Third-party financing is increasingly a preferred means of financing on-site renewable energy generation, particularly for commercial customers. Under these types of arrangements, a resident or business hosts a renewable system that is owned by a separate investor. Third-party financing arrangements are particularly beneficial for entities that cannot claim tax credits (such as governments, schools and nonprofits) and for entities that either lack initial investment capital to purchase a system or the desire to own and maintain a on-site renewable energy system. Under a third-party financing arrangement, an investor monetizes available incentives (e.g. tax credits, rebates and depreciation deductions). The investor then sells electricity produced by a system to a host entity at lower rates than the host customer may otherwise be able to benefit from, if the customer were to invest directly in the system.
Third party financing mechanisms include both power purchase agreements (PPA) and leasing arrangements. With a PPA, the host agrees to purchase all the energy produced onsite. Any excess generation is typically subject to a net metering arrangement between the host customer and a utility. With a leasing arrangement, the host agrees to pay a fixed monthly fee that is not directly based on the amount of on-site generation.
For economic reasons, most small-scale renewable energy facilities in the country are owned and installed by third parties. It is often easier for third parties to take advantage of federal credits and business depreciation, while relieving the property owner of the responsibility of financing the system and building it.
PPA Checklist for State or Local Governments
The North Carolina Solar Center and Interstate Renewable Energy Council’s Customer’s Guide to Solar Power Purchase Agreements provides a detailed explanation about the solar PPA model and how it compares with other financing options.
National Renewable Energy Laboratory report – Solar PV Project Financing: Regulatory and Legislative Challenges for Third-Party PPA System Owners
Forbes article on third party ownership.
Tioga Energy Annoted Sample Power Purchase Agreement