Financing Solar Panels: Securing Capital for a Solar Farm

If you’re a landowner-developer, you might be trying to determine the best financing for solar panels. From bank financing to external investments, this guide will help you find the best fit for your situation.

Leasing your land for solar (or running your own project) can bring in extra income while contributing to net-zero goals. But working out the right financing can feel like a headache.

You could finance a project yourself if you have the right capital, but let’s be honest – solar projects aren’t cheap. That’s why many landowner-developers turn to external financing for peace of mind.

So, to find the right approach for you, let’s break down your options and help you make a solid financial decision.

What Would Be the Typical Return on Investment for a Solar Farm?

The return on investment for a typical solar farm is around 10 to 20 per cent, with most farms becoming profitable within five to 10 years.

After this point, developers should make a significant amount from a project. As long as they properly maintain it.

What Are the Options for Financing Solar Panels?

Self-financing

If you are a landowner-developer, covering the full cost of your solar project yourself can be risky.

Even if you have a decent amount of cash set aside, the initial cost of a solar farm can be enormous.

From the cost of the panels and securing planning permission to grid connection and construction – it’s certainly not a cheap endeavour.

If you are a landowner-developer in a position to fund a project yourself, you’ll save a significant amount of interest. And as a landowner, you won’t have the added cost of leasing land, making it even more lucrative.

It’s worth mentioning that developers who are self-financing (whether they’re landowners or not) will need to bear all cost responsibilities for the site.

This includes sorting construction, site management and maintenance, and eventual decommissioning.

So, if you don’t have enough capital to pay for the entire project upfront, it’s worth looking into external financing.

Bank financing

For developers who choose not to attempt to finance the entire cost of a project upfront, bank financing is a popular option.

It’s a reliable and relatively accessible option for new renewable energy projects and usually covers up to 100 per cent of costs.

Although it’s a far lower risk than self-financing, developers and landowner-developers will need to consider interest rates.

That said, removing the heavy upfront investment can make trading in a lower immediate return worth it.

Once the project cost is paid off, the profits are all yours.

Solar success stories from bank financing

Still unsure about bank financing? Here are some success stories. Plus, if you’re looking for banks that support renewable energy projects, this will give you a great starting point.

Triodos Bank

Triodos Bank is particularly well-known for financing solar projects in the renewable energy sector. They even provided £3 million of new senior debt to bring a solar farm in Shropshire into full community ownership.

They also offer:

• Project and structured finance of up to £20 million
• Long-term senior debt facilities with terms of up to 18 years
• Sterling fixed and variable interest-rate facilities

UKIB

UKIB has also recently helped to finance a planned $660 million solar farm.

The plan seeks to double the amount of subsidy-free solar power in Britain and represents the bank’s commitment to renewables.

Natwest, AIB and Lloyds

If that wasn’t enough, Low Carbon is developing three new solar farms in the UK with financing from Natwest, AIB and Lloyds Bank.

Santander

Don’t forget about Santander’s recent $31 million funding for a 49.9 MW solar project in Dorset.

While this rundown of funding examples isn’t exhaustive, you can explore this comprehensive list of banks providing funding for renewables in the UK.

External investment

If you want to go with something other than bank financing, try external investment groups, Angel investors or high-net-worth individuals.

Companies like ESFC Investment Group offer financial models with a minimum contribution of 10 per cent. These companies can get large-scale solar power plants started and offer funding from €50 million.

They only offer investments of up to 90 per cent of the project’s cost, but the loan term gives you 10 to 20 years to repay. This way, you’d have the chance to get the project up and running (and profitable) before needing to start your repayments.

Better yet, their team of European experts (yep, that’s why they quote their costs in Euros) provide the following services:

• Financial advisory services
• Calculations of project parameters
• Models for financial performance
• Tailor-made solutions

It’s also worth mentioning that renewables investment manager NextEnergy Capital has also announced £327 million of new funding for up to 60 solar farms across the UK.

What about Angel investors and high-net-worth individuals?

With net-zero limits looming, high-net-worth individuals are increasingly looking to invest in new solar projects. This gives them a share of the profits while supporting low-carbon technology – a win-win.

You should start by looking at individuals with a net worth of at least £1 million and go from there.

If you’re interested in larger investments, Angel investment may be a good route to go down.

Angel investors are usually high-net-worth individuals who invest in projects for a minority stake in the final venture. This is typically between 10 and 25 per cent.

They provide the initial seed money that gets a project off the ground, and they’ll usually take their stake once the project is profitable.

Power purchase agreements

The final option for financing solar projects is a Power Purchase Agreement (PPA).

PPAs are essentially an agreement between a seller and a buyer. The seller generates electricity (in this case, the developer/site) and sells it to the buyer at a predetermined rate.

These agreements help to finance large-scale projects and offer long-term cash flow benefits to developers and investors. Parties usually sign the agreements for 10–20 years, and the contract is legally binding.

Although they will provide less profit than other financing options, they’re an excellent way to bypass external investment or bank loans.

In many cases, a developer will secure a PPA before approaching a bank, using it as proof that they’ve secured buyers.

This adds security that helps raise the necessary funds for the project.

Check out my dedicated PPA blog to learn more about Power Purchase Agreements and why they’re essential.

Risks Associated with Financing Commercial Solar Panels

There’s always going to be a certain level of risk associated with financing a renewable energy project. This is because the site won’t be profitable until it recoups its initial investment.

However, there are other hurdles developers will face before the project is up and running. These will include:

• Securing planning permission
• Construction hiccups
• Supply-chain and off-taker issues
• Connecting to the Grid
• Theft

1. Securing planning permission

One of the key uncertainties is securing planning permission and getting approval from the local community. This stage has the potential to delay or derail a project if not handled properly.

Planning permission is a particular risk when financing a project because if approval is not granted, the entire investment could be lost.

Developers often rely on financing based on the assumption that planning permission will be secured. If it isn’t, investors may pull out, or the cost of reapplying or amending plans could dramatically increase the financial burden.

If you’re a developer, you’ll need to set up an option agreement and secure full approval from the relevant landowner before moving forward.

However, as a landowner-developer, you won’t need to worry about optioning since you’ll be using your own land.

2. Construction issues

I briefly touched on this in the previous section, but construction challenges are a common risk when financing solar panels.

These could range from access road issues, delays to supply deliveries and even disagreements with construction teams. Although they won’t be deal breakers, these setbacks can mean that you’ll need a safety net of cash to fund more hours on the job.

It’s a good idea to set aside a cash buffer to cover any unexpected hiccups with installing a solar farm. It’s unlikely that you’ll need to use it all, but it’s always best to be prepared.

Severe weather can also impact panels during construction. For example, Storm Arwen caused significant damage to a farm near Wolviston back in 2021.

This is an extreme example, but it proves that you should prepare for unexpected setbacks during the construction phase.

3. A reliance on off-takers

As only some sites use all the energy that they produce onsite, many projects rely on off-takers to purchase the energy produced.

While most projects secure decent off-taker deals, there’s always a risk that not all of the energy you produce will be sold.

If you can’t secure a deal to sell the energy the site produces, you’ll face financial losses.

To avoid this, consider nearby businesses that could directly benefit from your energy production.

For example, Dewlay Cheesemakers use the energy produced by the GWDL Wind Farm to fund their dairy business. As dairy farming and cheese production take a lot of energy, having a project right on-site is a huge benefit.

4. Grid connection challenges

Connecting to the Grid is a crucial step in any solar project and can be tricky. It’s important to check whether there is a point connection near your site early on.

This is because connecting to the Grid can take up to 10 years with the current backlog. So, starting the process quickly is crucial for a positive outcome.

5. Potential theft

While not common, theft can be a risk for solar farms.

For example, more than £100,000 worth of solar panels were stolen in January 2023 near Evesham.

Thieves also took solar panels from sites near St. George, Abergele, and Llanelian in Wales in 2019. This amounted to a total of 160 panels stolen and was a considerable loss to the solar farm.

If that wasn’t worrying enough, thieves stole around £450,000 worth of solar panels in Kent from a shipment back in 2021.

So, while the risk of theft may not affect every project, it is a possibility you should prepare for.

Tips for Choosing the Right Financing for Solar Panels

Don’t spend it all at once

It goes without saying, but you’ll want to use your solar panel financing wisely.

It’s important to keep some funds in reserve for any unexpected hiccups in the planning and construction phases.

The initial construction costs will include things like paying construction teams to build and install the panels, but you’ll also need to invest in monitoring equipment.

Don’t invest every penny into the construction phase – otherwise, you won’t be able to monitor your project correctly. Equally, you’ll need enough funds to pay a site operator (if you’re using one) throughout the project’s life.

And if you’re not a landowner-developer, you’ll need to set aside enough funding to pay rental rates to your landowner.

Before you start crunching the numbers, remember to account for any loan repayments and interest you’ll incur.

In short, don’t try and rush the process and make sure you have enough capital for each phase.

Understand your respective responsibilities

Whether you’re a regular developer or a landowner-developer, it’s important to understand your financial responsibilities.

Typically, most of the financial responsibility for a project lies with the developer. This includes planning applications, option agreements, Grid connection costs, construction funding and post-construction costs.

Landowners who aren’t involved in project development will have a largely passive role.

However, regardless of how your site is developed, you must outline all responsibilities in a watertight lease agreement.

This ensures both parties understand their roles and helps prevent costly disputes mid-project.

Vet potential investments carefully

Investors can provide an immediate cash injection into your business, but it can be difficult to navigate if someone pulls out at the last minute.

Being let down is even more problematic if you’ve relied on that funding to move the project forward, being let down can cause the entire project to fail. This is why I always advise vetting your potential investors carefully.

To do this, ensure your investors are fully aware of what they’re getting into. Also, take the time to carefully check interest rates and terms with any banks involved. With complete transparency, you’re likely to avoid most major issues.

So, Is Financing Solar Panels Worth It?

Financing for solar panels is usually a must for developers as the initial cash injection for the average project is enormous.

While this isn’t the case for every site, financing is a decent way to spread the cost of a project and give you time to recoup your investment.

It’s clear that new projects can be costly. But as they can have an impressive return on investment, they’re usually worth considering.

Choosing the right financing option will ensure you stay safe, secure and confident during the project’s lifetime. And what could be better than that?

FAQs

I’m often asked about the best options for financing solar panels, especially with a UK focus. So, let’s clarify a few frequently asked questions that might help you out.

What is the best finance for solar panels?

If you don’t mind paying interest, bank financing is probably the safest and most reliable way to finance solar panels on a commercial scale.

But if you’d prefer a cash injection and a profit-share setup, external investment will likely be more appealing.

Do you have the cash to front the entire project? Well, that’ll save you a significant amount of money down the line.

However, choosing to go with an experienced developer (which takes the onus off the landowner) is also a viable option. After all, not every landowner will want to be so heavily involved with a project at every phase of its life.

In short, the best option depends entirely on your situation.

Does the UK government subsidise solar panels?

Two solar panel grants are available in the UK, but they’re typically offered for domestic properties or businesses.

These are the Energy Company Obligation Scheme (ECO4) and the Home Upgrade Grant.

The ECO4 usually provides up to £14,000 towards energy-saving initiatives for a home solar power system. But the grant is unlikely to benefit anyone building a commercial-scale solar farm.

There You Have It: The Ultimate Guide to Securing Financing for Solar Panels

If you’re interested in setting up a solar farm as a landowner-developer, contact the Lumify Team. We’ll guide you through the process’s stressful parts and ensure you know exactly where to start. Whether it’s understanding your options or getting information on the actual value of your site, we’re here to help.

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