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Five Methods for Financing Renewable Energy: Five Ways to Get to Zero in U.S. Real Estate

Aug 18, 2022

There are many financing options available to help with initial capital requirements for these types of sustainable initiatives. This article will examine five financing options that real estate developers could use to support renewable-energy ventures. It will also discuss the pros and cons of each.

  1. Direct purchase of sustainable energy equipment

This method of financing is the act of purchasing sustainable energy equipment outright.

Advantages Disadvantages
  • Ownership
  • Depreciation - Tax savings
  • Lower cost over time when compared to leasing
  • The owner of equipment can make it a profit-center for their building.
  • Potential to get Federal Investment Tax Credits or Accelerated depreciation Credits (ITC)
  • Most capital-intensive method
  • It's difficult to upgrade
  • Complex installation process
  • Continued responsibility to manage systems, monitor outputs, and maintain control
  • All repairs and maintenance are the responsibility of the customer.

Who should pick this method?

This is an ideal method for developers with positive tax liabilities who would be eligible to receive tax credits and accelerated deduction.

Royal Lahaina, Maui's Hawaiian resort, purchased solar panels. It also leveraged a state-of-Hawaii tax credit, federal ITC, depreciation, and federal tax credit. With those incentives, plus the cost savings that will accumulate to $3.9M over the next 25 years, the Resort expects that the solar investment will pay for itself in just over a year. The Royal Lahaina, a prime example, is a property owner with a positive tax obligation due to positive earnings that took advantage of the tax deductions when purchasing sustainable energy equipment.

Figure 1: Atop the Royal Lahaina Resort Maui, Hawaii

  1. Equipment leases

Developers will often lease renewable energy equipment rather than purchasing them. The equipment lease grants the property exclusive access to the equipment (e.g., solar panels on roofs, geothermal wells below the building's surface) during the lease period. Asset managers often purchase equipment from the lessor as the lease expires or as they near it.

Advantages[ii] Disadvantages
  • Less initial capital required
  • Lease payments exempted from taxes
  • Flexible terms
  • Upgrades can be made much more easily than purchasing
  • A lessor may pay for installation costs or the process.
  • Leased equipment may be integrated into the building design, i.e. geothermal wells), there could be complications when lease term ends
  • Leasing has a longer term with a higher cost than owning.
  • Contractual obligation

Who should choose this method of operation?

This method is suitable for developers who do not carry large tax burdens and have reduced immediate access to capital.

Blocpower is a Brooklyn-based energy efficiency business that offers this service. It has played a crucial role in making Ithaca the first city in the United States to decarbonize every building. Blocpower has a unique leasing model that offers additional benefits. These include regular maintenance and a guarantee of 15 years performance. [iii] Blocpower, although it primarily deals with the conversion of buildings, is an example of how creative financing can be applied to new development.

  1. Property Assessment Clean Energy (PACE).

PACE (property assessed clean energy) loans allow for the cost of renewable energy equipment to become part of the property assessment. Property taxes will be paid for these costs. This liability is passed to the buyer if the building is sold. This assessment is a debt associated with the property, rather than with the property owner. [iv]

Advantages[v] Advantages
  • Spreads repayment over many years, no upfront payment
  • Increases tax deductible property tax payments
  • Possibility of low interest rates thanks to the high security of loan repayments attached with property tax bills
  • A buyer must also accept loan obligations in connection with property-embedded items [vi] as an additional challenge when selling a home.
  • PACE loans for residential properties are more targeted at single-family homeowners than multifamily homes.
  • Single-family homeowners are more likely to be foreclosed if an assessment is attached.

Who should use the method?

PACE loans lend well to developers who wish to reduce their environmental impacts and taxable earnings without having to make a large downpayment.

Niche Poplars owned the Poplar apartments in May 2021. They used PACE loans to finance a 24-year solar, water and LED project. With this financing, the project is expected save just shy $1M over the next 24years and will save hundreds of thousand of gallons of drinking water and hundreds if tons of CO2 in the future. [vii]

  1. Power Purchase agreements (PPAs).

Power purchase agreements are contracts between an equipment owner and an energy buyer that pay for renewable energy for a specified time. These arrangements can be made by real estate agents who are either the sellers or the buyers of energy.

There are many types and forms of PPAs. However, the most popular are physical and virtual. A physical PPA means that the customer purchases energy at the point it is being produced. This allows them to receive the energy delivered through the grid. Virtual PPAs, also known as financial or synthetic PPAs and illustrated in Figure 2, allow the offtaker of energy to buy it virtually. This agreement does NOT affect the source and consumption of energy by the purchaser. It is instead aimed at companies concerned with their environmental impact statistics. [viii]

Advantages[ix] Disadvantages Energy buyers:
  • Receipt Renewable Energy Credits (RECs).
  • Protection against rising power prices
  • Virtual purchase agreements can be removed from any physical restrictions by virtual PPAs

For you:

  • Cash flow certainty for renewable energies
  • When cash flow was uncertain, buyer commitment makes certain projects more feasible.
The energy buyer's guide:
  • Barriers to entry since agreement sizes are typically tailored to large companies unless done through an aggregator
  • Buyers can be exposed to profile risk by fluctuating production capacities of energy methods

To the seller:

  • Selling at a fixed price could mean that the seller is not able to take advantage of rising power prices.
  • Responsible for all project operations, maintenance and repairs
  • Due to the requirement that seller and buyer be within the same grid area, there is a smaller customer pool for physical PAs

Who should use the method?

A PPA can be sold to developers who want to invest in renewable energy equipment with the ability to generate more electricity than their project demands. Developers who want to offset their carbon emissions but don't have the equipment to install it on their projects should consider purchasing a PPA. PPAs may be suitable for projects that have a climate that does not allow the efficient use of solar panels, or which are too difficult to accommodate geothermal wells. [x]

Boulder Valley School district of Colorado signed an agreement whereby a third-party owns and operates the renewable energy equipment. This is a prime example for a property owner using his real estate to enter in a physical PPA. This case was an early adopter of this approach. It occurred in 2012, when 14 schools were equipped with solar PV. The agreement lowered the district's energy costs by 10% over the period of the 20-year agreement. In this instance, the school districts benefited by this agreement because it moved the system performance risk to a third-party operator. They were still able to enjoy renewable energy without paying upfront.

Figure 2: Diagram of the process behind Virtual Power Purchase Agreements

  1. Renewable Energy Credits

Renewable energy credits (RECs), which are tied to renewable electricity produced at dedicated offsite energy plants, can be purchased. Buying a REC does not buy the energy itself, rather a tradeable commodity representative of the clean energy attributes produced in external facilities. These RECs are a way for corporations to reduce their carbon footprint by deducting the clean energy attributes. [xii]

Advantages Advantages
  • There are no physical changes to the property that are required
  • Reduces the stress of installing and managing renewable energy assets
  • Can be partnered with other methods (i.e., PPAs) to achieve multiple benefits
  • Offsets produced carbon rather than eliminating the carbon production at the source
  • Scope 2 greenhouse gas emissions are not affected by carbon offsets.

Who should use this method and why?

RECs work well for developers with a lower capacity to use renewable energy equipment in their projects. However, they still have the potential to help the industry.

Hudson Pacific Properties is a prime example. Recognizing the limitations of its on-site renewable energies, Hudson Pacific Properties entered into a 3-year REC arrangement that effectively negated Scope 2 greenhousegas emissions. This agreement brought Hudson Pacific Properties to 80% towards its goal of a net zero carbon portfolio. [xiii]

* * *

These five methods were highlighted but developers can also take advantage of many other state and local incentives. It is common for developers to combine any of the above methods in order to meet their sustainability goals.

These methods can be used by a variety of people, including real estate developers, asset managers and property owners.

[i] Sunpower Commercial Dealer. Solar Shines on Royal Lahaina Resort. SunPower Corporation. Retrieved December 1, 2021, from https://us.sunpower.com/sites/default/files/media-library/case-studies/cs-royal-lahaina-case-study_0.pdf

[ii] Laurence B. K. (2013.01.10). Business equipment: Buying vs. leasing. www.nolo.com. Retrieved December 2, 2021, from https://www.nolo.com/legal-encyclopedia/business-equipment-buying-vs-leasing-29714.html.

[iii] Landing: Ithaca. Blocpower. (n.d.). Retrieved December 2, 2021, from https://www.blocpower.io/ithaca.

[iv] Rumsey P. (2017. March 1). Solar is a great opportunity for real estate developers. Greenbiz. Retrieved December 2, 2021, from https://www.greenbiz.com/article/how-real-estate-developers-can-profit-solar.

[v] The Office of Energy Efficiency and Renewable Energy. (n.d.). Clean energy programs for property assessment Energy.gov. Retrieved December 2, 2021, from https://www.energy.gov/eere/slsc/property-assessed-clean-energy-programs.

[vi] Pritchard, J. (2020, October 1st). You can borrow for green improvements, and then repay your tax bill at your own pace. The Balance. Retrieved December 2, 2021, from https://www.thebalance.com/pace-loans-financing-for-upgrades-4124071.

[vii] Pace case studies. PACENation. (2020.October 9). Retrieved December 2, 2021, from https://www.pacenation.org/case-studies/.

[viii] Virtual Power Purchase Agreements: What they are, how they work, pros and con PPA types. EnergyRates.ca. (2021, September 14, 2021). Retrieved December 2, 2021, from https://energyrates.ca/power-purchase-agreement-ppa-vppa/.

[ix] Niklaus, A. (2021. October 25). What is a Power Purchase Agreement? Your definitive guide to power purchase agreements. Pexapark. Retrieved December 2, 2021, from https://pexapark.com/solar-power-purchase-agreement-ppa/.

[x] Energy Purchase Agreements, (epas), and Power Purchase Agreements. PUBLIC-PRIVATE-PARTNERSHIP LEGAL RESOURCE CENTER. (n.d.). Retrieved December 2, 2021, from https://ppp.worldbank.org/public-private-partnership/sector/energy/energy-power-agreements/power-purchase-agreements.

[xi] Borgeson Merrian, Zimring Mark. Financing Energy Upgrades for K-12 School Districts: A Guide to Tapping into Funding for Energy Efficiency and Renewable Energy Improvements, 2013. https://www.energy.gov/sites/default/files/2014/06/f16/lbnl-6133e-co.pdf

[xii] Renewable electricity credits (recs). EnergySage. (2020, December 23). Retrieved December 2, 2021, from https://www.energysage.com/other-clean-options/renewable-energy-credits-recs/.

[xiii] ULI. (n.d.). The Uli Blueprint for Green Real Estate -- Setting net-zero goals for... Urban Land Institute. Retrieved December 2, 2021, from https://casestudies.uli.org/the-uli-blueprint-for-green-real-estate-setting-net-zero-goals-hudson-pacific-properties/.

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