Quick Answer
For most UK manufacturers spending £200,000+ annually on electricity, outright purchase with Annual Investment Allowance gives the best long-term return. PPAs suit manufacturers with limited capital, tighter credit, or preference for off-balance-sheet treatment. Leases sit in the middle — off-balance-sheet historically, though IFRS 16 has changed this for many.
At-a-Glance Comparison
The three main solar finance models for UK factories, compared across the factors that matter most to manufacturers.
| Factor | Purchase | PPA | Lease |
|---|---|---|---|
| Upfront Cost | High (£700–950/kWp) | None | Low (0–20% deposit) |
| Monthly Cost | None (post-install) | Per-kWh (8–14p) | Fixed monthly payment |
| Ownership | Yes — full ownership | No — provider owns asset | No (usually) |
| Tax Treatment | 100% AIA year 1 | OpEx — fully deductible | Lease payments deductible |
| Flexibility | Low (long-term commitment) | Medium (contract terms vary) | Low (early exit penalties) |
| Best For | Well-capitalised manufacturers seeking maximum ROI | Capital-constrained; prefer no maintenance responsibility | Off-balance sheet preference; moderate savings |
Outright Purchase: Maximum ROI for Well-Capitalised Manufacturers
Outright purchase remains the benchmark against which all other solar finance models are measured. When a UK manufacturer buys a solar system directly — whether from cash reserves or via a business loan — they take full ownership of the asset and capture 100% of the electricity value generated over the system's 25-year life.
The typical installed cost for industrial solar in the UK ranges from £700 to £950 per kWp, depending on system size, roof type, mounting complexity, and DNO connection requirements. A 500kWp roof installation might cost £375,000–£475,000 fully installed, but the financial case is compelling when modelled correctly.
Annual Investment Allowance (AIA) — the Tax Advantage
The most significant financial benefit of outright purchase is access to the Annual Investment Allowance, which permits 100% of the capital cost to be deducted against corporation tax profits in year one. At 25% corporation tax, this effectively reduces the real cost of a £400,000 system to £300,000 in cash terms.
- ✓ AIA limit is £1 million per year — easily covers most factory installations
- ✓ Relief is taken in the year of purchase, not spread over the asset life
- ✓ Applies to panels, inverters, mounting, cabling — the full system cost
- ✓ Reduces effective payback from 4–5 years to 3–3.5 years in many cases
Beyond AIA, purchased systems generate income through the Smart Export Guarantee (SEG) — the export tariff paid for surplus electricity sent back to the grid. Large manufacturers who self-consume 70–80% of generation still export meaningful volumes, and SEG rates from larger suppliers typically range 4–8p/kWh.
On the balance sheet, a purchased solar system is a fixed asset depreciated over its useful life. The AIA first-year deduction applies for tax purposes regardless of accounting depreciation treatment. This creates a significant timing difference beneficial to cash flow in year one.
Solar PPA: Zero Upfront, Fixed Energy Price
A Power Purchase Agreement (PPA) is a contractual arrangement in which a third-party investor owns, installs, operates and maintains the solar system on your roof. You pay nothing upfront. Instead, you agree to purchase the electricity generated at a fixed or index-linked rate — typically between 8p and 14p per kWh — for a contract term of 15–25 years.
The attraction is immediate. A factory currently paying 28–32p/kWh for grid electricity can immediately begin consuming solar electricity at a discount, without capital outlay. For manufacturers under financial pressure, or with board policies against large capital expenditure, a PPA can unlock solar savings that would otherwise be unattainable.
How a PPA Works in Practice
- 1PPA provider surveys your roof, designs and installs the system at their cost
- 2You consume the electricity generated and pay per kWh at the agreed PPA rate
- 3Unused electricity is typically exported; the PPA provider retains SEG income
- 4Maintenance, monitoring and performance obligations rest with the provider
- 5At contract end, you may purchase the system, renew the PPA, or have the system removed
Change of Ownership: The Critical PPA Risk
The most significant commercial risk with a PPA is what happens when you sell your factory. PPAs are secured against the property and in most cases transfer to the new owner. This can complicate property transactions — buyers' solicitors will review the PPA terms, and some buyers may be reluctant to assume a 15-year energy purchase commitment at rates that may no longer be competitive.
PPA Due Diligence Checklist
- ✓ What is the rate escalation clause? (Fixed, CPI-linked, or RPI-linked?)
- ✓ What is the early termination penalty structure?
- ✓ Who retains SEG income and ownership of ROCs/carbon credits?
- ✓ What performance guarantees are in the contract?
- ✓ What is the purchase option price at years 5, 10, 15?
- ✓ What happens if the PPA provider goes into administration?
- ✓ How are disputes about metered output resolved?
- ✓ What is the process for change of tenancy or property sale?
For accounting purposes, PPA payments are treated as operating expenditure — fully deductible against profits in the year they are incurred. The system does not appear on your balance sheet. This off-balance-sheet treatment was historically a major attraction, though it provides less benefit now that IFRS 16 has already changed treatment of leases.
Solar Lease / Asset Finance: The Middle Ground
A solar lease (also called asset finance or hire purchase in some structures) allows a manufacturer to have a system installed with minimal or zero upfront cost, in exchange for fixed monthly payments over a term — typically 5 to 15 years. Unlike a PPA, the lease payments are fixed regardless of how much electricity the system generates; the economic benefit comes from the electricity savings you retain.
IFRS 16: The Accounting Change That Matters
Before 2019, operating leases were kept off the balance sheet, which made them attractive for manufacturers who wanted to preserve apparent gearing ratios. IFRS 16 (effective January 2019) changed this fundamentally. Under IFRS 16, most leases must now be recognised on the balance sheet as a right-of-use asset with a corresponding lease liability. This removes much of the off-balance-sheet advantage that made solar leases particularly attractive to larger businesses.
Small companies applying FRS 102 (Section 1A) may still benefit from simplified lease accounting, and some short-term leases (under 12 months) or low-value leases remain off-balance-sheet under IFRS 16 exemptions. Consult your finance director and auditors on the specific treatment for your organisation.
Advantages of Leasing
- ✓ Low or zero upfront capital
- ✓ Predictable monthly cost
- ✓ Lease payments are tax-deductible
- ✓ You retain electricity savings
- ✓ May include maintenance package
Disadvantages of Leasing
- ✗ IFRS 16 now on-balance-sheet for most
- ✗ Early termination penalties can be severe
- ✗ Lower lifetime savings than purchase
- ✗ Residual value risk at lease end
- ✗ No AIA benefit (provider claims it)
Lease terms typically run 5–15 years, with residual value determined at contract end. Balloon payments or purchase options are common. Early termination penalties can represent a significant proportion of the remaining lease value — often 80–100% of remaining payments — so manufacturers considering a property sale or business exit should carefully model exit costs before signing.
Tax Treatment Deep Dive: AIA, FYA, and OpEx Deductions
Tax treatment is often the deciding factor when a well-capitalised manufacturer chooses between purchase and PPA. Understanding the three main mechanisms is essential to building an accurate financial model.
Annual Investment Allowance (AIA) — 100% Year 1 Deduction
AIA allows businesses to deduct the full cost of qualifying plant and machinery — including solar panels, inverters, mounting systems and cabling — in the year of purchase. The current AIA limit is £1,000,000 per year, covering all but the largest industrial solar installations in a single year.
First Year Allowance (FYA) — 50% Enhanced Relief
The 50% First Year Allowance is available for investments in qualifying low-carbon technologies including solar. Where a business exceeds the AIA limit, or where strategic accounting reasons exist for not taking full AIA, FYA provides 50% deduction in year one with the remainder entering the main capital allowance pool at 18% per annum (Writing Down Allowance).
PPA/Lease OpEx Treatment — Annual Deductibility
PPA payments are operating expenses — deductible against taxable profits in the year they are incurred. There is no capital allowance mechanism, but the payments reduce your taxable income year on year. For a 25% taxpayer paying 10p/kWh PPA rate on 500,000 kWh/year: the £50,000 annual payment reduces tax by £12,500 per year — a modest benefit compared to AIA's year-one relief of £100,000+.
Which Model Is Right For You?
Work through these three questions to identify the most suitable finance model for your factory.