How Third-Party Ownership Helps Nonprofits Benefit from Solar
Taking advantage of the financial benefits from purchasing and installing solar PV projects is relatively straightforward for homeowners and for-profit businesses – there’s an upfront capital cost of the project which pays off over time via three primary revenue sources: free electricity, state-level incentives, and federal-level tax benefits.
When thinking about solar for a nonprofit, the main disadvantage to buying the system outright is that one of the major revenue sources, the federal tax benefits, are wholly or mostly inapplicable because nonprofits have little or no federal income tax liability with which to monetize the tax benefits. These benefits are significant. For systems installed in 2020, there’s a 26% investment tax credit (ITC) as well as the ability to depreciate 100% of the system in year one.
In order for nonprofits to take advantage of these federal tax benefits and extract the most value out of a solar installation, the “third-party ownership” model has emerged as a popular method for nonprofit solar financing. There are a variety of business models around the third-party ownership concept, but the most common is the “Power Purchase Agreement” or “PPA”.
What is a Power Purchase Agreement (PPA)?
Under a standard PPA, a solar developer will design, engineer, finance, construct, operate, and own the system for the term of the contract – typically 20 years. The host pays zero up-front cost and agrees to buy the electrical output of the system for the term of the contract at a cost per kWh that is lower than the cost of buying grid-delivered electricity. This arrangement provides immediate savings to the host nonprofit, as well as a long-term hedge against the volatility of the energy markets.
What about the tax benefits?
The tax benefits accrue to the system owner – under the PPA this would be either the developer or an outside financier who transacts directly with the developer. Ownership of the system is like a home mortgage – the system may be sold to different owners over its lifetime, but the developer usually remains as the “servicer” throughout the term. As a for-profit entity, the system owner can efficiently monetize the tax benefits which provide a large part of the system payback, allowing them to charge a lower per-kWh rate to the host for the electrical output.
What does this look like in practice?
From the customer’s viewpoint, all of the tax monetization strategy takes place behind the scenes. The customer can shop for PPA proposals which will offer some high-level system specifications along with a per-kWh price for the electricity. The obligation to buy the output is the main commitment for the customer – the developer does all the planning and work including permitting and interfacing with the local utility and delivering a turn-key project. The host has no operations or maintenance responsibilities aside from some typically benign obligations around not disconnecting or damaging the system.
We would start, as would any other developer, by asking for some information about your site (e.g. rooftop, parking lot) and requesting a copy of a recent electric bill. With this information, providers will be able to provide you with a free, no-obligation proposal to see whether it’s something you’d like to explore further.
As we always say at PowerOptions – a price is only as good as the contract terms behind it, so we encourage interested organizations to request template PPA contracts in order to evaluate different solar offers.
It’s important to remember that solar incentives – both state and federal, decline over time so if you’re considering solar we encourage you to start the process as soon as possible.