The four routes
Cash purchase
Buy the system outright. Claim 100% Annual Investment Allowance in year one (limited companies). Own the asset.
- Best for: owner-occupied offices, capex-comfortable balance sheets, organisations wanting maximum long-term value
- NPV: highest of the four routes (100% reference)
- IRR: 12-18% typical
- Simple payback: 5-7 years
- Watch outs: ties up capex; no off-balance-sheet treatment
Asset finance
5-10 year secured loan against the system. Monthly payment typically lower than avoided electricity cost from day one — cash-flow positive throughout the term.
- Best for: capex-constrained organisations with strong covenant; leased premises with 10+ year remaining term
- NPV: 80-85% of cash route
- Cash flow: positive month one
- Watch outs: interest cost reduces IRR; early repayment penalties can be material
Operating lease
Fixed monthly payment over 5-10 years. System reverts to lessor at term end (or negotiate buy-out at residual value).
- Best for: organisations preferring off-balance-sheet treatment; shorter remaining lease terms; simpler accounting
- NPV: 70-80% of cash route
- Watch outs: no long-term ownership unless residual is purchased
Power Purchase Agreement (PPA)
Third-party developer installs, owns, and operates. You buy electricity at discounted per-kWh rate over 15-25 year term. Zero capex.
- Best for: zero-capex appetite; multi-let landlords; performance risk transfer
- NPV: lowest of four routes (developer takes return)
- Cash flow: positive day one (30-50% below grid rate at contract start)
- Watch outs: long-term commitment; PPA provider has roof rights; exit costs at break clauses can be material; building sale requires PPA novation or buy-out
The decision framework
| Question | If yes → | If no → |
|---|---|---|
| Available capex of £200k+? | Cash | Continue |
| Want to own the system? | Cash / Asset finance | PPA |
| Lease 10+ years remaining? | Cash / Asset finance | PPA / short OpLease |
| Need cash-flow positive month 1? | Asset finance / PPA | Cash |
| Balance-sheet sensitive? | PPA / OpLease | Cash / AssetFin |
| Want max 25-year value? | Cash | Asset finance |
Worked example: 320 kWp London multi-let
System: 320 kWp on a multi-let London office. Capex £288,000. Annual generation 294 MWh. Self-consumption 78%. Day rate 30p/kWh.
Cash route: Year 1: -£288k + £72k AIA tax saving = -£216k net. Years 2-25: £96k/yr savings. Simple payback 4.5 years. 25-year cumulative benefit: £2.16m. IRR 15.8%.
Asset finance (7-yr term @ 7.5%): Year 1: £0 capex, £53.6k/year payments, £96k/year savings = £42.4k/yr positive for 7 years, then £96k/year for 18 years. 25-year cumulative: £2.0m. Effective IRR 13.2%.
PPA (20-year, 12p/kWh starting vs 28p/kWh grid): Year 1: £0 capex. Savings = (28p − 12p) × 250,000 kWh self-consumed = £40k/yr + £15k SEG retained. 25-year cumulative: £1.4m. No exit value.
Net call: cash delivers £760k more 25-year value than PPA but ties up £288k for 4.5 years. Asset finance delivers £600k more than PPA with no capex commitment. PPA is the only zero-capex, zero-balance-sheet route.
Capital allowances in detail
Annual Investment Allowance (AIA)
100% first-year deduction on qualifying plant and machinery up to £1m/year, permanently set at £1m from April 2023. Available to limited companies, partnerships, and sole traders. Solar PV qualifies.
Full Expensing (FE)
Introduced March 2023, made permanent 2024. 100% deduction (main pool) or 50% (special-rate pool) for limited companies. Solar PV is special-rate pool, so 50% in year one and 6% writing-down thereafter. Limited companies typically use FE if their AIA is exhausted by other purchases; otherwise AIA delivers stronger year-one tax benefit.
Research & Development Allowance
Where solar PV forms part of a documented R&D project (e.g. integrated with novel grid-balancing tech), 100% R&D Allowance may apply. Specialist tax advice required.
Common finance questions
What's the cheapest funding route?
Cash purchase delivers the highest 25-year NPV and IRR. But it ties up capital and requires the strongest balance sheet. Asset finance is typically the best second choice — slightly lower NPV due to interest cost, but cash-flow positive month one and no capex commitment.
Can a PPA work for a small office?
PPAs typically need system sizes above 100 kWp to attract serious developer interest. Below that, the deal economics don't work for the developer. Smaller offices are usually better served by cash purchase or asset finance.
What is Annual Investment Allowance worth?
AIA gives 100% first-year tax deduction up to £1m. For limited companies at current 25% corporation tax, this reduces effective capex by 25% in year one. On a £300k install, that's £75k of tax saving in the year of purchase.
How does Full Expensing differ from AIA?
Full Expensing was introduced in March 2023 and made permanent in 2024. It provides 100% first-year deduction (main pool) or 50% (special-rate pool) for limited companies on qualifying plant and machinery. Solar PV typically falls into the special-rate pool. AIA covers both partnerships and companies; FE is companies only.