Environmental Leader

Most businesses acknowledge the inherent benefits of using the sun to generate clean energy while, at the same time, saving on utility bills. However, there remains great uncertainty on how best to finance the initial capital required for the installation, operation and maintenance of integrated photovoltaic, hot water or thermal solar systems.

The following is a simple, five-step guide for acquiring and/or installing a solar system:

1. Complete an energy efficiency audit. Most utilities provide free efficiency audits to businesses.

2. Engage an experienced integrator. Qualified integrators (or contractors that manage solar projects from cost-estimating through construction phases) are an essential component in securing the most productive solar energy system. Selection of the appropriate integrator will depend upon the financing model adopted. An integrator can often assist with selecting the right solar equipment, selecting financing, and applying for federal grants or loans or state rebates.

3. Select your solar equipment. Research and select the most appropriate solar system for your business with the assistance of an experienced integrator—photovoltaic cell, hot water or thermal.

4. Contract options for funding a rooftop solar system.

Traditional Financing

Traditionally, a business interested in making a capital acquisition would apply for a commercial loan or line of credit from a bank. In the current economic climate, however, it often proves difficult, at best, to obtain such a facility. For this reason, certain integrators and industry trade associations have recently established financing programs to assist with the acquisition and installation costs. Some banks have also dedicated millions of dollars to financing programs that offer debt and tax equity for investment in renewable energy projects.

Operating (Solar) Lease

While classified as a lease, this structure affords a business an opportunity to take advantage of a solar system without incurring the significant initial capital outlay. Typically, a manufacturer of solar systems sells its products to a financing company that in turn leases the system to the end user. The end user is afforded a reduced and fixed utility bill but must assign any tax credits and/or rebates to the finance company or its investors. Often, the leases have long terms and strict conditions and penalties for early termination.

Power Purchase Agreement (PPA)

A PPA enables a business to enter into long-term contracts to acquire electricity produced by the solar system. Typically, the end user purchases the power on a kilowatt-per-hour basis from the energy company and/or dealer of the solar system. It allows for a direct benefit to the business in lower utility rates, while eliminating any uncertainty about the intermittency of solar power. The end user must assign any tax credits and/or rebates to the energy company and/or dealer, or their investors. Often, the PPAs have long terms and strict conditions and penalties for early termination.

5. Apply for and earn Federal Tax Credits, Grants, Loan Guarantees and State Rebates. These tax credits, grants, loan guarantees and state rebates may play a role in the selection and terms of the contract options above. The federal Emergency Economic Stabilization Act of 2008 authorizes $18 billion in incentives for clean and renewable energy technologies and energy efficiency improvements. The federal tax credit for solar systems is generally 30% of the cost and allows for accelerated depreciation.

On Sept. 1, 2009, the Department of Energy (DOE) and U.S. Treasury announced that $502 million is available in a first round of grants from the American Recovery and Reinvestment Act program that provides cash assistance to energy production companies. The DOE has also made available an estimated $30 billion in loan guarantees for renewable energy projects, and a program to award $2.3 billion in manufacturing tax credits for clean energy.

State rebates are also available through the California Public Utilities Commission’s California Solar Initiative, which provides incentives for existing and new commercial, industrial, and agricultural properties. If a business buys electricity from PG&E, SoCal Edison, or SDG&E or a municipal utility, it may qualify for cash-back incentives.

The above demonstrates a variety of options for businesses to use when analyzing the costs and benefits of solar technology. There is no better time than now to lighten up and enjoy the sunshine.

Michael Polentz is a partner and Tara Kaushik is an associate with the law firm of Manatt, Phelps & Phillips, LLP.