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Energy Insights

Solar Power for Commercial and Industrial Companies

With the introduction of Power Purchase Agreements (PPAs) and Operating Leases, solar power is making great commercial sense for many businesses globally.

This article looks at packaging up energy and solar contracts for business. It also provides some information that will give you a guide into Power Purchase Agreements and Operating Leases. This article also aims to answer this critical question; do Power Purchase Agreements for solar power really make sense for your business?

Firstly, here’s a bit of a background as to why this information is relevant to you.

Investing in roof top solar power for commercial businesses is now within grasp. The reason for this is two-fold. With the advent of a mass consumer market for solar power in Australia (fueled by the Government’s renewable energy policy - since the 1990’s) coupled with the evolution of the mass production of panels and inverters out of China in the last five years, it is now within reach.

What does this mean for your business? Rooftop solar power, can deliver up to 30% of the power requirements of commercial and industrial companies. Think of the obvious financial savings.

For most of our clients where we actively manage their energy supply costs from the grid, a capital investment in roof top solar still involves a 6 year (plus) simple payback. Even if utilisation of the output is 100%. So unless there are other strategic drivers such as NABERS ratings, tenant demand, or corporate sustainability positioning, it is a long term commitment for companies looking to allocate their scarce capital.

No need to stress though! There is an alternative to using your own capital.

An alternative to using your own capital

We recommend using the capital of a 3rd party to provide the solar power for your business needs.

There are currently two different structures that are being heavily promoted in the commercial and industrial electricity market, which will also assist you to manage the performance risk of the solar supply that you choose to invest in.

The first of these is a structure called a Power Purchase Agreement. This is where the buyer enters into a service agreement with another party that owns the solar solutions. The buyer pays the provider in c/KWh for the metered output of the solar panels.

The second of these is an operating lease supported by a performance guarantee. The table below outlines how the two of these structures work.

Power Purchase Agreement Operating Lease with a performance guarantee
  • Service agreement for the provision of an expected amount of electricity.
  • Works at an agreed price over a fixed term.
  • Involves oversight from the electricity market regulators.
  • Involves revenue grade metering and the on-costs of quality electricity billing.
  • Can entail additional costs that are difficult to justify for an investment in a small array.
  • A service agreement however is not reported as an asset in a corporate balance sheet under current international accounting rules.
  • Fixed payment per month to cover the cost of an asset plus interest costs.
  • Operating Leases have been useful to companies seeking to avoid listing assets and their liabilities on a balance sheet.
  • They can be easily related to a quality standard such as a performance output – coupled with a performance guarantee around a given standard of electricity output. This would return any shortcomings in electricity output in a specific period.
  • An operating lease can be a cost effective option to a PPA that avoids some of the regulatory oversight of the electricity market regulators.

SunEdison have a really good explanation on why using a third party is more beneficial for your business. See it here.

There are many good reasons and benefits as to why a PPA or an Operating Lease may work for your business now.

The table below lists some of the benefits of entering into an agreement with a third party.

Grid parity and discounts A PPA or Operating Lease can provide discounts to grid pricing. This will obviously depend on the structure of the buy price of energy at your site. It will also depend on the solar array installed on site.

A PPA or an operating lease can be structured to be cheaper than your grid supply prices.

Hedge against future pricing of grid supply It’s a reality that the price of energy from the grid is dependent upon many factors and presents risks to many businesses.

A PPA or operating lease, even one with an indexing price, will provide certainty over future costs for a portion of your sites energy costs.

Future proofing for batteries and improved panel efficiency Significant improvements in the cost effectiveness of batteries is expected in the next few years. Also, the next 10 years is forecast to deliver significant improvements in panel efficiency.

Waiting for these benefits to materialise is not a good strategy for delivering the benefits of solar power to your business.

A PPA or an Operating Lease can be structured to ensure that upgrades in technology are delivered through the course of the set agreement.

Do good, pay nothing Solar presents many benefits to our country and the world. You’ll be playing a huge part in the future of the environment.

Ready for change? Contact us.


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