The U.S. nonprofit sector is filled with entities that occupy, and often, own commercial buildings, with ideal roof and parking space for solar power. With the U.S. government phasing out cash grants, while extending tax credits for renewable energy projects, it is unlikely that many of these buildings will ever see a solar system on their roof, or in their parking lot.
Given that the current federal investment tax credit (ITC) for renewable energy equates to 30 percent of the total eligible cost of a solar PV system, this is a substantial incentive that nonprofits cannot take advantage of since they don’t pay federal income tax. The typical system suitable for the vast majority of these buildings ranges between 50 kW and 500 kW, with a small percentage needing systems larger than 1 MW.
To demonstrate the magnitude of this problem, here are some numbers that show just how many buildings in the U.S. are currently unable to take advantage of the ITC:
- Number of churches in the U.S. — roughly 350,000 (as of 2010 census data)
- Number of municipal buildings in the U.S. — roughly 20,000 municipal governments in the U.S. — if we assume each municipality has five government buildings, that’s about 100,000 total buildings
- Number of public schools — roughly 100,000 (as of 2010 census data)
Taking into account just these three categories of energy consumers, we are talking about over 550,000 buildings in the U.S. that cannot take advantage of the 30 percent ITC incentive. So, what’s being done about this?
Let’s explore some different options.
Operating leases are common financial instruments that are often used to acquire expensive equipment such as vehicles, computing equipment and machinery. Operating leases allow the lessee to benefit from lessor owned assets, over a number of years (typically five to 10) using fixed payments. Since this is such a well-known product, many nonprofits have looked to leases as a possible option for adopting solar. However, due to tax code, lessors are unable to capture the ITC while offering operating leases.
Loans, like operating leases allow borrowers to acquire assets over a number of years (typically three to 20 depending on the type of asset). However, because the borrower/owner is a nonprofit, this vehicle does not allow for the nonprofit to take advantage of the ITC. In addition, loans taken out to purchase solar systems reduce the amount of borrowing capacity of the borrower.
Power Purchase Agreements (PPA)
PPAs are agreements that allow energy consumers to consume solar energy with no money out of pocket, and in most cases, allow energy consumers to take advantage of lower electricity bills from day one. In this case, a third-party owner buys and installs the solar system and sells that building owner electricity at rates lower than their current utility rates. This allows the third-party owner (which is a tax paying entity) to monetize the ITC, and offer discounted electricity rates to the building owner.
Of these three options, PPAs have become the most popular financing vehicle for nonprofit entities for the reasons stated above. However, most companies that offer PPA financing do not offer financing for projects smaller than 1 MW, and almost none that will go below 500 kW.
This article was originally published by Sustainable Capital Finance and was republished with permission.
Lead image credit: Author provided | Shutterstock