It sounds too good to be true:
- Pay $0 down and trucks and crews will pull up to the curb,
- climb ladders to the roof,
- haul up heavy aluminum racks,
- haul up even heavier photovoltaic (PV) solar panels,
- hire local certified electricians to run wires from your utility room to the panels, and
- meet the local utility rep to approve and turn on your solar system.
Surely there must be a catch.
Sometimes an offer sounds too good to be true…and isn’t. In the case of many solar system installations, the offers are completely legitimate.
How do you get something for nothing?
The answer is that it’s not nothing. The seemingly impossible dream is the product of a combination of generous federal tax subsidies, local incentives, and long term contractual payments for the solar electricity.
Who owns the $0 down PV system? Ownership of the system is an important factor in determining whether $0 down is possible. A system that is installed for $0 down will be owned not by the solar host – the building that is using the electricity generated from the PV panels – but by a third party developer, bank or finance company. That third party will enjoy the tax benefits and incentives that help make the deal economics work.
Tax Benefits. The party owning the system is entitled to two important tax benefits, courtesy of Uncle Sam:
- 30% Investment Tax Credit. The builder of a solar system – whether a company or a homeowner – can reduce their taxes by 30% of the installation cost of the system (excluding certain soft costs like marketing and permitting and costs incurred in connection with the installation such as repairing the roof).
- Depreciation allowance. Commercial taxpayers can depreciate equipment. Residential taxpayers cannot. In the case of solar assets, Congress has authorized accelerated depreciation treatment over 5 years as opposed to the life of the system which could be as much as 25 years or more. Unlike tax credits, depreciation is a deduction against taxable income. The benefit is equal to the amount of the deduction (cost * annual rate of depreciation as prescribed by the IRS) * the taxpayer’s tax rate.
Other incentives. Some states, regulatory agencies and utilities offer incentives. These are frequently enjoyed by the owner of the system although the owner could agree to share these with the solar host. A number of incentives are available:
- Solar Renewable Energy Credits (SRECs). SRECs (sometimes dubbed something else) are financial rewards for each megawatt of renewable energy produced or energy conserved via other energy efficiency measures.
- Rebates. Some utilities offer rebates designed to reward solar developers, most often homeowners, for building solar systems that take pressure off the local utility system to build new generation capacity.
- C-PACE benefits. Some states and municipalities permit commercial solar developers to fold their repayments into their property tax payments, thereby turning what would otherwise be deemed a debt amortization payment into a long term tax obligation that runs with the land. This facilitates sale of the property without endless negotiations over the value of the solar PV asset.
Lease or PPA Payments. These benefits are available to the third party owner of a solar system and reduce the capital outlay for the solar developer. However, they are not enough to reduce the cost of the system to $0. To get to $0, the solar host – the building owner enjoying the use of the solar electricity generated from the PV panels – must make periodic payments to the owner of the system.
Payments may be made in two ways, each of which results in roughly the same stream of payments to the third party.
- Lease payments. The owner of the solar system can enter into a lease agreement with the solar host. Under the agreement the solar host will pay a monthly lease payment for the term of the contract, often 20-25 years. Ideally the lease payments will be less than the cost of electricity that is avoided by the solar host through the solar system. Avoided costs are the amount the solar host would have paid the utility if it were not for the solar system.
- PPA payments. Some solar system owners will ask the solar host to enter into a Purchase Price Agreement (PPA) under which the host will pay a price per kilowatt hour of electricity produced by the solar system to the owner of the system. These payments will vary by month, depending on insolation (amount of sunlight), angle of the sun’s rays during the month, etc. The average of such payments will approximate what a monthly lease payment would be.
$0 Down Not “Free.” Thus, $0 down does not mean “free.” A building owner who is a solar host but does not own a solar system will pay for electricity produced by the system over the life of the lease or PPA with the owner of the system. Ideally those payments will be less than the solar host’s avoided costs to the utility.
Why Buy? If the benefits of solar are possible with no cost, why would anybody want to buy a system? Unlike a leased car, for example, the solar lease or PPA might continue for 20 years or more. Why would buying ever make sense?
There are several reasons why buying a system may be preferable to leasing or entering into a PPA.
- Additional Savings from Ownership. If a solar host pays taxes, the tax benefits and other incentives available to solar system owners may be more beneficial and reduce in lower long term costs than leasing or PPA payments.
Consumers must prepare a detailed spreadsheet that shows the long term costs of ownership. In our work with hundreds of clients, we at Solomon Energy have found that for taxpayers ownership almost always saves more money in the long run than leasing or PPA payments.
- Flexibility. Ownership avoids some of the complications that can come from leasing or PPA payments. The federal government allows the tax benefits described above to vest over 5 years. If a solar host sells the property before the end of the 5 years certain penalties could ensure as the tax benefits would be “clawed back” by the IRS.
- Property Values. A number of studies have shown that the value of a commercial property or home will increase with solar PV installations. This makes sense in light of the lower operating costs that generally ensue from installing such systems.
However, if a system is not owned but leased or subject to a PPA agreement, a buyer will need to evaluate the economic benefits of the solar system including the escalating price of solar electricity, if any; the credit worthiness of the solar contractor and its ability to maintain the system over time; and the risk that at the end of the term the system will need to be removed from the roof.