How to Better Understand and Benefit from Solar Tax Incentives – Part 2: The Power of Solar Leases and Power Purchase Agreements for Small Businesses, Non-Profits, and Religious Institutions

How to Better Understand and Benefit from Solar Tax Incentives - Part 2: The Power of Solar Leases and Power Purchase Agreements for Small Businesses, Non-Profits, and Religious Institutions

This is the second in our three-part article series outlining some of the most important incentives available to those interested in producing or investing in solar energy. In this article, we’ll cover how small business owners and non-profit organizations can take advantage of solar tax credits and other tax benefits through a Solar Lease and Solar Power Purchase Agreements. 

Can my small business, nonprofit organization, church, temple, synagogue, or mosque access solar tax credits and other tax benefits?

Generating power from the sun has become the cheapest form of new electricity in the United States and around the world. Thanks to technology, manufacturing, and business model improvements, installation costs are at least 60% lower than they were a decade earlier. These cost improvements, combined with federal tax credits and utility incentives, mean that building owners can see their upfront investment pay back in just 7 or 8 years.

Unfortunately, because the federal solar Investment Tax Credit (ITC) is not refundable and not transferable, nonprofit organizations and religious institutions cannot claim the solar tax credit themselves, and also cannot claim the valuation depreciation expense deduction for the solar installations. Even small businesses with a moderate tax bill will have a challenge turning the ITC and depreciation deduction into significant financial value.

Read more about the solar Investment Tax Credit in the first article in this series, “How to Better Understand and Benefit from Solar Tax Incentives: The Solar Tax Income Credit and How It Can Help Residential and Commercial Property Owners.”

Leaving the tax benefits on the table results in a much longer payback period for building owners and requires a significant upfront investment.

However, it is still possible for nonprofit organizations and small businesses to comply with the solar ITC rules and access the benefit of the tax incentives for a solar installation.

What is a Solar Power Purchase Agreement (PPA) or Solar Lease?

Under a Solar Power Purchase Agreement (PPA) or a Solar Lease, a third-party partner pays for the entire installation of the solar project and owns the solar facility for at least six years, as required by tax regulations. That solar owner will then “rent” space on your property by signing a lease, usually a roof lease. The same solar energy partner will sell all the solar power the system generates to you as the property owner under a Power Purchase Agreement (PPA) or a Solar Lease.

Under a PPA or Solar Lease, the building owner pays nothing upfront, and the solar owner is responsible for all of the engineering, procurement, and construction costs.

On an ongoing basis, a building owner’s Solar PPA or Solar Lease payments are usually set at a discount compared to their current rates paid to their power company.

Under a PPA, the building owner pays the solar owner on a per kilowatt hour (kWh) basis each month, with the solar owner taking monthly solar production meter readings.

Under a Solar Lease, the building owner pays a stated amount each month, determined in advance based on reliable solar prediction software. For a building owner, the Solar Lease payments usually amount to a similar total savings as a Solar PPA.

What rules do I need to be aware of as part of my Power Purchase Agreement?

Each state and each utility have their own rules, but these systems are typically considered “behind the meter” (meaning the system directly supplies your building before moving extra power to the grid) and are sized to offset either all of a building’s power or the largest system that can fit on the property under the utility’s rules. For example, in Xcel Energy’s Minnesota territory, systems typically cannot be larger than: 1) what you can fit on a property; 2) 120% of the previous year’s electric use (kWh), or 3) 40 kilowatts in total “nameplate” rating.

The property owner continues to be the “customer” for the power company; as a result, typically the property owner and not the solar owner is the party that signs the power company solar agreements – usually an Interconnection Agreement and a Net Energy Metering Agreement. Typically, the roof lease and Solar PPA or Solar Lease ask the solar owner to assume responsibility for complying with these contracts, but the utility will consider the building owner as the one responsible to ensure the system is installed and sized properly. Provided systems comply with the rules set forth by the power company and state, any extra power generated must be purchased by the power company at the same retail rate a building owner pays for power purchased from the power company.

How long is a typical Solar Lease and PPA? What happens during the term, and what happens after?

After the project is installed, the solar partner must be responsible for operation and maintenance of the system and must own the system for at least six years to secure the complete tax and depreciation credits.

Solar PPAs and Leases often include a building owner’s “call option,” sometime after 6 years, allowing the building owner to choose to buy the system at a significant savings of 80-95% off the initial cost.

In some cases, the “call option” is timed with the end of a particular solar incentive period. For instance, in Xcel Energy’s Minnesota service territory, the call option for Solar*Rewards-benefitting PPA projects is often set to start after 10 years.

Once the building owner purchases the solar project, they no longer need to make Solar PPA or Solar Lease payments, and the building owner keeps 100% of the solar energy savings. Most solar panels typically carry 25-year warranties, and some manufacturers provide a guarantee that they will continue to produce at least 80% of the original rated power even after those 25 years.

When structured well and in compliance with tax credit rules, a Solar Lease and PPA partnership can allow a church, temple, mosque, synagogue, nonprofit organization, or small business owner access to the benefits of solar with no upfront costs, almost immediate savings, and substantial long term economic benefits, all on top of doing good for the planet.

If you’re interested in adding solar energy to your residential or commercial property and would like additional information about the incentives available to you, including Power Purchase Agreements, please contact Jeremy Kalin at Avisen Legal and he will be in touch with more information soon. For additional information on becoming a tax credit investor, make sure you read the final article in this series, “How to Better Understand and Benefit from Solar Tax Incentives: Investing in Solar Tax Credits.” 

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Jeremy Kalin

Jeremy Kalin

As the son and grandson of small business owners and as a “recovering” former politician, I believe that private enterprise can help solve some of the big challenges we face in our world. That we are all better served when for-profit, nonprofit and public institutions all pull on the rope together. Read Jeremy's Bio.

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