i am your guide to solar finance for business

Energy savings and resource efficiency

Business

How to compare finance products

It can be challenging to compare finance products as costs can be expressed in different ways: loans and chattel mortgages can use interest rates, leases use repayments, and power purchase agreements the price of electricity. Using financial metrics can help you compare the costs of different options.

Metrics

The metrics that suit your needs will depend on your business circumstances, solar investment goals and accounting practices. These metrics have been used to illustrate the scenarios for each finance product.

Simple payback period

The time (in years) it takes for the upfront cost of an investment to be recovered from the savings and other benefits generated by the investment. Future cash flows are not discounted, hence the term `simple’.

Net present value (NPV)

The total value, in today’s dollars, of all cash flows (costs, revenue and savings) generated over the life of a project. Future values are discounted to account for the time value of money.

Return on investment (ROI)

There are several ways to determine ROI, but the most frequently used method is to divide net profit of a project by total assets – e.g., if the net profit is $100,000 and total assets are $300,000, ROI would be 33 per cent.

Levelised cost of electricity (LCOE)

LCOE is the constant price (in $/kWh) that can be applied to all electricity generated by the solar system that leads to a net present value of zero.

It can be calculated in two ways.

  1. Not considering if the electricity is used onsite or exported and the time of day it is generated
  2. Only applying it to the electricity generated and used onsite, with exported electricity valued according to known feed-in tariff prices.

LCOE allows for easy comparison with retail electricity prices. electricity valued according to known feed-in tariff prices.

Internal Rate of Return (IRR)

IRR is a way of comparing the return from different capital investment options. It is only applicable to finance options that have a net expenditure early in the project with net income later in the project.

The IRR is the discount rate that makes the net present value of all cash flows from the project equal to zero. The higher a project's internal rate of return, the better the investment.

 Most large companies set a minimum IRR threshold for new projects.

Effective interest rate (Comparison rate)

An effective interest rate combines interest, fees and charges into a single annual interest rate. In consumer finance this is referred to as a `comparison rate’, and financiers are required to provide a comparison rate when quoting for a finance option.

 

 

 

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Page last updated: 10 December 2015