Power Purchase Agreements (PPA) and why they are an attractive alternative to the Capex option for Solar PV.
Options for funding the implementation of a solar PV system have probably never been more varied for businesses around the UK.
Monetising this roof-space asset is an attractive proposition for many. Not only with benefitting from reduced electricity prices over many years but also by improving CSR (Corporate Social Responsibility) credentials.
PPA brings different choices
With the advent of the Power Purchase Agreement (PPA), businesses have a funding proposition that brings different options to investment decisions and opportunities to benefit when capital isn’t readily available.
Capital Purchase and ongoing costs
In some instances, businesses owners may see the capital purchase of this asset as the most beneficial approach, with potentially the highest perceived ROI (return on Investment) and a payback period that is relatively short. In many cases however, the overall cost of ownership is not always apparent, factoring in the liabilities during the life of the system is often neglected.
The ‘all-inclusive’ option
When funding with a Zestec Power Purchase Agreement (PPA) clients don’t carry the burden of maintaining the system, this is the responsibility of us the Asset Manager and is an important consideration.
Solar PV systems are not ‘load and leave’. Installations require an operations and maintenance programme to ensure they run smoothly, enabling them to generate the forecast electricity savings throughout their lifetime. This inevitably adds a financial burden over and above the capital purchase, not to mention the hassle factor of managing the process. Some businesses simply don’t have the experience or expertise to manage this type of asset, or indeed monitor its ongoing performance.
In Zestec’s case all our installations benefit from proactive monitoring and maintenance as part of the PPA, removing this overhead from the client.
Added to the ongoing costs are the recent increases in business rates for companies with a solar installation. These represent significant multiples on historic rates depending on the system capacity; with a PPA these rates do not apply as the asset is not owned by the business.
Capital deployment and IRR
Alongside ongoing management is another key consideration; what is the most effective deployment of available capital to generate the best Internal Rate of Return (IRR)?
At the end of the day company investment priorities will influence this decision and this is where the PPA represents a strong balance for businesses; allowing them to benefit from reduced and inflation protected energy prices yet also freeing up valuable capital to deploy in growing the business.
Somebody to own compliance
Another consideration is the compliance challenge, which, if not managed correctly will lead to downstream problems. With a capital purchase someone in the business must take responsibility for compliance and overlooking something can have serious implications. This compliance includes ensuring installations meet permitted development requirements with local authorities and that they don’t contravene any charges banks or lenders may hold over the property.
From a PPA perspective this is where all parties are aligned; to approve a project the Asset Manager must ensure that all the required permissions are in place; thus protecting both the client and the investor.
Summary
As in any funding decision, options are available and it will come down to what is best for the business now and in the future. What is crucial is to take all factors into consideration when coming to this conclusion.
Get in touch with Zestec today to see how we can help you.