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A commercial solar system is a financial proposition so:
- A salesperson must understand financial concepts
- Both from a borrower’s perspective, and also
- From the perspective of a business owner investing their money into something other than solar
Case study: 100 kW system
A business owner is contemplating a 100 kW solar system to negate his incredibly high electricity bill but this is one of other options he has looked at:
- Could invest the money in the bank
- May spend more on marketing and advertising
- Purchase another machine
You need to know the value of money
Now money has a value and you have to understand the related concepts of:
- Present value
- Future value
- Net present value
An example of present value is the following:
How much do I need to spend/invest right now to achieve $110,000 with an annual return of 10%?
- Take the future value and divide by ( 1 + rate of return)
An example of future value is the following:
- How much money will I have in a years time if I invest $100,000 at 10% annual return
- Take the present value and multiply it by (1 + rate of return)
- $100,000 x (1.1)
Net Present value
Net present value is used to determine whether a certain spend or investment should be made.
In this example we will look at a commercial solar investment with the following key factors:
- 100 kW system
- Cost to the business is $100,000
- The W.A.C ( weighted average cost of capital ) is 10%
- The length of the investment is 6 years
- In other words what savings will the system accrue in this time in Net Present Value terms?
The assumptions around this particular system include:
- The system is installed in Melbourne, Australia, North facing
- Energy produced per 1 kW installed is 3.6 kWh on average
- Initial electricity price is $0.25 kWh
- Feed in tariff price is fixed at $0.7 kWh
- Electricity price increases 2% every year
- System maintenance is $500 and increases 2% every year after
- 80% of the solar goes to the loads, 20% to the grid
The NPV formula
The NPV formula calculates the present value of a series of cash flows, in this case electricity savings per year for six years, so $170,097.
Sounds good doesn’t it but it’s not the whole story!!
Not the whole story
Have to use the present value formula which is:
- Where FV= future value, in this case the savings from the solar
- R is the W.A.C.C, in this case 10%
- N is the year number, in the case of the first year this figure is 1
- We saved $27,644 in the first year but the present value is ($25,130.99)
The NPV formula
If we look at present value per year there is a steady decrease from $25,130 in Year 1 to $18,375 in Year 6 despite yearly electricity savings going up because of the rising price of electricity.
The NPV looks at the initial investment, $100,000, which is seen as a negative amount then adds up all the present value amounts year by year. In this case this is a good investment with an NPV of nearly $21,000. In regards to the IRR this is calculated when the NPV is assumed to be zero. In this case the IRR > than the WACC.
✅ The value of money has a time constraint
✅ The salesperson and business owner must both understand these concepts
✅ The Net Present Value concept allows assessment of an investment’s worth
If you’d like to see what Greenwood Solutions get up to in the real world of renewable energy, solar, battery storage and grid protection check out our industry and commercial pages: