The global move towards renewable energy has individuals and businesses exploring solar photovoltaic (PV) system, which remains by far the easiest form of renewable energy to implement to date.
This has given rise to various financing options available in the market to ease the adoption of solar installation for building owners.
To help you understand the different purchase options, here is our overview to help you decide which financing model is the most suitable for your business.
What are the different types of financing to install solar panels
Capital Expenditure (CAPEX) is an upfront payment of the total cost necessary to own and run the system. It is the most straight-forward form of asset ownership that does not increase your debt level and allows your business to avoid incurring third-party expenses and interest rates. Thereby making it the fastest method for your asset to produce the highest returns and depreciation benefits as compared to alternative financing options.
CAPEX decisions can serve as indicators regarding your company’s long-term goals, while streamlining your operational costs because you do not have to wait for funding and involvement from a third-party, and you can immediately benefit from the energy savings generated from solar PV and enjoy a low levelized cost of energy.
To reduce the high barriers of entry to a solar system ownership, the hire-purchase option is an instalment plan where the cost of the solar system would be spread across an agreed amount of time.
The staggered expenditure allows you to afford the asset through periodic payment over a short-term spanning from 12 to 60 months. This option allows you to hold onto your reserves even if you can pay in full, giving you more liquid flexibility, while owning the renewable energy credits (REC) of the system from the day it is in operation.
The system ownership is transferred either when the down payment is made, or when the credit is fully paid off, subject to the agreement terms. Usually, this also determines maintenance responsibility of the system. If the ownership is retained with the solar company during the credit period, they might offer to bear the maintenance cost of the system.
The short-term contract nature of this finance option is recommended for properties with land leases, with the added benefit of stable energy prices, essentially hedging against energy volatility.
Solar Lease/ Power Purchase Agreement (PPA)
Solar Lease is also known as a Power Purchase Agreement (PPA). An alternative to owning the system, a PPA is a long-term binding contract with a range of 15 to 25 years that affords you the opportunity to install solar power by a solar developer at your facility without requiring an upfront payment or deposit.
Instead, you pay an agreed upon rate in which the PPA price or Lease Payment increases over time for the energy service. Unlike ownership where your electricity bill may cost nothing, a PPA monthly electricity bill is vulnerable to price hikes by the energy provider.
Since the solar developer retains ownership of the hardware and the harnessed energy throughout the tenure, they are therefore responsible for the installation, maintenance, repair and replacement of the system.
This also means that it is the solar developer that owns the REC of the technology and any tax advantages that goes along with ownership.
While this finance model serves as the lowest barrier to access solar energy in the short-run, it is essentially a lease agreement for your electricity purchase for the long-term.
The decision of choosing a financing solution is determined by the financial capability and goals of your organisation. If you are considering integrating a solar system for your facility or would like to learn more about how it can help your business move towards environmental sustainability, you can reach out to our dedicated engineers to create a design and finance proposal tailored to your business.