Investment options for PV projects

December 2014 Download a PDF version of this article »

This document looks at the financial options that exist for those considering PV as an energy generator for their business. Covering Self-financed, debt financed and NWT's Solar Gain™ product which opens up the possibility of benefiting from renewable energy without the need for any personal investment.

Investment options for PV projects

The cost of installing

Even accounting for the huge cost reductions that have been achieved by improving the United Kingdom’s PV supply chain in recent years, a medium or large scale solar PV system still represents a significant investment for most businesses.

The modular nature of PV panels makes incredibly them versatile, meaning that systems can range anywhere from being relatively small installations to being vast arrays that cover acres of roof space.

The upper limit is normally the space available or the structural stability of the building. Clearly each situation is different, but assuming an installation of 100kW or more is being considered – approximately 400 panels – the cost can range anywhere from just over a hundred thousand to several million pounds.

This kind of money is often not readily available for projects of this nature. Where it is, there is generally strong competition from other business activities and investment opportunities.

Access to capital is not a prerequisite for benefiting from PV. There are other methods of getting a project off the ground. NWT’s SolarGainTM scheme means that your business can benefit without the need to invest any capital yourself.

Your solar income stream

Historically, income from a solar system has been discussed in terms of the tariff support payments on offer. As installation costs have come down and electricity prices have continued to rise, the saving you can make by generating your own electricity has become far more significant.

There are distinct components to the total income from a PV system to consider:

Distinct Components

The value of each component varies over the life of the system, depending on factors such as the rate of inflation, how rapidly electricity prices go up and what proportion of the electricity generated is used on site (the “self-consumption ratio”).

Breakdown of components

The chart below shows the relationship between the annual income from these three components for a 250 kilowatt PV system. In this example:

  • the rate of RPI inflation has been assumed at 2.7% p.a.
  • it is assumed that electricity prices will rise at 5% p.a. (currently this is nearer 10%)
  • it assumes that 75% of the electricity generated is used on site – typical for companies who do not operate at weekends
  • notice how the saving on electricity actually becomes more valuable than the FIT over time

FIT Income 2

The amount payable via the Feed-in Tariff (FIT) is fixed and payable to each kilowatt-hour of electricity generated, regardless of what ultimately happens to the electricity. Once it has been generated, it will either be used by your company (on site) or it will flow back to the grid and be used elsewhere (exported).

Breaking even and entering profit

Once the income streams are combined, we can calculate the total annual financial benefit of a system. It is then a case of assessing the return on investment to determine whether the business case meets a company’s investment criteria.

In this example, the combined income results in a situation where the system breaks even in the sixth year, and all subsequent years yield a profit. The FIT and Export Tariffs are guaranteed for twenty years and the savings on electricity purchase continue on even further (the panels are guaranteed to still be at least 80% efficient after 25 years and this is factored into our projections).

ROI 3

This is a typical projection for a commercial PV system; as you can see, attractive returns are available right now. All that is necessary to realise the ongoing profits is the necessary roof space and capital to get the project up and running.

Even if your company decides not to invest, there are still many scenarios where outside investment can be arranged that benefits all parties. The investor leases the roof space and takes the support payments and in return the owner or tenant receives cheaper electricity for the duration of the lease term.

Achieving maximum value

The ratio of the amount of electricity used on site to the amount exported is crucial in terms of determining the return on investment from a PV system. In order to achieve the maximum value from the solar electricity, you need to use it yourself.

This is because each kilowatt-hour used by you is likely to save in the region of 10.5 pence (depending on your supplier), but each kilowatt-hour that is exported to the grid will attract a tariff of just 4.77 pence. Essentially it is similar to you receiving a wholesale rather than retail price for the electricity you have generated. In addition to this, the export tariff is inflated each year according to the RPI whereas the electricity price is predicted to rise much faster – so as time goes by the potential lost value increases year on year.

As the charts below show, if the system is designed so that 75% of the electricity it generates is used on site and 25% is exported, then it will have much stronger financial performance than if 25% is used on site and 75% exported:

ROI 4

Matching your PV supply to your electricity demand to ensure you use as much solar electricity as possible will mean the value of the electricity generated is higher and the investment will be paid back sooner.

ROI 5png

* The export tariff income has already had the cost of maintaining the export meter and gathering the reading subtracted from the total.

Self-consumption ratio

This is the amount of electricity generated by the solar PV system that is used on site.  If the system is generating more electricity than is needed then the excess will be exported to the local distribution network for use elsewhere.

The ratio of the amount of electricity generated to the amount used on site has a profound effect on the payback period of a scheme – and the ultimate return from the investment.

Because electricity used on site has a far higher value than the price it can be sold back to the grid for, matching the size of a PV system to the demand at a site is absolutely crucial in terms of the financial payback.

The chart below shows the difference this makes for a 250 kilowatt-peak PV system over a twenty year period – the actual results will be somewhere between the two lines, depending on your self-consumption ratio:

Self-consumption ratio 6

Wherever possible, we seek to avoid situations where electricity is being returned to the grid in order to achieve the best possible ROI for our clients.

As the chart shows, whether the electricity generated can be used on site or not has a huge impact on how much revenue can be generated by a PV system and therefore, ultimately, whether it is wise to install on a building and if so how many panels to install.

Conclusion: investment options

It is clear that solar PV represents an opportunity to obtain financial benefit and improve your bottom line by exploiting an under-used resource – empty roof space. Making this a reality simply comes down to access to the necessary capital.

Purchase

The best return on investment for a solar PV system is achieved by having a system designed to meet the needs of your business and then purchasing it outright. This method clearly ties up a significant amount of capital and is not ideal for many businesses where there are other core-business investments competing for limited resources.

Debt finance and own

In the example given at the start of the document, a 250 kilowatt-peak system is installed for £255k. It generates 225,000 kWh of electricity per year, of which 75% is used on site and 25% is exported to the grid. The assumed cost of electricity for the example is 10.5 pence per unit.

The total annual income in year one is £37k, meaning the simple ROI is 14.5%

With financial returns this attractive it is not necessary for your company to use cash in order to install a solar PV system – there is room to attract an investor or to debt-finance the installation. The guaranteed, long-term income is generally more than sufficient to meet the loan repayments and also receive an incremental income.

NWT’s SolarGain™

If you don’t want to use cash or borrow to install your system, NWT can install, operate and maintain the system free of charge – giving you access to cheap electricity through our Solar GainTM scheme.

We rent land or roof space from you, then fund and build the solar power plant on it. We sell you electricity generated from the plant at substantial discount, which will be tied to the RPI, protected from commercially influenced pricing strategies of national energy providers.

When we invest in the solar plant, we retain the asset and supply you with electricity at a significantly lower rate than your current provider. The agreement between us will guarantee that your property will be unharmed as a result of the implementation and future maintenance of the solar energy generation system.

Adding value to your image

There are other benefits to installing PV besides financial income considerations. Whichever method you use to finance the installation, solar panels represent a visible demonstration of your company’s sustainability credentials and send a message to potential customers that you take social responsibility and the environment seriously.

Carbon reduction legislation exists already and it seems likely that its scope will expand in future – renewable energy is one very straightforward way to make a big difference in your reporting. As well as hedging against future energy cost rises, solar PV systems also reduce your company’s carbon emissions – in the process reducing your exposure to current and future environmental legislation.

Supply chain pressures can be a real issue in certain industries. For example, all of the large supermarket chains in the UK now assess potential suppliers’ environmental activities because they know that these issues really matter to their customers.

No obligation consultation

At NWT Energy we have the skills and experience to deliver market-leading PV system and advice. We can illustrate the outcomes of each potential investment method and guide you to a decision that suits your circumstances.

Visit nwtenergy.co.uk for more information and to arrange for a free, no obligation consultation to see for yourself how PV can improve your bottom line and company reputation. We can guide you through installing a bespoke PV system – tailored to your needs – with no capital required.

Author: Hugo Logan, Programme Manager, NWT Energy

 

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