Switching to solar power is a remarkable move for your business and a cost-effective one as well. Solar PV modules empower consumers with two significant benefits – savings on power costs and environmental contribution by going green. However, there are many essential technicalities you need to understand before making the final move to go green.
When you consider buying a solar power plant, you will find two options in the market – Investing in a rooftop solar power plant or buying solar power under a power purchase agreement (PPA). Both the options can be available under two models: the operating expenditure model (OPEX) or capital expenditure (CAPEX) model.
Here, we help you make an informed decision by highlighting the differences between the OPEX and CAPEX in terms of their merits and disadvantages and which model suits you better.
When investing in a solar power plant, there can be two primary business models, i.e., Capex and Opex.
As the name implies, the CAPEX model needs its own Capital Expenditure for the solar power plant setup, i.e. The customer holds possession of the asset. In this type of financing model, the customer pays all the equipment, design, installation, and commissioning costs. An additional annual maintenance contract is given for the plant operations & maintenance by the consumer.
However, if the business premises have sufficient space for installing a solar PV module, the business can make the upfront investment in owning a solar power plant. In that case, a solar CAPEX model should be explored.
Under the OPEX model, a Renewable Energy Service Company (RESCO) invests, manufactures, and takes care of an onsite solar plant. The customer pays for the power generated under a long-term power purchase agreement (PPA) for a fixed tenure at an agreed tariff.
The Opex model alleviates the investment and performance risk of a Capex model since the customer only pays for the energy generated with no significant asset-based investment, which makes the Opex model economical upfront. Therefore, even with a PPA, the power is considerably cheaper than grid power.
OPEX model is also known as a third-party ownership model where the consumers only provide the sites for the solar power plant. In contrast, the plant is possessed and operated by a solar power company or investors. As there is no investment and no associated performance risks, the company benefits from considerable risk-free savings.
The whole operation and maintenance for the agreed life term of the system are taken care of by the partner. The OPEX model is also known as the BOOT model (Build Own Operate Transfer), as the asset possession is transferred back to the customer at Zero cost after the PPA contract.
Read more about Types of Solar Power Plants
Who To Adopt Capex Model
Any business that can make the upfront investment in owning a solar power plant can opt for a Capex model. However, a CAPEX investment has additional potential. A well-managed Capex project can produce a 30% equity IRR and bring about the payback of 5 years, which makes it a profitable investment.
Generation/utilization, capital costs, and displacement tariff (the price of energy that solar substitutes) are the three most significant elements impacting returns. A 1% change in each of these directly affects the project IRR and payback periods by the same degree.
A business with intense green ambitions should also certainly consider Capex. An exclusively owned onsite solar plant is a noticeable commitment to sustainability.
Who To Adopt Opex Model
OPEX is an ideal model for many companies that do not wish to invest in non-core operations. It’s also suitable for them to handle these assets through a third-party player. In addition, in times of liquidity issues and market slowdown, the OPEX model is preferred for many consumers.
Any investment-grade company with a low-risk desire and with capital restraints can think through the Opex model. If authorizations for Capex are likely to be caught up at the C-suite level, Opex will likely see an effortless approval procedure. Moreover, an organization that is reluctant or can’t manage to pay for the plant’s maintenance and operation, including dedicated personnel, will prefer the Opex model.
It is a techno-financial decision in opting for OPEX Vs. CAPEX model, since numerous factors are influencing the decision making viz. capital investment, operation & maintenance, and technical expertise. However, one thing is for sure: switching to solar power adds to long-term business sustainability.
Insolation Energy is a leading solar manufacturing company in India, with superior technology and expertise, offering you the best cost-effective processes, management, and support. The company manufactures the best solar modules in India and helps consumers with optimal technologies, and provides economically competitive service.