The South African economy is grappling with continuous power outages and increasing energy tariffs. This turmoil has left businesses in complete disarray as many cannot keep their doors open unless they introduce an alternative energy source.

Amongst the various options, rooftop solar has emerged as the most popular choice. This is no surprise as the equipment doesn’t require a lot of maintenance, the majority of the components have a long useful life span, and the total cost is somewhat manageable for a fair portion of the market. The benefit to the business owner is the investment will continue to produce electricity for many years and with each tariff increase by Eskom, the system will continue to be a cost saver for the business owner.

So how are businesses funding the capital outlay?

For businesses that have not budgeted for the capital expenditure or would prefer not to self-finance the solar installation, a number of options are currently available in the market. These options include:

1.) Entering into a Power Purchase Agreement

A popular option for businesses is to enter into Power Purchase Agreements (PPAs). PPAs regulate the contractual relationship between the power producer and the energy consumer and covers the cost of electricity, terms of the contract, payments terms etc.

Pros:

• Minimal upfront cost
• Stable cost with predictable inflation-linked increases
• Maintenance and monitoring are the responsibility of the power producer
• Payments made in terms of the PPA are fully deductible for tax purposes

Cons:

• Long-term commitment
• The energy consumer doesn’t qualify for the Section 12B tax incentive
• Ownership of the assets vest with the power producer

2.) Rent-to-own arrangements

Another viable financing option is a rent-to-own arrangement. As with traditional lease agreements, rent-to-own arrangements are a legally binding contract between two parties, the lessor (owner of the assets) and the lessee (the party using the asset), that outlines the terms and conditions for leasing a solar system. The lessee pays a fixed monthly lease payment, which is typically reviewed annually. However, at the end of the term, the asset is transferred to the lessee.

Pros:

• Minimal upfront cost
• Stable and predictable costs
• Maintenance and monitoring are the responsibility of the lessor

Cons:

• Total cost of ownership can be high over the long term
• Long-term commitment
• The energy consumer doesn’t qualify for the Section 12B tax incentive

3.) Debt funding

Raising debt funding from a financial institution is an option for businesses. Typically, financial institutions will offer up to 70% debt funding on solar assets. This means that the end customer would need to have up to 30% available capital. In other words, on a R10 million installation, the business would need R3 million in capital available to raise the remaining R7 million from the financial institution.

Pros:

• Ownership and control
• The energy consumer does qualify for the Section 12B tax incentive

Cons:

• Only interest payments are tax deductible
• Large upfront capital outlay
• Maintenance and monitoring are the responsibility of the corporate

The prospectus of Eskom supplying the South African market with reliable electricity, within the next two years, is remote and when they eventually achieve this, the cost of the electricity would most likely be significantly higher than the cost of producing energy through solar. Businesses should, therefore, be exploring alternative energy solutions as their adoption is inevitable.

As an alternative to the above financing options, Jaltech is offering the market a hybrid funding solution for businesses that are interested in installing solar. The advantage of engaging Jaltech is that its commercial terms are significantly more attractive than all three of the financing options mentioned above.

If you are looking to fund a solar solution for your company, contact Jaltech by emailing Rory Sim at rorys@jaltech.co.za or click here to complete an enquiry form.

Rory Sim – Head of Solar Origination at Jaltech