Clean Energy Finance 101

The articles on our site track and inspire fresh ways to unlock value from sustainable energy infrastructure. We use technical terms the way practitioners do, but we get that sometimes a term can freeze your eyes as you read. This glossary aims to keep you going. Please use it as you will and share terms you think we should add by reaching out to alec.appelbaum@yale.edu.

CEFF Glossary Terms

4

45Q

Known as “45Q” for where it lives in the US tax code, the initial version of the code was intended to facilitate two types of carbon capture: enhanced oil recovery and underground storage. The bill re-appeared in 2017, now called the FUTURE Act (Furthering carbon capture, Utilization, Technology, Underground storage, and Reduced Emissions Act). It’s a tax credit, not a tax deduction. Credits are transferrable. initially sends credits to the owner of the carbon capture equipment but allows them to be transferred to another company involved in handling the CO2. There are size requirements for eligibility, and they vary by emissions source and application of CO2. Construction must begin by January 1, 2024. Credits can be claimed for 12 years. The clock starts ticking once operation begins. (You'll note that this is longer than the 10 years over which the wind production tax credit can be claimed.) The credit value adjusts with time, linearly, and will be indexed to inflation beyond the linear increase. Projects that use the credit for making products must demonstrate a favorable lifecycle analysis (LCA) under the Clean Air Act. Source: American Energy Society 

A

AAR

The average annual return ( ) is a percentage used when reporting the historical return, such as the three-, five-, and 10-year average returns of a mutual fund. Source: Investopedia

Abrogation

To abolish by authoritative action, annul. Source: Merriam-Webster

Acceleration

Action by the lenders to make the whole of their debt due and payable following an Event of Default. Source: Principles of Project Finance, E.R. Yescombe

Accounts Payable

Accounts payable (AP) is an account within the general ledger that represents a company's obligation to pay off a short-term debt to its creditors or suppliers. Another common usage of "AP" refers to the business department or division that is responsible for making payments owed by the company to suppliers and other creditors. Source: Investopedia

Accounts Receivable

Accounts receivable (AR) is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. Accounts receivables are listed on the balance sheet as a current asset. AR is any amount of money owed by customers for purchases made on credit. Source: Investopedia

Accreted Interest

Accreted interest is the interest that accrues on a loan that is added to the principal rather than being paid as interest as it accrues. Source: Law Insider

Aggregator

An aggregator is an intermidary (e.g., a company) that groups distinct agents in a power system (i.e., consumers, producers, prosumers, or any mix thereof) to act as a single entity when engaging in power system markets (both wholesale and retail) or selling services to the system operator(s). In a DER system, an aggregator may link electricity end-users and DER owners and the power system participants who wish to serve these end-users or exploit the services provided by these DERs. Source: MIT Energy

Air mass coefficient

The air mass coefficient (AM) defines the direct optical path length through the Earth's atmosphere, expressed as a ratio relative to the path length vertically upwards, i.e. at the zenith. The air mass coefficient can be used to help characterize the solar spectrum after solar radiation has traveled through the atmosphere. The air mass coefficient is commonly used to characterize the performance of solar cells under standardized conditions. Source: Wikipedia

Albedo

is a measure of how much light that hits a surface is reflected without being absorbed.Something that appears white reflects most of the light that hits it and has a high albedo, while something that looks dark absorbs most of the light that hits it, indicating a low albedo. Source: North Carolina Climate Office

Algorithm

An algorithm is a set of instructions that produces an output or a result, and algorithms can be simple scripts or complicated programs. algorithms are the mechanism by which the entire process of adding to the chain of records through the validation of transactions occurs. For example, miners validate transactions to be recorded to the blockchain and mining requires the application of an algorithm to validate and retrieve data. Source: GoodAudience

Alternate Current

Alternating current, abbreviation AC, flow of electric charge that periodically reverses. It starts, say, from zero, grows to a maximum, decreases to zero, reverses, reaches a maximum in the opposite direction, returns again to the original value, and repeats this cycle indefinitely. Source: Britannica Encyclopedia

Alternative Underwrite

The utilization of alternative data, assessments, lenders, or otherwise innovative models of lending in order to assess risk, often with the outcome of increasing access to credit.

Amortization

is an accounting technique used to periodically lower the book value of a loan or intangible asset over a set period of time. The term "amortization" can refer to two situations. First, amortization is used in the process of paying off debt through regular principal and interest payments over time. An amortization schedule is used to reduce the current balance on a loan, for example a mortgage or car loan, through installment payments. Second, amortization can also refer to the spreading out of capital expenses related to intangible assets over a specific duration – usually over the asset's useful life – for accounting and tax purposes. Source: Investopedia

Amortized loan

An amortized loan is a type of loan with scheduled, periodic payments that are applied to both the loan's principal amount and the interest accrued. An amortized loan payment first pays off the relevant interest expense for the period, after which the remainder of the payment is put toward reducing the principal amount. Source: Investopedia

Ancillary Services

The term ancillary services is used to refer to a variety of operations beyond generation and transmission that are required to maintain grid stability and security. These services generally include, frequency control, spinning reserves and operating reserves. Traditionally ancillary services have been provided by generators, however, the integration of intermittent generation and the development of smart grid technologies have prompted a shift in the equipment that can be used to provide ancillary services. Source: Wikipedia

Anemometer

, device for measuring the speed of airflow in the atmosphere, in wind tunnels, and in other gas-flow applications. Most widely used for wind-speed measurements is the revolving-cup electric anemometer, in which the revolving cups drive an electric generator. Source: Britannica Encyclopedia

Angel Investors

An angel investor is usually a high net worth individual who funds startups at the early stages, often with their own money. Angel investing is often the primary source of funding for many startups who find it more appealing than other, more predatory, forms of funding. The support that angel investors provide startups fosters innovation which translates into economic growth. These types of investments are risky and usually do not represent more than 10% of the angel investor's portfolio. Source: Investopedia

Angle of Attack

The angle of attack is the angle between the reference line of a body and relative wind. On an airfoil such as one on a wind turbine, it is the angle between the chord line and the relative wind vector. Source: University of Hawaii

Annuity

An annuity is a contract between you and an insurance company in which you make a lump-sum payment or series of payments and, in return, receive regular disbursements, beginning either immediately or at some point in the future. Source: Investopedia

Annuity Future Value

The future value of an annuity (AFV) is the value of a group of recurring payments at a certain date in the future, assuming a particular rate of return, or discount rate. The higher the discount rate, the greater the annuity's future value. Source: Investopedia

Annuity Present Value

The present value of an annuity (APV) is the current value of future payments from an annuity, given a specified rate of return, or discount rate. The higher the discount rate, the lower the present value of the annuity. Source: Investopedia

Annuity Present Value Factor

The present value annuity factor (APV Factor) vis used to calculate the present value of future one dollar cash flows. Source: Finance Formulas

Anode

, the terminal or electrode from which electrons leave a system. In a battery or other source of direct current the anode is the negative terminal, but in a passive load it is the positive terminal. For example, in an electron tube electrons from the cathode travel across the tube toward the anode, and in an electroplating cell negative ions are deposited at the anode. Source: Britannica Encyclopedia

Application Programming Interface

An application programming interface, or API, is a set of programming code that queries data, parses responses, and sends instructions between one software platform and another. In the context of trading, a trader will often use an API to establish a connection between a set of automated trading algorithms and the trader's preferred trading broker platform for the purpose of obtaining real-time pricing data and place trades. Source: Investopedia

ASC 842

is the new lease accounting standard published by the Financial Accounting Standards Board (FASB). It replaced the previous US GAAP leasing standard, ASC 840, which is almost 40 years old. Source: LeaseAccounting.com

Asset Class

A grouping of similar types of investments that behave similarly in the marketplace and are subject to the same laws and regulations. Broad examples of asset classes include:

  • Equities (also known as stocks) – assets that represent ownership of part of a company
  • Bonds – assets that guarantee a fixed payment stream. Bonds are often further categorized based on structure or source of the payments. Examples of these subclasses include municipal, corporate and mortgage bonds.
Assets

An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. are reported on a company's balance sheet and are bought or created to increase a firm's value or benefit the firm's operations. An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses, or improve sales, regardless of whether it's manufacturing equipment or a patent. Source: Investopedia

Atmospheric Boundary Layer

The bottom layer of the troposphere that is in contact with the surface of the earth. The ABL depth (i.e., the inversion height) is variable in time and space, ranging from tens of meters in strongly statically stable situations, to several kilometers in convective conditions over deserts. During fair weather over land, the ABL has a marked diurnal cycle. During daytime, a mixed layer of vigorous turbulence grows in depth, capped by a statically stable entrainment zone of intermittent turbulence. Source: American Meteorological Society

Attenuation

In physics, attenuation or, in some contexts, extinction is the gradual loss of flux intensity through a medium. For instance, dark glasses and cloouds attenuate sunlight and water and air attenuate both light and sound at variable attenuation rates. Source: Wikipedia

Availability Factor

The availability factor of a power plant is the amount of time that it is able to produce electricity over a certain period, divided by the amount of time in the period. Source: Wikipedia

B

Balance Sheet

A balance sheet is a financial statement that reports a company's assets, liabilities and shareholders' equity at a specific point in time, and provides a basis for computing rates of return and evaluating its capital structure. It is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders. Source: Investopedia

Band Gap

A band gap is the distance between the valence band of electrons and the conduction band. Essentially, the band gap represents the minimum energy that is required to excite an electron up to a state in the conduction band where it can participate in conduction.[1] The lower energy level is the valence band, and thus if a gap exists between this level and the higher energy conduction band, energy must be input for electrons to become free. The size and existence of this band gap allows one to visualize the difference between conductors, semiconductors, and insulators. Source: Energy Education, University of Calgary

Baseload

power refers to the minimum amount of electric power needed to be supplied to the electrical grid at any given time. Day to day trends of power usage need to be met by power plants, however it is not optimal for power plants to produce the maximum needed power at all times. Therefore there are baseload power plants like coal-fired power plants which provide the minimum needed electricity, and peaking power plants which meet the fluctuating needs. Source: Energy Education, University of Calgary

Basis Risk

Basis risk is the financial risk that offsetting investments in a hedging strategy will not experience price changes in entirely opposite directions from each other. This imperfect correlation between the two investments creates the potential for excess gains or losses in a hedging strategy, thus adding risk to the position. Source: Investopedia

Betz Limit

The Betz limit is the theoretical maximum efficiency for a wind turbine, conjectured by German physicist Albert Betz in 1919. Betz concluded that this value is 59.3%, meaning that at most only 59.3% of the kinetic energy from wind can be used to spin the turbine and generate electricity. Source: Energy Education, University of Calgary

Black Start

A black start is the process of restoring an electric power station or a part of an electric grid to operation without relying on the external electric power transmission network to recover from a total or partial shutdown. Source: Wikipedia

Blackbody Radiation

"Blackbody radiation" or "cavity radiation" refers to an object or system which absorbs all radiation incident upon it and re-radiates energy which is characteristic of this radiating system only, not dependent upon the type of radiation which is incident upon it. The radiated energy can be considered to be produced by standing wave or resonant modes of the cavity which is radiating. Source: Hyper Physics

Blended Capital

A mix of government or non-profit grants, equity investments, and bank loans, or multiple sources of capital. Diversifying the capital sources used by Green Banks can mitigate the risks and alleviate the constraints of relying solely on public capital. In addition, new capital sources can also encourage or enable a to create new investment structures. A blended capital approach has enabled CT Green Bank to crowd-in larger pools of private capital, while allowing CT Green Bank to broaden its scope for project selection and work with nontraditional market segments. Source: Coalition for Green Capital

Block

Blocks are digital information stored in a public database (a singular “chain” that is replicated across a network). Blocks can be small amounts of information, but are typically larger chunks of information (the order of magnitude is tens or hundreds of kilobytes) that could include time stamps, digital signatures, as well as the actions performed (e.g., approval of contract, payment requested, quantity of product used, etc.). Typically a block includes hundreds or even thousands of transactions bunded together, including a record of historical transactions and multiple new transactions that include multiple digital signatures and time stamps. Once bundled and verified, the block receives a hash (its own unique identifier) and is added to the chain. The next block to be added to the chain will contain the hash of the previous block as well as its own unique hash as a mechanism to keep things linked in order. Source: Investopedia

Blockchain

A blockchain is one type of a decentralized, distributed digital ledger, or one long chain of records that is linked by written codes that require authorized decoding and encryption across a system of nodes. The entire system of these encoded blocks of information is managed by a p2p network that adheres to protocols for nodal communication and validating new blocks and then replicating the consensus chain across the network--these protocols distinguish blockchain from other types of distributed ledgers. The goal of blockchain is to allow digital information to be recorded and distributed, but not edited. Meeting this goal requires a lot of computing power distributed across a large network and strict "if-then" protocols or algorithms. Source: Investopedia

Bond

A bond (corporate, government - treasury and municipal, zero coupon, floating rate) is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer. details include the end date when the principal of the loan is due to be paid to the bond owner and usually includes the terms for variable or fixed interest payments made by the borrower. Source: Investopedia

Bond valuation

valuation is a technique for determining the theoretical fair value of a particular bond. includes calculating the present value of a bond's future interest payments, also known as its cash flow, and the bond's value upon maturity, also known as its face value or par value. Because a bond's par value and interest payments are fixed, an investor uses bond valuation to determine what rate of return is required for a bond investment to be worthwhile. Source: Investopedia

Bonding Authority

The power of a bank or financial authority to issue bonds in their own name. This includes the ability to securitize future receivables.

Book value

An asset's book value is equal to its carrying value on the balance sheet, and companies calculate it netting the asset against its accumulated depreciation. can also be thought of as the net asset value of a company calculated as total assets minus intangible assets (patents, goodwill) and liabilities. Source: Investopedia

Borehole Temperature Profile

Borehole data are direct measurements of temperature from boreholes drilled into the Earth's crust. Departures from the expected increase in temperature with depth (the geothermal gradient) can be interpreted in terms of changes in temperature at the surface in the past, which have slowly diffused downward, warming or cooling layers meters below the surface. Source: NOAA

Business interruption insurance

is a type of insurance that covers the loss of income that a business suffers after a disaster. The income loss covered may be due to disaster-related closing of the business facility or due to the rebuilding process after a disaster. Source: Wikipedia

Byrd-Hagel Resolution

The Byrd–Hagel Resolution was a United States Senate Resolution passed unanimously with a vote of 95–0 on 25 July 1997, sponsored by Senators Chuck Hagel (R-NE) and Robert Byrd (D-WV). The resolution stated that the US should not sign a climate treaty that would 'mandate new commitments to limit or reduce greenhouse gas emissions for the Annex I Parties, unless ...[it]... also mandates new specific scheduled commitments to limit or reduce greenhouse gas emissions for Developing Country Parties within the same compliance period', or would result in serious harm to the economy of the United States. This effectively prohibited the US from ratifying the Kyoto Protocol. Source: Wikipedia

C

Cap and Trade

is a market-based policy tool for protecting human health and the environment. A cap and trade program first sets an aggressive cap, or maximum limit, on emissions. Sources covered by the program then receive authorizations to emit in the form of emissions allowances, with the total amount of allowances limited by the cap. Each source can design its own compliance strategy to meet the overall reduction requirement, including sale or purchase of allowances, installation of pollution controls, implementation of efficiency measures, among other options. Individual control requirements are not specified under a cap and trade program, but each emissions source must surrender allowances equal to its actual emissions in order to comply. Sources must also completely and accurately measure and report all emissions in a timely manner to guarantee that the overall cap is achieved. Source: California Energy Commission

Capacity Balancing

The requirement imposed by electricity grids or natural gas pipelines that supply and demand be equal over a certain time period. Source: FERC

Capacity Factor

Capacity factor is the ratio between what a generation unit is capable of generating at maximum output versus the unit’s actual generation output over a period of time. These two variables can be significantly different. Source: NMPP Energy

The ratio of actual energy produced by an energy generating unit or system in a given period, to the hypothetical maximum possible (i.e. energy produced from continuous operation at full rated power) Source: Renewable Energy Research Laboratory

Capacity Firming

Use of storage to mitigate rapid output changes from renewable generation due to: a) wind speed variability affecting wind generation and b) shading of solar generation due to clouds. It is important because these rapid output changes must be offset by other “dispatchable” generation. Source: U.S. Department of Energy

Capacity Price

Fixed payment based on $/MW-month based on availability.

Capacity Utlilization

In the context of the electricity industry, capacity utilization refers to the percentage of infrastructure used to successfully deliver electricity over the course of the year. A historically low capacity utilization rate indicates that the existing energy infrastructure is not used efficiently. A large amount of capacity is only leveraged during times of peak demand.  Source: Investopedia

Capital

is a term for financial assets, such as funds held in deposit accounts and/or funds obtained from special financing sources. Capital can also be associated with capital assets of a company that requires significant amounts of capital to finance or expand. Source: Investopedia

Capital Expenditures (CapEx)

expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. CapEx is often used to undertake new projects or investments by a company. Making capital expenditures on fixed assets can include repairing a roof, purchasing a piece of equipment, or building a new factory. This type of financial outlay is made by companies to increase the scope of their operations or add some economic benefit to the operation. Source: Investopedia

Carbon Capture and Storage

(CCS) is a technology that can capture up to 90% of the CO2 emissions pro­duced from the use of fossil fuels in electricity generation and industrial processes, preventing the carbon dioxide from entering the atmosphere. The three stages include capture, transport and the storing the CO2, typically underground. The storage often takes place in depleted oil and gas fields or deep saline aquifer formations. CCS projects are eligible for $50/ton under . Source: Carbon Capture and Storage Association

Carbon Capture, Utilization, and Storage

Carbon capture utilization is very similar to CCS. The process and technology used to capture CO2 from fossil fuels powered electricity generation remains the same. The main difference is that the end result is not the long term storage of CO2, but the utilization of the gas in industrial processes either on site or elsewhere. CCUS projects are eligible for a $35/ton tax credit under . Source: International Energy Administration

Carbon Intensity

An carbon intensity (also CI or emission intensity) is the emission rate of a given pollutant relative to the intensity of a specific activity, or an industrial production process; for example grams of carbon dioxide released per MJ of energy produced, or the ratio of greenhouse gas emissions produced to gross domestic product (GDP). Source: Wikipedia

Carbon tax

Carbon pricing curbs greenhouse gas emissions by placing a fee on emitting and/or offering an incentive for emitting less. The price signal created shifts consumption and investment patterns, making economic development compatible with climate protection. Carbon pricing is advancing rapidly as an approach to spur climate action. By 2020, 25 percent of global emissions are expected to be under some carbon pricing mechanism. A large and growing number of non-Annex I countries under the UNFCCC are pursuing carbon pricing: South Korea, China, Thailand, Singapore, Bangladesh, Kazakhstan, South Africa, Côte d’Ivoire, Colombia, Chile, Argentina, Brazil, Mexico, Panama, Trinidad and Tobago, others. Source: UNFCCC

A tax on fossil fuels, especially those used by motor vehicles, intended to reduce the emission of carbon dioxide. Source: Oxford Languages

Cash Waterfall

Waterfall payment structures require that higher-tiered creditors receive interest and principal payments, while the lower-tiered creditors receive principal payments after the higher-tiered creditors are paid back in full. Debtors typically structure these schemes into such tranches to prioritize the highest-principal loans first because they are also likely the most expensive. Source: Investopedia

Cathode

, negative terminal or electrode through which electrons enter a direct current load, such as an electrolytic cell or an electron tube, and the positive terminal of a battery or other source of electrical energy through which they return. This terminal corresponds in electrochemistry to the terminal at which reduction occurs. Within a gas discharge tube, electrons travel away from the cathode, but positive ions (current carriers) travel toward the cathode. Source: Britannica Encyclopedia

Credit Enhancement

A feature that increases the creditworthiness of an individual or corporate borrower. It is intended to reduce the risk that the investors will not be repaid. One simple type of credit enhancement is a loan loss reserve, which accepts the losses for a portion of the defaults in an asset pool. Other types of credit enhancements include payment mechanisms such as On-Bill Repayment and PACE.

E

ESA

In an Energy Services Agreement, energy efficiency is treated as a service rather than a product. In this type of agreement, a project developer evaluates a building and executes energy efficiency upgrades. The customer pays for this energy service over time at an agreed-upon rate. One way to structure the contract is to have the customer pay per unit of energy saved, which means they only pay for the actual savings and do not bear the risk of an underperforming project.

G

Green Bank

Green banks are generally defined as public or quasi-public financial institutions that use public funds to attract private investment to clean energy projects. Green bank activities can include offering financing guarantees, creating new financial products, and helping alleviate market barriers and inefficiencies. Green banks in Connecticut and New York have hired staff with extensive experience in both the private and public sectors. Each of these banks has the authority and capability to work closely with private sector entities to design effective clean energy financing solutions.

Green Bonds

Green bonds are issued to pay for climate/environmental projects. These are often issued by large institutions – such as World Bank, Bank of America, and Toyota – that invest in both environmental and non-environmental projects. However the proceeds from the green bonds are invested exclusively in green projects.

M

MACRS

The Modified Accelerated Cost Recovery System (MACRS) is the primary tax depreciation system used by the IRS. Depreciation is an income tax deduction that taxpayers can use to recover the cost of certain types of property over time. MACRS specifies different cost recovery periods for different types of properties, usually based on the expected useful lives of these properties. However, MACRS allows for a relatively short five-year cost recovery period for solar photovoltaic assets despite the fact that solar systems often have a useful life of 25 years or more. This accelerated recovery period increases the attractiveness of solar investment.

O

On-Bill Finance

On-Bill Finance allows utility customers to borrow money from their utility at little to no interest to pay for certain energy efficiency measures. The loan is repaid over time through the utility bill.

On-Bill Repayment

On-Bill Repayment programs help utility customers secure private financing for energy efficiency and renewable generation by allowing them to repay the private financing institution through their utility bills. Placing the repayment on the utility bills provides lenders and other investors with greater assurance that they will be repaid, therefore enhancing the credit of participating customers. This results in a greater number of customers being eligible for financing as well as better overall financing terms for qualifying customers.

Open Source OBR

These are on-bill repayment programs that allow multiple lenders and other investors to compete for customers. They allow a wide variety of financing products, such as loans, leases, power-purchase agreements, and Energy Services Agreements, to be eligible.

P

PACE

Property-assessed clean energy (PACE) allows building/home owners to repay loans for energy efficiency and/or renewable generation through their property tax bill. Placing the loan repayment on the property tax bill reduces the risk of default because property taxes are almost always successfully collected. This reduced risk of default provides a credit enhancement for participating building/home owners and therefore allows more building/home owners to get access to financing at attractive rates.

PACE 2.0

Property-assessed clean energy (PACE) 2.0 is a new version of PACE that is emerging in Connecticut, California and some other states. Like the original PACE, PACE 2.0 allows for clean energy investments to be repaid through property-tax bills. But PACE 2.0 goes a step further by allowing payments for solar leases and for solar power-purchase agreements to also be repaid through property-tax bills.

R

Renewable Electricity Production Tax Credit

The Renewable Electricity Production Tax Credit (PTC) is a per-kilowatt-hour tax credit for electricity generated from qualified renewable resources including, but not limited to, wind, geothermal, and closed-loop biomass. It incentivizes renewable energy in a market dominated by fossil fuels. This tax credit is generally only available for the first ten years of production. The PTC is not typically used for solar generation.

S

Secondary Market

Secondary markets are ones where securities and other assets can be purchased from somebody other than the initial issuer of the asset. For example, when a bank sells the mortgages that it originated as mortgage-backed securities, it is selling into a secondary market. Secondary markets are particularly important to clean energy finance because the payment obligations that are created through clean energy finance mechanisms like PACE and On-Bill Repayment (see definitions above) can be turned into an asset and sold on secondary markets. The ability to sell these assets on the secondary market is very attractive to investors and helps drive down the cost of capital for clean energy projects.

Securitization

This is the process of combining financial assets into a pool and then selling portions of that combined pool on the secondary market to institutional investors, such as pension funds. The resulting asset (i.e., mortgage-backed securities) generally requires a credit rating from a rating agency assessing the risk associated with it. By allowing the original investor in a project to sell the resulting asset on the secondary market, securitization increases initial lenders’ willingness to provide low-cost capital. This is particularly true if the resulting securities receive a high credit rating because the asset will be worth more on the secondary market.

Solar Investment Tax Credit

The solar Investment Tax Credit (ITC) is a 30-percent United States federal tax credit for the cost of solar systems installed on residential and commercial properties. It is gradually ramping down over time.

Solar Lease

This is a contractual agreement under which an individual or business allows solar panels owned by a third party to be installed on their property and leases those panels for a fixed period of time. Lease periods typically fall between 10 and 20 years. Third-party ownership structures, such as solar leases and solar power-purchase agreements, allow investors to take full advantage of the tax benefits of solar (see Tax Equity Investment).

Solar Power-Purchase Agreement

A solar power-purchase agreement (PPA) is a contractual agreement under which an individual or business allows solar panels owned by a third party to be installed on their property and agrees to purchase the power produced from the solar installation at an agreed-upon rate over a fixed period of time. Third-party ownership structures such as Solar Leases and Power Purchase Agreements allow investors and consumers to take full advantage of the tax benefits of solar (see Tax Equity Investment).

T

Tax Equity Investment (Third-Party Ownership)

This is an investment in solar development by a third-party private investor who utilizes federal tax benefits to offset taxes they would otherwise owe. In such an arrangement, a third party investor owns the solar panels and collects the tax benefits while leasing out the panels or selling the power through a solar power-purchase agreement. The two primary tax benefits for solar investment are the solar Investment Tax Credit (ITC) and the MACRS. In practice, tax equity investments are generally attractive for profitable financial companies and for a few wealthy individuals with extensive real estate holdings.

Y

Yieldco

A yieldco is a publicly traded company that is created for the purpose of owning assets that produce cash flow. Some yieldcos specifically focus on renewable energy assets. The income from these assets is then generally distributed to the shareholders as dividends. While yieldcos are structured as normal taxpaying corporations, yieldcos that own renewable resources can use the tax benefits associated with clean energy investment to avoid paying taxes.