How do we pay for solar?

Cash, loan or PPA: how to pay for solar

The question in most of our customers’ minds isn’t necessarily “Will solar work?”. It is more likely to be, “I know it will work-but how do I pay for it?”

It’s a fair thing to worry about. Commercial solar will cost tens of thousands at least, and most business owners already have somewhere else that money could go: stock, a van, wages, the roof repair that can’t wait any longer.

The good news is that there are three established ways to pay for solar, each suited for different businesses. Here’s how each works, what it costs, and what to watch for.

First, the same example for all three

To keep this honest, I’ll use one illustrative system throughout: a 50kW array on a commercial roof, costing £50,000, saving the business £12,500 a year on its electricity. That’s a four-year payback, which is typical of the commercial buildings we install on, where most of what the panels generate is used on site through the working day.

Your own figures will differ, so treat the percentages and ratios as the useful bit, not the exact pounds.

Option 1: Pay cash

You buy the system outright. You own it from the off and you keep 100% of the savings.

What it costs: £50,000 upfront. Your bills immediately reduce by £12,500 a year. Over a 25-year panel lifetime, even allowing for gradual degradation and inverter replacement, that’s a very large number against a one-off £50,000 outlay.

What helps: the tax treatment. Solar panels within the Annual Investment Allowance (AIA) for a business and are classed as plant and machinery, so the cost can usually be set against your taxable profits through capital allowances. In practice that can mean a meaningful chunk of the cost comes back through a lower tax bill in the year you buy.

What to watch for: lots of businesses keep £50-100,000 in the bank balance as ready cash for emergencies. If that money is gone, there’s no buffer for hard times. If the money is sitting idle, solar at a four-year payback is hard to beat. If it’s what keeps the business flexible through a quiet quarter, it might be wise to think again.

Best fit: businesses with spare cash that isn’t earning much, and owners who want the simplest possible arrangement.

Option 2: Borrow the money

You take out a loan or asset finance to cover the install, and the savings from the panels go towards the repayments.

What it costs: interest, on top of the £50,000. Using an assumed 8% over seven years, repayments would be about £780 a month, or £9,350 a year. Total interest over the term is roughly £15,000

What that looks like in practice: the system saves £12,500 a year and the repayments are £9,350, so the business is about £3,150 a year better off from the first year, with nothing paid upfront. When the loan ends, the full benefit of the solar is yours. Choose a shorter term, say five years, and the repayments rise to roughly £12,150 a year. That’s roughly break-even while you repay, then all savings afterwards.

What helps: you own the system from the start, so the capital allowances point from Option 1 can still apply, and the repayments are spread over the years the panels are earning their keep. Many lenders will secure the loan against the equipment itself, rather than against your property or personal assets, though this varies, so check the terms.

What to watch for: the interest rate could change it from breaking even to making a loss on a month to month basis. Check the loan term as well. A longer loan makes the monthly payment friendlier but costs more in total. And be clear about what security the lender wants. Most installers, including Pinnacle Solar, have finance partners with loan arrangements specifically for solar, so probably best to go with one recommended by the installer.

Best fit: businesses that want to own the system but would rather keep their cash for the business and are comfortable with a modest monthly commitment against a monthly saving.

Option 3: A Power Purchase Agreement (PPA)

With a PPA, a third party pays for and owns the system. It’s installed on your roof, and you buy the electricity it generates from them, at a rate that’s lower than you currently pay to your supplier. You pay nothing upfront.

What it costs: no capital, but you don’t keep the full saving. If your current unit rate is, say, 28p per kWh and the PPA rate is 20p, you save the difference on every unit the panels generate and you use. That’s a real saving from day one, but it’s smaller than the cash or loan routes, because the PPA provider takes a margin for funding and owning the system. What’s more, most PPA contracts last 15-20 years. At that point, the ownership of the system passes to the user: you! It’s a free solar system, albeit a slightly old one.

What helps: it’s the lowest-risk way in. There’s no capital outlay, no interest, and typically the PPA provider takes on responsibility for the system’s performance and maintenance, since they’re the ones who need it working to be paid. For a business that wants the benefit without the balance-sheet impact, this is what a PPA is built for.

What to watch for: this is where the small print matters most.

• Contract length. PPAs are long agreements, often 15 to 20 years. Are you definitely going to be in the building that long?
• Your building. The system sits on your roof, owned by someone else. If you sell or move, that agreement needs to transfer or be bought out, and that can complicate a sale. If you rent, you’ll also need your landlord’s agreement.
• The roof. If the roof needs replacing during the contract, who pays to take the panels off and put them back? Ask before you sign, not after.
• Price escalators. Check whether the PPA rate is fixed or rises each year, and by how much. A rate that starts below the grid price but climbs faster can quietly erode the saving.
• The end of the contract. What happens after the term: do you get the system, buy it for a nominal sum, or is it removed? Make sure you can answer that before signing.

Best fit: businesses that want to cut their bills without spending capital or taking on debt, own their premises, and are comfortable with a long agreement.

How to choose

If you ask me which is “best”, I’ll say it depends on what you value more: owning the asset and keeping the full saving or keeping your cash and your balance sheet free of it.

As a rule of thumb:

• If you have the cash and it isn’t doing anything useful, buy it outright. It gives the highest return.
• If you’d rather keep the cash but are happy to own the system, borrow. You still keep most of the saving, and you can be cash-positive from year one.
• If you want solar without capital or debt, and you own your premises, a PPA works. Just go in with eyes open about the length of the contract and what happens to the system if the building changes hands.

The point of all three is that the savings start straight away. You aren’t choosing whether the numbers work. You’re choosing who carries the capital, and what you want to own at the end of it.

What we’d suggest you do

We work through all three with you, using your actual figures, as part of the Energy Security Diagnostic. If you’d like to see where your business stands before you talk to anyone, take the free Business Energy Scorecard, which takes five minutes and shows whether your building is ready to be made energy secure.