PPAs vs Cash vs Grants 2026 | Commercial Solar Decision Tree

The hardest question in commercial solar is not “should we install PV?” It is “how should we fund it?”. UK businesses have four meaningful funding routes — cash with Full Expensing, grant-funded capex, Power Purchase Agreement, and asset finance / leasing. Each has different economics, different risk profiles and different fits. This piece sets out a decision tree.

The four routes — a quick recap

Cash with Full Expensing. You pay capex upfront and reclaim 25% via corporation tax in the year of spend. You own the asset, capture all the savings, take all the risk.

Grant-funded capex. You pay reduced capex (after grant of 25–30% for IETF, 100% for PSDS, 40% for REPF) plus Full Expensing on the net. You own the asset, capture all the savings, take some application risk.

Power Purchase Agreement (PPA). A third-party investor pays for and owns the solar PV. You sign a 15–25 year contract to buy the power from them at a fixed pence/kWh, typically 6–9p below grid prices. Zero capex. You don’t own the asset.

Asset finance / leasing. You finance the capex through a 5–10 year asset finance arrangement. You own the asset (or have a finance lease that converts to ownership) and pay for it through opex over time. Mid-ground between cash and PPA.

The decision tree

Five questions, in order, get most businesses to the right answer.

Q1: Are you in the public sector?

If yes, the answer is PSDS. There is no Full Expensing in the public sector (it’s a tax allowance, and the public sector doesn’t pay corporation tax). PPAs are technically available but rarely used in the public sector because the procurement complexity is high and the capex equivalent is fully grant-funded under PSDS. Asset finance is occasionally used for non-PSDS-eligible measures but is structurally weaker than PSDS where eligibility applies.

For NHS trusts, schools, MATs, FE colleges, councils and central government — PSDS is the route. Skip to “How to win PSDS” in our PSDS for schools piece.

If no, continue to Q2.

Q2: Are you UK-incorporated and paying corporation tax?

If yes — your project benefits from Full Expensing on whatever capex you fund. This is true for all four private-sector routes (cash, grant + capex, PPA, asset finance) where the capex remains in your hands. PPAs are the exception — the funder owns the asset, so they get the tax benefit, not you.

If no (sole trader, partnership, charity, loss-making): Annual Investment Allowance still gives 100% first-year relief on the first £1m of plant. You don’t get Full Expensing benefit but the AIA effect is similar within the £1m limit. Continue to Q3 anyway.

Q3: What is the project capex?

Project size drives the next branch.

Capex below £150k:

The application overhead for a grant doesn’t pay back at this scale. The transaction cost of a PPA doesn’t pay back either — most PPA funders won’t engage below 250kWp (around £150k of capex), and those that do charge premium tariffs that erode the case.

Cash + Full Expensing is normally the right answer below £150k. If cash isn’t available, asset finance is the secondary option. Asset finance for £80k to £150k typically runs at 7–9% APR over 5 years; the monthly cost is usually well below the monthly electricity savings.

Capex £150k to £500k:

This is the most variable zone. Cash + Full Expensing works well if you have the cash. PPA economics start to work but transaction costs are still material relative to project size. Grant routes work for IETF-eligible manufacturing, REPF-eligible rural enterprise and PSDS-eligible public sector — but Full Expensing alone often beats a marginal grant application on net economics.

Capex £500k to £2m:

Grants become competitive at this scale. IETF at 25–30% effective grant rate produces meaningful savings even after application overhead. PPA economics are strong because transaction costs are amortised over a larger asset. Cash + Full Expensing remains the simplest route and is the right answer if cash is genuinely available.

Capex above £2m:

Almost always either grant-funded (where eligible) or PPA-funded. Cash funding at this scale creates capital allocation tensions — most businesses prefer to keep capital for productive uses where the return is higher than 4.66-year-payback solar. Asset finance becomes structurally identical to a PPA at this scale.

Q4: Are you genuinely cash-constrained, or is solar competing with other capital uses?

Genuine cash constraint (loss-making, growth-stage, retained earnings rationed) usually points to PPA. The PPA structure removes capex from the question entirely and replaces it with a kWh tariff that is, by structure, lower than your current electricity rate. The only commitment is the long-term contract.

Capital allocation tension (cash is available but solar is competing with higher-return uses) is more nuanced. The right answer depends on the marginal return on capital elsewhere. If your business can deploy capital at 12%+ IRR in core operations, paying cash for a 16% IRR solar project is fine but not transformative. If your alternative capital uses run at 6–8% IRR, solar at 16% looks excellent and cash funding is clearly the right answer.

Q5: How long do you intend to occupy the site?

PPAs typically run 15 to 25 years. If your tenure at the site is shorter, the PPA buyout terms become the dominant question. For sites with 5–10 year occupancy horizons, PPAs are usually wrong because the buyout cost in years 5–10 is high.

For owner-occupied freehold premises, tenure is not a constraint. PPAs work cleanly.

For tenant-occupied leasehold premises, tenure matters. The standard PPA structure includes a roof lease from the building owner to the PPA funder, separate from the operational lease between the building owner and the tenant. The tenant signs the off-take agreement. If the tenant leaves, the off-take agreement either transfers to the new tenant or is novated to the building owner. The legal structure is workable but adds complexity.

For tenancies under 5 years, PPAs are usually unworkable. Cash + Full Expensing or asset finance are the routes that fit.

Worked examples — using the decision tree

Example A: An SME engineering company, £200k capex, owner-occupied premises, profitable, cash available

• Q1: Not public sector
• Q2: Yes, UK-incorporated, paying corporation tax
• Q3: £200k → middle zone, cash + Full Expensing or marginal grant
• Q4: Cash available, alternative uses limited (small SME)
• Q5: Owner-occupied, long tenure

Answer: Cash + Full Expensing. Net cost £150k. Payback ~4 years. No application risk, no PPA contract complexity, owns the asset.

Example B: A large food manufacturer, £1.5m capex, leasehold but 18-year remaining lease, profitable, cash allocation pressure

• Q1: Not public sector
• Q2: Yes
• Q3: £1.5m → grant zone or PPA zone
• Q4: Capital allocation pressure exists
• Q5: 18 years remaining → PPA viable

Answer: Either IETF + Full Expensing (grant route) or PPA. Run both side by side. The grant route saves more cash in absolute terms; the PPA preserves capital. If the manufacturer’s IRR on capital alternatives exceeds 12%, the PPA wins on IRR-of-capital basis. If lower, the grant wins. Real-world: 60% of clients in this scenario choose the PPA, 40% choose the grant route.

Example C: A multi-academy trust, £4.2m of estate-wide PV + heat pump retrofit, public sector, integrated decarbonisation pathway

• Q1: Public sector → PSDS

Answer: PSDS. 100% grant-funded. No question.

Example D: A 280-cow dairy farm, £278k capex, owner-occupied, partnership structure, REPF-eligible council

• Q1: Not public sector
• Q2: Partnership — gets AIA, not Full Expensing. Effect similar within £1m.
• Q3: £278k → middle zone
• Q4: Cash limited (typical for farms)
• Q5: Owner-occupied, multi-generational tenure

Answer: REPF + AIA. Net cost £162k. Payback 3.8 years. REPF is the right grant route for rural enterprise and the application overhead is much lower than IETF.

Example E: A logistics 3PL, £3.2m capex on Big Box site, 22-year lease, parent company has £14bn balance sheet

• Q1: Not public sector
• Q2: Yes
• Q3: £3.2m → large project, grant or PPA
• Q4: Capital allocation pressure (large logistics groups optimise capital tightly)
• Q5: 22 years → PPA viable

Answer: PPA. Logistics is the textbook PPA market. Investment-grade covenant, long tenure, large project, capital allocation pressure. Tariffs at this scale and covenant typically 5.4–6.0p/kWh. Material annual savings, zero capex.

Hybrid structures — when to use them

PPAs and grants are not mutually exclusive. Some IETF-funded projects are PPA-structured, with the grant going to the PPA funder and passing through as a lower headline tariff. This is common for £1m+ manufacturing projects where the operator wants both the grant economics and the off-balance-sheet treatment of a PPA.

The mechanics: the PPA funder is the applicant for the IETF grant, with the operator providing site cooperation. The grant reduces the funder’s net asset cost; the funder lowers the PPA tariff to reflect the reduced cost; the operator captures the value through cheaper electricity over the term.

This structure works but adds 6 to 10 weeks to the project programme because both the IETF application and the PPA contract have to be in place before construction starts. We have run several hybrid structures since 2023.

Asset finance — the fourth option

Asset finance and leasing are the fourth meaningful route. The mechanics:

• A finance company owns the solar PV asset
• You make monthly or quarterly payments over a 5 to 10 year term
• At end of term, you typically buy out the asset for a nominal residual value (£100 to £5,000)
• Total payments are capex + interest, typically 5–9% APR

Asset finance sits between cash and PPA on the spectrum. You eventually own the asset (unlike PPA). You don’t pay capex upfront (unlike cash). The tax treatment is more complex — finance leases get different treatment from operating leases, and the Full Expensing eligibility depends on the contract structure.

For most projects under £500k, asset finance is the secondary option after cash + Full Expensing. For projects in the £500k to £1.5m bracket, asset finance can work alongside or instead of a PPA.

Mistakes we see

Anchoring on grants when they don’t fit. Some businesses spend 6 months pursuing a marginal IETF application when Full Expensing alone would have produced a similar net cost in 6 weeks.

Misreading PPA contracts. Tariff escalators (RPI vs CPI vs fixed), buyout schedules and exit terms are the contract features that matter most. Many PPAs we audit have terms favouring the funder more than the operator realised.

Ignoring tax position. Loss-making companies don’t get immediate Full Expensing benefit. The capital allowance carries forward but the time value is lost. For pre-revenue or growth-stage businesses, PPAs are often structurally better than cash + Full Expensing for this reason.

Assuming larger is better. Maxing out roof area for the largest possible system often produces lower IRR than a smaller system that better matches site demand. Self-consumption falls off a cliff at 110%+ of weekday daytime demand.

How to start

Every project we work on starts with a 20-minute scoping call covering exactly the questions in this decision tree. Within 24 hours of the call we come back with a written funding shortlist and an indicative cost-and-benefit comparison across the routes that fit your situation.

The fastest route is the free funding review form.