Maximize Efficiency in Commercial Buildings
7 Solar Financing Mistakes and How to Avoid Them
Last month New York City’s major electrical utility an- nounced that it would work with solar developers toward a more modern grid. Although such progressive utility policies are not universal across the nation,
it is clear that more PV systems will be
installed. It is important for building
owners to consider the options for solar
financing. This article will help you avoid
When developing PV programs, facility
owners often spend most of their time
considering the physical attributes of the
equipment, such as how many megawatts
it will generate. The financing of the
project is an afterthought decided at
the last minute and may be dictated by
the vendor. This is a mistake because a
project’s financing dramatically affects
the outcome. The seven most common
energy project financing mistakes are
1) Using inflated utility
Savings calculations are only
projections and are highly dependent
on estimated utility rate increases. Any
project can be made to look good by
using aggressive escalation assumptions.
However, if rates increase by less than the
assumption, savings could be diminished.
Do your best to evaluate whether the
proposed escalation rates are realistic.
For example, look back at your billing
history and review your utility’s press
releases to see if it forecasts higher rates.
Run your economic plan using a variety
of rate escalation scenarios (high, middle
2) Neglecting to consider direct
ownership and Power Purchase
Solar equipment can be rented under
a Power Purchase Agreement (PPA) or
owned outright by the building owner.
The PPA option allows the owner to lock
in steady and potentially low electricity
rates for 20 to 25 years. PPAs are
indirectly subsidized by a 30% Federal
Investment Tax Credit and accelerated
depreciation. Substantial state incentives
(which can disappear suddenly) may also
be available. Operations, maintenance and
system upkeep are the responsibility of
the solar equipment’s owner. The building
owner pays only for the electricity the
system generates, shifting all system risk
to the solar owner.
On the other hand, solar systems are
fairly easy to maintain and don’t have
much risk associated with them. Owning
the system holds the potential for nearly
free electricity once the system is paid off.
Consider both options carefully as they
THESE COMMON MISTAKES in solar financing
could derail your PV project.
have very different pros and cons in their
3) Misunderstanding the sav-
The guarantee is a large part of the
value a solar company brings to the table,
so ask questions until you understand it.
Some companies even promise to write
a check if savings don’t materialize.
Don’t confuse your guarantee with
the performance bond that insures
construction because they are entirely
Make sure you understand exactly what
is being warranted (dollars, electricity
savings or production?) and by whom. Is
the guarantee the responsibility of the
company or the equipment manufacturer?
For how long? What happens if the
company is sold or goes bankrupt? What
rights do you have? In what ways can
the company make good on its warranty/
guarantee? Furthermore, a warranty or
guarantee is only as good as the company
providing it. Does it have the operational
and financial strength to stand behind
its promises? You should examine a
company’s track record, claims history
and audited financial statements before
4) Forgetting operation and
To generate the savings projected,
systems and equipment must be
maintained. For example, inverters need
to be replaced every 10 to 15 years and
panels need to be washed regularly.
continued on page 11
BY ERIC A. WOODROOF