With any big purchase, deciding to buy or lease is a personal choice with both pros and cons. The same holds true for rooftop solar, with the added twist that an array can pay for itself in the long run. Nevertheless, not every customer has the financial endurance to take that course.
‘A potential owner needs to look at the cost and availability of capital to make this investment,’ says Bill Bush, chief financial officer at Calif.-based developer Borrego Solar. ‘Ultimately, it's a choice of using in-house capital or third-party capital.’
After analyzing all of the factors, the decision comes down to the individual rate of return or return on investment.
‘If their cost of capital is lower than the implied return, then, assuming that the capital is available, they should own the system,’ Bush says. ‘If not, they should look to other financing arrangements, such as a lease, to take advantage either directly – or indirectly – in the environmental attributes of the system.’
The physical location of the system itself can also play a factor economically, according to Chris Diaz, senior vice president at Florida-based Seminole Financial Services. Low solar irradiance and low power purchase agreement rates or low power costs make system ownership less viable.
‘The bottom line for the owner/developer is developing a system that will produce enough power to make economic sense,’ Diaz says.
Where available, solar renewable energy credits (SRECs) can be a compelling incentive to help defray the cost of owning a system. With system ownership, the business or homeowner may receive SRECs for energy generation. The business or homeowner may sell the SRECs or retain them – enabling the business to make renewable energy claims for marketing or public relations purposes.
However, in some situations, the rights to the SRECs may change hands.
‘In a power purchase agreement, the developer may take the SRECs – and resell on the open market – to help offset the cost of the equipment,’ says Evan Merkel, renewable energy engineer at Maryland-based renewables consultancy Antares Group.
In this case, the lessee/building owner has no right to claim that they use renewable energy – without purchasing other open market SRECs.
Accessing federal tax incentives can defray ownership costs. However, some key incentives are set to soon expire. Therefore, delaying the decision may cost the customer money.
The investment tax credit (ITC), which provides a 30% tax credit for residential and commercial solar projects, expires at the end of 2016. After that, the ITC loses two-thirds of its value, dropping to a 10% credit. Meanwhile, the Section 1603 Treasury grant program that allows developers to recoup 30% of the cost of the project in lieu of the ITC expires at the end of 2016.
‘Depending on the person/entity, the owner may not have the tax appetite to take advantage of the full 30% tax credit,’ Merkel says. ‘That would be a serious hit to project financials for those wanting to own their system.’
Borrego's Bush maintains that it is very important to investigate all opportunities. For example, sale-leasebacks – now popular in the commercial space – may be a useful financing option. Choosing one financing arrangement over another is an exercise in cost and availability.
‘In the first order of analysis, the business determines whether it has – or projects to have – the available funds to make the investment in the solar facility,’ Bush says.
Part of the funds could come from avoided costs – meaning what money that had been budgeted for electricity could be applied to PV system ownership. The tax incentives earned as the owner could also defray much of the upfront cost. If the business is unable to make the investment due to capital scarcity, then a lease is a real option, as it defers the capital cost over a series of longer term payments, freeing up available capital for other parts of the business.
Bush says leasing can also work if the business does not want to have the asset on their balance sheet or if there are other considerations that don't allow them to expend the required capital. ‘In those cases, using capital from other providers can be very attractive,’ he says.
