HomeFeatures/AnalysisFive solar PV financing options for C&I businesses in South Africa

Five solar PV financing options for C&I businesses in South Africa

With the adoption of solar PV systems by commercial and industrial businesses now mainstream, the most significant consideration for companies is selecting the most appropriate financing option for their project. Charl Alheit, chief investment officer at SolarAfrica, looks at five options: PPAs, fixed roof rentals, lease agreement/equipment rental, upfront capital investment, and bank financing.

As years of mismanagement at energy utility Eskom results in continued power outages and energy tariff increases across South Africa’s industrial and manufacturing sectors, domestic businesses are increasingly looking to renewable energy alternatives to power their commercial operations.

Perhaps the most favoured alternative to state-supplied power, rooftop solar photovoltaic (solar PV) systems are progressively being considered the most readily accessible off-grid energy solution in South Africa.

According to the Department of Mineral Resources and Energy, South Africa’s solar resource is one of the highest in the world, with an annual 24-hour global solar radiation average of about 220W/m2.

When this is considered alongside the 300% increase in domestic electricity prices over the last thirteen years, the growing trend towards solar for businesses appears inevitable.

According to renewable industry organisation GreenCape, rooftop small-scale embedded solar generation systems remain the dominant renewable energy technology in South Africa due to price, technical maturity and ease of implementation.

The installed capacity of solar PV rooftop systems in South Africa has increased from 387MWp in 2017 to approximately 1.35GW in 2020/21, GreenCape outlines.

On the back of such significant market growth, numerous financial mechanisms to fund larger commercial and industrial solar PV installations and operations have emerged in recent years, including Power Purchase Agreements (PPAs), fixed roof rentals, lease or rental agreements, upfront capital investment, and bank financing options.

With the adoption of solar PV systems by commercial and industrial businesses now mainstream, the most significant consideration for these companies is selecting the most appropriate funding option for their solar project.

Power Purchase Agreements (PPAs)

PPAs are a popular choice among commercial and industrial consumers, owing to the fact that the installation, operations and maintenance of the system are fully covered by the solar services provider.

Most often, this funding mechanism includes insurance and performance guarantees, with the biggest advantage being reduced electricity costs from day one.

This allows business owners to enjoy the benefits of clean energy from a solar PV system installed at their premises, at no upfront cost.

A PPA includes the installation of a fully operating solar system but removes the hassle of having to maintain, monitor, operate and clean the system for years to come. Business owners can now enjoy solar energy and the savings it will generate with zero capital expenditure or operating risks.

Following the signing of a long-term agreement, a solar tariff is billed monthly, based solely on the amount of energy the business produces. This tariff increases annually at a fixed escalation, allowing businesses to accurately predict future energy costs.

This tariff is up to 40% cheaper than the national grid, providing significant savings each month and over the lifetime of the agreement.                                                                                     

Businesses that use large amounts of daytime power and operate five to seven days a week are likely to generate the highest savings from this funding model.

While ownership of the solar system will remain with the service provider until the end of the agreement, business owners have the option to purchase the system during the term of the agreement.

Various exit options are available should a business owner wish to end the agreement earlier, while any damage to the solar system will be fully covered by insurance.

Financing solar PV cost table: Full breakdown and comparison of costs between a PPA and solar system cash purchase.

Fixed roof rental

Fixed roof rentals have become a favoured choice for the owners of commercial shopping centres and strip malls, as a long-term roof rental agreement monetises their previously unused roof space.

The solar services provider pays a fixed monthly payment to the property owner for the use of the building’s roof space, which also produces solar energy for the property.

The property owner pays the solar services provider for the energy used based on Nersa or municipal rates, while all other costs, such as system maintenance, operations and insurance, remain with the services provider.

Lease agreement/equipment rental

Under a solar lease agreement, also known as an equipment rental, the installation, maintenance and management of the solar panel and its components is paid for by the solar PV provider, while the business pays a fixed monthly lease payment for the duration of the lease term.

The monthly payment is determined based on the estimated annual production of the solar system.

A lease agreement is unlike a PPA in that the consumer pays a fixed monthly amount rather than agreeing to purchase the power generated by the system at a set price per kilowatt-hour (kWh).

Unlike a PPA, your monthly solar lease agreement payments remain the same throughout the year, and the risk associated with the volume of solar energy produced and consumed resides with the property owner.

Upfront capital investment

Companies able to fund their solar PV project from existing cash reserves may find the upfront costs startling but the benefits appealing.

A medium-sized commercial system of 200kWp currently costs between R1.9-million and R2.1-million, excluding battery costs. Benefits to cash-funded systems include VAT deductions, as well as Section 12b tax benefits and carbon credits, which can result in additional cost savings of up to 28%.

However, the business is also solely responsible for all ongoing annual costs, such as installation, insurance, performance monitoring and management, which can amount to a minimum of R88 500 per year, along with exposure to the performance risk of the system.

Bank financing

Responding to increased interest by industrial and manufacturing energy consumers in solar PV solutions, several local banks have structured innovative finance agreements.

Absa, Nedbank, Standard Bank and FNB all offer loans for solar PV installations, with primary instruments being term loans, instalment sales agreements, asset and property finance, mortgage-backed business loans and access bonds.

The lending period for commercial installations ranges between 5 to 10 years, while the collateral requirement for the debt funding is often taken against the underlying property and the system.

The challenge with receiving finance from the banking sector is that since they don’t specialise in solar PV ownership, the solar production risk will remain with you and your monthly repayments will be fixed, irrespective of the system’s performance. Further, you could be using up valuable credit lines with the bank.

 

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The views expressed in this article by the author are not necessarily those of the publishers and/or association partners. While every effort is made to ensure accuracy, the publisher and editors cannot be held responsible for any inaccurate information supplied and/or published.

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