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October 14, 2015

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Solar Panel Operating Lease Package, Better than a Power Purchase Agreement?

May 14, 2015

 

 

Power Purchase Agreements (PPA) are common place in the solar power market. A PPA is an arrangement whereby a third party will install a solar panel array on a property and the hosting business agrees to buy the electricity at an agreed rate for 25 years (can be as low as 5p/kWh). However is this best way to benefit from Solar Power if a business is not wanting to invest their own capital?

 

Smeaton Wood Energy (SWE) has a package that is more innovative and attractive than a PPA. The package is a Solar Operating Lease combined with a full Operating & Maintenance (O&M) contract and a yield guarantee. Click here for an information pack.

 

So how does the Solar Panel Operating Lease work?

 

The structure of the Solar Panel Op Lease Package is simple, a funder will pay for the installation and maintenance of the Solar Array. In return they will lease the use of the panels to the connected property. This allows the cost and maintenance of the installation to be spread over a number of years through pre agreed fixed lease payments so that the leaser can instantly benefit from the installation. PLEASE NOTE: A business can exit the scheme at any stage.

 

                The lease rates are dictated by the value of the installation and the financial stability of the firm making the lease payments. The scheme doesn’t impact future borrowings as it is unsecured and off book. The Solar Operating Lease scheme covers all maintenance and replacements which removes any replacement risk or running costs. The table below provides an example of what the position can look like at various stages of the scheme for a 250kWp solar array (*estimated rates for a small business):
 

 

 

If you compare the cumulative profit of the Op Lease/Rental approach with a 5p PPA it looks like the below on a 250kWp system:

 

 

 

Clearly the ongoing benefits with a Solar Panel Operating Lease package are more beneficial. However how do the exit strategies compare?

 

A PPA is extremely rigid, the hosting business will be tied into a 25 year contract. The only way to exit is to reimburse the Solar Panel owner/funder for any loss of revenues. Therefore if a business needs to exit in year 15, 10 years’ worth of revenue will need to be reimbursed which will be substantial.

 

Whereas with the Operating Lease approach the exit cost is dictated by the amount of installation cost still outstanding. If an exit is made in year 8 plus (as install cost has been covered), the exit cost is minimal and can be comfortably covered by the cumulative profit. Unlike a PPA at the point of exit the solar panel system is passed to the business to continue to utilise.

 

Because the solar system ownership transfers to the hosting business on exit of an Operating Lease there is still a benefit for a business if they decide to exit in years 1-8. The reason being that the solar array carries a significant future revenue stream which provides substantial value. This actually makes the solar array more valuable than the installation cost the moment it is commissioned. Therefore if a business is forced to exit before 8, the solar array can be sold to a funder for more than the exit cost which brings the business an exit margin if needed from year 1.

 

The news on a confirmed change in legislation allowing solar arrays to be moved from one property to another has only made the second hand sale of a solar array simpler.

 

To see how your business can benefit from a Solar Operating Lease package, please contact us today.

 

 

 

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