Solar PPA vs Business Loan

By 2023, the UK’s solar power systems and financing model are set to evolve rapidly as governments worldwide aim for a carbon-free future by 2050.

For business owners, the options for financing a solar panel system are expanding. The two most frequent pathways to funding include a Solar Power Purchase Agreement (PPA) and loans from commercial lenders.

As you contemplate the optimal solution for financing your company, it’s important to weigh both the advantages and disadvantages of each method. In this blog post, we will explore Solar PPA versus Loan finance in detail by contrasting their respective pros and cons.

Apply Now

Find out today if your college or university qualifies for solar panel Funding or a grant.

What is a Solar PPA (Power Purchase Agreement)

What is a solar power purchase agreement (PPA) for businesses (1)

A solar PPA is when a third-party solar developer finance, builds and maintains a solar power system for the customer. The customer then agrees to purchase the energy generated from the solar panels at a fixed rate over the course of a long-term contract.

Solar PPA contracts length can last up to 25 years, however, the contracts can be shortened to 20 or even 15 years as long as the buyer is willing to pay a higher price for the electricity generated by the solar-powered system.

The longer the PPA agreement the less you will pay for electricity.

The more you pay for the electricity generated from the solar power system the less time the agreement lasts.

Solar panels will most likely be installed on the roof of your business and the solar developer will make all necessary upgrades to adhere to safety regulations.

When acquiring a solar PPA you will not have to pay any upfront costs with the exception of any applicable taxes. Since you are only paying for the energy that you use, this type of financing can provide a low-cost alternative to a traditional business loan from a bank or lender.

However, since you are locked into a long-term contract, there is less flexibility if you decide to cancel.

 

example of a solar power purchase agreement PPA for a company

                                                                                                                                                                           Example of a solar PPA and how they work

  • Green Energy Co offers to install a solar energy system on XYZ Inc’s factory’s roof.
  • Green Energy Co will design, finance, construct and maintain the solar energy system over the length of the contract
  • XYZ Inc agrees to purchase the electricity generated by the system for 20 years at a fixed price of £0.10/kWh
  • The PPA guarantees a stable and predictable source of electricity for XYZ Inc and also helps them to achieve their sustainability goals.

Savings from PPA

  • XYZ Inc currently consumes 500,000 kWh of electricity per year
  • The current price of grid electricity is £0.12/kWh
  • The price of electricity under the PPA is £0.10/kWh

Based on these assumptions, we can estimate that XYZ Inc would save £20,000 per year by purchasing electricity under the PPA. (£0.12/kWh – £0.10/kWh) x 500,000 kWh = £20,000

On a monthly basis, this would be approximately £1,667 in savings per month. (£20,000/12 months).

How much can I save with a solar PPA?

Typically, businesses can save anywhere from 10-50% on their energy bills with the implementation of a solar PPA.

The amount of money you can save with a solar PPA depends on numerous factors such as the size and type of solar energy system that you have installed, your current energy usage, and the terms of the contract.

Solar Power purchase agreements are designed to save a company money on energy bills and offer a long-term and reliable source of energy.

Furthermore, businesses can receive tax credits on their solar installations if they decide to pursue this financing option.

Pros and cons of a solar PPA

One of the main advantages of a solar PPA is that you do not have to pay any upfront costs. This reduces your risk and allows you to make a return on investment sooner than if you were to take out a loan.

Solar PPAs also offer more stability and predictability since you are buying the electricity generated by the solar panels at a fixed rate over the course of your contract. This helps businesses plan and budget more effectively for future energy costs.

Here are some pros and cons related to solar PPA to consider:

Pros:

-No upfront costs

-Guaranteed a cheaper source of electricity

-Fixed price for electricity over the contract period

-Stable and predictable source of energy for businesses

-Opportunity to achieve sustainability goals

-Can reduce risk in comparison with other forms of financing

Cons:

– You are locked into a long-term contract

– Reduced flexibility if you decide to cancel the agreement

– Limited opportunity to benefit from the increase in solar energy prices

– Solar systems must be maintained and monitored for the length of the agreement

– Third party solar developer could go out of business which could lead to problems

bank loans for solar panel systems

Banks loans for solar power systems

A business loan is another option for businesses looking to finance a solar power system. This type of financing involves borrowing money from a bank or lender and repaying it with interest.

This can be a more cost-effective option for businesses that need to purchase large solar systems or have the cash flow to repay the loan.

Example of a bank loan for a solar power system

example of how a manufacturing company, XYZ Manufacturing, would take out a bank loan for a solar power system:

  1. XYZ Manufacturing approaches a local bank, ABC Bank, for a solar bank loan to finance the installation of a solar power system on their facility.
  2. ABC Bank assesses XYZ Manufacturing’s creditworthiness and financial stability, and based on that, the bank approves a loan of £65,000 with a repayment period of 10 years and an interest rate of 7%.
  3. XYZ Manufacturing uses the loan to purchase and install a solar power system on their facility. The solar power system generates electricity that XYZ Manufacturing uses to power their facility, reducing their energy costs and their reliance on fossil fuels.
  4. During the repayment period, XYZ Manufacturing repays the loan in monthly instalments to ABC Bank. The monthly loan payments would be approximately £567. (£65,000 + (£65,000 x 7%) / 10 years) / 12 months
  5. After 10 years, XYZ Manufacturing will have fully repaid the loan to the bank, and they will continue to benefit from the reduced energy costs and the positive environmental impact of the solar power system.

Financial break down

  • Loan amount: £65,000
  • Repayment period: 10 years
  • Interest rate: 7%
  • Monthly loan payments: £567. (£65,000 + (£65,000 x 7%) / 10 years) / 12 months
  • Total interest paid over 10 years: £8,550 (£65,000 x 7%)
  • Total repayment over 10 years: £73,550 (£65,000 + £8,550)

Please note that these figures are based on the provided assumptions and terms of the loan, and may vary depending on the lender and the borrower’s creditworthiness and financial stability.

To find out what your company credit score is click here

 

Pros and cons of a business loan for solar power

Here are some pros and cons related to business loan for solar power to consider:

Pros:

– Lower upfront costs, as you only need to pay a percentage of the total cost of the solar system

– More flexibility to choose when and how you want to pay back your loan

– Opportunity to benefit from any increase in solar energy prices

– Ability to take advantage of tax credits and incentives

Cons:

– Higher long-term costs due to interest payments

– Risk associated with borrowing money from a lender

– Possible financial penalties if you default on the loan

– Need to monitor the solar panel system and ensure it is properly maintained

– Potentially difficult and time-consuming application process.

solar ppa vs loans

Solar PPA vs Loan - what will save me more money?

This will depend on your business needs and situation. For example, if you need a large solar system or have the cash flow to repay the loan, then a business loan may be more cost-effective.

Business loans tend to stretch for 10-15 years as a solar PPA tends to stretch for 15-25 years.

However, Solar PPA’s can vary in contract length and it is negotiable with the solar producer.

With a business loan, you will have to pay more back each month than you would with a solar PPA, as a solar PPA is designed to last over a longer period of time saving you money along with way.

With a solar PPA, you can be guaranteed a lower price for KWPH straight from the beginning, saving your business possibly 10-50% on electricity usage.

For businesses looking to finance a solar power system, it is important to consider the pros and cons of both a solar PPA and a business loan.

Depending on your needs and circumstances, one option may be more cost-effective and beneficial than the other.

Ultimately, solar financing is a long-term investment that can have significant impacts on your bottom line. Therefore, it is important to compare your options carefully and make a decision that best suits your business needs.

solar ppa vs loans

Solar Power purchase agreement vs Loan - The Financial Benefits

Solar PPAs and business loans both offer financial benefits to businesses looking to finance a solar power system.

A solar PPA allows businesses to save money on their electricity bills from day one and is a great option for businesses looking for long-term savings.

Meanwhile, a business loan can often provide businesses with greater upfront savings and the flexibility to choose when and how they want to repay their loan.

Solar PPA Benefits:

– Lower electricity bills from day one

– Longer payback period (15-25 years)

– Guaranteed reduction in electricity costs

– Potential to benefit from adding solar energy prices

Business Loan Benefits:

– Potential lower upfront costs

– Flexibility to choose when and how you want to repay the loan

– Opportunity to benefit from any increase in solar energy prices

– Opportunity to take advantage of tax benefits associated with borrowing money

Ultimately, the choice between a solar PPA and a business loan will depend on your business needs

Conclusion

 

When you’re weighing the pros and cons of whether to finance your solar energy project with a Solar PPA or a business loan, it’s essential to take into account how each option fits in with the specific requirements of your company.

Depending on what works best for you financially, one may be more cost-effective and profitable than the other.

Certain businesses may have access to more favourable terms on financing and loans due to having higher credit lines, while others might not be so lucky.

Share:

Facebook
Twitter
Pinterest
LinkedIn