Frequently asked questions
Please note: Energy Trust is not providing any legal, tax, or accounting advice by providing the following descriptions. This information may not be used to avoid IRS penalties.
What are third-party ownership arrangements?
Third party ownership arrangements are used by entities that cannot utilize the federal or state tax incentives available for solar, or by entities that prefer not to own and maintain a system or lack financial capital needed to invest in solar. Entities that cannot take advantage of the tax policies are typically governments, municipalities, schools, non-profits or other tax exempt organizations.
In a third-party ownership arrangement an entity hosts the system on one or more of its buildings, but the system is owned by a separate business or investor. The investor purchases the system and utilizes the incentives and solar tax benefits (e.g. federal investment tax credit, accelerated depreciation). The host entity enters into a long-term contract with the system owner allowing the host to use the power produced by the system.
These arrangements enable the third-party business and the host to help each other. Governments, schools, and nonprofits usually have roof space and the desire to generate solar power, but lack sufficient funding to purchase solar systems outright or the ability to monetize tax credits. Investors have capital available for investment and an appetite for tax credits, but lack roof space. By working together in a third-party ownership arrangement, both can meet their needs, resulting in more solar installations in our communities than would happen otherwise.
Important note: Third party ownership arrangements are typically used only for large solar electric installations (100 kW and above). Occasionally, they are used for solar electric systems as small as 50 kW or for solar water heating systems. Third party ownership arrangements are sophisticated financial deals and often have substantial transaction costs. Solar developers who execute these arrangements work extensively with lawyers and accountants to find investors, to ensure that investors will be able to claim their tax credits and are following all IRS regulations, and to execute proper contracts between all parties.
What are the types of third-party ownership arrangements?
There are two types of third-party ownership models that are most commonly used in Oregon, though there may be other models. The descriptions below are provided for information only, and do not constitute tax advice and cannot be used to avoid IRS penalties. Please consult with your tax advisor before entering into a third-party ownership arrangement.
Power Purchase Agreement (PPA)
A third-party business or investor installs, owns and maintains the solar system on the host’s facility. The system owner measures the solar energy produced by the system and sells that energy to the host for an agreed-upon price during contract period, typically 15-20 years.
The power purchase price may be a flat rate or an escalating rate. Either way, it should be predictable for the host. The solar energy purchased from the third-party system owner offsets energy that would otherwise be purchased from the host’s utility.
The host may have the option to pay some amount upfront in exchange for a lower energy purchase price. At the end of the agreement term, the host may have the option to buy the system at fair market value, renew the PPA or have the system removed.
A third-party business or investor installs and owns the solar system on the host’s facility, and the host uses the solar system and the energy it generates under a long term (typically 15-20 years) lease agreement. The host may be responsible for system operation, maintenance and insurance.
The lease payments may be flat or escalating during the lease term. Either way, the payments should be predictable for the host. The solar energy generated by the system is used by the host to offset energy that would otherwise be purchased from their utility.
The host may have the option to pay some amount upfront in exchange for lower lease payments. At the end of the lease term, the host may have the option to buy the system at fair market value, renew the lease or return the system to the owner.
Which type of third-party ownership arrangement is best?
It all depends on the priorities and requirements of the host. Keep in mind that every developer’s contract terms and offer will differ, so hosts should identify their key needs up-front. Things to consider include the pricing escalation rate offered by a PPA vs a lease, who is responsible for maintenance and repair, insurance requirements, availability of production guarantees, and end of term or early buyout options offered.
Can a for-profit business install a solar system using a third-party ownership arrangement?
Yes, any business may host a solar energy system using a third-party ownership arrangement. The standard commercial incentive would apply.
How does a nonprofit/government or a for-profit business using a third-party ownership arrangement apply for an Energy Trust incentive?
The host business and the third-party owner may apply for an Energy Trust incentive by choosing an approved trade ally contractor to install the system and working with the contractor to apply for incentives using the appropriate forms.