Funding solar for business: exploring the options
Energy prices are an ongoing issue for businesses. One route to significant energy savings, for those with suitable property, are commercial solar installations. For businesses considering solar, the financing options can be confusing. This blog sets out the difference between Power Purchasing Agreements and more traditional Hire Purchase financing and finds that whichever route you choose, there are savings to be made.
Why businesses are considering commercial solar
The current level of energy prices represents a significant issue for businesses. Over the last 20 years, businesses have seen a five-fold increase in electricity prices with significant increases after 2021. To provide context, in 2021, small businesses were paying an average 16.5p per kWh for electricity compared to circa 26.3p pence in 2025; a 60% increase.
Installing ground or roof mounted solar panels, often in conjunction with battery storage, can provide companies with very significant energy savings as well as energy security. Companies with freehold/long leasehold property can arrange for feasibility assessments from solar installers or independent consultants to determine the suitable of the property for commercial solar and system design. For companies with property on shorter leases, the process will invariably require the detailed involvement of the property landlord as a key decision maker.
A key issue for many companies is how to fund the upfront cost of solar installation. The Power Purchase Agreement (PPA) is an actively marketed financing product with no upfront cost which is very different from the traditional asset finance product of Hire Purchase. This blog explores the issues to consider with PPA and Hire Purchase financing and why either solution should provide benefits compared to the “do nothing” option of not installing commercial solar.
How does a PPA work?
The PPA is a long-term contractual agreement (typically between 20-25 years) between the company installing solar and the PPA provider under which the PPA provider arranges and pays for the design/installation (usually by a 3 rd party installer) of the commercial solar on the company’s property. The PPA provider is responsible for the operation, maintenance and insurance of the solar installation for the duration of the agreement (and can appoint 3rd party agents to fulfil these obligations). At the end of the PPA contract, legal ownership of the solar installation should pass to the company for nominal consideration (although individual PPA contracts can vary with another option being extending the contract term).
The PPA provider sells a fixed proportion (typically 80-90%) of the power generated from the solar installation to the company at a fixed rate that is below the rate available via the grid. This fixed rate will increase annually by an agreed percentage (typically 2%) to reflect the impact of future inflation. The “excess” electricity that is generated above the fixed proportion will be “sold” to the grid with the PPA provider benefiting from the export tariff income. This benefit will vary depending on the amount of “excess” electricity generated and the rates for export tariff income.
Hire Purchase (HP)
Under HP, a company can purchase their solar installation through regular instalments over a fixed period (generally 5-7 years). While the company will only acquire legal ownership once it has made the final HP payment, it will be the economic owner from inception including responsibility for service, maintenance & insurance (although this may be provided under contract by the installer or other 3 rd party provider). With HP, a company should be able to claim tax capital allowances on the qualifying expenditure and a refund of the VAT.
In the following example, we explore how a Power Purchasing Agreement could compare with Hire Purchase.
Example background:
ABC Ltd is an engineering company whose current electricity consumption from the grid is circa 80,000 kWh per year. ABC Ltd owns a freehold property suitable for a 100 kWp roof top solar system with related battery storage. Following technical due diligence/quotes, ABC Ltd has selected a reputable solar company to undertake the design and installation of the 100 kWp system. Subject to seasonal variations, this should cover ABC Ltd’s annual electricity consumption with any excess being exported to the grid to benefit from export tariff income.
The total cost of the design and installation is £100,000 plus VAT of £20,000; total £120,000.
Power Purchasing Agreement (25 year term) | Hire Purchase (7 year term) | |
|---|---|---|
Design and installation | Total £120k paid by the PPA provider. No cost to ABC Ltd. | HP amount will be £100k to cover the pre-VAT cost of the installation. ABC Ltd can directly recover the £20k VAT. |
Repayment costs | None | Assuming interest of 9% and an annual repayment profile, ABC Ltd would make fixed payments of circa £20k per year for 7 years to repay the £100k principal plus interest (total £140k). |
Savings from electricity generated by the solar installation | ABC Ltd agrees to buy 85% of the electricity generated at an initial fixed price of 15p per kw (compared to current cost of 26p per kw). ABC Ltd would save £9,350 (85,000 kWh at 11p per kWh) in the first year assuming no change to market energy prices. The fixed price will increase by 2% pa with the precise amount of future annual savings depending on the difference between the adjusted fixed rate and actual electricity prices. As a guide, extrapolating the first year saving of £9,350 provides ABC Ltd with a benefit of £233k over the 25-year contract period. | ABC Ltd will directly benefit from the electricity generated (including any tariff income from export). Given ABC Ltd is currently paying 26p for 85,0000 kWh this benefit will be at least £22k per year (with additional export tariff income). As the HP payments are £20k, during the 7 years of the HP agreement the net benefit to ABC Ltd is £2k pa. Once the final HP payment is made after Year 7, then ABC Ltd will benefit from the full free electricity generation (and any export tariff) being £22k+ pa at current price levels. |
Service and maintenance | The PPA provider is responsible for service, maintenance and insurance over the contract period. | ABC Ltd will have to factor in the costs of service, maintenance and insurance. |
Ownership and tax implications. | During the contract period, the PPA provider is the legal and economic owner of the installation not ABC Ltd. As a result, ABC Ltd cannot claim tax capital allowances on the costs of the system (nor can it claim a refund of the VAT amount). | ABC Ltd becomes the legal owner on making the final payment in Year 7. ABC Ltd should be able to claim tax 100% capital allowances on the £100k cost. If a 25% corporate taxpayer, ABC Ltd would receive a £25k tax benefit significantly reducing the net cost of its investment. |
Overall economic impact (assuming market prices for energy remain the same in both cases). | Precise savings will depend on the difference between the fixed price and actual electricity prices. Guide is £9,350 per year. Benefit over 25 years: guide circa £233k. | Savings in initial 7-year HP period £2k per year. Savings in years 8-25 £22k per year. Benefit over 25 years: circa £410k. Costs of service, maintenance and insurance to be factored in against the benefit of the export tariff income ABC Ltd will receive. |
Conclusion
As can be seen from this example, PPA and HP are both viable solutions for financing commercial solar offering different profiles. The PPA offers long-term fixed electricity prices while the HP provides access to free electricity generation making it difficult to make a direct financial comparison between the two proposals. However, in the example used, HP provides significantly more benefit over 25 years than the PPA but the PPA provides higher benefits in the first 7 years (being the period when HP payments are made). The extent to which one may provide a better solution than the other will depend on the individual circumstances of the company concerned including its VAT and tax position.
The critical point is that commercial solar, whether financed via PPA or HP or an alternative option, can provide huge benefits to companies in the current environment of high and uncertain electricity prices. In contrast, the “do nothing” option will deny companies the ability to access these benefits.
Note: The above is for information only with the examples given for illustrative purposes only. The availability of financing will depend, inter-alia, on specific criteria including the credit profile of the company. This blog is not intended to provide, and should not be relied on for, commercial, tax, legal or accounting advice. Independent commercial, tax, legal and accounting advice should be sought before entering into any transaction.
This blog has been written by Net Zero Asset Finance Ltd with assistance from Commercial Solar Funding – details of both are below.
Stuart Cook
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