Other Solar Financing Mechanisms

Schools have several other solar financing options beyond PPAs and third-party ownership.

Schools have several other financing options if they do not wish to pursue third-party ownership. One alternative is to issue bonds to cover the up-front cost of going solar. Energy cost savings can then be used to repay the principal and interest due to bondholders. Because municipal bondholders are usually willing to accept lower interest rates than they would on other debt investments, school projects can be funded at a lower cost of capital compared with most private sources of debt. The financing efficiency of the various mechanisms described here changes over time as tax benefits and other incentives, project costs, and market changes come into play. Along with third-party ownership, some of the preferred school financing vehicles include:

General Obligation (GO) Bonds

GO bonds are backed by the full faith and credit of the government entity. They are repaid from general revenue such as fees and tax collections. Local jurisdictions issue GO bonds typically to fund uses such as government buildings, roads, and schools that don’t have a revenue source. Because of the high transaction costs for bond financing, solar development is typically combined with other capital improvements. Since GO bonds encumber the taxing authority debt capacity, they often require a public referendum.

Revenue Bonds

These municipal bonds are paid back from earnings of the facility acquired or constructed with the issued bonds. Examples include projects that generate revenue such as parking garages, toll roads, utilities, and higher education. Since repayment depends on the success of the project or projects funded, investors typically require a higher interest rate than for GO bonds. But since they don’t typically encumber the government’s debt capacity, they don’t typically require a public referendum.

Clean Renewable Energy Bonds (CREBs)

CREBs may be used by government, public power providers, and electric cooperatives to finance renewable energy projects. The bondholder receives federal tax credits in lieu of a portion of the traditional bond interest, resulting in a lower effective interest rate for the borrower. Funds are allocated by Congress so there is a limited amount of resources available. Check with your state government on the availability of these funds.

Qualified Energy Conservation Bonds (QECBs)

QECBs may be used by state, local, and tribal governments to finance certain energy efficiency upgrades and renewable energy projects. Through QECBs, the federal government provides bond issuers with direct interest rate subsidies. While the subsidy amount varies with U.S. Treasury Qualified Tax Credit Bond Rates, bond issuers have generally received subsidies between approximately 3-4% of the bond amount. Funds are allocated by Congress so there is a limited amount of funds available. Check with your state government on the availability of these funds.

Tax-exempt Lease Purchases

Schools are also somewhat unique in their ability to enter into a tax-exempt lease purchase agreement. Also known as a “Municipal Lease,” this financing mechanism allows some local governments or districts to lease solar energy equipment from a solar company at lower payments and longer terms than other leasing options. Lease payments to the solar company are low because, like a municipal bond, the company, as the investor, is not taxed on the interest they receive through repayment.

These agreements are usually not considered long-term debt, with lease payments made from operating rather than capital budgets. Unlike a true lease, the title is granted to the school district when the lease is signed. Therefore, school districts are unable to take advantage of federal solar tax incentives through these arrangements. In considering this option, schools should weigh the benefits of low tax-exempt interest payments and a longer lease term against alternatives, such as PPAs, that do allow for tax incentives to be passed on to the solar company.

Energy Services Performance Contracts (ESPCs)

Energy services performance contracts (ESPCs) can provide schools with another cost-effective means of investing in solar. Through these agreements, customers contract with an energy services company (ESCO) to assess the current energy use at one or more buildings and to propose a package of energy conservation measures to reduce consumption. The ESCO provides a customer with a guaranteed level of performance for these energy upgrades and ensures a minimum level of cost savings. A portion of these energy cost savings is used to compensate the ESCO for their work in making the energy upgrades, with the remainder retained by the customer.

While ESPCs have typically involved energy efficiency measures with a relatively short payback (such as energy-efficient lighting, building envelope improvements, etc.), these contracts can also include upgrades with a slower payback, such as solar PV. In states that allow for third-party ownership, tax-exempt customers such as public schools could enter into a PPA with the ESCO for the solar PV system included as part of the performance contract, allowing the customer to invest in solar with little or no upfront cost and for the ESCO to take any available tax credits and pass their value on to the customer. For more information on solar in ESPCs, see Integrating Solar PV into Energy Services Performance Contracts: Options for Local Governments Nationwide from the North Carolina Clean Energy Technology Center.

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Last Updated: 1/15/2021

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