Sources of Finance

In the recently published report “UK Solar PV Strategy: Part 2” DECC suggest the following sources of finance are available for solar PV (and other renewables):

  • Crowd funding. Linking up communities and individuals with renewable energy projects make it possible for everyone to share in the benefits of clean energy production.
  • Green Deal Finance. Consumers can use Green Deal finance to help meet the costs of installing solar PV on their property and receive the Feed-in Tariff (FiT) as well. The amount they can finance through the Green Deal will depend on how much the home is expected to save on its electricity bill. However Feed-in Tariff payments (generation and export tariffs) cannot be included in this calculation.
  • Power Purchase Agreement (PPA) or ESCO. Where a third party company, an Energy Supply Company (ESCO) pays for the solar installation and retains ownership, and sells electricity back to customer at a discounted rate. This will not eliminate customer’s energy bills, but it can offer significant reductions.
  • Lease finance. A solar lease is much like a car lease and can be a Hire Purchase agreement, or a Finance Lease. Someone else owns the equipment, and the customer pays a monthly fee to lease it until the end of the agreement. A solar lease differs from a solar power purchase agreement (PPA) in that the customer is leasing the equipment, whereas with a PPA, they are paying for the electricity the panels produce. Leases can have either fixed, escalating, or de-escalating monthly payments over the lifetime of the agreement, which currently can be up to five years. In a sense, they are very similar agreements, in that someone else owns and maintains the system. But there can be much lower electricity bills from a clean, renewable source of energy. Like a PPA, the advantage of a solar lease is that instead of making a large upfront investment in solar panels, the customer can get started with little to no upfront investment.
  • Non-Debt Operating Lease. True operating leases offer a flexible method of acquiring solar installations. The customer effectively makes monthly repayments to a finance company over three periods. The first period is usually between three and seven years where the financier is able to recoup up to 90 per cent of the capital cost of the equipment. There is then a secondary term on the lease, usually a further three to five years where the repayments drop significantly to allow the financier to recoup the remaining 10 per cent of the capital cost before a tertiary period of peppercorn rentals of a nominal amount. The customer can choose to terminate the agreement at the end of the primary or secondary terms, or at any point after. The customer is able to be the recipient of all the energy that is produced, as well as directly receiving Feed-in Tariffs and Export Tariffs where eligible. Monthly payments are usually tailored to match the customer’s energy savings and exports, and aim to have a zero up-front cost for the installation. A key element of the operating lease is that in accounting terms it is not classed as debt funding i.e. it is financed through normal expenditure account in the same way customer’s current electricity bills are paid. Non-debt funding has no effect on other credit lines such as the bank, and allows the customer access to future funding should they need.
  • Home Equity Solar Loans. Some home equity loan products are beginning to take into account the value the solar energy system adds to the customer’s home into their cumulative loan to value ratio calculations. This means more people would qualify for a loan with these products. A solar system which saves on energy bills and generates income can add value to the property. For example, if a solar system saves the home owner £1,000 a year in energy, and generates £2,500 a year in additional income, it adds £50,000 to the value of the home. Some lenders are beginning to lend against the future value of the property.
  • Contract Hire. Contract Hire is very similar to a lease rental scheme on a car. Monthly payments are made to a third party financier for a period of 3-10 years with a ‘balloon payment’ at the end of the primary term.
  • Small commercial utility finance. This is suitable for commercial rooftop energy projects whereby the roof owner has shares in the utility company created to own the asset. The tenant buys the energy required to run their business from the utility company created by the investor and the roof owner.
  • Community energy projects. There are many different forms of community energy, including both wholly and partly community owned developments. One example is based on the ESCO or PPA agreement described above. The key difference is that the shareholders in the ESCO are local communities, individuals and local associations. A group can get together and purchase shares in a newly formed business (the ESCO) which then purchases the solar installation and sells the energy at a discounted rate to the shareholders. Sometimes, the installer of the solar PV also takes a share in the ESCO. The ongoing benefit is that the shareholders each take a share of the long term profits of the ESCO, as well as saving on their electricity bills.