Local governments and authorities throughout Pennsylvania continue to explore the pros and cons of solar energy, but many have not moved forward with solar projects due to the difficult hurdles they pose. For one thing, finding a suitable location can be a challenge, and the location is extremely important to the project’s performance. An even bigger concern is the return on investment. Solar energy projects typically require a significant upfront cost and public servants do not want to spend taxpayer dollars frivolously. In addition, government municipalities cannot take advantage of solar energy’s lucrative tax credits since they are non-profit entities. Instead, they rely on competitive grants or other incentives to make a solar project a worthwhile investment. Unfortunately, most grants for renewable energy development do not apply to non-profit organizations. Even if a non-profit successfully secures a grant, it can take considerable time and resources.
Fortunately, the solar industry has come up with creative funding options that make it possible for local governments to benefit from solar energy. Some of these options include:
1. Third Party Owned and Operated
There are a handful of third-party ownership options that have been successfully used by local governments. The most common is a Solar Power Purchase Agreement (PPA). In a PPA, solar developers build, own, and operate the solar projects. The developers and their partners can take advantage of tax incentives resulting in advantageous terms for the local government. The developer assumes all of the operations and maintenance of the project through the term of the agreement. A PPA is typically a 25-year agreement and is an attractive option because it does not involve capital expenditure on the part of the local government, meaning that no taxpayer dollars are used on developing and maintaining the solar array. Depending on the size and location of the solar array, this approach can also result in property tax revenue for the local government.
2. Direct Ownership
For local governments with the means or access to favorable debt financing, direct ownership is an attractive funding method. In this model, the local government maximizes its savings from a solar energy installation. Depending on the needs of the local government, the initial investment in solar can be rather large, so this option isn’t favored by many local governments. But in some cases, the economics of direct ownership make sense. Depending on the scale, it is possible for governments to realize a return on investment in less than 14 years in a direct ownership scenario (much less in certain scenarios)
3. Hybrid Option – Solar Power Agreement
An increasingly popular option is a Solar Power Agreement (SPA). A SPA is suggested where the local government prefers direct ownership but wants to monetize the projects tax incentives. A solar developer can partner with the local government in building the project to gain access to tax incentives. Local governments can expect to save 15% to 25% on project development costs using a SPA. IRS regulations require that the developer maintain ownership in the solar project for a minimum of 6 years to be able to claim the tax incentives. One notable difference with SPAs is that the local government can make an upfront payment towards the project and eliminate or reduce monthly payments.
On your own, it can be a long and hard process learning the different strategies necessary to determine if solar energy is a sensible investment. To help clients and other local government entities navigate this complex process, BAI Group offers a no-cost solar feasibility study—to review utility data and to determine the best location for a solar array by conducting a site evaluation. If the local government has a good prospect for solar energy, BAI Group can offer a variety of solar development services for the municipality to take advantage of.
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