Funding Options
FINANCING YOUR GREEN ENERGY REVOLUTION
SELF-FINANCING
This is self-explanatory, in that the customer will pay for the installation in stage payments and once all payments are made, the customer will own the equipment and will be free to operate the equipment in a manner that they choose and enter into a maintenance contract with their chosen service provider.
Under this option, compared to asset finance and PPA, the customer will make the largest investment but over the lifetime of the project (greater than 20 years) the financial position of the company will be better. This is because whilst you have taken the most risk, in terms of money invested upfront, you will receive the most reward as you will own the system outright.
This option has been popular recently due to the higher energy prices, making payback periods shorter and therefore reducing the financial risk to the customer.
ASSET FINANCING
Asset finance is in effect a loan where you will agree to make fixed, periodic payments to cover the cost of the installation with options of the financing being secured against the equipment. Periods of financing vary but contracts typically last a maximum of 5 years. You will still own the equipment and will be free to operate it to meet your energy needs in the same way as self-financing. This provides a balance between not investing any capital upfront but also receiving a larger chunk of the lifetime savings through still owning the equipment.
POWER PURCHASE AGREEMENT (PPA)
A power purchase agreement, also commonly known by the acronym PPA, is a popular method that is effective for businesses that are looking to go green without the need for capital expenditure. The equipment is financed and installed by the third party and in return the customer will agree to purchase all electricity that they consumed from the green energy equipment at a discounted rate for a pre-determined contract length which is often greater than 10 years. This means that you will be cash positive from day-one simply by purchasing cheaper electricity from the on-site generation compared to the grid.
The other key difference between a PPA and asset finance is that the equipment is owned, maintained and operated by a third party. This allows the customer to avoid the risk and complexity of equipment ownership and operation. If the equipment doesn’t operate then you will not pay for any of the generations and you will be no worse off than if the equipment was not installed on the site.
As the equipment is owned and operated by a third party, it is possible that the solution can be an off-balance sheet financing solution which adds to its attractiveness to some customers. Please note that the balance sheet position is ultimately determined by your auditors and can’t be guaranteed.
The main drawback to this option is that as the third party is taking more risk, the total amount you will end up paying for the system will be higher over the life of the project.