How Solar Power Agreements (SPA) help nonprofits
By Todd Bluechel
Historically, nonprofits have relied upon third-party ownership models like power purchase agreements (PPA) to fund solar projects if their reserves were not robust enough to pay for the system outright. Traditional PPAs were the "go to" funding option offered to nonprofit projects by solar installers because they were a way to fund solar projects when the nonprofit didn't have the cash available.
Unfortunately, PPA contracts are difficult to understand and can include unfavorable terms like escalators and expensive purchase options. And PPAs are not allowed in the following states: Alaska, Arkansas, Florida, Kansas, Kentucky, North Carolina, South Carolina, Oklahoma, and West Virginia.
Over time, PPAs have become viewed by some as the used car salesmen in the solar financing world because when all is said and done, PPAs don't benefit the nonprofit as much as they benefit the third-party owner of the PPA. To understand why, consider the following: PPAs much more efficient at sourcing debt than a traditional PPA provider. Therefore, it's the nonprofit that receives the lion's share of the benefits-not a bank or Wall Street investor. Because all the payments over the term of the agreement are being paid for upfront, there is no need to have escalators in the contract. Contracts void of escalators will always be significantly less expensive than contracts with escalators.
In response to the 2018 tax laws, CollectiveSun announced they had created a financing tool unlike any other. Solar power agreements (SPA) were designed to be compliant with the new tax laws, and the SPAs allow CollectiveSun to be compliant with utilities such as Los Angeles Department of Water and Power (LADWP) and others that prohibit PPAs.
Since CollectiveSun structures their proprietary deposit lease as an SPA and not a PPA, SPAs can be used to help nonprofits nationwide in utility service territories that allow leases, but do not allow PPAs.
SPAs are, in essence, a deposit lease or a performance-based lease with a deposit feature. SPAs are similar to prepaid PPAs insofar as the cost of 20 years worth of energy is being paid for in advance by the nonprofit. However, by working with CollectiveSun, nonprofit projects over 50kW only have to provide 85 percent of the EPC cost versus 100 percent because CollectiveSun applies tax credits to reduce any installer's bid by 15 percent.
To offer additional clarity on the SPA structure, nonprofits that work with CollectiveSun are leasing the equipment from CollectiveSun. But instead of making a fixed monthly lease payment, the amount of the monthly lease is deducted from the deposit and is variable based on the performance of the solar equipment. The nonprofit makes an "85 percent deposit" which is equal to 85 percent of the installer's full purchase price, and also equal to the total expected lease payments over the term of agreement. CollectiveSun records the 85 percent deposit as a loan from the nonprofit.
Each year, instead of receiving a separate lease payment from the nonprofit, CollectiveSun reduces the loan balance by the amount of that year's lease payment, which is based on the amount of solar energy produced. Over time, the balance of the loan is slowly diminished by the production of solar energy and corresponding lease payments.
CollectiveSun understands that nonprofits would much rather own their solar systems themselves as soon as possible. Therefore, at the end of six years (when all the tax benefits are fully consumed), the nonprofit enjoys a pathway to ownership. And there are no escalators in SPAs.
The basic question CollectiveSun asks nonprofits is: Would you rather pay a solar installer 85 percent or 100 percent to go solar? CollectiveSun is the only company in America to offer SPAs.
If you're an installer or nonprofit and you would like to learn more about SPAs, contact Todd Bluechel at [email protected].