Source:
Philip Krain, Michael Polentz, Tara Kaushik, SI Staff Buying Renewable Energy, Tips and Tricks
The third-party financing method is used to make the most out of a diverse resource mix. One participant may have real estate ideal for a renewable energy project; the other may have capital and/or expertise to facilitate the investment purchase. There are many types of third-party financing within all the renewable technologies. The benefits to both the host and the investor vary.
Here’s how it works:
- In the energy industry, there are financiers (investors) who are comfortable with evaluating the internal and external risks. The investor offers the host an energy services agreement (ESA), which establishes specific terms and payments that must be met.
- In solar, the ESA typically calls for all power generated from the system to be purchased by the host. In wind, the ESA is typically signed by the utility due to the production-based incentives and project scale. In either case, the investor-owner assumes all costs, maintenance and risks associated with the system’s performance.
- The investor is responsible for permitting, engineering and design, procurement and installation. The host provides roof space, is willing to commit to a financing contract (see below) and provides access to the host for maintenance.
Traditional financing
Traditionally, a business applies for a commercial loan or line of credit from a bank. 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.
Power purchase agreements (PPAs)
In most cases, hosts commit to a 20-year contract. At the end of the contract, they may sell the system at “fair market value.” In many cases, the owner (investor and developer) is looking to gain the short-term market rate return provided by the investment tax credits and the mid-period return based upon the power rates. Typically, the end user purchases the power on a kilowatt-per-hour basis from the energy company and/or dealer of the solar system.
The Oregon Flip, or an operating lease
This model aims to transition ownership of the system to the property owner after a six-year period. In this model, the host is a more active participant with some upfront financing. The host chooses to leverage its financial resources in order to purchase a system, which may be 10 times the size of a direct purchase.
For wind projects, the benefits to the property owner are much the same. The difference is that their contracts are usually 10 years rather than six. After the investor-owner absorbs the tax benefits and the developer has achieved its return, the real estate owner becomes the system owner for an agreed-upon price.
Third-party investors
Major developers and financiers of renewable energy systems include Renewable Ventures, SolarCity, SunEdison, Tioga Energy, Conergy, as well as Wells Fargo, U.S. Bank and other large financial conglomerates.
Choosing the right provider will depend primarily upon project size and expertise. Many of these organizations are looking to finance solar projects no smaller than 5 megawatts, making it difficult for building owners to participate.
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 percent of the cost and allows for accelerated depreciation. The American Recovery and Reinvestment Act made available $3 billion in cash assistance to energy production companies. The Department of Energy 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.