Power Purchase Agreements (PPA) and why they are an attractive alternative to the capex option for solar PV systems.
Options for funding the installation 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 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 when capital isn’t readily available.
Capital purchase and ongoing costs
In some instances, business owners may see the capital purchase of a solar PV system as the most beneficial approach, with potentially the highest perceived ROI (Return on Investment) and a payback period of c.8 years. In many cases however, the overall cost of ownership is not always apparent and factoring in the liabilities during the life of the system is often neglected.
The ‘all-inclusive’ option
When funding with a Zestec PPA clients don’t carry the burden of maintaining the system, this is our responsibility, as the Asset Manager and is an important consideration.
Solar PV systems are not ‘fit and forget’. Installations require an active 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, expertise or desire to manage this type of asset, or indeed monitor its ongoing performance. We routinely hear from owners who have not achieved their forecast returns from a capital purchase investment, because a laissez-faire approach to operation and maintenance has resulting in persistent under-performance or extended periods of unscheduled downtime.
In Zestec’s case, all our installations benefit from proactive monitoring and maintenance, removing this cost and responsibility from the client.
Added to the ongoing costs are the recent increases in business rates for companies with a solar PV installation. These represent significant multiples on historic rates depending on the system capacity; with a PPA business rates are typically lower and are payable by the investor not the business owner.
Capital deployment and IRR
Alongside ongoing management another key consideration is; what is the most effective use of available capital to generate the best Internal Rate of Return (IRR)?
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.
Increasingly, SME and large businesses alike are reaching the view that a higher IRR can often be achieved via an investment in their core business activities.
Somebody to own compliance
Another consideration is the compliance challenge, which, if not managed correctly may lead to downstream problems. With a capital purchase option, someone in the business must take responsibility for compliance and overlooking something can have serious implications. This compliance includes ensuring installations meet local planning requirements, local grid operator requirements, are installed and commissioned in accordance with all required standards and best practices and 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 the project is developed to the highest possible standards; thus protecting both the client and the investor.
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.