Like any financial investment, solar energy can be a very involved decision. There are multiple factors to consider, multiple benefits to be aware of and multiple ways to finance your investment.
From Small-Scale and Large-Scale Technology Certificates to a business or homeowners return on investment, to the way that you might finance your solar system, there are many things to consider to ensure you are making the best decision for your business or household. Whilst purchasing a solar system outright will offer the greatest returns, this is not always an option and so it is important to understand what your options.
Small-Scale and Large-Scale Technology Certificates
Under the Federal Government rebate scheme, there are two system classes to consider. All systems which are 100kW or less come under the Small-Scale Technology Certificates (STC) classification. STC’s are paid out based on the size of your solar system, with 100kW receiving 1520 STC’s in 2020. This program is being phased out over the next 11 years.
There are benefits and limitations to this 100kW ceiling for STC’s. The benefits of the STC program include higher certificate values, larger volumes of credits paid in an upfront lump sum, and a simpler trading process. However, it is not uncommon for solar companies to limit system sizes to 100kW when the usage patterns of the business allow for a larger system and greater returns in the long run.
The reason for this is that a system which exceeds 100kW is incentivised under the Large-Scale Generation platform. Under this platform, a system’s size and generation capability will determine the amount of Large-Scale Technology Certificates (LGC’s) awarded to that system.
By calculating the annual Megawatt Hour production of a system – how many thousands of Kilowatt Hours produced – over the course of a year, multiplied by certain loss factors, the Clean Energy Regulator can allocate a volume of LGC’s to the owner of that system on an annual basis. Losses can include the efficiency of use of power within an organisation, voltage rise and drop factors based on cabling distances and more. These LGC’s are paid out annually and are much lower in both volume and price than their Small-Scale counterpart.
Return on Investment
Whilst there are multiple ways to finance a renewable energy investment such as a commercial solar system, outright purchase still offers the greatest returns. A premium quality solar system designed to provide the best performance and with the greatest cost-benefit ratio for the consumer will typically pay for itself in 3-4 years.
Obviously, there is a myriad of factors which can affect the returns on a solar investment. Rate of electricity, tariff structure, cost of the system, quality of components, mounting configuration, generation size, and more, will all contribute to the repayment period.
From a business perspective, depending on whether you are on a straight kWh rate (consumption only), it is likely that you will be paying mid 30c per kWh for your electricity, after any discounts. At this rate, it is reasonable to expect that your ROI for a solar system will sit between 25% and 30%. Higher kWh rates can result in ROI’s of as much as 35-40% in some cases.
If you are on a consumption and demand tariff, your rate for electricity becomes a bit more challenging as there are multiple charges to consider. You will be paying less per kWh for your usage but also paying for the volume of power you draw as a maximum. The repayment periods for a business on a demand tariff (kVA) can be slightly longer than one on a straight kWh charge.
As I mentioned earlier, there are multiple financing options for your renewable energy investment, each with their own benefits. It is uncommon for a business owner to have the expendable capital readily available to invest in a solar system outright. Not to say that some businesses don’t, or can’t afford to buy their system outright, but invariably there will be some other Cap-Ex project that takes priority and a lot of business owners opt to finance their renewable investment.
So, if I am not going to pay for it outright, what are my options?
The most common financing option, this option is a pretty straightforward loan, secured against a company’s financial history &/or directors guarantees, with principal and interest paid over an agreed period, normally 3-6 years. There are multiple clean energy investment vehicles or companies around, offering enticing interest rates and securing options to allow for relative ease of application.
Some financial institutions struggle with the idea of solar energy, seeing only the financial outlay and potential unpredictability of solar energy as a large risk and as such, offer higher interest rates and require greater security or assurances regarding loan serviceability. However, there are a few organisations who have recognized that if your business is solvent and trading well, that you will only be better off with a solar system given its ability to free up cash-flow and provide valuable savings/returns for two decades or more. They offer interest rates ranging from less than 3% to approximately 5.5%p.a. depending on a number of factors.
This option is almost always cash flow positive from Day 1 i.e. the $ savings from the solar power exceed the monthly loan repayments.
Power Purchase Agreements
A Power Purchase Agreement is probably the least popular financing option for a solar system. A Power Purchase Agreement is an agreement whereby a third party pays for your solar system and then sells your power at a highly reduced rate.
At the end of a pre-determined purchase period, typically 7-10 years, you will have the option to purchase the solar system from your provider at a depreciated rate. This can be appealing to businesses who wish to reduce their overheads in the short term, with the long-term goal of purchasing the generation source in the future. The shortcoming of such an arrangement is that you will still be paying a third party for all of your power. Whilst the rate of power is reduced, you are still dependent on an external party for your electricity supply at all times.
This is the least attractive alternative as it is cash flow negative albeit at a lower rate than doing nothing.
Regardless of which pathway you think is best suited to your situation, there is no argument that investing in a solar energy solution to decrease your cost of power, as well as your impact on the environment around you is a no brainer. With technology having taken massive leaps and bounds forwards over the past decade, your investment should last you 20-25 years, providing serious returns and having positive impacts. How you choose to finance it is up to you; when you choose to do it is a pretty easy one.
Contact us at P4B Solar today if you’re interested in Financing for a Residential or Commercial Solar System