Solar for nonprofits: Benefits, financing explained

As clean energy becomes more widely available, homeowners and businesses alike are adopting solar power more frequently. Thanks to the Inflation Reduction Act of 2022, nonprofits and other tax-exempt entities now also have access to valuable tax credits and incentives, making it more affordable for nonprofits to join the clean energy movement.

We'll explain how nonprofits can benefit from the elective pay option offered by the IRA, in addition to the other financial benefits organizations can gain from going solar.

There are many other advantages to installing a solar system when it comes to nonprofit organizations, too. One of the most important ones is the refundable tax credit, which we'll break down in more detail below. But first, we'll cover some of the other reasons going solar makes smart economic sense.

Financial benefits

Going solar decreases the cost of operations for nonprofits, leaving more funds to devote to their mission. The amount of savings a solar panel system can generate for an organization depends on many factors, including the size of the system, geographic location, and current electricity rates. On average, a system will generate tens of thousands of dollars in savings during its 30+ year lifetime by producing free electricity. Without a solar system, the nonprofit would otherwise have to pay a utility company for electricity every month in perpetuity.

Solar also insulates organizations from volatile electricity rates. Electricity prices have historically risen at around 3% each year nationwide, and price increases fluctuate depending on the cost of fuel. Solar provides a low fixed-price for electricity that never changes – or eliminates the cost completely – which has the added benefit of making it easier to project operating costs into future years.

Social & economic benefits

The adoption of solar energy reduces the U.S. economy's reliance on foreign energy and contributes to local economies by creating jobs. The solar industry employs more people in the U.S. than the oil, gas, and coal industries combined, according to a report from the Department of Energy.

Environmental benefits

Many nonprofit organizations are committed to cleaner, green energy, and going solar is one way to meet those goals. Installing solar decreases your organization's overall carbon footprint because carbon dioxide emissions are typically generated from coal or natural gas-based electricity. Solar power is emissions-free, and the increasing adoption of solar, along with other renewable energy technologies, decreases the overall emissions that large buildings generate over time.

Despite the many benefits of solar energy, many nonprofits lack the funding to install a solar panel system. Until 2022, only residential and commercial properties could take advantage of federal tax incentives available to those who own a solar panel system, but due to the IRA nonprofits can now benefit from solar tax incentives, too.

For the first time ever, nonprofits can "receive a payment equal to the full value of tax credits for building qualifying clean energy projects," according to the White House. This is an elective pay provision, often referred to as direct pay. In the past, the fact that nonprofits didn't have tax liability prevented them from receiving federal solar tax credits, but the IRA changed that. Nonprofits can qualify for a tax credit if they install solar, wind, or battery storage projects, as well as if they build community solar projects, install EV charging infrastructure and more. If a tax exempt entity installs solar panels, for example, they can now receive a direct payment back from the government for the full value of the applicable credit, which can be up to 30% of the total cost of installation. When you factor in additional state and local incentives, the savings are even more significant.

It's important to make sure your organization correctly registers your solar project so you can receive your full tax credit. The credit is a direct payment, so you'll receive your credit in the form of a check. You'll have to register your project with the IRS in advance and get approval. Once you're approved, the entire process can take anywhere from four to 18 months. The final step is filing your taxes. Once you've filed, you can expect to receive your payment within 45 days.

Most nonprofits and tax exempt entities can now take advantage of the IRA, so make sure to check whether your organization qualifies. Everything ranging from state and local governments, school districts, churches, tribal governments, rural electric cooperatives, and municipal utilities are eligible for elective pay.

Leases and PPAs

Before the IRA allowed nonprofits to claim the ITC, many nonprofit organizations financed their solar installation through a lease or power purchase agreement (PPA) rather than owning the system outright. This meant that the solar installer benefited from the tax credit instead of the nonprofit.

In some cases, solar leases or power purchase agreements (PPA)may still be a worthwhile option to consider. Most solar leases are zero-down, which means they don't require an upfront payment. With a solar lease or PPA option, a third-party financier owns the system and covers the cost of installation and maintenance over the duration of the agreement. In return, they receive tax credits and other financial incentives available to them as the system owner. While some solar installation companies finance leases themselves, many work with banks or lenders to secure financing for their nonprofit clients.

Typical solar lease or PPA agreements have a duration of 10 to 20 years, during which the property owner pays the leasing company each month for essentially renting the system and generating free electricity. On average, going solar can reduce an electric bill anywhere from 10% to 30%.

CollectiveSun solar financing

While most solar leasing agreements typically require monthly payments, there are also contracts that can be paid as an upfront lease or PPA. CollectiveSun, an EnergySage partner, provides a different approach to the classic PPA agreement.

CollectiveSun offers financing through a prepaid PPA in which the nonprofit organization pays for the entire term of the PPA upfront. CollectiveSun can take advantage of the 30% solar tax credit and pass half of those savings (15%) on to the nonprofit organization. After year 6 of the agreement, ownership of the system transfers to the nonprofit with warranties to cover maintenance. From then on, the nonprofit has free access to the electricity from the solar system. CollectiveSun financing is available to nonprofit and tax-exempt organizations in all 50 states.

For nonprofits, one of the hurdles with this type of financing can be coming up with the upfront capital to pay for the prepaid PPA. However, CollectiveSun offers financial assistance and a variety of ways to help secure the necessary funds. These can include soliciting donations from the members of the nonprofit, financing via property-assessed clean energy (PACE), a crowd-lending option, and more.

RE-volv

RE-volv is another organization devoted to making solar more accessible for nonprofits through innovative financing solutions. Its model, called the Solar Seed Fund, allows nonprofits to save 15% on their electricity bills through a solar PPA or lease. Over time, as a nonprofit makes its lease or PPA payments for the discounted solar electricity, money is reinvested into the Solar Seed Fund, helping to continuously finance additional solar projects for other nonprofits across the country. In RE-volv's own words, "It's a pay-it-forward model for solar energy."

If you work at a nonprofit interested in going solar, we recommend signing up on the EnergySage Marketplace to receive multiple competitive bids for a solar installation. It's a good idea to have a discussion with a decision maker at your organization to confirm they're on board with exploring solar options.

Before signing up, collect past electric bills and the electricity use history for your organization – installation companies use this information to appropriately size your solar panel system so that it can cover as much of your building's electricity needs as possible.

If you're seeking financing options for the installation, it's also a good idea to talk to your potential installer about the lenders they have relationships with and what their offerings are. You can also each out directly to organizations like CollectiveSun and RE-volv that are committed to helping nonprofits finance their solar projects.