Solar Power Cash Flow: Comparing Different Purchase Options
10th Aug 2020
Australia offers excellent conditions for solar power. The cost of solar panels and other system components is lower than in many other countries, and there are excellent government incentives that make the technology more affordable. In addition, the Australian sunshine makes solar panels more productive, and their output is valuable because it lowers the consumption of expensive electricity from the local network. However, a very important decision before deploying a solar array is how it will be purchased.
Companies can purchase the entire system directly, either with their own capital or by taking a loan. They also have the option of a solar power purchase agreement or PPA, where they pay for the electricity produced during a specified contract term. This article will conduct a simple financial comparison for all three purchase options, while summarizing their advantages and disadvantages.
Purchasing a Solar Power System in Cash
A cash purchase is straightforward – the company interested in going solar simply uses its own capital. Thanks to the low technology costs and solar incentive programs, it is now possible to install solar panels in Australia for less than $1,000 per kilowatt. With the abundant sunshine, and assuming favorable site conditions, each kilowatt of solar power capacity can produce over 1,500 kilowatt-hours per year.
The following is a simplified estimate of installation costs and productivity for a 100-kilowatt solar power system:
- Project cost = $100 kW x $1,000 per kW = $100,000
- Estimated annual production = 100 kW x 1,500 kWh per kW = 150,000 kWh
For a company that is normally charged 25 cents/kWh, this amount of solar generation would be saving $37,500 per year. The direct payback period is 2.7 years, which is excellent considering that solar arrays can last over 25 years.
Among all purchasing options for solar power, a cash purchase achieves the highest savings in the long term, since there is no interest payment. However, the owner must wait for a few years before achieving the first savings. There is also an opportunity cost associated with the upfront cost, which could have been used for other investments or for business operations.
Purchasing a Solar Power System with a Loan
When a solar array is purchased with loan financing, some of the potential savings are lost due to interest payment. However, the upfront cost becomes zero, and companies can cover loan payments with electricity savings. In this case, the savings start from the first month of operation, and the net cost of the solar installation becomes zero.
- A $100,000 loan with an interest rate of 6% and a term of 10 years would result in annual payments of $13,322.
- This represents less than 40% of the electricity savings achieved by solar panels ($37,500), which means the project essentially pays for itself.
- The downside is having to pay over $33,000 in interest during a period of 10 years.
- However, the $100,000 that would be spent upfront can be used for other investments.
Australia offers abundant financing options for business, while solar panels are very productive thanks to the local sunshine. Under these conditions, using loan financing for solar power is an excellent business decision.
Solar Savings with a Power Purchase Agreement
Like a loan, a solar PPA also reduces the upfront cost to zero, but there are some important differences. Instead of purchasing the solar array itself, the user pays for the electricity delivered over a contract term – 150,000 kWh per year in this example.
Assuming a PPA price of 15 cents/kWh, the difference with respect to the local electricity price is 10 cents/kWh. In other words, the solar PPA offers $15,000 in savings from the first year of operation. All upfront costs are assumed by the provider, which means these savings start immediately for the user.
A solar PPA offers several benefits beyond the zero upfront cost. Since the solar array is still owned by the provider, they are responsible for operation and maintenance. This includes replacing any components that reach the end of their service during the PPA term. Also, since the solar installation is managed and operated by experts, users can delegate responsibility over the system and focus on their core business. When a solar array is owned directly, on the other hand, the company must train maintenance personnel to keep the system in optimal condition.
With a cash purchase and loan financing, only the upfront cost of a solar array is covered. On the other hand, a solar PPA includes the operation and maintenance expenses in the kWh price. With this approach, companies can reduce electricity costs while relying on the solar provider for technical support.