Solar energy has become increasingly popular as a clean and renewable energy source, with more businesses and homeowners investing in solar projects to reduce their carbon footprint and energy costs. However, financing these projects can be complex, often involving various stakeholders and financial mechanisms. Two common methods of financing solar projects are through common equity and tax equity. In this article, we’ll delve into the differences between these two approaches and their implications for solar investors.
Read: How Solar Tax Equity Funds Work
Solar common equity
Common equity is a straightforward form of investment in which investors purchase shares of ownership in a solar project. These investors become partial owners of the project and share in its risks and rewards. Common equity investors typically include individuals, institutional investors, and venture capitalists.
Key characteristics of solar common equity:
- Ownership Stake: Common equity investors hold a direct ownership stake in the solar project. They have a say in decision-making processes and may receive dividends if the project generates profits.
- Risk Exposure: Common equity investors bear the full risk of the project, including market fluctuations, technological risks, and operational challenges. If the project fails to meet its financial targets or incurs losses, common equity investors may suffer financial losses.
- Return Potential: Common equity investors have the potential for higher returns compared to debt investors or tax equity investors. If the project performs well, they can benefit from increased project value and dividends.
- Tax Treatment: Common equity investors are not eligible for tax benefits associated with solar investments, such as the federal Investment Tax Credit (ITC) or accelerated depreciation. Instead, they rely solely on the financial performance of the project for their returns.
Solar tax equity
Tax equity is a financing structure commonly used in renewable energy projects, including solar. In this arrangement, investors provide capital to finance the project in exchange for tax benefits, primarily the federal Investment Tax Credit (ITC) and depreciation deductions. Tax equity investors are typically large financial institutions, such as banks or corporations, with substantial tax liabilities.
Key characteristics of solar tax equity:
- Tax Benefits: Tax equity investors receive the majority of the tax benefits associated with the solar project, including the ITC and depreciation deductions. These tax benefits can significantly reduce the investor’s tax liability, providing a form of return on investment.
- Limited Risk Exposure: Unlike common equity investors, tax equity investors have limited exposure to project risks. While they may lose their investment if the project fails, their primary concern is securing the tax benefits rather than the project’s financial performance.
- Lower Returns: Tax equity investors typically receive lower returns compared to common equity investors. The returns are mainly derived from the tax benefits rather than the project’s operational performance.
- Project Participation: Tax equity investors do not have a direct ownership stake in the project and typically have limited involvement in its management or decision-making processes. They are primarily concerned with maximizing their tax benefits.
Key differences
- Ownership vs. Tax Benefits: The primary difference between solar common equity and solar tax equity lies in the form of return. Common equity investors receive returns based on project performance and dividends, while tax equity investors receive returns primarily through tax benefits.
- Risk Exposure: Common equity investors bear the full risk of the project, while tax equity investors have limited exposure to project risks.
- Involvement: Common equity investors have a direct stake in the project and may have a say in its management, whereas tax equity investors are primarily concerned with securing tax benefits and have limited involvement in project operations.
Which option is best for you?
Both solar common equity and solar tax equity play crucial roles in financing solar projects, each with its own set of advantages and disadvantages. Common equity offers direct ownership and potential for higher returns but involves greater risk. Tax equity provides access to tax benefits and lower risk but offers lower returns and limited project involvement. Understanding these differences is essential for investors seeking to finance solar projects and maximize their returns while managing risk effectively.
EnergyLink is a proud partner of Archetype Energy, who can provide access to both forms of capital for solar projects close to NTP with an offtaker secured.
