If your business is looking to hedge against increasing electricity rates and do something good for the environment at the same time, you might want to consider solar.
Businesses can invest in their own systems to generate power, or agree to buy power from a third party.
A bank with an experienced team in solar energy finance can help, says Dan Pistone, senior vice president and manager of Bridge Bank’s Technology Banking Group.
“Several options exist to take advantage of the benefits of installing solar energy systems, and each option has its merit, depending on what your short- and long-terms goals are, and what type of business you own or manage,” says Pistone. “The right financial partner can help you make informed decisions about ownership versus leasing, and can provide insight into the implications of both options.”
Smart Business spoke with Pistone about how a solar energy system can help you lock in utility rates for years to come and how a bank can assist you in your efforts.
What does a business need to think about when considering solar?
Solar power is a growing industry and as new technology and improved manufacturing efficiencies continue to advance, solar energy systems are becoming increasingly accessible to business owners. If your company wants to install a solar energy system, you have two choices. You can buy the system and have the benefits of ownership, or you can secure a lease of a system, in which a third party owns the system as an asset and you agree to purchase all of the electricity it produces.
Over the last two years, the growth in renewable energy financing has come as a result of tax equity financing, corporate taxpayers who are looking to leverage the available state and federal tax benefits and large banks that are doing large-scale utility-grade projects. However, those banks tend to focus solely on big projects, in the 20 to 50 megawatt range. But, for smaller businesses looking at installing smaller rooftop or ground mounted systems ranging in cost from $500,000 to $15 million, very few financing options exist, quite simply because few banks have the expertise to effectively manage these complex financing structures.
So it becomes challenging for businesses to find a bank that has the infrastructure in place and the knowledge base to manage the complex nature of this type of financing.
If a business wants to use solar energy, how does it get started?
The first step for a business is to determine whether it wants to purchase and own the solar energy system, or if it wants to lease the system and make utility payments to the owner of the asset.
That decision starts with knowing your tax status. Entities such as nonprofits, schools and churches don’t pay taxes, so they wouldn’t receive the benefits of the subsidies that are available. So if you are a school district, for example, and you want to install a solar system in your schools, you wouldn’t get the benefit of the tax credit, or the benefit of depreciating the system as an asset, in which case it would make more sense to instead find a developer that can bring that tax investor in.
Then there are negotiations between the developer and the off-taker of the energy to determine what the utility rate is going to be over the term of the agreement and the escalation rate on an annual basis. Power purchase agreements are generally 15 to 20 years in length, which is favorable to business owners because it allows them to control the cost of electricity over the term of the agreement. Plus, banks and equity investors prefer the longer term because it provides a long-term asset in the agreement.
What will the bank look at when determining financing?
The bank will take a holistic view of the entire project, including an examination of the creditworthiness of the off-taker, and look at the developer, its history, and its ability to construct projects and its track record, as well as other agreements such as operations and maintenance. It will also look at the actual components of the solar energy systems themselves, such as the panel inverters, to get an overall comfort level for the project.
Then it will size that project by looking at the long-term cash flows that will be generated from the electricity sales, and the short-term cash flows, such as local and state incentives. It will look at all those different sources of cash flow that come into a project and decide which of those it feels comfortable lending against.
What should a developer look for when choosing a financing partner?
Energy finance for small-scale projects is a new and fairly complicated practice and, for many business owners or developers, there’s definitely a learning curve at the beginning of a project or system purchase. Look for a bank that is able to provide not only a flexible suite of loan products, but also one that is willing to advise you on how to appropriately capitalize the project and how to properly structure an agreement between parties in a lease. The bank should provide an advisory service, not just debt financing.
Many of the banks that are engaged in energy finance are really only focused on large-scale projects, so it’s often difficult to find the right partner. But if you can find that partner, they should have the ability to advise you on how to aggregate projects to achieve economies of scale. If your goal is to finance these projects, your bank should be a resource to educate and advise you on how to proceed every step of the way.
Dan Pistone is senior vice president, manager, Bridge Technology Group. Reach him at (650) 462-8502 or [email protected]