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What are third party ownership arrangements?
What are third party ownership arrangements?
What are the types of third party ownership arrangements?
Can a for-profit business install a solar system using a third party ownership arrangement?
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 credits and benefits 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 can not 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 utilizes the tax credits and benefits available for the solar system (e.g. federal investment tax credit, Modified Accelerated Cost Recovery System, Oregon Business Energy Tax Credit) and sells the power produced by the system to the host entity.
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 and credits to purchase solar systems outright. Investors have capital available for investment and the ability and desire to use 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 installations (100 kW and above). Occasionally, they are used for systems as small as 50 kW. Third party ownership arrangements are sophisticated financial deals with significant 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 generally two types of third party ownership models that are currently the most common in Oregon. 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 and owns the solar system and sells the power produced by the system to the host for a set period, typically 15-20 years. The power purchase rate typically starts at retail and escalates by a set percentage per year. At the end of the power purchase agreement term, the host may have the option to purchase the system at its depreciated value, renew the PPA, or neither, in which case, the system would be removed.For the term of the agreement, the third party business is responsible for the maintenance of the system and all costs (i.e. insurance, inverter replacement.)
Benefits: The host locks in a predictable rate structure for the power produced by the system. The host does not have to maintain or insure the system, and is able to purchase solar power generated on its own building at a rate roughly equal to regular retail power.
Flip Model
The flip model also takes advantage of the state and federal tax credits and benefits, but operates differently from the PPA. The flip model has been used extensively in power projects in the US, particularly for a broad array of wind projects.In the typical flip model, the host entity forms an LLC with an investor. The host contributes a small amount of funding to the LLC, but the majority of the funding comes from the investor, who also becomes the majority owner of the LLC.
The LLC owns the solar system and sells the power produced by the system to the entity. (The host purchases the solar-generated power instead of purchasing the same amount of conventional power from the utility.) The majority investor earns their return from the sale of the electricity to the host plus the tax credits and benefits.
After approximately six years or so, when the tax credits and depreciation have been fully utilized and the owner reaches its rate of return, the ownership structure ‘flips’: the host entity becomes the majority owner of the LLC and the investor becomes the minority owner. The nonprofit may buy out the investor’s minority share of the LLC, thereby dissolving the LLC and making the nonprofit the sole owner of the solar system.
When used with governments or schools, the flip model presents a challenge that must be addressed: a government cannot become party to an LLC in Oregon. One way to address this is for the city or county, for example, to serve as the host for the solar system, while two other parties form the LLC and sell power to the city. After the flip, the LLC may opt to the sell the depreciated system to the city.
Benefits: The host entity may have the opportunity to purchase the system for substantially less than its full price and realize the benefits of ownership after that. If the host can maintain, insure and replace equipment cheaper than the LLC, host will realize additional savings.
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.
Can a for-profit business that does not have tax liability utilize the nonprofit/government incentive?
No, the incentive is only available to systems hosted by entities not subject to taxation. These may include, for example, governments, municipalities, schools, places of worship, nonprofits, local service districts and other tax-exempt entities.
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 submit a Form 220T and Third Party Ownership Guide to Energy Trust.
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