Disclaimer: This page is intended as information, and does not constitute financial advice or recommendation. Please seek out professional advice before making any decisions regarding your organisation’s financial planning.
This guide offers a straightforward look at financing decarbonisation and renewable energy projects for businesses seeking to reduce their environmental impact and energy costs.
Whether you're looking for ways to upgrade with no upfront cost, manage energy expenses, or find flexible financing, our guide lays out what you need to know in order to make the best choice for your organisation.
In this guide, we’ll explain the following types of renewable energy project finance for businesses:
- Feed-in Tariffs
- Contracts for Difference
- The Smart Export Guarantee
- Solar Power Purchase Agreements
- Asset Finance
Feed-in Tariffs
Initiated in April 2010, the FIT scheme was designed to boost green energy production in the UK by offering payments for generated electricity from renewable projects, with an emphasis on solar PV.
The FIT scheme ended in March 2019. Widely considered a success, the scheme had a goal of installing 750,000 solar PV systems by 2020; by 2015, it had resulted in 730,000 systems installed across the UK.
The transition to Contracts for Difference
With the FIT scheme's closure, the incentive was replaced by the Smart Export Guarantee (SEG) and Contracts for Difference (CfDs).
Aimed primarily at larger renewable energy projects, Contracts for Difference are private contracts between a renewable energy generator and the UK government-owned Low Carbon Contracts Company (LCCC).
The contract sets a ‘strike price’ for the electricity generated by the renewable energy system over a specified period. If the market price is below this strike price, the government pays the difference to the generator, and if the market price is higher, the generator pays back the difference.
The Smart Export Guarantee
The Smart Export Guarantee requires certain electricity suppliers to pay small-scale renewable energy generators for the energy they export back to the grid. Designed as a market-driven scheme, the SEG encourages energy suppliers to be competitive and offer attractive tariffs for exported renewable energy, thereby potentially providing better returns for renewable energy generators.
Power Purchase Agreements
A Corporate Power Purchase Agreement (PPA) offers companies sustainable energy solutions with zero upfront costs.
An Example of a Power Purchase Agreement
Consider a company entering into a PPA with a wind energy provider. The provider agrees to install wind turbines on their property at no initial cost to the company. In return, the business commits to buying the wind-generated electricity at a fixed rate for 15 years.
This arrangement enables the business to support renewable energy production and achieve its sustainability goals without the need for a large capital expenditure. The fixed electricity price under the PPA also protects the business against future energy price volatility.
Power Purchase Agreements Explained
Corporate PPAs are generally available in three distinct models:
The "Sleeved" PPA
Direct sale of power from the generator to the corporate buyer, facilitated by an intermediary (like an energy supplier) who ensures the power reaches the buyer's location.
The "Synthetic" PPA
Involves a financial agreement rather than physical power transfer, where the generator and corporate buyer settle the difference between the market price and the agreed PPA price.
The "Private Wire" PPA
Power generation is located close to or at the buyer's site, avoiding the national grid and offering power exclusively to the buyer.
Key Benefits of Power Purchase Agreements
- Zero Initial Investment: Companies can access renewable energy solutions without any upfront costs, leading to immediate cost savings.
- Supporting Environmental Targets: Companies can significantly reduce their indirect greenhouse gas emissions related to energy consumption, known as scope 2 emissions. These agreements can also help to manage emissions tied to the company's value chain, referred to as scope 3 emissions.
- Stabilising Energy Costs: Unpredictable energy prices can be mitigated through PPAs. This allows organisations to fix their energy rates, shielding them from market volatility and providing long-term financial predictability.
- Cost Savings: Companies can benefit from reduced energy costs compared to prevailing market rates, as the flexibility of these agreements can allow them to negotiate favourable terms.
Solar Power Purchase Agreements
A Solar PPA is an arrangement wherein a developer is responsible for the design, financing, installation, and permitting of a solar energy system on a customer’s property, usually at minimal or no upfront cost to the customer. Solar PPAs usually last between 15-25 years, aligning with lease terms. This ensures financial stability for solar providers to fund panel installations.
Key Takeaways of Solar PPAs
- Cost-saving Rates: The power generated by the system is sold to the property owner at a rate that is generally lower than what their local utility company charges, offering a cost-saving alternative to buying from the grid.
- Developer Benefits: The developer benefits from the sale of the generated power along with any applicable tax credits and incentives.
- Agreement Duration: PPAs typically last between 10 to 25 years, with the developer managing the system's maintenance throughout.
- End-of-term Options: At the end of the agreement, customers may have options such as extending the PPA, purchasing the system, or having it removed.
Key Benefits of Solar PPAs
- Zero Initial Cost: Developer covers the design, procurement, and installation costs.
- Fixed Electricity Costs: Offers predictable electricity pricing, with protection from utility price hikes.
- Low Risk: Developer handles system maintenance and operation.
- Tax Credit Leverage: Developers utilise tax credits to lower system costs, beneficial for entities unable to use tax credits directly.
- Property Value Increase: Potential to boost property value, with the PPA transferable to new owners.
Asset Finance
Asset finance is a way for businesses to access certain types of assets without having to buy them outright. Asset finance has been used to cover various decarbonisation technologies, from solar panels and heat pumps to wind turbines. It also allows companies to unlock the cash tied up in assets they own, or use those assets as security for a loan.
This type of financing is particularly appealing for companies that:
- Lack the upfront capital for new assets but are eager to expand,
- Want to make use of significant assets for a specific time,
- Prefer to manage large expenses over time with predictable monthly payments,
- Are looking for an alternative to traditional bank finance.
There are two main asset finance paths: acquiring new assets or securing loans against existing assets.
How does asset finance work?
Asset finance allows you to use what your business needs by renting it through a financing agreement rather than buying it outright. You might need to provide a form of security, like property or another valuable asset, to secure the financing.
The finance arrangement means the asset gradually pays for itself over the leasing term, typically 3 to 5 years, with the financier covering the cost upfront and you spreading the cost over time.
Types of asset finance
- Hire purchase
- Operating lease
- Finance lease
- Asset refinancing
- Invoice financing
What is hire purchase?
Hire purchase is a financing method that lets you pay for your net zero tech in monthly instalments. Once you complete all the payments, you own it.
What is an operating lease?
An operating lease lets you rent an asset for only part of its usable life.
This form of leasing is the simplest type of asset financing because it frees you from the responsibilities and benefits of asset ownership, such as dealing with insurance and upkeep. Operating leases could also be an attractive option if you’re looking to install rapidly-evolving tech, as it provides greater flexibility for upgrades in the future.
What is a finance lease?
A finance lease, or capital lease, is a lease agreement where you rent an asset for a significant part of its useful life. It's designed for long-term usage, allowing you to use the asset and pay its entire value over time, without ever owning it.
This setup offers potential tax benefits, such as the ability to deduct lease payments from profits and claim VAT back, enhancing tax efficiency for some businesses.
With a finance lease, you assume most ownership responsibilities, like maintenance and dealing with depreciation, similar to what you'd expect with actual ownership. However, the asset doesn't appear as owned on your balance sheet.
Payments are made monthly, covering the asset's cost plus interest. At the end of the lease, you can either extend the lease at lower payments, sell the asset and keep part of the sales proceeds, or return it.
