Solar, battery and electrification projects typically involve a large upfront investment and then very small ongoing costs coupled with large ongoing savings. This mismatch in timing can make projects hard to fund and finance internally. This article looks at the different financing or contracting options available and compares the pros and cons of the two main types of funding: Outright Purchase and Power Purchase Agreement (PPA).
Funding Type
The funding options available for solar and battery systems are summarised below in descending order of popularity:
- Outright Purchase - Paying for the project yourself and owning the project
- Power Purchase Agreement - Financing the project with payments based on electricity generation
- Lease - Financing the project with fixed monthly payments
- Environmental Upgrade Agreement - Financing the project via council rates
- Subscription/Rental - Renting the system for a monthly fee with the ability to stop at short notice.
- Chattel Mortgage - Financing the project whilst owning it (like a home mortgage)
The two most common methods for funding a commercial solar, battery or electrification project in Australia are 1. Outright Purchase and 2. Power Purchase Agreement. The process for contracting under either option is well established in Australia with suitable contracts for both.
The table below summarises the pros and cons of these two options.
| Finance Option |
Pros |
Cons |
| Outright Purchase |
- Full ownership of the systems, including all future decisions on expansion and operation.
- Full exposure to savings and revenue from the systems, with a payback of 3-5 year.
- Depreciation of the assets owned by you and associated tax benefits.
- Simpler contracting process, directly between you and the solar retailer.
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- Requires a large investment to be made, paid over milestones during the installation.
- Less protections from under performance or failure (can be partially mitigated with defect liability, liquidated damages and performance guarantees clauses)
- Additional costs for operation and maintenance contract required to ensure optimal performance at an additional cost
|
| Power Purchase Agreement |
- Does not require an upfront investment , allowing capital to be deployed in other areas of the business.
- The PPA provider is incentivised to keep the system performing with 100% alignment with the solar retailer.
- Includes ongoing operation and maintenance for the duration of the PPA term.
- Allows the system to be purchased from the PPA provider for $1 at the end of term with all benefits flowing to the customer following this.
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- Repayment costs erode a large chunk of the benefits realised from the solar system.
- Limited control of the assets as they are owned by the PPA provider during the term of the agreement
- Partially mitigated with a buy-out schedule, with a fixed price for the customer to buy-out the contract and own the system at any point during the term.
- More complicated contracting process with three parties: the Customer, the solar retailer, and the financier.
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