Investing in solar power

Factors to consider before investing in solar power

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The recent strengthening of the Rand against the US dollar and the Euro has reduced the cost of solar installations for businesses substantially, making the business case for solar energy an even more attractive proposition to reduce operational costs. This is according to Manie de Waal, CEO of Energy Partners Solar, who says that as a result, the payback period on the average commercial solar installation is currently as short as four to six year, a significantly shorter time span in comparison to a few year ago.

“Between 65% and 70% of the cost of installing a commercial solar photovoltaic (PV) array is dependent on the exchange rate. Globally, the cost of PV systems has also contracted substantially in recent years, which bodes well for companies in South Africa looking to reduce the amount that they annually spend on electricity for their operations.”

With that said, De Waal points out that there are a number of factors that businesses need to take into account when starting to explore PV solutions. “In a country like South Africa, solar power is one of the best ways to reduce a company’s energy costs, and we have seen our clients reduce their consumption considerably. However, every organisation operates in a unique manner, and each has various factors to consider before opting to purchase a renewable system with their own capital. 

According to De Waal, location is the first point to consider. “It is important to know how many hours of direct sunlight the property receives per year. If there are plans for a rooftop PV array, one has to also look at the orientation of the building, and how much weight the roof can hold. Alternatively, one can install the system at ground level, if there is space for it. Along with this, it is vital to compare the cost and projected yield of the PV system with the electricity tariffs currently being paid by the business. This should give a clear indication of how much will be saved and the payback period of the system.”

He adds that projected maintenance costs are also an important variable to include in one’s calculation. “On average, the annual maintenance of a PV system is between 0.9% to 1.1% of its initial capital value. After year 10, the business should start budgeting for a full replacement of the PV installation’s inverters, since they will need to be changed at least once during the 25-year life cycle of the system.”

Further driving down the potential cost of a system is the tax incentives that companies receive. “Section 12B of the Income Tax Act allows business owners to deduct the value of new PV systems as a wear-and-tear expense from their business income in the first year. This 100% accelerated capital allowance applies to commercial PV solutions with a generation capacity of less than one megawatt of power (AC). All of these factors help to calculate an accurate estimate of the system’s payback period,” he says.

As an alternative, De Waal says that power purchase agreements (PPA) with solar energy suppliers have proven to be a much simpler solution for many businesses, and are increasingly gaining traction in South Africa.

A number of changes to the Energy Regulation Act late last year have made it possible for businesses to enter into pure PPAs with suppliers such as Energy Partners Solar. These agreements essentially guarantee energy cost reductions of between 15% and 30%, while also taking the obligation of maintenance and component replacement away from the business. The client also does not need to have required capital available.

“This is becoming one of the preferred options for companies that want to eventually own their renewable energy systems. De Waal cautions that clients should ensure that the PPA on offer includes the option for the client to buy the system from the service provider at any time during the contract.”

Lastly, De Waal offers a final caveat to companies exploring renewable solutions. “While the cost of these systems are reducing significantly each year, a business still needs to be sure that it will reap the full benefit of an installed PV system. A condition is that the business uses electricity 7 days a week. A heavily skewed load due to seasonal fluctuations is also not ideal – as this could result in a situation where systems are oversized and effectively produces solar power that is not utilized by the client nor does the client get compensated for such power by the grid utility,” he explains.

“Solar energy is becoming more advanced and exponentially cheaper every year, and more companies need to start considering their options for employing renewables as a way to cut down on operational costs,” De Waal concludes.

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