That fossil fuel is running out is a given. What better option of green energy is there than the inexhaustible supply of an non-polluting character of solar power. However, what is the best method of making this investment. In this article common possible investing options are discussed with their different forms, upsides, downsides profitability and risks.
PPAs
A PPA is an power purchase agreement. In general, it is a contract with a set price per kWh or a percentage of the market price per kWh. The energy used is paid per amount kWh used. The solar system is owned by an investor who distributes the energy to the other party (IRENA, 2018).
Different types of PPA
There are two different types of PPA, namely: sleeved and virtual. First, a sleeved contract, is an agreement under which the energy is sold to the off taker and the same energy is used by them (IRENA, 2018). A virtual PPA is a contract where the energy is in theory sold to the off taker but is in reality not used. The user uses energy from the grid, but by utilizing the PPA they get the certificate of using green energy (REC/GO) (IRENA, 2018).
The upsides of a PPA
Firstly, the system is owned by another party and therefore the risk of producing less energy is at the other party. Whenever the solar panels produce less energy than stated in the contract the owner of the panels has to buy the missing energy from the grid and sell it to the offtaker for the fixed, cheaper PPA price. Furthermore, the contracts are set for a longer period of time, so price risks in the future can be hedged. This assumes that inflation together with increasing demand will increase energy prices in the future. The electricity price is paid per kWh so no substantial initial investment is needed (Next-kraftwerke, 2024).
The downsides of a PPA
Firstly, the contracts are long-term, so the prices of energy can possibly drop to below the PPA price, because there is a set amount that needs to be bought the offtaker will possibly occur a loss in the long run. Moreover, the contracts are complex and coming to an agreement takes much time, different risks have to be included in the price analysis which make it hard to come up with a set PPA price. Besides that, accounting costs have to be included too (Next-kraftwerke, 2024). The maintenance costs are for the investor, which implies that you do not lose time scheduling maintenance and repairs.
The profitability of a PPA
Compared to the other types of financing a PPA has a higher annual price of the energy. However, the risks of not producing are not on the offtaker so there is certainty that the amount of electricity stated in the contract is delivered. The price of a PPA is usually lower than the price of the grid and can therefore foster substantial savings.
Risks
The risks associated with solar panels are not on the offtaker, they are on the owner of the project. They bear e.g. the risk of non-production. Additionally, when for example a solar panel breaks down maintenance and operations are usually not with the offtaker . The only risk the offtaker encounters is the price of energy falling and paying too much per kWh at the end of the contract lifespan.
Leasing solar panels
A solar lease is a third-party ownership. The company is leasing the solar panels for a set amount per month. The consumer is entitled to the yield of the solar panels without paying more, as the system is leased by the consumer. The system is owned by the third-party. Depending on the type of lease they are monitoring and maintaining them.
Different types of lease
The first form is financial lease. In this form payments are made over a longer period of time, the lease it the owner of the property and is responsible for the maintenance and repair of the solar panels. Furthermore, the lessee has to pay much more than the cost of the equipment or property as the lessor does not render any services. An additional form of leasing is operational lease, this is when an asset is used in a specific period. Lessor bears the risk of obsolescence and incidental risks. Additionally, the maintenance and repair costs are for the leassor. The lease is allowed to be terminated after giving notice. Lessor does not realize full costs of the lease which implies that they will not pay this amount as a leassee.
The upside of a lease
Firstly, the payments are equal every year without a massive increase in the beginning of the investment. Moreover, assuming operational lease, the maintenance costs are for the owner/ leassor and not for the host/ leassee. Furthermore, certain amount of energy output is guaranteed by the lease company, depending on the contract. This has the same benefits as an PPA, as the lease company will have to buy energy from the grid when it cannot provide the contractual amount of energy. As consumer you will only have to pay your lease payments.
The downside of a lease
To begin with, the operational expenses are for you (depending on the type of lease). The risk of the panels not producing is for you, when you have a financial lease instead of an operational lease, so when there is no enough energy you have to buy the expensive energy from the grid. The return on investment is lower than financing a system (Kemper, 2023). Furthermore, a lease has a long contract agreement, so it is difficult to terminate before the end date. Continuing, the leassor calculates a leasing fee, therefore, the solar system costs more than originally due to the revenues the lease company wants to make. Moreover, there can be price escalators for the system, implying that the price you pay will be higher every year, around the 2.9%-3.9% (Kemper, 2023). Lastly, the solar tax credit and other incentives created for buying green energy options, are not for you but for the leasing company.
Profitability of a lease
The monthly payment of a lease are lower than of buying the energy from the grid. Depending on the type of lease, your profitability is not having to pay the maintenance costs.
Risks of a lease
The long period of the lease is a risk that has to be taken into account. Additionally, when you are not able to pay your lease payments a lawsuit might follow with all of the legal costs adding to the costs of the lease when the court obligates you to pay the contractual price for the lease.
Financing solar panels
When solar panels are financed a loan is taken out by a second party, this can be a bank or another investor. There is a percentage of interest paid every year to the lender as a fee for the loaned money. This percentage depends on the credit score of the lending party, as the lender asks a risk premium for default (Irby, 2022). The solar panels are your property.
Different types of loans
There are several different types of loans; secured, unsecured, long-term, short-term, amortized and re-amortized. A secured loan required an asset as collateral , the lender may foreclose as you default, it takes longer to approve a loan, the interest is sometimes tax-deductible. Lastly, there are nor undisclosed fees (Mooney, 2023). Furthermore, an unsecured loan, in contrary, does not need an asset as collateral for the loan, therefore, there is no foreclosure if you default. Moreover, the loan can be approved the same day. Continuing, the interest is not tax deductible. Lastly, there can be undisclosed fees involved in the unsecured loan.
A longer loan period has a higher interest rate with lower monthly payments because there are more payments being made, higher total cost of ownership as there is more interest paid (Mooney, 2023). With a short term loan, there is a lower interest rate, together with higher monthly payments as there are less payments made during the course of the loan. The total cost of ownership are lower as there is less interest paid.
Furthermore, an amortized loan has the monthly payments and terms set. This is mostly the case for secured loans. On the other hand, there are re-amortized loans, this is mostly applicable to unsecured loans. A lump sum is paid after a certain amount of time and the monthly payments are reduced after this, the monthly payments are not set in stone.
The upsides of a loan
Firstly, the asset is yours for the entire lifespan of the solar panels. Therefore, the value of your property increases as you own the solar panels, it makes it easier to sell your property as the market value of it increases. Furthermore, you do not have to pay the entire project up front but you will save on your electric expenses from the beginning. Moreover, you are entitled to the subsidies for installing the solar panels as you are the owner of the system. Due to the interest paid to the loan tax benefits could be enjoyed. Continuing, the electric expenses are fixed for the amount of energy produced in the system. The return on investment is bigger compared to someone with a lease or a PPA (Mooney, 2023). Lastly, your money is not tied up in the system (Understand solar, 2024)
The downside of a loan
Firstly, the return on investment is lower than buying the system with your own money, as a portion is paid as interest fee. Additionally, the break-even point of your investment is later, as you have to pay more money for your investment. Furthermore, it is hard to find a loan which covers the whole system including batteries, this has to be found or the money for the battery should be cash money before installing the system. Lastly, the agreement can be confusing resulting in the consumer being trapped in unfavourable terms and conditions for the consumer.
Profitability of a loan
The total costs of the system are higher than a cash investment as you pay a risk premium in the form of interest to the lender. However, the overall costs are smaller then other forms of financing.
Risks of a loan
Depending on the type of loan, with default the risk of losing your collateral is a probability. This could imply loosing your house when there is no longer the ability to make the loan payments. The risk of the system not operating properly is yours to bear, so the lacking amount of energy is something you have to buy from the grid.
Conventional investing
It can be described as an investment made with cash, without utilizing a form of financing. The money was saved prior to the investment.
The upsides of making a cash investment
Firstly, the savings are the highest, as no money is paid in a form of interest or a lease premium. Furthermore, you own the system, therefore, you are eligible for tax credits, subsidies and the solar panels create added value to your home which makes the market price of your house higher and makes it easier to sell. The break-even point is closer to the present than other options (Understand solar, 2024).
The downsides of an upfront investment
The first downside, the entire system has to be financed up front with an initial investment, which can be a high amount to pay at once. Consequently, a large sum is bound for a long time period. (Understand solar, 2024).
Profitability of normal investment
All of the electricity that is produced is free, besides the maintenance costs, therefore, the monthly energy costs are low.
Risks of normal investing
The system is owned by you, therefore, weather and other forms of malfunction of the panels are directly impacting you. This implies that you have to buy the expensive energy from the grid when there is less energy produced than needed together with paying for the repairs in case of damage. Lastly, the investment is already paid so there is no risk of default in this type of financing.
Conclusion
PPA, leasing, solar panels, taking out a loan, or making an investment with cash upfront are forms of investing in solar panels. The type of investment is dependent on your personal preferences. This article aimed at aiding making the choice in you situation.
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