Maximizing Solar ROI: Why Cash and Finance Purchases Outperform Third-Party Ownership
The final part of a 3-article series outlining the different ways of financially structuring a commercial solar purchase. Please reference the two previous articles on how community solar site leases and power purchase agreements function.
A cash or finance purchase for a solar energy system provides businesses with access to the full range of financial benefits, usually making it a far more lucrative option compared to third-party ownership structures like Power Purchase Agreements (PPAs) or Community Solar Site Leases. Businesses typically recoup their investment in the span of time between 5 and 8 years, and sometimes in as little as 3 years.
When federal tax incentives combine with state subsidies, utility-level programs, and grant funding, these collectively offset a significant portion of the cost of system ownership, increasing profitability and driving down the payback period dramatically – all before even factoring in the avoided cost of power.
Federal Programs
Federal programs, such as the Investment Tax Credit (ITC), currently set at 30%, allow businesses to immediately deduct a substantial portion of their system costs. Then, there are bonus federal tax credits for projects located in energy or low-income communities, and domestic content adders for using U.S.-manufactured components. Under the right conditions these can increase the federal tax credit to 50% of the total system cost. Federal tax depreciation under the Modified Accelerated Cost Recovery System (MACRS) then allows businesses to depreciate their solar asset at an accelerated rate over five years.
State & Utility Programs
State and utility-level programs then layer on significant additional value. Renewable energy credits (RECs) reward businesses for generating clean energy. Net metering credits offset energy costs by crediting businesses for surplus power generated sent back to the grid. And in certain states, feed-in tariffs pay fixed rates for feeding excess electricity into the grid, regardless of what the on-site power use is. Certain states, such as California, New York, and Illinois, then offer additional grants and subsidies for systems with specific characteristics such as carports; certain system sizes; or that are installed in certain cities or communities.
Avoided Cost of Power
Finally comes the avoided cost of power, usually the most critical component of the financial equation. Unlike a third-party ownership model, where a third party system owner sells the power produced for a profit, direct ownership allows the business to use the power generated directly. So the cost savings here comes in the form of an avoided cost of power, and businesses can eliminate or drastically reduce their reliance on utility-provided energy, and the associated rising rates and volatility. Over the course of 25 to 30 years, the avoided cost of power can result in anywhere from hundreds of thousands, to tens of millions of dollars in savings, depending on the size of the business.
The Case for Ownership
In a PPA or lease structure, the third-party owner leverages all these state and federal programs to generate their own returns, passing only a small fraction of the resulting benefits to the business in the form of discounted electricity rates or lease payments. By directly owning the solar system, these incentives and subsidies that third-party owners would rely on to achieve their ROI, are instead fully captured by the business owner.
Sussex Energy has modeled hundreds of sites throughout the country, and the typical return on investment sits around 5-7 years. However in certain states, the combination of federal, state, and utility incentives is so robust that business owners can achieve payback periods as little as 3-5 years. An example of this would be a business located in a high cost of power area, that is in a federally designated “energy community”, and that has a new and largely open flat rooftop.
While the upfront capital investment for a cash or finance purchase is higher compared to third-party ownership options, the long-term financial benefits far outweigh the initial costs. And for companies with sufficient capital or access to low-interest financing, a cash or finance purchase should be a serious consideration – and we would suggest, the structure of first resort. The ROI, driven by a combination of tax credits, subsidies, grants, depreciation, and avoided costs, far exceeds that of third-party ownership structures, offering a financially transformative opportunity for businesses.
