On the surface, the solar lease is bright and shiny, guaranteed to make you smile and soften those pesky energy bills and emissions. But buyer beware, every time we have looked under the hood, all is not as it seems. Here are the 4 Big Things to look out for when they give you the sales pitch:
Cost of capital
We often see solar lease and/or PPA providers comparing their offering with purchasing solar outright. They tell you that if you keep cash in your pocket, it will get 8-10%, so why spend it on solar? It’s the right question to ask, but the wrong number to use. You might get 8-10% in the long run on the share market or property market, but these investments are up and down all the time, and getting it right isn’t easy.
Investing in solar is closer to a term deposit or bond – low risk, and steady returns. Investments like these typically pay 4%, and even less after tax. So putting your money in solar to receive tax free investment returns makes for an attractive risk-weighted investment, if you get it right. Even for larger businesses that might be paying 14-15c/kWh for daytime energy, tax free returns of 6-8% are possible with solar.
Of course you should lease your panels, you won’t have to pay for cleaning, maintenance, replacement of parts, monitoring or changing the colour of your panels when they go out of fashion!
On paper it makes sense (not the changing colour bit), but anyone that knows solar knows that when you buy right, it’s as close to set and forget as there is. Granted, inverters won’t last forever, but that’s why you pay a little bit more up front for the best there is, saving hassles down the track. Don’t believe me? Well ask yourself this, if O&M costs are so high, then why is your profit driven supplier telling you they will look after it for you for nothing?
I nearly fell off my chair when I saw a lease quote that assumed the grid price of electricity increases at 7% per annum. That’s been the trend for the last 5-8 years or so, but it’s definitely not the trend going forward. Official forecasts have it closer to 3%, and in some states there is talk of prices going backwards. Of course your lease fee increasing a meagre 3% pa for 15 years will looks good compared to the grid going up at 7%. But if grid prices flat line, it’s a very different story.
Apples and Oranges
Ok, here is one for the geeks. Everyone knows that capital has an opportunity cost right? Well, so do avoided energy savings. When you penalise a solar investment based on opportunity cost, you also have to reward your operating savings to be comparing applies with apples. Follow me?
The solar lease pitch will tell you that buying solar outright has an opportunity cost – shock horror. But what they don’t tell you is that by spending your dough every year on their lease, you are missing out on the prospect of investing your savings. That’s right, after you invest $300,000 in solar, every year when you save $50,000 off your bottom line, that’s $50,000 that can be invested in more productive pursuits than paying your energy bill. So if your opportunity cost is 8%, then your returns on that $50,000 saved every year will also be 8%. That’s something your solar lease salesman will not remind you, and it makes a huge difference to the comparison.
So, buyer beware and if in doubt, call for help.
Tosh Szatow is Director, Co-founder at Energy for the People. A certified benefit corporation.