2022 IRA: Mid Market Solar Ownership Trends

Third party ownership via PPAs, ESA, or leases is the predominant financing structure for the commercial solar market. Is that model going to get flipped on its head as a result of the 2022 IRA and the new direct pay allowance for tax-exempt entities?

Conductor Solar estimates that of all $7.3B US middle market solar projects built in 2021, $5.8B (79%) were financed via a third-party ownership model. The remaining $1.5B were owned directly by the end customer, something we refer to as a “cash deal.”

Now, don’t get that percentage of dollar value confused with the volume of projects. A significantly higher percentage of projects by count were cash deals. However, those tend to have smaller system sizes of $100k-$500k, whereas almost all of the larger projects, such as community solar projects (often $3M-$10M), are financed via third-party ownership. 

Pre-IRA, tax-exempt entities were unable to monetize the investment tax credit or depreciation. Third-party owners were able to capture the value of both which provided a much more compelling value proposition. Now, however, tax-exempt entities are able to file for a cash payment from the IRS equal to the amount of the investment tax credit, putting them on a much leveler, if not better, playing field. 

So, will they work to pony up the cash or raise the financing needed to own these systems directly going forward? We asked 30 of our industry friends at the recent RE+ conference for their thoughts as to how this ratio may change over the next five and ten years.

Our take is that the middle market solar industry will certainly see a higher amount of cash deals moving forward, particularly among tax-exempt entities like nonprofits and government entities. But there are still many cases where a third-party owned deal is the optimal path.

The two primary reasons for using third-party ownership are 1) these are typically structured as off-balance sheet transactions for the customer, which can be appealing to a CFO, and 2) $500k to $2M solar arrays are too expensive for most organizations to prioritize over core initiatives, but too small to warrant separate financing from their banks. For more details on the PPA structure, including when / why a customer may or may not prefer it, check out our PPA overview blog post here.