A Guide to Nonprofit Solar Financing Using PPAs
For homeowners and businesses, the financial benefits of purchasing and installing solar PV projects are relatively straightforward. The initial upfront cost pays for itself over time via three main revenue sources:
- Free electricity
- State incentives
- Federal tax benefits
But, for nonprofits such as healthcare facilities, faith-based organizations, and public schools, the cost-benefits of this equation can be harder to balance. The reason being that federal tax benefits are largely inapplicable, as nonprofits have little or no income tax liability.
This by itself can have large implications on the commercial viability of a solar project, given the fact that in 2020 there is a 26% investment tax credit (“ITC”) available, as well as the ability to depreciate 100% of the system in year one.
However, there is an instrument available to all those organizations looking for cost-effective nonprofit solar power solutions, known as a “third-party ownership model”. The most popular among these is the Power Purchase Agreement (PPA), which is what we explain in this article.
How Does Nonprofit Solar Financing Through a Power Purchase Agreement (PPA) work?
The standard PPA arrangement is where a private developer will design, engineer, finance, construct, operate, and own a solar power system that is installed onto the buildings and/or grounds of a nonprofit. The developer will own the array for the entirety of the contract, which is usually 20 years.
As the developer owns the system, there is no upfront cost for the nonprofit or public entity. Instead, the nonprofit enters into an agreement with the developer to buy the electrical output generated from the system at a set kWh for the life of the contract.
Can Nonprofits Take Advantage of Tax Benefits Using PPAs?
The developer is a for-profit company, therefore eligible for federal solar tax benefits. They pass on the savings of the incentives to the nonprofit by charging them a lower per-kWh rate for the electrical output, compared to the price they would otherwise pay for traditionally generated power.
What Do I Need to Consider Before Investing in a PPA?
As the developer takes care of the setup and management of the system, there is little active work involved on the part of the nonprofit. The main commitment from the customer is to buy the output at the agreed-upon price.
Therefore, the per-kWh price for electricity is the most important factor to consider. It’s possible to shop around for quotes, in much the same way as approaching competitive suppliers for electricity quotes.
Another point to consider is the length of the contract. As a PPA agreement can range from 10 to 25 years, you’re signing up for a long-term commitment. You will need to align this with your future plans. It is possible to negotiate a shorter contract term, but this will likely result in a higher per-kWh price.
You will also want to determine if any site upgrades are needed to facilitate the installation, such as roof repairs.
How Can Nonprofits Get Started with PPAs?
Here at PowerOptions, we have a solar program with clean energy specialists, Solect Energy. The program offers a solar-plus-storage solution to nonprofits and public entities in Massachusetts, Connecticut, and Rhode Island.
This begins with us asking for information about your site (e.g. rooftop, parking lot) and requesting a copy of a recent electric bill. With this information, you receive a free, no-obligation proposal to see whether it’s something you’d like to explore further.
It’s important to remember that solar incentives – both state and federal, decline over time so if your nonprofit is considering solar we encourage you to start the process as soon as possible.