A commercial solar system is a financial proposition so: 

• A salesperson must understand financial concepts
• Both from a borrower’s perspective, and also 
• From the perspective of a business owner investing their money into something other than solar

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Case study: 100 kW system

A business owner is contemplating a 100 kW solar system to negate his incredibly high electricity bill but this is one of other options he has looked at:

• Could invest the money in the bank
• May spend more on marketing and advertising
• Purchase another machine

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You need to know the value of money

Now money has a value and you have to understand the related concepts of:

• Present value
• Future value
• Net present value

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Present value

An example of present value is the following:

How much do I need to spend/invest right now to achieve $110,000 with an annual return of 10%? 

• Take the future value and divide by ( 1 + rate of return)
• $110,000/(1.10)
• $100,000

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Future value

An example of future value is the following:

• How much money will I have in a years time if I invest $100,000 at 10% annual return
• Take the present value and multiply it by (1 + rate of return)
• $100,000 x (1.1)
• $110,000

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Net Present value

Net present value is used to determine whether a certain spend or investment should be made.

In this example we will look at a commercial solar investment with the following key factors:

• 100 kW system
• Cost to the business is $100,000
• The W.A.C ( weighted average cost of capital ) is 10%
• The length of the investment is 6 years
• In other words what savings will the system accrue in this time in Net Present Value terms?

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Assumptions

The assumptions around this particular system include:

• The system is installed in Melbourne, Australia, North facing
• Energy produced per 1 kW installed is 3.6 kWh on average
• Initial electricity price is $0.25 kWh
• Feed in tariff price is fixed at $0.7 kWh
• Electricity price increases 2% every year
• System maintenance is $500 and increases 2% every year after
• 80% of the solar goes to the loads, 20% to the grid

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The NPV formula

The NPV formula calculates the present value of a series of cash flows, in this case electricity savings per year for six years, so $170,097. 

Sounds good doesn’t it but it’s not the whole story!!

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Not the whole story

Have to use the present value formula which is:

PV =FV/(1+R)n 

• Where FV= future value, in this case the savings from the solar
• R is the W.A.C.C, in this case 10%
• N is the year number, in the case of the first year this figure is 1
• We saved $27,644 in the first year but the present value is ($25,130.99)

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The NPV formula

If we look at present value per year there is a steady decrease from $25,130 in Year 1 to  $18,375 in Year 6 despite yearly electricity savings going up because of the rising price of electricity. 

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Initial investment

The NPV looks at the initial investment, $100,000,  which is seen as a negative amount then adds up all the present value amounts year by year. In this case this is a good investment with an NPV of nearly $21,000. In regards to the IRR this is calculated when the NPV is assumed to be zero. In this case the IRR > than the WACC.

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Conclusion

✅  The value of money has a time constraint

✅  The salesperson and business owner must both understand these concepts

✅  The Net Present Value concept allows assessment of an investment’s worth

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If you’d like to see what Greenwood Solutions get up to in the real world of renewable energy, solar, battery storage and grid protection check out our industry and commercial pages:

https://www.greenwoodsolutions.com.au/industry 

https://www.greenwoodsolutions.com.au/commercial