Solar PPAs are an affordable way to access the benefits of solar electricity

5 FAQs about solar PPAs

In some of our previous posts, we’ve alluded to the benefits of a solar PPA: both as a way to provide more options for business owners wanting to go solar, and as a way of reducing costs in certain sectors. At this point, you may be convinced that solar finance is an affordable way to access green energy for your company, but you may have a few questions. In this blog, we explore the 5 most common questions about the most common form of solar finance, the solar power purchase agreement or PPA.

Why a PPA?

As we mentioned in the previous blog, a solar PPA usually enables an electricity consumer to utilise solar energy at a rate that is cheaper than the existing utility. In addition the ownership of the solar system remains with the PPA provider, and the user only pays for the electricity that they consume, rather than for the overall cost of the solar system – making it an affordable choice for several sectors. Below follow some of the most frequently asked questions about solar PPAs.

1) How long does a solar PPA last?

In fact, this question gets asked so often that we wrote an article about how long solar PPAs are already, and if you’d like a detailed answer to the question, have a look at that article. The summarised answer is, “it depends”. Whilst as a rule of thumb, the longer the PPA, the greater the  immediate cost-savings will apply, many businesses prefer to enter into a shorter PPA period for a higher tariff, after which time the system ownership is transferred to the energy user. It all depends on the requirements of the client, as well as the overall objectives of the project.

2) Do I have to own the building to enter into a solar PPA?

PPAs ideally take place between a building owner and an energy provider, since the construction and ongoing maintenance, as well as energy distribution throughout the building, will require the building owner’s input and buy-in. However, if the building owner agrees to make the rooftop available for the solar system and the agreement takes the building and end user into account, tenants may be able to enter into a PPA.

3) If it isn’t sunny, do I still pay?

Depending on the type of PPA agreement you enter into, you shouldn’t have to pay if the system is not generating energy (take into consideration though, that even on cloudy days solar systems generate a good amount of power). However, the opposite does apply: if it is very sunny and producing more than what the building is consuming, the client may be liable for a minimum payment for the energy that is wasted, should it not be used. That is why it is essential to ensure that the system is sized correctly.

4)What happens at the end of the PPA?

Depending on the type of agreement, the system may transfer over to the client who then will take ownership of the solar system. This could work well if the building owner wishes to take  ownership of the system after a period of time. However, there can also be “early exit” options, if the property owner is concerned that the building might be sold during the PPA term. Again, each situation is different, and when entering into a PPA it is best to check if the agreement contains provision to either buy the system, or to get the new building owner to assume the PPA, should the building be sold.

5)What is included in the PPA tariff?

Depending on the type of agreement you enter into, the tariff will include the costs of designing the system, procuring all necessary components, and constructing the system on the suitable rooftop or ground-mounted area so that the solar electricity is readily available for the client. The tariff also includes the costs of maintaining the system on an ongoing basis, such as cleaning and part replacement as needed. Typically, these combined costs will be similar, or less than utility based power when comparing on a per-kWh basis.

 

Are you interested in finding out more? Contact our solar finance department to learn more about our solar financing options.

Fair Cape Dairies 100 kWp solar system

When cost reduction is king: 3 sectors perfect for solar finance

If you’re in business in South Africa, you’re likely feeling the squeeze of a slow-growing economy. Whilst some sectors have been more affected than others, it is safe to say that cost reduction remains a top priority for most facilities managers in today’s economic environment. At significantly lower cost to coal-based power, solar PV is a perfect solution for reducing overall electricity costs. However, for those that do not have the capex to outlay for the purchase of a new system, solar finance options remain a good choice. In this post we’ll explore three sectors that lend themselves particularly well to solar finance.    

What is solar finance?

Solar finance usually involves a Power Purchase Agreement, or PPA, between a producer of electricity and an end-user of electricity. In the case of solar PV, this usually enables an electricity consumer, such as a building, to utilise solar energy at a cheaper rate to the existing utility. In addition, although the solar system may be installed on the user’s rooftop, the ownership of the system remains elsewhere, and the user pays for the electricity that they consume, rather than for the overall cost of the solar system.

  1. The Manufacturing Sector

Industrial processing, particularly the manufacturing sector, remains one of South Africa’s most important, given the potential to create and maintain jobs. However, in a weak economy, manufacturing is one of the first sectors to suffer: and South Africa is lagging behind its regional peers. Although South Africa needs support and policy certainty when it comes to manufacturing, it is also of chief importance that each individual facility maintains its profitability through slick and efficient and operations – and this should include using the cheapest energy.

At a much lower LCOE than grid-based power, solar is a great option for manufacturing businesses. Solar finance is especially relevant as manufacturers are not necessarily interested in owning and maintaining their own solar system – they just need to access affordable and reliable power. By entering into a solar finance option such as a solar PPA, they can maintain low operating costs and remain competitive in a struggling economy.

Dynachem Industrial manufacturing facility

Dynachem Industrial manufacturing facility, 60 kWp

  1. The Agro processing Sector

Agro processing is a subset of the manufacturing industry but focused on processing raw, agricultural materials. A key growth sector in South Africa, Agro processing has been emphasised by the Department of Trade and Industry, as well at the Eastern Cape’s Department of Economic Development, and for obvious reasons: it accounts for almost 14% of South Africa’s manufacturing sector.

Similar to the manufacturing sector, agro processing runs on a tight margin and reducing operating costs are welcome. Although the input material costs may fluctuate significantly depending on the seasons and weather, entering into a solar PPA will ensure consistently low electricity prices for the processing of the raw materials.

As an added bonus, agro processing plants are often situated in rural areas, where there is access to adequate land for ground-mounted PV solutions, or large agricultural buildings for  rooftop PV solutions.

Fair Cape Dairies 100 kWp solar system

Fair Cape Dairies 100 kWp solar system

  1. The Hospitality and conferencing sector

The hospitality sector is undeniably important to South Africa, with it contributing 9.3 % of the countries overall GDP in 2016. However, the sector is also facing challenges – as disruptive technology such as AirBnB continue to grow and tightened budgets mean less cause for business conference travel.

As any facilities manager of a hotel or conference centre will tell you, running a well-oiled ship is a key aspect of ensuring that their facility remains competitive. This means finding innovative ways to ensure costs are kept to a minimum. When budgeting, planning is very important, particularly because there are several variables year-on-year that can affect the overall cost of maintaining the facility.

This is why a solar finance option is perfect for the hospitality sector: entering into a solar PPA will ensure a fixed escalation on the cost of electricity for several years – meaning greater control when planning energy costs. Ensuring that the building management system is also optimised toward solar energy – for example, ramping up the aircon mid-morning rather than early morning – can ensure even greater savings. The bonus with a PPA, furthermore, is that the system will be operated and maintained externally – giving facilities managers one less thing to worry about.

Century City Conference Centre goes green through solar energy installed by SOLA Future Energy

Century City Conference Centre 260 kWp solar system

Solar finance options are fast-growing way of tapping in to the cost and environmental benefits of solar power. Although these three sectors here are ideal for a solar finance option such as a PPA, it is not only these sectors that can benefit. Contact us to get a sense if a solar finance option will work for you.

Solar finance options make solar PV available to large businesses in Africa

Finance options for rooftop solar PV in Southern Africa

If your business is considering a solar PV system, chances are that you have looked at the advantages of the system in terms of the reduction of electricity acquired from the national grid and reduced carbon emissions, but the most important question will remain: how will a solar system save money for your business?

Although many companies will choose to purchase their solar PV system outright – meaning that after paying a once-off amount for the system, they’ll be able to use the system’s free energy over the next 25+ years – this is not the only option available to go solar. As opposed to purchasing a solar system outright, there are several solar finance options requiring little to no upfront costs, allowing more flexibility for a company.

For companies that don’t want to outlay capex to acquire an embedded solar system for their building, a financed solar solution is a great way to enjoy the benefits of solar – including reduced electricity costs and carbon emissions – without the upfront capital. Solar financing options generally allow businesses to pay only for the solar energy they use, depending on the type of agreement that is entered in to. The following blog explores the various solar finance options for commercial and industrial businesses in Southern Africa.

Introduction to solar finance

Simply stated, solar finance is a way to enjoy benefits of solar PV without the upfront capital costs. Instead of owning the solar system from day 1, businesses can “rent” a custom solar system through various solar finance options. Businesses can therefore still enjoy a diversification of energy sources and reductions on energy costs, without acquiring the solar system themselves.

Solar finance could be a particularly appealing option if:

  • A business does not have capex budget for the cost of a solar PV system
  • A business has a portfolio of buildings and does not want to buy separate PV systems for each; removing the “hassle factor”
  • A business would like to achieve electricity cost savings without impacting the balance sheet
  • A business wants to plan accurately for costs of electricity and wants greater stability with regards to tariff increases

A solar finance option will still entail a custom built embedded solar system being installed on the client’s building, but instead of ownership for the system being with the building owner, it will belong to the finance provider. In this way it differs from wheeling green energy or buying renewable energy certificates. With an embedded solar system that doesn’t belong directly to the business, there is little reason to get very involved in your building’s electricity supply – as long as the power is efficient, reliable and cost effective. Furthermore, dependent on exact structure of the agreement, the solar asset remains off balance sheet, allowing for a greater return on assets.

In contrast, owning one’s own solar system means that the building will have its own embedded power generation that belongs to the business. If the business has a good Operations and Maintenance contract in place and wishes to spend Capex upfront, this is a good option.

However, business owners may want to have even less involvement: as long as the cheapest and most reliable form of electricity is available. In this case, it pays to enter into a solar Power Purchase Agreement with a company specialising in solar PV, who will concentrate on all aspects of the system’s design, operation and maintenance over the lifetime of the system. The business can thus maintain its independence, only paying for the electricity that it uses.

Market overview of solar finance options

There are three types of solar finance agreements which are generally used for commercial and industrial business owners in Southern Africa. They differ slightly in scope and objectives, but the outcomes are similar.

  1. The solar Power Purchase Agreement (PPA).

The first and most common solar financing option is the solar Power Purchase Agreement (PPA).

A business who enters into a PPA agreement will only pay for the electricity that the system generates on a monthly basis, similar to municipal or utility power. This tariff will increase gradually over the years, but dissimilar to utility tariffs, the increases are usually at a fixed escalation that is agreed upon upfront, shielding business from price volatility.

Often  included in this agreement is an “early purchase option”, or an option to purchase the solar PV system anytime after an initial period. This enables flexibility for the business, should they decide at a later stage to purchase the system rather than continuing to pay for the solar electricity through the PPA.

At the end of a PPA term, the client is usually offered the option to purchase the system for it’s residual value or the system ownership automatically transfers to the client for no value. This is an important matter that can affect the starting tariff of a PPA and potential clients must make sure they know who the system belongs to at the end of PPA before entering into it.

  1. A roof rental agreement

A roof rental agreement is the second type of solar finance commonly used. In this type of agreement, a business leases their rooftop to a solar provider who builds a solar system and enters into a PPA to sell the energy from the system. The company entering into the PPA does not necessarily need to be the same as the company leasing the rooftop, which allows for several possible arrangements.

For example, a building owner with tenants could earn rental income from having a solar system installed on their roof and then have their tenants enter into a PPA, who would benefit from cost savings of the PPA. Alternatively the building owner can be the lessor of the roof rental agreement as well as the offtaker of the PPA and decide how to pass on the PPA savings to his tenants.

This option provides commercial building owners a yield enhancement of their property, turning previously unused roof area into income-making asset.

  1. An equipment rental/lease agreement

The third common form of solar finance is an equipment rental or solar lease agreement which is very similar to a PPA, in that a client pays a monthly fee towards the use of a solar PV system. The major difference with this type of solar lease agreement is that the fee is not linked to the output of the system but is rather fixed. In other words, the client would pay a similar amount, agreed in advance, every month, rather than paying for the energy that is generated in a specific month based on an agreed-upon tariff.  

Fixed tariff escalations: risk or reward?

For conservative business owners, signing on to a fixed tariff escalation for energy costs might seem risky. After all, what happens if the costs of state power go down significantly in the coming years?

This is a fair question, and the best way of mitigating this risk is to ensure that the fixed escalation on a solar PPA will be significantly lower, on average, than the utility’s escalation. In general, tariff escalations for many Southern African state utilities are quite high and fluctuate significantly year on year. Generally PPA tariffs increases range between 5-10% per annum, whilst Eskom and NamPower have had 10-year average increases of 13.8% and 13.4% respectively.

The graph below demonstrates the average tariff increases for South Africa and Namibia’s utilities over the last 10 years. Whilst some years, the increase was lower than the 6% increase typical of a solar tariff, the average increase is much higher than 10% (the grey line demonstrates a typical PPA tariff increase of 6%).

PPA tariff increases in South Africa and Namibia

Furthermore the discount offered by the PPA in year one offers further buffer from the PPA tariff ever crossing the utility tariff.

Conclusion

Solar financing readily makes clean, renewable energy available to a range of energy users in the commercial or industrial property environment. Offering both flexibility and stability, they are a very helpful way of promoting the accessibility of solar PV solutions to business owners across Southern Africa.

Do you have a business that could benefit from a solar finance solution? Contact us for more information.

 

solar PV for commercial and industrial property

Installing solar on your commercial or industrial property? 6 questions you need to ask

Installing solar PV systems on commercial or industrial property has become a commonplace practice, given that property investors generally look at the long-term value of their assets. Since solar provides consistent, affordable and clean energy over a 25 year lifetime, it is not surprising that commercial and industrial properties are investing in solar. However, given the flurry of investment, there are many solar system providers – and even more opinions around what is important when installing a solar system. Investing in solar PV is an incredible investment, if it is done correctly, but as someone specialising in property development, you might not know how to judge if a solar system will be done in a way that ensures optimal ROI (Return on Investment). In the following blog post, we explore 6 different questions that are essential to commercial and industrial property owners when going out to procure a solar system.

A beginners buying guide to C&I solar PV – the essential components

At its most essential, a solar PV system harnesses the energy of the sun and converts it into electricity for use. However, in terms of how this energy is harvested and when and where it is deployed, there are a range of variables that can significantly impact both the cost and the output of the system. The first step to understanding if your commercial property would benefit from solar is to understand your energy tariff. By doing this, you’ll be able to see if a typical solar tariff will beat what you’re currently paying. In order to find out the detailed costs and expected returns on a solar project for a commercial or industrial building, you would then need to commission a feasibility study, or solar proposal, that will show some basic figures on the return for your property.

There are a few essential components that should be covered in a solar feasibility proposal:

  • The size of the system (DC) and the proposed output (kWh). This is a basic indication of how much power the solar system would output based on the size of your building. There are various different ways that this can be optimised – which will be explored later in the post.
  • What the system will cost, given a comparative option of upfront capital cost (capex/ EPC cost) or a financed solar solution (PPA). This would show what the ROI would look like on various options and help you decide what is most relevant to your building and business model.
  • If you have load data for your building or facility, a good feasibility study should include a load analysis. If no load data was provided, the study should explicitly say this, so that there is no confusion as to the accuracy of the figures in the proposal.    

Once you have received a feasibility study on your commercial or industrial property, it is important to make an informed decision on the procurement of the system – and that’s where this article aims to help. The following 6 questions to ask when buying solar for commercial and industrial property should guide your thinking:

1. What is the optimum size of the system?

It may seem obvious, but the size of a solar system is one of the most key aspects of ensuring that solar PV works for your business. This is because there are several factors – such as operational requirements, roof space, reliance on diesel, etc., that all factor in to the optimal size for a PV system. When assessing a solar feasibility study, it is important to check that there is optimal configuration of the system design: that all components deliver their maximum value and make the system more efficient.

For example, you can get optimal value from solar inverters by making sure that they are not overloaded or operated outside of the manufacturers instructions. Similarly, solar modules might perform more efficiently if surrounded by a cool breeze. When assessing the property’s energy load profile, it also might add value to slightly oversize the system, or incorporate a small battery, in order to reduce the property’s demand charges (more on this later). By paying a slightly higher fee for the added components, the saving on demand costs could be significant, depending on the tariff structure and the building’s operations.

Value engineering will ensure that environmental factors, energy load, building design and component functionality are all taken into account to ensure the most efficient system size for your property and budget.

value engineering ensures better cost effectiveness for solar PV on Commercial and industrial property

2. Will the system meet legal requirements?

This question is almost as obvious as the first question but it is one that is, surprisingly, often overlooked. There are a large amount of compliance and legal standards when it comes to installing a solar system, and in order to make sure they don’t have any legal hassles, commercial property owners need to make sure that the solar system provider will ensure compliance with all relevant requirements.

Compliance with legal perimeters changes in each country, so the service provider will need to be familiar with the requirements for each particular property location. In South Africa, the following basic compliance rules apply:

  • Solar PV systems under 1 MW in size must have embedded generator approval from the relevant municipality
  • In some municipalities you may be required to go through a building plan approval process, especially for carport or ground mounted installations
  • For solar PV systems over 1 MW, the current legislation stipulates that these systems must have an electricity generation licence  from Nersa (the National Energy Regulator of South Africa). However, it is expected that this process will become slightly easier for projects between 1  – 10 MW in the coming months
  • If it is a battery coupled or off-grid system, it currently does not have to be registered, however this might change in the future depending on how Nersa regulations are updated going forward
  • The system should also meet technical compliance standards. It is important, for example, that the system is compliant in terms of technical regulations for electricity connections – (NRS regulations 097-2-1 – grid connection of embedded systems). A qualified electrical engineer is needed to sign off on this.  
  • Structural compliance – ensure that the structural design of the system is signed off by a professional engineer (Pr Eng).
  • Some PV installations may require additional regulatory approvals such as environmental impact assessments, rezoning, etc.

3. What do good quality components look like?

From just a simple Google search for solar panels, one will realise that there are a range of manufacturers out there, and trying to find the best quality vs price components can be daunting. The most important thing to evaluate when looking at the type and quality of components used in a solar system proposal is that the warranties and guarantees meet the requirements of the length of the investment. In terms of investing in a solar PV system for a commercial property, this usually means 20 to 25 years.

  • Solar modules or solar panels form the basis of your investment. Generally, solar modules come with a 20 – 30 year performance guarantee. Mono-crystalline solar panels are typically more efficient than polycrystalline, but tend be be slightly more expensive. Also, make sure that you differentiate between performance guarantee (the guaranteed efficiency of the panel during its operational life) vs product guarantee (the manufacturing or workmanship guarantee on the panel itself).
  • Inverters convert the DC electricity to AC and integrate this into the building’s energy supply. Typically, inverters carry a 5 – 10 year guarantee, which can be extended.
  • Batteries are another component that you will want to ensure are of good quality, if they form part of your system. Remember that how batteries are managed will also ensure that they carry a longer life span. Battery technologies are advancing rapidly in terms of cost and robustness, and are now available with warranties in excess of 10 years.
  • Also make sure that the feasibility costing includes provision for the installation of weather and monitoring instrumentation that will allow you to track the performance of the system over time.

Solar PV module and mounting system

 

4. How has the performance of the system been guaranteed in the short, medium, long term?

In addition to component guarantees, it is also useful to take note of overall guarantees of the system for the long, medium and short term. A solar system installer may have an overall efficiency measurement or performance ratio by which they guarantee the system. For example, they may measure the ratio between the total amount of available insolation (solar power) on your property’s site, vs the usable power coming out of the system (DC).

The solar proposal should also include a Internal Rate of Return or IRR. As those in the commercial and industrial property industry will be well aware, IRR is the rate of return on investment that will be achieved by investing capital in a solar asset, over the lifetime of that asset. IRR can also be calculated during a specific timeframe, for example, the first 10 years of a solar system’s lifespan.

When it comes to signing a financed solar system or a Power Purchase Agreement (PPA) with a solar solutions provider, IRR would not be relevant. Instead, the savings from solar energy would be calculated as a monthly operational saving, based on the expected tariff increases.

5. How will you measure ongoing performance and ROI on your solar system?

Like any asset, solar PV systems need ongoing care and maintenance in order to retain their optimal performance. When evaluating  the purchase of a solar solution the provision and associated costs of Operations and Maintenance (O&M) is an essential component to consider.

Not only will investment in O&M diagnose any possible problems early through continual real-time monitoring, it will also ensure that the system continues to produce the predicted savings and ensure the overall financial case of the project.

When evaluating an O&M offering, make sure that there is regular reporting and site inspections and the option of accessing live data on the solar system, such as through a client portal. Keeping track of the solar system’s historical performance through regular reports will help you to look at the savings and ROI over time and to make more accurate predictions of future performance.

If your solar system is on a PPA, you will not be directly responsible for its ongoing maintenance and operations. However, you should still request ongoing reports to track your savings comparative to your alternative power options.

ongoing solar operations and maintenance is essential for Commercial and industrial property

6. Will energy storage improve your solar system?

Although batteries have historically been expensive additions to solar PV systems, it is now essential to ask about energy storage when thinking about a solar system for your commercial or industrial property. The prices of batteries have rapidly decreased and often can ensure a more efficient use of the abundant solar resource. Whether you originally planned to include batteries in the system or not, it is worth asking about when evaluating a new solar proposal.

How could combining solar PV with batteries and/or generators improve the overall business case? It depends on your specific building and load profile – for example, peak shaving can help to push overall tariffs significantly lower and change the business payback of the solar PV system significantly. Similarly, for retail centres and remote industrial or mining properties, batteries can allow a totally islanded or microgrid solution.

That concludes our list of 6 questions to ask when installing solar PV on commercial and industrial property. Like any large asset, investing in a solar PV system requires careful decision-making and evaluation. If you have a commercial or industrial property that you are interested in converting to solar power, try our online feasibility tool.

Design engineer completes an industrial solar system design for a industrial power purchase agreement (PPA)

New design engineer off to a great start with industrial solar system design

Design engineer completes an industrial solar system design for a industrial power purchase agreement (PPA)

Mandi Qavane, one of 5 design engineers at SOLA Future Energy

Mandilakhe Qavane has been with SOLA Future Energy for about 6 months, although he’s been working in the renewables industry for about 3 years. The first fully-fledged system he’s designed with SOLA is Dynachem – a chemical powder manufacturing and packaging plant in an industrial part of Cape Town.

The system, which was completed this week, belongs to SOLA Future Energy, with a power purchase agreement (PPA) in place, which will enable the manufacturing plant to buy clean energy back at a fixed-rate tariff. The arrangement will provide the plant with clean energy over the next 20 years, shielding the industrial plant of the variability of Eskom tariff increases.

Mandi is 26 years old, having worked as a technical engineer after studying a B Tech in Mechatronic Engineering at Cape Peninsula University of Technology. He says that the Dynachem project taught him a lot about overseeing an entire project from the design, through to the construction and commissioning of a solar system. Although the project is small – 60 kW – it still carried its own challenges. The structural, engineering and mechanical aspects of the system needed to be carefully designed in order to make an efficient, optimised solar PV system for the industrial plant.

Although Mandi has worked on high-level designs for several larger systems, Dynachem is the first he’s designed from start-to-finish. The process, he explains, has taught him a lot about all phases of designing and constructing a solar system. “The best thing about [working with SOLA] is the experience… I have been with SOLA for 6 months now but there is a lot that I have learned,” he grins.

The Dynachem industrial solar system uses 180 Canadian Solar 330 watt poly crystalline modules and 1 50kW Inverter to deliver 59.4 kW of direct current (DC) electricity – around 36% of the plant’s energy needs. Reducing the plant’s entire load on the grid will mean that it will experience demand savings as well as reductions in its costs for energy per month. With the system lasting 20 years, the chemical manufacturer is likely to benefit substantially from the reduced energy costs.

Mandi is one of 5 design engineers working for SOLA Future Energy, and plans to get his Pr. Eng one day. He is excited to work on SOLA’s forthcoming projects – not only industrial plants like Dynachem – but in Africa too.

Dynachem chemical manufacturing plant will save 36% of its energy through its PPA

Dynachem chemical manufacturing plant will save 36% of its energy through its PPA with SOLA Future Energy