Project Everest

Problem

Timor: Comparison of Solar Business Models

As our team has moved to explore the potential of a photovoltaic (PV) solar install business here in Dili, we have been researching the business models of popular solar companies. From this research, we have found four main options for selling solar PV systems, each of which can be used in conjunction with each other. The first two options involve purchasing the system, and the latter two options are lease-style arrangements controlled by the installer.

 

1. Outright Purchase

The simplest option is to sell the system outright, with a lump sum payment (usually with initial deposit).

This approach requires no complicated financing hassle for the installer, simply install the system and get the money. This can also be beneficial to a customer with sufficient capital, as it generally yields the highest long-term return.

The downside is that there many potential customers do not have the cash to drop on a relatively high-cost investment. Even if a customer does buy outright, they may opt for a smaller system than would best suit their power requirements.

 

2. Loan

Another way to purchase a PV installation is through a loan, generally provided by a third party, such as a bank or micro-financier. This is similar to buying outright, where the system will be fully owned by the customer when the loan is payed out, and any available government incentives are awarded to the customer. This enables customers without initial cash to buy a PV system via instalments.

This gives installers access to a broader market of customers, while keeping the financial arrangement similar to outright purchase. The downsides for customers are the interest payed on the loan, and having responsibility for the system's maintenance.

 

3. Power Purchasing Agreement (PPA)

With this option, a PV system is installed on the customer's house/building, but the system is (at least initially) owned by the installer. The customer pays nothing up front, and instead buys power from the installer, usually at a lower rate to the grid. This can be indefinite or for a set period (say five, ten years), after which the system belongs to the customer.

The installer benefits from a source of constant cashflow, but has to bear the installation and maintenance costs (or borrow). The customer gets cheaper electricity, maintenance is taken care of, but the interest paid is the highest in the long run.

 

4. Lease

Similar to a PPA. The system is owned and maintained by the installer, but the payment is a fixed amount per week/month. Whether this arrangement is cheaper for the customer than a PPA will depend on the lease details and the customer's power consumption.

 

 

These arrangements can be useful for greatly expanding the market penetration of solar. For example, Tesla-owned SolarCity, a company that heavily markets PPAs and leases, has installed 2.45 GW since inception, and had revenue of over $500M in 2016.  Unfortunately, their massive growth had not translated into profits at the time of their Tesla acquisition. While the profit margins for lease/PPAs should be much higher than their cash sales, the initial costs have been high, amassing them $1.25B in debt. This is likely why SolarCity's new parent, Tesla, is looking to shift focus from expensive financing, to more initially profitable cash and loan sales.

 

 

From the successes and failures of these various solar finance arrangements, it's clear that a balance needs to be struck between long-term growth/volume and short-term sustainability, just as with any business.

edited on 2nd July 2018, 19:07 by Wade Tink

Ramy Hasham Jul 25, 2017

There is no clear way to tell which method is the best since we are facing similar problems with our "PowerNow" project here in Cambodia. We considered implementing two of these payment methods depending on the financial situation of our customers and though it could work really well. For example, if your target audience is not financially stable, then you could offer a payment plan using options 3-4 and if they are well off then you could have them pay outright with option 1. You could also charge more for the payment plans and make more money in the long run then if you would have sold it outright. This way you can profit off these outright sales while also having a steady cash flow from the payment plans.

Best of luck in your project.

Reply 4

Andrew Vild Jul 25, 2017

This is something you boys could contribute to.

Reply 2

Ben James Jul 25, 2017

Subscription payments seem like a more secure option for communities. Researching in Malawian rural communities, it seems that even if people raise capital for a product such as a personal PV system, its use does not always lead to an economic return for the communities. This has contributed to unsustainable business cases happening previously here, so a pay as you go/loan could secure the sales from the economic returns that people make from the product, else they return it!

Reply 1

Wade Tink Jul 2, 2018

Status label added: Work Update

Reply 0

Wade Tink Jul 2, 2018

Status label added: Problem

Status label removed: Work Update

This post is the current "problem" only as it considers current alternatives. Needs alot more detail.

Reply 0

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