We are at the point where the Australian power grid is almost saturated by solar output from residential rooftops.
But in one of the strangest paradoxes in modern times, many of the householders that install solar in their homes are also business owners that have failed to seize the same opportunity for their commercial enterprise.
This is even more strange when you consider that those businesses are likely to achieve a far greater financial and environmental return than can be achieved at an individual household level.
Because they will utilise much of the solar power they generate during the working day, most businesses can save substantial sums of money by dramatically reducing the amount of energy they have to buy from the national grid. And because they are using the energy during the day, they don’t have to worry about the increasingly stingy feed-in tariffs being offered by state and territory governments.
If you need further convincing about the value of investing in commercial solar, think about the following.
The economics of commercial solar are constantly changing. But in the past 12 months, the changes have all been in the direction of creating benefits for business owners – regardless of whether they are small, medium, or large enterprises.
The price of solar is continuing to fall
The most significant change has been the plummeting price of commercial solar systems.
The average price of a 100kW solar system (including solar panels and solar inverter) varies across Australia but is in the order of $92,500 in Sydney increasing to just under $100,000 in Canberra. The highest quality systems can cost between $150,000-$200,000.
Ten years ago, you would have been lucky to be able to buy a system half the size (50kW) for the same amount of money.
While solar prices are continuing to fall, it is unlikely that we will keep seeing successive years where the price is halved. When the marketing material from solar companies says, ‘there has never been a better time to buy,’ there is a lot of data and evidence to support their claims.
Generous government incentives are still available
There are still some good government incentives available for commercial solar, but they are becoming increasingly constrained as the power grid becomes saturated with solar and as the Australian Government gets closer to meeting its Renewable Energy Target.
The Small-scale Technology Certificates (STCs) for panels ≤100kW and Large-scale Generation Certificates (LGCs) for solar panel systems >100kW offered by the Australian Government make a significant dent in the costs to business of going solar.
But they are only available until 2030 and the number of certificates that are available will decrease every year until then.
Outstanding internal rate of return and short payback period
In July 2020, the internal rate of return for a commercial solar investment is between 10-35%, making it far more appealing than nearly any other business asset you can name.
Businesses who are paying over 30c/kWh for their electricity could see their investment returned in 2-5 years.
How Incentives Reduce the Payback Period of Solar Power
For example: A 100-kW solar system will save around 165,499kWh. This equals around $40,000 annually.
With an installation price of $160,000, the payback period is 4 years and the ROI is 25%.
If the project is installed in Brisbane (zone 3), it gets 1520 STCs.
With an STC price of $36.00, the incentive is $57,760 and the net price is $102,240.
The payback period drops to 2.5 years, while the ROI increases to 39%.
Financing arrangements mean businesses can install solar for zero net cost
A range of innovative grants, loans and other financing mechanisms are available that make it easy for commercial businesses to take the plunge and go solar.
For example, most solar companies are now offering five-year finance terms that mean purchasing a solar power system can be cash-flow positive experience from day one. Some even guarantee this.
Larger banks like CBA, NAB, ANZ and Macquarie have also come to the party and started offering 100% solar finance packages (primarily in the form of chattel mortgages and rental finance), with rates of around 5% when secured and 8% to 11% unsecured.
To sweeten the deal a little more, the ATO allows a depreciation rate of 5% per year on solar panels and some components such as batteries and inverters can be depreciated at a rate greater than 5%. Under a chattel mortgage you can depreciate the solar system from day one, the interest on repayments is tax deductible and you can claim the GST paid in the first BAS after the lease is taken out.
Solar systems can also be funded under a Power Purchase Agreement (PPA). This is an arrangement where the provider or finance company (which could be your solar installer or a renewables financing group such as Solar Bay) pays the cost of designing, installing, funding, operating and maintaining the system at a commercial premise.
The business pays no upfront capital cost but benefits from an immediate reduction in electricity bills (in some cases this can be a guaranteed 100% reduction). The solar system is owned by the finance company and the solar power generated is sold the customer at a cheaper rate than purchasing from the grid. The installation is completed at zero net cost, the loan is paid with energy savings and at the end of the period, the system is transferred to the customer at no cost. Financing for commercial investments does not get much better than that!
There are some signs that commercials are starting to get the message that going solar makes good business sense.
In the first quarter of 2019, Green Energy Markets reported investments in large-scale clean energy projects doubled to over $20 billion. There was an 83% increase in the capacity of commercial solar installations between 100 KW and 5 MW and in 2018, the fastest growing technology was large-scale solar plants with more than 100kW capacity.
While the COVID-19 pandemic has led to a decline in the number of solar installations in the first half of 2019, as business returns to normal (or whatever our new normal is going to look like), there is good reason to think the trend of increasing investments would continue, driven by:
- The availability of STCs and LGCs until 2030
- Continuing increases in the price of electricity (although prices have stabilised, and in some cases declined, as COVID-19 has led to reduced demand)
- Emergence of renewable energy market investment opportunities beyond the wholesale electricity market
- Continuing declines in the price of solar PV
- Increased demand for solar energy to power the electric vehicles and electric heat pumps for water and spacing heating
- PV plants replacing existing coal power stations over the next 10+ years
- State government policies designed to increase the use of renewable energy.
If the savings are not enough to convince you, think about your reputation
The recent announcement by McCain’s that it was starting work on Australia’s largest behind-the-meter renewable energy system led to a flurry of positive media attention both nationally and internationally. Customers are increasingly climate conscious and the benefits for a brand’s corporate image by choosing to go solar should not be underestimated.
Today you have the option of installing a solar system for zero net cost; that can be cash-flow positive from day one; that has an outstanding internal rate of return, short payback period; protects you against future increases in electricity prices and increases your corporate image. What are you waiting for?