As the solar industry matures and evolves, many companies might not be aware of the wide range of options available for funding or owning a commercial solar project. Over the last several years, increasingly sophisticated financing structures have been developed to cater to virtually any business situation and objective.
To shed more light on all of the available options, Safari Energy recently held a webinar called The Solar Decision Tree: Understanding which Solar Financing Structure Fits Best for Your Business with the Solar Energy Industries Association (SEIA). The discussion was led by our Chief Financial Officer, Andrew Blevin and Chief Risk Officer and SVP of Project Finance, Patrick Goff, both of whom bring decades of experience in project finance and energy transactions.
Solar power can be a tool to achieve ESG goals, save money on electricity costs, or receive tax credits. The first step to accomplish these objectives is selecting the right financial structure. Safari Energy is a leading solar developer backed by PPL Corporation with a track record of over 500 commercial and industrial-scale solar projects across the country. With extensive experience working with REITs and strong banking relationships, Safari Energy has successfully guided numerous businesses through the financial decision-making process outlined below.
Why solar is a good investment
Solar provides an array of financial, operational, and environmental benefits for companies of all sizes and types.
1. Tax benefits
Companies can claim 26% of solar project costs against federal income taxes through the federal solar investment tax credit (ITC). As opposed to tax shelters, commercial solar projects carry minimal operational risk to the owner. The ITC has been instrumental in the adoption of solar energy by commercial entities over the last decade, and is a straightforward and well-mandated method of reducing taxable income.
2. Operational benefits
Investing in solar is about so much more than the tax benefits. By investing in solar, companies can lock in low, predictable electricity rates for decades, leading to significant operational savings. Solar paired with battery storage can also improve reliability to avoid increasingly frequent power outages and reduce downtime. Additionally, solar can increase property values without altering the structure of the building, and ongoing maintenance requires minimal oversight.
3. ESG benefits
Lastly, solar is a particularly straightforward and cost-effective solution for companies seeking to impact their Environmental, Social, and Governance (ESG) objectives. ESG solutions often can be complicated or costly to implement with marginal results. However, solar provides a simple, proven, and impactful way to lower carbon emissions or decarbonize altogether.
How to determine solar structures
There are six core types of financing structures for commercial solar projects. Prior to determining which solar financing structure is the best fit, companies should first consider their tax appetite, access to capital, and credit rating. If a company has a moderate to large tax appetite, they will want to consider a Cash Purchase, Bank Loan, Property Assessed Clean Energy (PACE) Loan, or a structured solution with a Specialty Finance Company. In each case, the company owns the solar system on their property and is, therefore, able to redeem the associated tax benefits. A Cash Purchase is ideal if the company is not capital constrained and wants to keep all the economics for themselves. If the company prefers to retain capital to reinvest or wants to spread out their payments over time, a Bank Loan is more appropriate, provided the organization has good credit. A PACE Loan is best for companies with weaker credit or greater capital constraints, own the property, or prefer to have financing terms in line with the asset’s lifespan. The PACE model allows property owners to finance the up-front cost of renewable energy or other energy efficiency improvements and then pay the costs back over time through their property tax assessments. If the company has weak credit and cannot access low-cost capital, they can organize a structured solution with a Specialty Finance Company, which specializes in high-yield debt arrangements. For companies that do not have tax appetite but have good credit or a parental guarantee, opting for an Operating Lease or a Power Purchase Agreement (PPA) are great alternatives. With these financing structures, a third party like Safari Energy owns the system on the company’s property and sells the energy back to them at a discount compared to utility rates. An Operating Lease is best for companies that cannot monetize the ITC and accelerated depreciation deductions. With early buy out provisions, this option allows a company to own the solar system after the tax benefits have been monetized. On the other hand, a PPA is good for companies that don’t want to own the system, but want low-cost electricity for no upfront capital expenditure.
Choosing the right partner
With the wide variety of financing structures that have been developed over the last several years, it is possible for nearly every type of company to enjoy the financial, operational, and environmental benefits of solar energy. Financing is just one piece of the puzzle, so choosing the right development partner to execute your project and achieve your company’s goals is an equally important decision. Safari Energy is the solar partner of choice for commercial and industrial customers, real estate owners, public sector organizations, and solar developers seeking competitive financial solutions for their projects. Contact Safari Energy today to jump start your solar strategy with a free solar financial analysis for your portfolio.