CAPEX vs PPA: How to Pick the Right Financing Model to Go Solar?

Going solar is a profitable investment for all types of consumers be it commercial, industrial or residential! Every consumer saves money on electricity bills by installing solar annually. During current economic situation, these savings are looked as a handsome amount in hand. However, when it comes to switching to solar, one of the key challenge is its capital cost. Paying upfront capital cost may stress most of the consumers. Therefore, some consumers think twice before going solar even if it is profitable in future. Yet, going solar is an extremely affordable when many financing models are available in the industry.

This article will help you understand the solar financing models that any consumer may opt for switching to solar. Navitas Solar is one stop solution to go for all kinds of solar products.

CAPEX- CAPital Expenditure

In this model, solar installer installs solar power plant at consumer’s place & consumers are supposed to pay the capital cost of the solar plant upfront on their own. In this model, consumers are supposed to bear all funds required for the operation and maintenance. Consumers install solar plant to reduce their electricity bills. Any type of excess generated electricity is injected into the grid. It is considered as the best deal because in this model, paying any type of interest is not involved in the long runtime. The cost of solar plant and the cost of electricity are the lowest in this model when you are switching to solar. The Return On Investment(ROI) is also high under this model. When consumers are having enough cash in their hand and interested to avail GST benefits and depreciation benefits, this is the suitable model to choose. Even for residential consumers also it’s the best model especially when your state is providing substantial subsidies. The payback period under this model is less than four years. Consumers may enjoy low levelized cost of energy (LCOE) under CAPEX model. A business with serious green ambitions should also definitely look at CAPEX since a 1 MW solar power plant offsets approximately 1400 tons of CO2 annually. A wholly owned onsite solar plant is a visible commitment to sustainability. This model is the most common type of rooftop deployment in India. In this model, the owner is able to generate and trade carbon credits of the solar plant. Typically, 1 MW of solar power plant can generate approximately 1400 carbon credits a year.

PPA- Power Purchase Agreement

This model is also termed as OPEX (OPerating EXpenditure) or RESCO (Renewable Energy Service COmpany) model. This model for going solar allows the consumers to install solar plant without buying it. The solar plant installed at the consumer’s place is owned and maintained by the solar installer in this model.
 

The consumer is supposed to sign a Power Purchase Agreement (PPA) to buy the electricity generated by the solar plant at an agreed tariff. Any excess electricity generated may be injected into the grid. The key advantage of this model is that tariff is fixed for a period of 10- 25 years depending upon the contract. In this model, all types of cost and risks are borne by the solar developer. The developer will be the solar plant’s owner for the lifetime and is responsible for operation and maintenance of the plant throughout. Therefore, the consumer may get rid of paying the upfront capital cost. However, the electricity generated by solar plant under this model is a bit costly than CAPEX. However, not many installers offer OPEX model for small projects or households. Generally, installers offer OPEX model for medium to large-scale projects to make the project viable. Some drawbacks of this model are lack of tax depreciation benefits, GST benefits and high levelized cost of energy (LCOE). This model is ideal for companies who are looking up to go for green transition. This can be a better option in states that are providing significant subsidies on installing rooftop solar.

- Arun Krishnan, President-Sales, Navitas Solar