As the world continues to seek cleaner and more sustainable sources of energy, solar power has emerged as a leading contender. Solar energy offers numerous advantages, including reduced carbon emissions, lower energy costs, and increased energy independence. However, when considering solar installations, individuals and businesses often face the dilemma of choosing between two financing models: Capital Expenditure (CAPEX) and Renewable Energy Service Company (RESCO). In this article, we will delve into the features, benefits, and considerations associated with each model to help you make an informed decision on which solar model is better suited for your needs.
Business Models in The Case of Solar Power Plants
When it comes to solar power plants, the business model refers to the approach through which consumers or investors generate revenue by selling the electricity produced to DISCOM or saving money by consuming the generated electricity. In India, there are two primary solar business models: CAPEX and RESCO.
However, there is no one-size-fits-all solution as each model has its advantages and disadvantages. The choice between CAPEX and RESCO depends on the specific objectives of going solar, as it is not solely about going green. Businesses must consider their strategic goals when selecting the appropriate model for solar power plant installations.
Hence, it is crucial for consumers and investors to carefully choose the right business model to minimize risks and maximize return on investment (ROI). Many customers in India and overseas find themselves confused between these two models. There have been numerous cases where customers who initially intended to opt for RESCO eventually switched to CAPEX, or vice versa, after engaging in detailed discussions with system installers.
CAPEX (CAPITAL EXPENDITURE) SOLAR MODEL
The CAPEX solar model is widely adopted as the prevailing business model for solar power plants in India. Under this model, consumers typically engage a solar Engineering, Procurement, and Construction (EPC) company, which offers a comprehensive installation of the entire solar power system and subsequently transfers ownership of the assets to the consumers.
Under this model, the owner assumes full responsibility for the project's costs, maintenance, and operational risks. The solar project owner purchases the solar panels, equipment, and installation services outright.
Features of CAPEX Solar Model:
- Residential, industrial, and commercial customers have the opportunity to take ownership of the solar system.
- Customers initiate rooftop solar projects with the goal of reducing their own electricity expenses.
- The customer assumes full responsibility for financing the project's capital expenditure.
- Customers can profit by selling any excess power generated to the DISCOM.
- The savings obtained from reduced electricity tariffs benefit the owner of the roof and solar power plant.
- Commercial and institutional clients are eligible to claim accelerated depreciation.
- The Engineering, Procurement, and Construction (EPC) company also provides annual operation and maintenance (O&M) services for the plant at a mutually agreed cost per year.
Benefits of CAPEX Solar:
- Long-term cost savings: With CAPEX, the owner benefits from significant long-term cost savings by eliminating monthly electricity bills and potentially generating surplus energy that can be sold back to the grid.
- Return on investment: By owning the system, the owner can directly benefit from any tax credits, incentives, or rebates available for solar installations. They can also realize a return on their investment over the system's lifespan.
- Increased property value: Solar installations often increase property value, making CAPEX an attractive option for homeowners and commercial property owners looking to enhance the marketability of their properties.
Disadvantages for CAPEX Solar:
- High upfront costs: The primary drawback of CAPEX is the substantial initial investment required to purchase the solar system. This can be a significant barrier for individuals or businesses with limited financial resources.
- Maintenance and performance risks: As the owner, you are responsible for maintaining and ensuring the performance of the solar system. This includes addressing any potential equipment failures, repairs, or system optimization.
- Technological obsolescence: Rapid advancements in solar technology can lead to the potential for system components to become outdated over time. Upgrading or replacing equipment may incur additional costs.
RESCO (RENEWABLE ENERGY SERVICE COMPANY) SOLAR MODEL
A Renewable Energy Service Company (RESCO) is an ESCO (Energy Service Company) that offers consumers access to energy derived from renewable sources such as solar photovoltaics, wind power, or micro hydro. In this solar financing model, a third-party service provider (RESCO) owns, installs, operates, and maintains the solar system on behalf of the customer. The RESCO model is often structured as a long-term agreement, typically ranging from 10 to 25 years. The RESCO or BOOT (Build, Own, Operate, Transfer) solar model operates on a "pay as you consume" principle, where consumers pay for the electricity they use.
Features of RESCO Solar Model:
- The Solar Power Plant is owned either by the RESCO or ENERCO, which are energy companies.
- The customer availing the service does not possess ownership of the Solar Power Plant. Instead, they enter into a Power Purchase Agreement (PPA) with the actual investor at a tariff and tenure mutually agreed upon.
- Under this arrangement, the customer is charged based on the electricity consumed, with a per unit price for the power used.
- The RESCO developer takes responsibility for the annual operations and maintenance (O&M) of the Solar Power Plant.
- Any surplus power generated by the Solar Power Plant is sold to the DISCOM, benefitting the RESCO in terms of revenue from the excess energy sales.
Benefits of RESCO Solar:
- Lower upfront costs: RESCO eliminates the need for a significant upfront investment, making it an appealing option for those who cannot afford the initial expenses associated with solar installations.
- Outsourced maintenance and performance risks: With a RESCO agreement, the service provider is responsible for maintaining and optimizing the solar system's performance, reducing the burden on the customer.
- Flexibility and scalability: RESCO allows for flexibility in terms of system size and scalability, enabling customers to adjust their energy requirements over time as their needs change.
Disadvantages for RESCO solar:
- Reduced Control: By opting for the RESCO model, the customer relinquishes control over the solar system, including the ability to customize or upgrade the equipment.
- Long-Term Commitment: RESCO agreements typically span several years, making it crucial to thoroughly review the contract terms before signing.
BOOT (BUILD, OWN, OPERATE, AND TRANSFER) SOLAR MODEL
BOOT (Build, Own, Operate, and Transfer) is a form of RESCO that encompasses the following characteristics:
- Under the BOOT model, the Renewable Energy Service Company (RESCO) undertakes the construction, ownership, operation, and eventual transfer of the rooftop solar project to the customer (Rooftop Owner) upon the contract's expiration or in accordance with mutually agreed-upon terms.
- Upon the transfer of ownership, the customer assumes responsibility for the operation and maintenance (O&M) of the solar project.
- The customer has the option to either continue utilizing the services of the original RESCO for O&M requirements or arrange for their own maintenance and operation services
In a Nut Shell
The CAPEX model allows for savings to begin after the payback period, while in the RESCO/BOOT/OPEX model, savings commence from the first day. However, it is important to note that the savings and free electricity obtained through the CAPEX model will consistently be significantly higher compared to the savings achieved through RESCO.
WHO SHOULD CHOOSE WHAT?
YOU SHOULD OPT FOR CAPEX SOLAR MODEL:
- If you prefer a quick payback period of 3-5 years and enjoy free electricity for 25-30 years thereafter.
- If you want to invest your money in solar to obtain better risk-adjusted returns over a 25-year timeframe compared to other financial or core business assets.
- If you seek indirect benefits such as accelerated depreciation, cheaper electricity, and goodwill.
- If you consider securing a bank loan, the CAPEX model may be more favourable than the BOOT model.
YOU SHOULD OPT FOR RESCO SOLAR MODEL:
- If you are comfortable with a long contract period of 15-20 years.
- If you can generate regular cash flow throughout the duration of your RESCO contract.
- If you desire the benefits of cheaper electricity without investing capital in the project.
- In the case of the BOOT model, you accept the responsibility for operations and maintenance after the ownership transfer.
- If you are prepared to tolerate any potential unsatisfactory services from the RESCO provider. Switching between service providers is practically impossible due to contractual obligations and associated hassles. RESCO companies will not accept such terms until they realize their returns.
Both the CAPEX and RESCO models have their advantages and considerations, making the choice depends on individual circumstances. The CAPEX model offers ownership, control, and long-term cost savings, but requires a higher upfront investment. On the other hand, the RESCO model provides lower upfront costs, immediate savings, and minimal maintenance responsibilities, but you do not own the system and may have limited flexibility.
Before making a decision, it is crucial to evaluate your financial situation, available capital, long-term goals, and preferences. Consulting with solar energy experts, financial advisors, and considering local regulations and incentives can help you make an informed choice. Ultimately, both models contribute to the growth of solar power and a more sustainable future.