Solar ITC: The Complete Guide to the Investment Tax Credit
One of the biggest considerations in any commercial solar project is deciding how you’re going to pay for it. The good news is that there are a number of financing options available to business owners. Let’s take a look at some of the most common ways that organizations can pay for commercial solar energy systems.
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Types of Commercial Solar Financing Available
The first thing you want to determine is future ownership of your solar system. Do you want to own it outright or do you just want to have guaranteed access to the power generated by a solar array on your property? There are pros and cons to each.
Direct Purchase of Commercial Solar Projects
If you ultimately want to own your solar system, you’ll likely need to finance its purchase. This gives you complete ownership of all of the energy generated by your system, but it also makes you fully responsible for the operation and maintenance of that system (it’s typically recommended that you outsource this to experts).
Solar Investment Tax Credit
Most businesses making a direct purchase of their solar power system are eligible for the Solar Investment Tax Credit, also known as solar ITC. The Solar ITC is designed to reduce the cost of commercial solar projects by reducing your tax liability with both a tax credit and an accelerated depreciation schedule.
When it was first introduced in 2006, the ITC offered a 30% tax credit on commercial solar projects that were started between 2006 and 2019, so long as they were put in service by 2026 (or 2024 in some cases).
The legislation was designed to step down gradually by reducing the amount of credit available over time; it ultimately would have stepped down to nothing. But the federal government has intervened twice to extend the higher tax credits – first in December of 2020 as a part of their COVID-19 relief spending package, and then most recently with the passage of the Inflation Reduction Act (IRA).
With the IRA, Congress extended the 30% Solar ITC for commercial projects until 2025, giving even more business owners the opportunity to take advantage of the program. (The rules for residential and commercial projects differ, so you’ll want to work with a reputable commercial solar provider to ensure your project qualifies and that you maximize your credit).
If your business has high tax bills, buying your system outright and taking advantage of the Solar ITC may provide more financial and tax benefits than leasing your system.
Cash and Loans
The simplest way to pay for solar is to not finance it at all, but unless your company can just write that check you’ll need to understand your solar loan options.
A commercial solar loan works just like any other loan you might take out for your business. It will either be secured by your company’s real estate or other assets, or it will be unsecured. Those that have collateral for a secured loan can often get more favorable rates from lenders than are available for unsecured loans.
Like other loans, your business will need to go through a credit approval process, and your rating will impact the terms you’ll be offered. Solar loans are typically set up with a 20-year repayment period.
Commercial Property Assessed Clean Energy
If your state allows commercial property-assessed clean energy (C-PACE) financing, this alternative form of debt financing is something to consider. Essentially, a C-PACE loan can be taken out for energy efficiency and renewable energy projects such as solar. It’s then repaid as a part of your property taxes over the next 20-30 years.
C-PACE programs are only available in 38 states and Washington D.C., so you’ll need to work with your solar provider to see if this financing option is available to you. You can see a map of available states here: https://www.pacenation.org/pace-programs/
Leasing Commercial Solar Energy Systems
If you don’t have high tax obligations, or the financial benefits of direct ownership don’t pencil out, there are a variety of ways to have on-site solar without the obligations of ownership.
Note that with each of these scenarios, the third party owner of the system will be the one to benefit from the Solar Investment Tax Credit.
Power Purchase Agreement
With solar power purchase agreements (PPAs), you contract with a solar developer that pays for, installs, and maintains a solar system on your property. The system could include ground-mounted, rooftop, or carport solar panels and an energy storage system.
The developer owns the system but agrees to sell you electricity at a fixed, reduced cost per kilowatt hour (kWh) used, in exchange for letting them install the array on your property. These types of agreements are usually in place for 10-25 years.
PPAs are popular because they can be structured with minimal upfront costs to the business owner.
PPAs are commonly used to finance larger renewable energy projects for healthcare facilities, educational institutions, and manufacturing facilities. Depending on how the agreement is set up, there may be a provision for your business to purchase the system at various points during or at the end of the contract.
Similar to a power purchase agreement, a solar lease scenario also involves a third party owner and can often be structured with no upfront cost.
The primary difference between a PPA and a lease is that rather than pay per kWh used as you would in a PPA, you’ll pay a fixed rate over the lifetime of the contract (typically 7-25 years). Your lease payments aren’t tied to the amount of energy the system produces so they are consistent month-to-month. The downside is that you’re paying a flat rate every month, even if you don’t use all of the energy that’s allowed under the terms of your deal.
If you opt to do a lease, you’ll need to decide whether you want to do an operating lease or a capital lease. The primary difference is that operating leases, which are essentially treated as equipment rental, are considered off-balance sheet financing. A capital lease, which acts more like a loan, would appear on your balance sheet.
Velo Solar offers a unique solar lease-to-own product for systems as small as 50kW, which leads to ownership in as little as 7 years.
Energy Service Agreement
Energy service agreements (ESAs) are similar to leases in that you pay a fixed rate to the system owner in exchange for the “service” of solar energy. In this scenario, the provider ensures you’ll see a certain level of energy savings.
Due to the way ESAs are structured, they are most often employed when a business is financing a number of energy projects, including things like solar and energy efficiency upgrades.
Which Commercial Solar Finance Option is Right for You?
Navigating the commercial solar financing world can be challenging, but the good news is you don’t have to go it alone. There are a number of reputable lenders servicing the commercial solar market, and many solar contractors have in-house solar financing options available.
Working with a top solar provider like Velo Solar will simplify the process of financing your commercial solar energy system – and regardless of how you finance it, as soon as your solar array is installed and operational, your business can reap the benefits of being powered by clean, renewable energy.