costs in exchange for reduced tax benefits. Whichever way you go, adding solar is one of only a few investments that start putting money back into your business's bottom line from the moment it's turned on.
More and more companies are investing in solar energy every year, further proving that this form of clean and renewable energy isn't just an environmentally-smart decision, but financially savvy as well. If your organization is looking into commercial solar, we give an introductory explanation of the most common types of commercial solar financing options below.
1. Cash and Loans
Whenever possible and suitable for the owner, cash is typically the best financing option for companies looking to reap the benefits of federal and state solar incentives and accelerated depreciation. As part of the Inflation Reduction Act passed in 2022, the 30% solar tax credit was reinstated and extended through 2032. This gives businesses a lucrative incentive to go solar and offsets nearly one-third of the system cost.
Although there aren't many downsides to a cash purchase, the biggest con would be the access to capital. Not every company has the required money to make a full cash purchase, but it's possible to combine cash with a loan or lease to maximize the ROI on your commercial solar investment.
Low interest loans or lines of credit with an existing banking relationship generally offer the fastest and most lucrative return outside of an all-cash purchase. In general, it's typically recommend to finance only the necessary portion of the net cost after incentives are applied to achieve the best payback.
2. Leasing for Non-Profits
A lease typically offers a higher monthly payment and does not translate into immediate ownership. At the end of the lease term, organizations generally have the option to negotiate a buy out. Buying out a lease usually has lower fees than buying out a PPA, which is another added benefit to leasing should you choose this commercial solar financing route. There are several lease programs that are available to for-profit companies with a tax liability.
As part of the Inflation Reduction Act, non-profits can receive a direct payment up to 40% of the system cost with no tax liability needed. Because of this lucrative incentive, leasing frequently doesn't pencil out to be the best financing option=. At Sun Valley Solar, we don't currently offer a lease due to the competitive nature of the IRA benefits.
The biggest con to leasing a commercial solar energy system is that there is no direct ability to take advantage of tax and depreciation incentives. These incentives go a long way in helping reduce the cost of commercial solar energy systems and speed up the ROI on this kind of investment.
3. Solar Service Agreement/Power Purchase Agreement (SSA/PPA)
Power Purchase Agreements, also called Solar Service Agreements, have long been used by utilities and municipalities to finance the purchase of electrical generating facilities. PPAs are a common way to finance solar installations at commercial and institutional facilities in certain states. With a PPA, you pay for only the power that's generated, and typically lock in energy rates lower than what utilities offer. Similar to leasing, PPAs also lack a direct ability to take advantage of tax and depreciation incentives.
4. Public Financing
Some businesses may qualify for public financing options, such as bonds, grants, or other incentives available only to specific rural businesses and non-profits. These options may provide favorable financing terms or reduced interest rates, making them an attractive choice for eligible organizations.
Eligibility requirements and availability may vary by location, and businesses may need to navigate a complex application process. It's also typical with public financing that organizations have to combine several financing options to reach the full amount needed.
Financing Your Commercial Solar Project
It's essential to carefully evaluate the pros and cons of each financing option based on the unique needs and circumstances of your business. Factors such as available capital, tax implications, long-term cost savings, and clean energy goals should all be considered.
Commercial solar funding options are diverse and offer organizations flexibility in aligning their financial goals with clean energy initiatives. Whether it's through cash/loan, lease, SSA/PPA, or public financing, businesses can leverage these options to realize immediate and long-term financial benefits while making a positive impact on the environment. With careful consideration and expert guidance, your organization can find the right financing model that suits your unique needs and paves the way towards a more sustainable future.
If you've been thinking about adding solar to your commercial operation, or want to learn how solar can help your business and its energy goals, we invite you to schedule a consultation with a member of our commercial solar team. Not quite ready for a consultation, but want to learn more? Download our free commercial solar guide, "Is Solar Right for Your Organization?"
This blog has been updated from its original publication date of 10/20/2020 to reflect current funding options.