Many if not most independent schools have the physical space for substantial installations of solar power: large, flat roofs; spacious parking lots and/or adjacent, unused land. And now, with the Inflation Reduction Act, the choice is more affordable. Solar not only offers the potential for cost savings, but also supports student, faculty and parents’ desire for increased sustainability with reduced energy usage and positive environmental impact.
Nuts and Bolts
The Inflation Reduction Act (IRA) brings new life into schools’ decisions around solar. Signed into law in 2022, the IRA aims to boost investments in domestic energy production and manufacturing, and to reduce carbon emissions by roughly 40% by 2030. With the IRA, the investment tax credit (ITC) for most on-site projects will increase from 26% to 30%, with potential bonus credits — depending on final regulations and your project — reaching up to 70%.
“The IRA extended the Solar Investment Tax Credit last year, so businesses that previously considered solar but did not move forward should take a second look."
— Margo Madden, APPI Energy
Nonprofit entities, including nonprofit independent schools, are now eligible to receive payment in lieu of tax credits for energy projects like solar photovoltaic (PV) systems. “The Inflation Reduction Act (IRA) extended the Solar Investment Tax Credit (ITC) last year, so businesses that previously considered solar but did not move forward should take a second look,” said APPI Energy Chief Strategy Officer Margo Madden. “With the increased incentives, we are seeing more favorable ROIs and shorter paybacks.”
Prior to the IRA, nonprofits had limited options for taking advantage of solar tax credits. In general, a nonprofit would need to enter a third-party agreement for solar financing, a solar lease or power purchase agreement (PPA), or other financing options where the third-party could use the projects’ solar tax credits on behalf of the nonprofit.
With the IRA, the IRS will now directly pay nonprofits the amount of tax credit earned by solar electricity projects, the base amount of which will be 30%. With a $100,000 solar project, earning a 30% tax credit, for example, the nonprofit will now receive a $30,000 check from the U.S. Treasury. It’s also important to note that this provision of the IRA applies only to nonprofits; for-profit entities will not qualify for this direct payment.
On top of the 30% tax credit, there are the potential for “adders” or additional credits, including a 10% adder for purchasing U.S.-made products; a 10% adder if the project is built in an energy community, coal community or brownfield site, and a 10% adder for low-income communities, with an additional 10% for federally subsidized affordable housing.
The IRS review is still in process and the exact details of these additional 10% adders are not yet fully settled. It is fairly safe to assume, however, that many nonprofits will be able to earn at least one if not two of the additional 10% adders, which would amount to a total cash payment from the U.S. Treasury of 40% to 50% of a solar system’s project costs.
“There continues to be a lot to unpack from the IRA,” added APPI Energy Senior Client Advisor, Michael Lewis. “It’s prudent to weigh your options and utilize an expert to ensure all incentives are being captured, that you’re partnering with the right vendor, and that the project is being managed from the initial conversation through to completion. Oftentimes it’s the initial conversation and planning phase where crucial details and information are overlooked if you aren’t aware of the full scope of considerations.”
Independent schools have a variety of options for funding solar projects, including low-cost loans, fundraising efforts, power purchase agreements (PPA) and cash.
These options fall into two camps: primary and third-party ownership. For primary ownership, the benefits include solar renewable energy credit (SREC) income and the ability to receive 100% of the associated energy savings. Cons include the upfront investment and the onus of maintenance. For third-party ownership, those pros and cons flip-flop, with third-party ownership having little to no upfront costs, reduced electricity costs, and no maintenance responsibilities but lacking the SREC savings.
To maximize savings, it’s also important to review and capture all available state and utility rebates and incentives.
In regards to the direct payments from the IRS for tax-exempt entities, it is also important to note that for systems larger than 1 MW, after 2024 the percentage of the 30% direct pay received declines (with 0% by 2026). However, this does not apply to systems under 1MW, which will receive the full 30% direct pay regardless of the equipment used.
Prior to the IRA, PPAs were a popular choice for nonprofits, allowing an investor to take on the onus of owning the system. With a PPA, the nonprofit pays the investor/owner for the electricity generated from the solar array. The benefit is more favorable electricity costs at a fixed rate over time, oftentimes up to 25 years. The direct pay component of the IRA for nonprofits does not change the pros of a PPA, but it does add more benefits to a cash or financed option to own.
To maximize savings, it’s also important to review and capture all available state and utility rebates and incentives. These include Property Assessed Clean Energy (PACE) financing as well as state and utility grants for nonprofits.
A solar project can be completed in just a few months. Every project is unique of course, but a general framework for each phase is: design: 2-3 weeks; utility interconnection process: 1-4 weeks; permitting process: 2-12 weeks; installation process: 2-6 weeks; final inspection and syncing power: 1-4 weeks.
Additional considerations include cost of components, availability of materials, and access to a consultant and solar developer.
Every project is unique, which makes it difficult to answer another frequently asked question: “How much will we save?” without getting into particularities of the project. Incentives will vary case-by-case, as widely as the individual goals and budgets per project. Nonetheless, the case study below may give you an idea of potential savings:
- Size of System: 583kW DC (roof mounted on a metal roof)
- 25-year Power Production Warranty
- Offsets 249 Metric Tons of CO2 per year equivalent
- The offsets reduce carbon emissions from the atmosphere as much as 294 acres of forest would per year.
- Solar offsets about 80% of the school's annual electricity usage
- Year 1 kwh electricity production at this system size will be roughly 574,000 kwh's per year
- At a rate of $0.10 per kwh, this saves about $57,400 per year in electricity.
In this instance, the system size was decided based on the school’s budget and long-term carbon reduction goals. There are opportunities to utilize a system that would offset all of the electricity usage, rather than the 80% exemplified here.
Benefits of solar include improved air quality, a stronger path to energy independence, significant savings on your electricity bill, a hedge on rising energy costs, and a more resilient electricity grid. Solar generally provides a fixed electricity energy budget for 25 years.
Investing in solar power can also help school leaders meet calls from the school community for increased environmental sustainability and from the school board of trustees to meet environmental social and governance (ESG) goals. Many schools find that their students are the driving force for reduced emissions and improved sustainability efforts. Parents aren’t far behind, with key stakeholders advocating for a “greener” learning environment that aligns with global, national and local initiatives.
“We have seen a rising trend over the past few years as an increasing number of organizations are considering renewable energy generation for their facilities. Solar supports your educational institution’s long-term sustainability goals,” added Madden.
The first step is to simply get the conversation started. Start to outline your goals internally, but before getting too far down the path, we recommend utilizing a trusted energy consultant.
APPI Energy offers no cost, no obligation exploratory calls with schools in order to answer initial questions, help identify and establish goals and outcomes, and put schools on a path towards a solar PV project that meets goals while positioning schools for a successful project. Contact APPI at 800.520.6685 or firstname.lastname@example.org.