Energy Equipment Leases

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• Examples from the Field
• Program Characteristics
• Reaching Underserved Communities and Addressing Consumer Protections
• Roles and Responsibilities
• Getting Started

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Consumers, organizations, and government agencies often use leases to stretch the payment for large clean energy investments over several years. High-efficiency heating, ventilation, and air conditioning (HVAC) equipment or solar photovoltaic (PV) panels are common investments that may be a good fit for leases.¹ Equipment manufacturers, vendors, and third-party lessors all may offer leasing arrangements. When the lease ends, the customer may purchase or return the equipment or extend the contract, depending on the type of lease. By leasing, consumers or organizations may be able to obtain newer, more efficient equipment than otherwise may be available or affordable.

Three of the most common types of leases are operating leases, capital leases, and tax-exempt leases.²

• In an operating lease, the lessor owns the equipment, and the customer rents it at a fixed monthly payment. These rental payments are typically an operating expense. To qualify as an operating lease, a transaction must pass several tests set by the Financial Accounting Standards Board.³ At the end of the lease, the customer can extend the lease, purchase the equipment for fair market value, or return the equipment.⁴
• In an capital lease, the customer is the owner of the equipment for most legal and accounting purposes during the term, and the total project cost is determined at the start of the lease.⁵ In this way, a capital lease functions similarly to a project loan. The customer declares the equipment as an asset and the lease payments as a liability on its balance sheet. At the end of the lease term, the customer can purchase the equipment for a discounted price.
• Also known as a municipal lease, a tax-exempt lease-purchase agreement is a common financing structure that allows a public, tax-exempt organization to pay for renewable energy equipment or energy efficiency upgrades using its annual revenues.⁶ In these lease agreements, the interest the lessor receives from the customer is exempt from federal income taxes, allowing them to offer a lower interest rate to the customer.⁷ Although the financing terms for tax-exempt leases may extend as long as 15 to 20 years, they are usually shorter than 12 years, with the limit being the useful life of the equipment. The customer has title to the equipment throughout the term of the lease and retains ownership once the lease repayment is complete. This option is an effective alternative to traditional debt financing but is available only to municipalities and other political subdivisions that qualify.

PPAs can be structured in many ways to shift or mitigate risks for the parties involved. For example, one way of structuring a PPA is with a prepaid PPA. In this arrangement, the customer pays the total discounted cost of the full PPA up front, with no payments made during the term of the agreement. The financier assumes no credit risk because the customer makes all payments in advance. Since this structure shifts risk onto the buyer, it would likely offer favorable PPA terms for the buyer of the power. Prepaid PPAs are available for commercial and small-scale utility projects. However, the uptake of the prepaid option has been minimal compared to the other forms of PPAs.

Energy equipment leases generally share the following key features:

• They allow lessees to use equipment or other property for the duration of the lease.
• They require the lessee to pay the lessor a fixed amount for a specific term.
• They often allow lessees to purchase clean energy technology during or at the conclusion of the lease term.

Leases may be administered by the following entities:

• State governments can develop lease arrangements to assist state agencies, institutions, and municipal governments to implement clean energy technologies.
• Local governments may also use tax-exempt lease-purchase agreements to finance energy efficiency or renewable energy upgrades.
• Third-party funders (i.e., private entities such as financial institutions) can offer lease products to facilitate the expansion of clean energy technologies, such as solar or energy efficiency upgrades. Private lenders may target areas where consumers also receive other specific financial incentives through state, local, or utility programs (e.g., rebates or credits) for clean energy improvements.

Examples from the Field

Virginia’s Energy Leasing Program

• the Virginia Department of the Treasury administers the Energy Leasing Program, which offers low-interest leases to Virginia agencies, institutions, boards, and authorities for energy efficiency projects of $100,000 or more.
• The program uses a master lease structure, where Virginia acts as the lessee and program participants can be added as individual leases through appendices to the master lease. This approach reduces transaction costs and lowers interest costs for agencies.
• The program offers 12-year and 15-year leases. Interest rates are indexed to the 10-year Constant Treasury Note and are fixed at the time of each financing lease.

Bloomington, Indiana, Solar Lease

• The City of Bloomington installed 2.1 MW of solar energy as of 2020 at 32 locations.
• The City used a guaranteed savings contract to install the system and then leases the solar system from the provider.
• The rent-to-own lease allows the city to pay off the lease with energy savings.

Green Jobs - Green NY Financing and Green Jobs – Green NY with BlocPower

• The New York State Energy Research and Development Authority (NYSERDA) issued multiple series of green bonds to finance residential solar and energy efficiency programs from 2018 to 2020, ranging from about $15 million to $18 million per issuance.
• BlocPower bundles energy-inefficient buildings in low-income areas into “blocs” to allow them to implement energy-efficient measures efficiently and cost-effectively. The company uses software to analyze the “bloc’s” energy usage to determine appropriate retrofits and projected energy savings.
• The company enters into leases and energy service agreements with property owners for energy-efficient equipment such as electric heat pumps. Property owners pay a fixed, monthly price for the lease of the equipment.
• Through NYSERDA’s On-the-Job Training for Energy Efficiency and Clean Technology Program and the Clean Energy Internship Program, BlocPower is expanding the company’s local clean energy workforce to administer its services.⁸

Washington State’s Local Option Capital Asset Lending (LOCAL) Program

• Washington State’s LOCAL program, which is a lease agreement offered through the Office of the State Treasurer (OST), provides a way for municipalities to finance their own equipment and real estate projects, such as property acquisition and facility construction.
• The OST brings together all the lease agreements and packages them as a security called a Certificate of Participation (COP). Investors can purchase the COP and receive lease payments throughout the term of the lease.
• The minimum borrowing capacity is $10,000 per lease, and the maximum borrowing capacity is based on the borrower’s debt capacity and ability to repay.

Program Characteristics

Here are the typical characteristics of energy equipment leases.

Program types	Operating lease, capital lease, and tax-exempt lease
Target sectors	Commercial; Industrial; Residential: Single-family homeowners; Residential: Multifamily; Public; Nonprofit
Potential funding sources	Bonds, public funds, ratepayer funds, and private lenders
Security required of borrower	Equipment provided as collateral
Repayment mechanism	Monthly lease payment to lessor
Funding needs	Typically, sponsors provide a high level of funding to make the program successful for many participants
Enabling legislation requirement	May be required

Reaching Underserved Communities and Addressing Consumer Protections

When developing a financial program to overcome upfront cost barriers, considering the needs of underserved communities early in the process can help decisionmakers create a comprehensive program and incorporate consumer protections. Decisionmakers can evaluate how and to what extent marginalized communities and considerations of equity have been included in the policymaking process for developing a program by considering the following questions:⁹

• Have marginalized communities, consumer protection organizations, and organizations serving marginalized communities participated meaningfully in the policymaking process?
• Does the policy help address the impacts of inequality or inequity, or does it widen existing disparities?
• What are the barriers to more equitable outcomes?
• How will the policy increase or decrease economic, social, and health benefits for marginalized communities?
• Does the policy make energy more accessible and affordable to marginalized communities?

Some leases may provide financing specifically for low- and moderate-income (LMI) households. For example, tax-exempt lease-purchase agreements can benefit LMI customers because they do not have to own the renewable energy or energy efficiency asset after the lease expires.¹⁰ Clean energy and efficiency providers may offer financing and leases for older buildings in underserved communities that would otherwise not be able to finance energy efficiency upgrades. This model can help to overcome barriers such as high upfront equipment costs and landlord-tenant split incentives.

Roles and Responsibilities

Clean energy lease programs may be established by state and local governments. Program administrators will need to establish eligible technologies and sectors, develop standardized approaches, create common lease and financing terms, and identify financial providers (e.g., banks). Once lease programs are operational, agencies will need to create marketing materials and develop plans to increase public awareness of the financial tools. State governments should also develop procedures for monitoring payments, as well as reviewing and auditing existing leases to ensure that they are compliant with established standards.

Utilities often have a limited role in the implementation and operation of leases. Generally, the main role for utilities is to communicate the availability of these financial tools to their customers through marketing, education, and outreach. Other third parties, such as financial institutions, may establish their own lease programs for clean energy.

Getting Started

State and local governments should consider these steps and best practices during the design, approval, and management of a lease program:

• Establish program rules and credit evaluation processes for lease providers to use to offer and approve financing for target sectors and project types.
• Evaluate service and financing providers to create a vetted list that consumers can use with confidence.
• Engage key stakeholders to inform the development of regulations, policies, procedures, and guidance for lease programs.
• Implement robust consumer protections.
• Determine how to reach out to consumers and dedicate the time and resources needed to ensure consumers are aware of the program. Ensure fair marketing and sales practices from service providers by reviewing and approving their messaging, especially for LMI consumers.
• Describe the program’s potential economic and environmental benefits, depending upon lease volume.

References and Footnotes

¹ This profile covers leasing of energy-efficient or clean energy equipment. The terms “green leasing” or “energy-aligned leasing” are used to describe leasing property while realigning the financial incentives for sustainable or energy measures within lease documents to enable both the lessor and lessee to benefit from the investments. More information and guides on “green leasing” can be found through the Institute for Market Transformation or the Building Owners and Management Association.

² Better Buildings, U.S. Department of Energy. n.d. Lease Financing.

³ Financial Accounting Standards Board. n.d. Leases.

⁴ Better Buildings, U.S. Department of Energy. n.d. Lease Financing.

⁵ Global Financial & Leasing Service. 2018, July 24. What are Capital Leases?

⁶ U.S. Department of Energy. n.d. Leasing Arrangements.

⁷ U.S. Department of Energy. n.d. Leasing Arrangements.

⁸ NYSERDA. 2021. Bringing New Talent to the Clean Energy Industry.

⁹ Governments, agencies, and nonprofits have developed equity lenses and frameworks to ensure that issues of race and equity are incorporated throughout policy-making processes. These questions draw from the following frameworks: Institute for Energy Justice, “Section 2 – Energy Justice Scorecard”; City of Seattle, “Racial Equity Toolkit”; and Higher Education Coordinating Commission, “Oregon Equity Lens.”

¹⁰ U.S. Department of Energy. n.d. Leasing Arrangements.