The Three Routes to Factory Solar in 2026
Every solar installation on a UK factory roof sits within one of three commercial structures. The physical panels, inverters and cabling are identical — what differs is who owns the asset, who takes the financial risk and who captures the long-term return. Understanding these differences is the most important decision a factory finance director or operations manager will make before proceeding with a solar project.
| Structure | Upfront Cost | Who Owns the Asset? | Long-Term Return | Best For |
|---|---|---|---|---|
| Outright Ownership | £100k–£1m+ | Factory / Building owner | Highest (8–12x over 25 years) | Capital-available businesses |
| Solar PPA | Zero | Third-party developer | Moderate (developer captures upside) | Capital-constrained; short leases |
| Lease / HP | Low (deposit only) | Finance house (until end of term) | Good (between ownership and PPA) | Businesses preferring monthly payments |
Outright Ownership — Pros, Cons, Financials
Outright purchase is the default structure recommended for most UK factories with access to capital or the ability to borrow at commercial rates. The factory pays the full installation cost upfront, owns the asset from day one and captures 100% of the electricity savings and export income for the system's 25–30 year life.
Advantages
- Maximum long-term return on capital — typically 8–12x over 25 years
- Full Expensing or AIA tax relief in year one, reducing effective cost by 19–25%
- SEG (Smart Export Guarantee) export income goes to the factory
- Asset adds value to the building (improved EPC rating, capital asset on balance sheet)
- No contract terms restricting modifications, sub-letting or building changes
Disadvantages
- Requires significant upfront capital (£100,000–£1 million+ depending on system size)
- Factory bears all maintenance responsibility and inverter replacement costs
- Less attractive for businesses with short remaining lease terms
- Capital could be deployed elsewhere in the business
At 2026 electricity prices of 28–32p/kWh, a 300kW owned system costing £220,000 typically achieves payback in 3.5–4.5 years and generates net cumulative returns in excess of £2 million over 25 years. After Full Expensing at 25% corporation tax, the effective capital cost reduces to approximately £165,000, improving the payback to under 3.5 years.
Solar PPA (Power Purchase Agreement) Explained
A solar PPA is a contractual arrangement under which a third-party developer installs, owns and operates a solar system on the factory's roof. The factory consumes the electricity generated and pays the developer a per-kWh rate — typically 10–18p/kWh — which is materially below the current grid rate. The factory pays nothing upfront and the developer recoups their investment through the electricity payments over a 15–25 year contract term.
How PPA Pricing Works in 2026
PPA rates in 2026 typically sit at 10–18p/kWh, against a grid electricity rate of 28–32p/kWh — a saving of 10–20p per kWh consumed. Contracts usually include an annual price escalator of 2–4% (the RPI or CPI link), meaning your PPA rate rises over the contract term. A well-negotiated PPA should guarantee that the factory's PPA rate remains below the prevailing grid rate throughout the contract, providing a floor of savings even if grid prices fall. Ensure your contract includes a "grid price parity" clause: if the PPA rate ever exceeds the grid rate, payments revert to grid pricing.
The PPA model has grown significantly in the UK commercial solar market since 2022 as rising electricity prices made the economics more attractive for developers. However, the structure is inherently less financially rewarding for the factory than outright ownership. The developer typically earns a 12–20% internal rate of return on their capital — this is value that could have accrued to the factory had they owned the system.
Key PPA Contract Terms to Scrutinise
- Rate escalation clause: Is the annual uplift linked to CPI, RPI or a fixed percentage? RPI has historically been higher than CPI.
- Minimum payment clauses: Some PPAs require payment for a minimum volume of electricity regardless of consumption. Ensure minimum volumes are set below your expected consumption.
- End-of-term purchase option: What is the method for calculating the purchase price at contract end? Fair market value is preferable to an independently assessed price.
- REGO transfer: Confirm that Renewable Energy Guarantees of Origin are transferred to the factory for Scope 2 reporting purposes.
- Removal costs: If you vacate the building, who bears the cost of system removal? The contract should be clear.
Lease / Hire Purchase Models
Finance lease and hire purchase (HP) arrangements occupy the middle ground between outright ownership and a PPA. The factory contracts with a specialist asset finance house — not a solar developer — to fund the installation. The finance house pays the installer, and the factory repays the finance over 3–7 years in monthly instalments. At the end of the term, the factory owns the asset outright (HP) or has a buyout option (finance lease).
Typical Lease / HP Terms in 2026
- Deposit: 10–20% of system cost
- Term: 3, 5 or 7 years
- Interest rate: 6–9% per annum (fixed)
- Asset ownership: Finance house during term
- End of term: Factory owns asset (HP) or option to buy (lease)
- Tax treatment: Capital allowances on HP; lease payments as P&L expense (finance lease)
- VAT: Payable on monthly instalments (HP) or full value up front (some lease structures)
- Monthly payment (300kW, 5-year HP): approx. £4,200/month
For a 300kW system costing £220,000, a 5-year HP arrangement at 7% interest produces monthly repayments of approximately £4,200. Against monthly electricity savings of approximately £5,500–£6,000 (assuming 80% self-consumption at 30p/kWh), the installation is cash-flow positive from month one — generating approximately £1,300–£1,800 net monthly benefit during the finance period. Once the HP is repaid, the full saving accrues to the factory.
The principal disadvantage versus outright ownership is the total interest cost — typically £25,000–£40,000 over a 5-year term on a £220,000 facility. This reduces the overall return but does not negate the financial case, particularly for businesses where the cost of capital deployed on solar is high relative to alternative uses.
Which Structure Suits Which Factory Profile?
| Factory Profile | Recommended Structure | Reason |
|---|---|---|
| Profitable SME, owns freehold, strong cash position | Outright purchase | Maximum return; Full Expensing reduces effective cost immediately; asset improves building value |
| Growing business, cash tied up in working capital | Hire Purchase (5-year) | Cash-flow positive from day one; capital allowances on asset value; owns asset at term end |
| Leaseholder, 15–20 years remaining on lease | Purchase or HP with landlord consent | Long enough to recoup investment; negotiate solar rights clause into lease |
| Leaseholder, 7–12 years remaining on lease | Solar PPA | Zero capital at risk if building is vacated; developer handles asset removal; immediate savings |
| Loss-making business (limited tax benefit from allowances) | Solar PPA or Finance Lease | Full Expensing has no value when no taxable profits; operational expenditure model is simpler |
| Local Authority or public sector body | PPA or Salix Finance | Public bodies cannot claim tax allowances; PPA or Salix interest-free loans are better suited |
Tax Treatment: Full Expensing, AIA, VAT and R&D Relief
The tax treatment of a factory solar investment varies significantly depending on which commercial structure is used. This section addresses the four most important tax considerations for UK manufacturers.
Full Expensing (Capital Allowances)
Since April 2023, UK companies subject to corporation tax can claim 100% first-year allowances on qualifying plant and machinery under Full Expensing. Solar panels, inverters, mounting systems and associated electrical infrastructure all qualify. On a £300,000 system, Full Expensing generates a corporation tax deduction of £300,000 in year one — a cash tax saving of £57,000 at 19% or £75,000 at 25%. This relief only applies to outright purchase and hire purchase (where the purchaser is treated as the economic owner); it does not apply to operating leases or PPAs.
Annual Investment Allowance (AIA)
The AIA provides 100% first-year tax relief on qualifying capital expenditure up to £1 million per year. For factories spending under £1 million on capital equipment in any tax year, the AIA delivers an identical result to Full Expensing for solar installations. Above £1 million total qualifying spend, Full Expensing becomes the relevant mechanism. Both routes produce the same immediate tax saving; the distinction matters primarily for unincorporated businesses (sole traders, partnerships) which cannot claim Full Expensing but can claim AIA.
VAT Treatment
For businesses registered for VAT, the 20% VAT on a solar installation is fully recoverable as input tax, provided the installed system is used for taxable business activities (which covers the vast majority of factory operations). This means the effective upfront cost is the net ex-VAT price. For non-VAT-registered entities (charities, certain public bodies), the VAT becomes an additional cost — a 20% increase on the net price. Under a PPA, the factory pays for electricity services rather than purchasing an asset; VAT applies to the per-kWh electricity payments at the standard rate.
R&D Tax Relief
Where a factory is investing in solar as part of a broader energy innovation programme — for example, integrating solar with novel load management systems, developing proprietary battery control algorithms, or testing new solar panel configurations — some proportion of the associated development costs may qualify for R&D tax credits under HMRC's R&D relief scheme. The standard solar installation itself does not qualify, but if your project includes genuine technological uncertainty and development activity, engage an R&D tax specialist to assess eligibility. This is a secondary benefit, not a primary one, but it has delivered meaningful additional value for a number of manufacturing clients.
Real-World Scenarios: Three Factory Profiles
The following three scenarios illustrate how the choice of commercial structure plays out in practice for different types of UK manufacturing business.
East Midlands Plastics Manufacturer — 450kW Owned System
A family-owned injection moulding company in Nottinghamshire with a freehold industrial unit and electricity costs of £280,000/year. The board approved a 450kW rooftop solar installation costing £310,000 (ex-VAT) in Q1 2026. With Full Expensing at 25% corporation tax, the effective cost after tax relief was £232,500. The system offsets approximately 45% of electricity consumption, saving £110,000/year in year one and growing at 3% annually with electricity price inflation. Payback period: 2.1 years on effective post-tax cost. The company opted for outright purchase using accumulated reserves, treating the investment as equivalent to other plant and machinery upgrades.
West Yorkshire Textile Manufacturer — 200kW HP Finance
A mid-sized textile manufacturer in Bradford with a 12-year lease, electricity costs of £150,000/year and working capital committed to machinery upgrades. The company chose hire purchase finance for a 200kW rooftop installation costing £148,000 (ex-VAT). A 5-year HP facility at 7.5% p.a. produced monthly repayments of £2,960. Monthly electricity savings of approximately £3,800 (80% self-consumption at 30p/kWh) meant the system was cash-flow positive by £840/month from day one. Capital allowances were claimed on the HP asset value in year one, generating £37,000 in immediate tax savings. After 5 years, the company owns the asset outright with remaining 20-year return accruing in full.
South East Logistics Operator — 350kW PPA
A third-party logistics operator in Kent with a 9-year remaining lease on a 15,000m² warehouse. With no certainty of lease renewal and capital committed to fleet electrification, the operator agreed a 20-year PPA for a 350kW rooftop installation. PPA rate: 14p/kWh, escalating at 3% annually. Against a grid rate of 30p/kWh, the immediate saving was 16p/kWh on self-consumed electricity (approximately 80% of generation). Year one saving: approximately £65,000. The PPA developer benefits from Renewable Energy Guarantees of Origin (REGOs) in addition to the electricity payments. The operator secured REGO transfer in the contract, enabling Scope 2 zero-carbon electricity reporting under the market-based GHG Protocol method.
Frequently Asked Questions
What is a solar PPA and how does it work for UK factories?
Is outright ownership or a PPA better for a UK factory?
Can a factory claim Full Expensing on solar panels?
Does a solar PPA count towards ESOS or Scope 2 emissions reduction?
What happens at the end of a solar PPA contract?
Trusted Solar Installers Across the UK
We work with a network of MCS-certified regional installers. If you need a recommendation outside our coverage area, these are the firms we trust:
- ALPS Electrical — MCS-certified solar installer — Teesside & North East England
- Midland Solar — Commercial & industrial solar installer — West Midlands
- YEERS — Solar panels & heat pumps — Yorkshire
- EC Eco Energy — UK-wide commercial solar & renewables installer
- Solent Solar — Commercial & residential solar installer — Hampshire & South Coast