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Energy savings and resource efficiency

Business

Operating lease

With an operating lease the ownership of the solar system stays with the financier. At the end of the contract you could have the option of refinancing, buying or upgrading. The financier carries the risk so the cost of finance is often relatively high. Repayments are usually fixed for the term of the lease.

Also known as: Rental agreement, rental lease

Scenario

Below is an illustration of how the cash flows and benefits of an operating lease could work under a realistic, but hypothetical scenario.

 

Solar project

Solar system size

30kW

System cost

$46,285

Replacement inverter cost (assume a new inverter is required after 15 years)

$9,355

Cost of daytime grid electricity

$0.21 to $0.28 / kWh

Capacity charge

$0.34 / kW / day

Finance conditions

Proportion financed

100%

Term

10 years

Interest rate

12.5%

Residual payment

25%

The chart below illustrates the annual cash flow outcomes based on this scenario.

Operating lease: cashflow analysis for an example 30kW solar PV system

This 10 year operating lease means that you are cash flow positive from year 1. There are significant costs of finance in years 1 to 10, but they are exceeded by your energy bill savings. This example includes a balloon payment in year 10 to purchase the system at the end of the lease for 25% of its initial cost. You also pay for inverter replacement in year 15. Other than those years, you enjoy healthy returns after the contact is completed, ending with a Net Present Value of around $57,000.

 

 

Finance details

Period

Principal

Interest Rate

3 -10 years

Up to $200k

5 to 16%

Fees, charges and other payments

Leases usually involve

  • an establishment fee
  • monthly service fees
  • exit fees

 

Operating leases have no residual, but if you take the option to buy, then you must buy the solar system at market value. This may be a nominal figure, as the resale value of a 5-10 year old installed solar system is unlikely to be material.

Although the financier is notionally responsible for the system under an operating lease, you will generally pay for maintenance of the solar system throughout the lease term.

Accounting and tax

The financier owns the solar system and it does not appear on your balance sheet as there is no obligation to buy at the end of the lease. You may claim tax deductions for all fees and lease payments, but may not claim deductions for depreciation of the asset. 

Advantages

  • Zero or reduced upfront cost, freeing up cash for other business investments.
  • You are under no obligation to purchase the possibly obsolete system at the end of the lease.
  • You may have the option to purchase the system quite cheaply at the end of the lease and continue to save on energy bills for the remaining life of the system.
  • Repayments may be somewhat lower because of the retained value at the end of the lease.
  • Repayments are fixed, making budgeting simple.

Disadvantages

  • Cost of finance generally high due to the disposal risk borne by the financier.
  • You will typically have to pay for maintenance and operation.

Risks

  • Energy bill savings may be less than the lease repayments, so you may not see net benefits.
  • You may be liable for maintenance and operation, so make sure you clarify that in the contract.
  • If you wish to purchase the system at the end of the lease, make sure you budget for the residual payment.
  • Fees and charges will vary between financiers, so make sure you understand them all.

 

 

The performance of any solar  finance option is highly dependent on how you and your financier structure the agreement. This includes the amount financed, the term of the agreement, the interest rate charged, fees and charges and any balloon payments or residuals.

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Page last updated: 10 December 2015