When considering solar energy finance options, many South African business and property owners are turning to power purchase agreements (PPAs) to fund their shift to green energy. This is simply because they are one of the easiest and cost-effective means of joining the renewable energy revolution.
Are you considering making the move to solar but aren’t sure what financing route is right for you? It’s important to know your options, including those that involve capital expenditure (e.g., outright purchase) and those that require zero capital expenditure (e.g., a PPA).
In this article, we go over the options so you can make an informed decision.
In an outright purchase, the person or organisation wishing to benefit from the solar energy finances the installation themselves and owns the system from day one.
Owning your own system may sound like a good idea, but this option comes with a significant warning. This is that the owner carries all the risk. Besides the financial risk, you would ultimately be responsible for the everyday operation, maintenance, and insurance of the system. These costs must be paid separately, over and above the significant capital outlay to install the system.
In effect, choosing to self-finance in this way means that you will have to run your own small power utility in addition to your main business!
Many South African banks have begun to offer solar energy finance products to their customers, particular within the commercial, industrial and agricultural spaces. One of the major benefits for such businesses is that it allows them to claim a Section 12B tax allowance, resulting in effective savings of 28% on the system.
However, bank solar financing also comes with certain risks. For one, going this route may eat into your business’s lines of credit with your bank, which you may wish to use elsewhere. Bear in mind that a 1 MW solar plant currently costs R12 million to build. Many businesses choose rather to keep their lines of credit open by using alternative financing solutions.
In addition, as with an outright purchase, bank financing would leave you with the responsibility and risk of managing your solar plant. Even if you have an operations and maintenance contract with an engineering, procurement and construction company (EPC), you will spend considerable person-hours and business resources dealing with insurance companies, the EPC, and other service providers should something go wrong.
Power purchase agreements are a solar energy finance solution that offers business owners protection against the risks and headaches of financing, operating, and maintaining a solar installation. This is in addition to the significant tariff savings they offer.
Under a PPA, a solar services provider like Decentral Energy owns and operates the solar PV system that is installed on a business owner’s property. The business owner then pays only for the energy generated by the system. Moreover, we work with specialist solar services providers to handle all the details of operations, maintenance, security and insurance, saving you and your business significant time and energy.
These are financed options, meaning that they require zero capital expenditure on your part. But they also include buy-out options that allow business owners to purchase the system after a period. For Decentral PPAs, this is typically three years.
PPAs typically come in two variations: “take or pay” and “no take no pay”.
Under the terms of a “take or pay” PPA, the customer pays a fixed monthly fee for all the energy that a solar system produces.
This is an option that is typically offered within the agricultural sector, where energy use varies throughout the year. During seasons in which a farmer uses less energy than the system generates, the excess energy can be fed into the grid and “banked” with Eskom for use within 12 months.
In a “no take no pay” solar PPA, the customer pays only for the energy they use. That is, if you don’t take the power, you don’t pay for it. It’s like a “pay as you go” contract with no fixed monthly fees and no upfront costs.
Have more questions? Our PPA FAQ has answers to the most common queries we receive.
