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Commercial Solar: the financial side
Wednesday, October 28, 2020
It’s a financial proposition
Contemplating a commercial solar system is a financial proposition and therefore a salesperson must understand financial concepts both from a borrower’s perspective and that of a business owner investing their money into something other than solar.
Now for a scenario...
A business owner is contemplating a 99 kW solar system to negate their incredibly high electricity bill but this is one of several other options they have looked at.
Investing the money in the bank, spending more on marketing and advertising, or purchasing additional income-generating equipment are all viable options.
A business owner may ask themselves the following questions:
- If I go down the commercial solar option, do I finance, or pay cash?
- If I invest in a bank, how does this compare to solar?
- What will be the actual savings from solar?
- After x amount of years how much will I actually save?
The case study: 99 kW solar system
A renewable energy company is offering a 99 kW system at a cost per watt of $1.17 + GST and the levelised cost of electricity has been calculated at $0.20 kWh.
Let’s punch the figures from this case scenario into the calculator...
The total system cost is $115,830+ GST and the payback period has been calculated at 4.45 years with an ROI of 22.46%, no loan.
I will invest instead . . .
Let's say the business decides to invest the money in a bank:
- Interest rate is 2% PA
- Investment period is 6 years
- Compounded monthly
Interest earned at the end of the investment is $14,754.
So what about commercial solar . . . ?
The owner decides to look at the solar option and decides to loan money from the bank:
- Interest rate is 3.66% PA
- Loan period is 6 years
- Compounded monthly
Solar results are . . . .
What are the results?
How does the solar “stack up” against the investment?
Loan amount paid is $129,189 and this is a difference of $13,359 from the original cost of the system which was $115,830.
And. . . .
Let’s assume that the price of electricity did not increase over the 6 year period, yeah right!
Savings in electricity with no increase is:
- $150,346 - Total savings over 6 years
- $129, 189 over the 6 years
- Difference of $21,157
Total electricity savings are $150,346 and this assumes no increase in electricity and have included a solar panel degradation output of 0.7% per year plus $500 maintenance per year, increasing 2% each year.
Now if we realistically assume a 3% increase in electricity per year, the business will actually save $162,222 over the life of the loan and keep on saving for at least 25 years!
The Comparison . . . . Invest in the bank, or Solar?
And the winner is . . . .
With the investment you have an extra $14,754 but with the solar you have saved $33,032!
Investment vs electricity savings, interest rates
Longer periods, higher interest
Let’s assume a fantasy investment interest rate of 5.5% PA compounded monthly with the same solar loan interest rate of 3.66% and have increased the loan/investment period to 7 years.
The advantage of the increased interest rate for the investment disappears and we still do better with solar!
Investment vs Electricity savings, years of loan
"Cash positive from day one"
There is a lot of talk about being cash positive from day one. So what does this actually mean?
This means that the monthly payment is less than the savings in electricity made because of the solar and this is the ideal situation. Day one, cash positive!
Solar does not produce the same amount of energy all the time and this means that some months produce more than others.
That means some months are cash positive and some not, so ideally you have to look at being cash positive on an annual basis.
The business owner has a range of options in regards to how to spend their money and therefore a commercial solar system is offered as a financial proposition. Based on current interest rates for loans and investment, solar makes complete financial sense and the benefits of solar are ongoing for at least 25 years.
Note: this is a fairly simple look at solar and finance and is not meant to be taken as a blueprint for making important financial decisions. Greenwood Solutions takes no responsibility for how this information is interpreted or used. Please consult your financial advisor before embarking on any investment path.