Going Solar makes sense, but where to start and how to finance it?

by Michael Fahey | Nov 07, 2016
The recent spikes we have seen in electricity prices in some states, along with growing concerns about certainty of supply and an overall upward long term pricing trend has now made the installation of Solar Photovoltaic (PV) arrays even more compelling for many businesses. But with the myriad of different products, services and funding models on offer, it is no surprise that many are confused about how and where to start, and more critically, which model will deliver the best financial outcome for their business or organisation.
This article was originally published on LinkedIn by Energy Action CFO Michael Fahey.

The need to be across regulatory requirements, while also being aware of any federal or state government finance funding options available may also add to the confusion. In light of all of this, getting some expert advice is a good place to start – Energy Action can certainly help here.

This article presents a broad overview of the two most common Solar PV models currently being promoted to businesses, how they are funded, some of the government finance funding options that are available, and which industry sectors might be best suited to use any of these.

Energy Action recommends using third party capital in most instances to fund commercial and industrial solar installations, with the primary benefit (among others) being that no initial upfront investment is required, thus preserving your capital. This can be achieved via a Power Purchasing Agreement (PPA) or an Operating Lease, which are the two most common solutions currently being promoted.

Under a PPA, the business enters into a service agreement with a third party that installs and owns the Solar installation, paying the provider for electricity generated at an agreed price over a fixed term. The PPA is subject to oversight by energy market regulators.

An Operating Lease involves a fixed monthly payment which covers the cost of the installation plus an interest component, underpinned by a performance guarantee. Operating Leases do not have the same degree of regulatory oversight as PPAs.

Both of these models are fairly complex and it is often difficult to obtain the transparency required in order to undertake the necessary financial analysis. For example: What will the real price advantage be (compared to the grid)? What are the CAPEX and finance costs? What is the value of Renewable Energy Certificate (REC) offsets? What will the value of the asset be at the end of the contract?

There are many factors to consider in deciding which model may best suit your business – this is where an expert like Energy Action can help to demystify things and advocate on your behalf to secure the best deal with a third party provider.

Another important consideration is the rapid and ongoing advancement in both Solar PV and battery storage technologies, which has been prevalent in consumer markets. This has no doubt resulted in some in the commercial and industrial sector adopting a ‘wait and see’ approach in anticipation of improved technologies and lower costs.

However, while there will no doubt be significant improvements in Solar PV performance and the cost effectiveness of battery storage over the next 10 years or so, there is still much to be gained by acting now. A strategic approach is to structure a PPA or Operating Lease to allow for technology upgrades over the life of the contract, meaning that you will not be stuck with an obsolete system.

In some circumstances, it may be beneficial for a business or organisation to fund their own Solar PV installation ‘upfront’. In this case, there are some attractive government funding options available.

The Clean Energy Finance Corporation (CEFC) is currently offering a number of low interest finance options for eligible energy efficiency projects, including Solar PV installations, in partnership with three of the four major banks – some of these offer 100% financing.

But what kinds of businesses should be considering Solar PV as a possible solution to lower their energy costs? In the past, due to the need for significant upfront CAPEX and longer payback periods, this was mostly restricted to large site users such as those in the manufacturing/processing or agriculture sectors.

However, rapid improvements in Solar PV performance in recent years, combined with lower CAPEX requirements and higher grid energy costs (and consequently shorter payback periods), now make this a feasible solution for a growing range of businesses and organisations across a diverse range of sectors. These include education, local government, community groups and sporting clubs, aged care, hospitality and retail, to name just a few.

Another notable trend recently has been the increasing use of Solar PV in the commercial building sector. This includes both owner occupiers and those with long term leases in commercial buildings, such as high rise office buildings or shopping centres.

So no matter what business or sector you are in, chances are you have the opportunity to significantly reduce your electricity costs and improve your bottom line with the installation of a Solar PV array. And of course, the positive contribution you can make to the environment should not be disregarded.

But in order to ensure that you are getting the best deal possible and that any contract is tailored to suit your needs (and your balance sheet) make sure you speak to Energy Action. We offer a completely ‘agnostic’ service and we can manage the whole project for you, and even help to secure the right finance funding.

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