Jan 11, 2016

It is no secret Australian manufacturers have been experiencing a tough time of late. The high Australian dollar, a tough international market and high commodity prices have all contributed to a prolonged period of difficult trading conditions.

Among these high commodity prices, and perhaps having the biggest impact, is the significant rise in energy prices experienced since the turn of the century.  Real electricity prices for manufacturing businesses have increased on average 60% since 2003[1], and for energy-intensive manufacturing this has taken a heavy toll on production costs and profits. Where in the past Australian industry has enjoyed low energy prices which has helped compensate for a higher cost of labour, this competitive advantage has now been wiped out by rising energy costs[2].

With companies now having to be smarter about every facet of their operations, looking for alternatives to traditional energy agreements is becoming a more attractive option. Solar photovoltaic is one such option which is steadily gaining popularity amongst Australian manufacturers, made especially through a solar power purchase agreement.

Solar PV systems

Solar PV is the term used to describe solar photovoltaic (PV) power systems, commonly known as solar panels or rooftop solar.

Solar has been consistently popular internationally. Today, more than 51% of all new electric generating capacity in the U.S. came from solar in the first quarter of 2015[3].

While it has been slower to take off in Australia, commercial scale solar photovoltaic (PV) energy is an increasingly attractive investment for Australian companies. In NSW alone more than 5000 businesses have installed a solar PV system, helping save around $25 million per year on power bills[4]. There are two main reasons for installing a solar PV system

1. Helps to contribute to a sustainable future and raise a company’s environmental profile
2. Financial benefits: While companies are well aware of the issues around environmental impact, unless there is a sound economic case that delivers results to the bottom line most companies remain hesitant about moving forward into utilising solar energy. The fact that commercial size buildings provide the potential for large scale solar installations means the financial gain can be considerable

Indeed the decision to switch to solar can be a big one. The purchase and installation of a solar PV system traditionally requires a large up-front capital cost, with system prices for a 100kW system reaching nearly $200,000[5].  This initial investment is the greatest hurdle, as no profit will generally be seen from the system for between 5 to 10 years[6].

A common and successful business model overseas, but relatively new to Australia, a solar power purchase agreement can help Australian manufacturers implement a solar energy system without the initial capital outlay and ongoing hassle.

Solar power purchase agreement

A solar PPA is an agreement is a financial arrangement in which a third-party developed designs, installs, owns, operates, and maintains the solar energy system on a customer’s property, and a host customer agrees to site the system on its roof or elsewhere on its property and purchases the system’s electric output from the solar services at a fixed rate lower than local utility’s retail rate.

PPAs typically range from 10 to 25 years and during this time the operator remains responsible for the operation and maintenance of the system.

While internationally in countries including Germany, Japan and the USA, solar PPAs have been used by the commercial sector for many years, the concept is still quite new to Australia and their remains many misconceptions regarding the advantages and disadvantages.

There are 4 key benefits of PPAs for manufacturers:

As the host customer of a PPA agreement, manufacturers something benefits.

• No upfront capital costs: The developer handles the upfront costs of sizing, procuring and installing the solar PV system. Without any upfront investment, the host customer is able to adopt solar and begin saving money right away. Money can then be better invested into core business activities where typical target ROIs in Australian range from 15-40% as opposed to solar which earns less than 15%[7].
• Reduced energy costs: Solar PPAs provide a fixed, predictable cost of electricity for the duration of the agreement, allowing the customer to maintain a constant price throughout the term of the PPA, saving more as utility prices rise overtime
• Limited risk: The developed is responsible for system performance and operating risk
• Potential increase in property value: With energy efficiency and sustainability at the forefront of public consciousness, it is generally accepted that the addition of solar rooftop panels adds value to a property[8]

PPAs have now been available in the US for about 10 years. In California 75% of new solar PV installations use a PPA or similar leasing structure[9].