Solar investment analysis: effects of electricity rate structure and financing terms on financial leverage, after-tax cash flow and profitability

Purpose Producers with electricity-intensive production systems face large bills with uncertain electric rate inflation adding to financial risk. Solar panels can reduce this risk, but producers hesitate to invest given lengthy payback periods, unpredictable reimbursement policy for solar electricity generation and high financial leverage. We demonstrate a decision aid for optimizing financing terms subject to amount and timing of federal income tax credits (ITC) and utility-specific rate structures. Design/methodology/approach The decision aid serves as (1) a benchmark for bids from solar installers; (2) an interface to break electricity rate structures into variable rate components vs fixed access and demand charges and (3) a tool to optimize loan length and amounts across two loans to lessen borrowing capacity and cash flow concerns. Findings Compared to a single 10- or 20-year loan for solar panels, a 10-year note together with a second loan repaid using ITC over the course of 1–5 years resulted in superior net present value (NPV), lower break-even electricity cost and addressed cash flow and borrowing capacity concerns. A longer 20-year note further eased cash flow issues at the cost of less favorable financial leverage and NPV. Originality/value Separating cash flow implications of subsidized solar investments into two categories, one for ITC realization and the other for equipment, allows for better loan collateralization. Using a unique set of firm observations, we arrive at system size and rate structure generalizations for Arkansas and beyond.