Solar’s access to finance is why it’s so far ahead of power-generation rivals

In energy markets, there is nothing quite like it. Solar is a capital-intensive energy technology (in fact one of the most capital intensive) that has access to more finance streams than any other.

Let me explain...

Conventional power generation technologies, usually coal-fired power plants, nuclear or gas plants have relied heavily on structured project finance capital markets. Generally, in years past, a government would issue bonds for the capital works (yes, trading off their credit rating – not that those really mean too much as the GFC demonstrated). Fast forward a few decades and debt finance would be handled by the banks in conjunction with a percentage of equity from a large utility, often owned by a government. These projects more often than not, received debt guarantees by governments but due to the way the utility business was heavily regulated in favour of their survival (government, of course, fear the lights going out) they always made a good return to their investors and the interest bills got paid.

The thing with this traditional finance model is that, really, you went to the same group of people each time to finance your project. Power plant proposals were beholden to the banks, usually a syndicate would be formed led by local banks with international banks to spread the risk. The public (via governments/utilities) were always the debtors.

Fast forward to present day and renewables.

Wind power proved more agile than coal plants, in Australia at least, due to the maturity of the energy sector and capital markets. Lots of finance for these smaller (relative to coal plants) projects could be sourced completely offshore. This would help facilitate their rapid rollout. Unfortunately, in recent times politics got in the way with the Abbott government deliberately creating uncertainty. Even though the situation for garnering funding has improved for these medium-scale renewable energy projects, there is still a significant hurdle in financing.

So what is different with solar? Solar is a different beast altogether than wind or coal in that the reasons for solar projects getting built are very diverse and the funding pools to finance the building of them are also very diverse. This means that the solar industry is very resilient, even in the face of a political campaign against it.

Residential

First, let’s look at funding sources for residential solar systems

1) Cash

Domestic solar systems first and foremost can get paid out of cash savings, that’s cash that probably would have been earning at best 2.5% in the bank and may or may not have been allocated to other discretionary spending if it hadn’t gone to solar.

2) Credit cards

Two types of credit card options are funding domestic solar systems. Astute home owners can take advantage of six to18-month interest free introductory offers on credit cards that have no monthly fees and no interest whatsoever (unless you miss a payment of course). Others could use a credit card paying significantly more interest (in the range of 10-20%). Even though this isn’t a good rate it is still a significant source of funding for solar in Australia.

3) Vendor finance

The big power utilities, along with some of the solar companies including Energy Matters (now Sunedison), offer financed PV systems where you pay so much per month for 48 or 60 months until you pay your system off.

4) Pensions and superannuation

Another source (I’ll separate this out from cash) for financing solar systems has been people’s retirement savings. In fact this one has probably been one of the most significant.

The motivations for these investments are also an interesting part of the equation.

Some of the solar installs are quite rational decisions. Customers understand their energy usage and how much self-consumption they will get out of a system. They understand the feed-in tariff (which are pretty low these days at around $0.06/kWh, depending on where you live) and they can see that their payback will be somewhere between four to eight years.

Other people who don’t have a complete grasp on the financials (and this is probably the majority) have heard that the economics are reasonable and so are willing to purchase solar based on simply a recommendation from others.

Furthermore, there is the environmental and social aspect. Many people like to take a leadership position in their community and others want to show that they’re doing the right thing. These all lead to cash being freed up to build more solar. These motivations, rational and irrational are just not available to conventional electricity generation projects.

Business

Businesses have been investing in solar for a range of reasons but until the last few years it hasn’t really been primarily for an economic return.

1) Public relations budget

A lot of companies want to look good and they want to be seen as good corporate citizens. Coming from an equivalent pool of money that could be considered 'public relations and marketing', large visible solar arrays are often installed on commercial rooftops. The marketing cost is not significant when the payback is considered and being powered by solar is such a good news story, which gets it bumped up the priorities list. So even if solar might not be considered the best thing to invest in, it benefits from the goodwill that it will generate for the business.

2) Staff engagement human resources management budget

Although it is similar to the aforementioned PR reason, businesses often find that they are under significant pressure from staff to do something good. Investing in solar is seen as good for staff morale which reduces costly staff turnover.

3) Energy budget

In many cases a medium-sized energy intensive business that operates during normal business hours will install a solar system for self-consumption purposes to save money on their bill. In this particular case the rationale has been primarily a financial one. In some instances larger consumers can move from capacity charging arrangements to small customer arrangements saving even more money by clipping their peaks during the day due to the addition of solar.

Utility

Utilities and independent power producers are benefiting from government programs to increase renewable power tapping into conventional capital markets to get these projects built. Compared to the various funding sources for solar this source isn’t the biggest, however it has certainly featured strongly in the United States due to the Portfolio standards in California and US Department of Energy loan guarantee programs.

I know of a few more diverse motivations for a solar install including a wedding gift, home-warming gift and a gift to one’s elderly parents to help them in retirement. As you can see solar is financed from many sources and for many reasons – including ones I’m sure I haven’t mentioned. This is why solar is so different. Scaling from a few hundred watts (for example, upgrades to existing systems) to gigawatts, solar is scalable to meet the available funds of any group/organisation or individual in the community. That’s why solar photovoltaics are going to dominate energy generation in the future, no other energy generation technology can compete when it comes to finding a funding source no matter how big or small.

Matthew Wright holds a graduate diploma in engineering and is executive director of Zero Emissions Australia, technical director at Efficiency Matrix and resident columnist at Climate Spectator.