Economic analysis and preparation of commercial proposals for PV projects

Defining the best way to present a commercial proposal to solar energy customers can make the difference between signing contracts and unsuccessful prospects.

They must contain as much information as possible, seeking technical and operational details and as many supplier options as possible.

However, even with all the environmental and social resources related to renewable energy systems, economic criteria are still the main motivation.

For this reason, it is very important that integrators, consultants and installation companies understand what the economic variables are to develop a commercial proposal suited to the customer's profile.

Negotiating understanding of the reality of the project, seeking to offer the best technical and economic solution for your profile, requires more frequency from clients.

Service and excellence, not just providing equipment and services. After all, a customer experience is passed on to neighbors, friends and family.

When successful, this experience is converted into great advertising, consequently resulting in more business. The most used economic indicator among solar energy companies is the payback (return on investment), normally calculated in years.

There are at least two ways to perform this calculation. In a simple way, divide the total investment by the estimated annual savings, it is possible to calculate how many years the client will wait to return their investment.

Another way is to use more variables like inflation, average increase in energy tariffs, loss of generation over the years and maintenance expenses. This calculation method, considering future cash flows, is known as payback registered.

To carry out this calculation correctly, it is necessary to understand and use the concept of AMR (Minimum Attractive Rate). This variable can be understood as the minimum investment, in this case, the client accepts to earn on the invested capital.

The TMA is made up of the COP (Opportunity Cost) plus an extra gain due to the risk of a new business. The COP is the percentage that this investor has in return on his money in an investment with low risk or greater control and predictability.

In other words, you can use a forgone opportunity, also called a discount rate. For example, a person who has investments with an average savings of 5%. It's only worth taking money out of savings to earn more than 5%.

Additionally, the investor will define the amount he wants to earn, a remuneration for taking the risk of taking the money from the investment invested as insurance and investing in a new business.

This extra gain due to risk is very variable and depends on the investor's profile, available capital value and usage risks. In any case, this subject must be discussed with the client, so that he understands the additional gains after investing in photovoltaic solar energy, possible risks associated with business and capital gains over the 25-year useful life.

Another important indicator is the IRR (Internal Rate of Return), which can be provided, for this application, as a return on invested capital, normally calculated in % annually. To understand the IRR, it is important to review the technical concepts of the NPV (Net Present Value) of a cash flow.

Cash flow indicates financial inflows and transfers in a given period, also detailing the origin of all the money and its application, developing as a result of financial flow. The NPV represents the present value of future payments discounted at a defined interest rate, subtracting the initial investment.

For example, considering, for a hypothetical project, an NPV result of R $ 100 thousand (using a discount rate of 8%). This result means that the investor will have a gain of R $ 100 thousand above the case of gain or capital invested in another project with an annual gain of 8%.

In other words, it can be considered as additional gain from the investment change option. It is worth noting that the NPV can be negative, or represent a financial loss on the investment, characterizing it as unfeasible.

If the NPV calculation uses discount rates, the result represents the value of the accumulated capital, in present values, the investor will have a return (nominal NPV).

The IRR, in turn, is a rate that makes the NPV zero, thus measuring the profitability of a cash flow. As a rule, a project must be accepted when an IRR is greater than the MARR or the COP, depending on the investor's risk utilization.

Calculations are used using easily available equations in financial mathematics content, made available in tools such as Excel. When an IRR is calculated without considering a discount rate, the result is called a nominal IRR, which represents the gain over the period.

If a discount rate is applied, or the value found is a real IRR, which represents or will obtain additional gain on the rejected investment. From these concepts, and developing the cash flow and useful life of a solar PV system, it is possible to calculate the payback, the most common model for analyzing investment returns.

If the calculation was made in a simple and direct way, dividing the value of the investment by the annual savings, an IRR can be estimated as the inverse of the payback, dividing 100% by the value in years.

For example, using this simplification, a payback of five years represents a rate of 20% per year of return on invested capital. Make a comparison with the investment in the economy in the previous example, with a yield of 5%, or the solar system had a gain four times greater.

Some clients have investments in fixed income funds such as public bonds, debentures, CDB, LCI, LCA, with returns greater than the economy, which can exceed 8% per year when selected with redemption plans in medium and long terms.

In many of these cases, the additional gain that a solar photovoltaic system provides is evident. Additionally, the consumer can use the monthly savings on the energy bill to invest again in previous funds.

This simplified method brings errors, but can be considered a good approximation, especially for recent estimates of prospective projects.

Other non-technical questions should be used in analyses, for example, social and behavioral factors. Many people are at risk when they do not pay attention or have money in a bank account, and this brings a certain amount of insecurity.

Instead of debating and trying to explain complex concepts, often based on the client's reality, the professional must understand the client-investor's point of view and seek a solution that is comfortable.

Explaining how to calculate profitability, how to make comparisons, show news, share Brazilian and other country data and show success stories.

Additionally, when the client does not wish to use their own capital, loans with financial institutions can be great options, normally with interest rates ranging from 1 to 2% per month.

Example: an 8 kWp system negotiated at R $ 35 thousand with estimated generation of 1000 kWh measured in a tax-free tariff region of R $ 0.80 / kWh. To determine the savings, it is necessary to define the simultaneity factor, which represents the percentage of energy generated that will be consumed by the installation.

According to ANEEL (National Electric Energy Agency), these values range from 38% to 58%. Furthermore, most Brazilian states charge ICMS (Tax on Circulation of Goods and Services) on the portion of the TUSD (Tariff for Use of the Distribution System).

In this case, considering the TUSD value of R $ 0.30 and 40% of simultaneity, with ICMS of 25%, an annual saving will be R $ 8.8 million.

Table 1 presents the comparative result between the two methods for the previous example. No simple method is not used such as operation and maintenance expenses, reduction of generation efficiency, reduction and increase in energy tariffs.

Regarding maintenance, there is a lot of debate among professionals, especially as technologies advance and the system's useful life is long. Furthermore, there are manufacturers warranties up to 12 years for some equipment.

In any case, the best option is to use values between 0.5% and 1% (per year) on the invested capital. In this example, for detailed calculations, the value of 1% was used, corrected for inflation estimated at 3% per year.

The reduction in efficiency is indicated by module manufacturers, normally 0.8% per year. These changes do not occur linearly, however, to facilitate the calculations, this was applied linearly.

Finally, the estimated increase in tariffs must be considered, with a typical value of 5% per year. Thus, the payback in the detailed method it was higher, since other expenses were used.

The opposite occurs when calculating the total savings generated over the 25-year useful life. On the other hand, an economic rate of return had a higher result using the detailed method, as the simple method does not consider the effect of compound interest over time.

Table 1 – Calculation methods and results

A large portion of photovoltaic systems use financial banks, with participation from cooperatives and sector associations that provide credit also increasing.

It is very important that companies offer their clients comparative studies between the available possibilities, the economic returns on each option and also simulate various financial entities to understand which is the best option for the client. Factors such as: history with a specific bank, company profile, financial health and sector of activity influence the rates offered.

For example, in question, a tax of 1.5% per month was considered, with fixed installments over a period of 5 years. The comparative results are presented in Table 2.

 Table 2 – Comparison between payment methods

The nominal IRR is the average return on invested capital, just as the nominal NPV is the value of capital accumulated over 25 years after installing the system. To calculate the real IRR, simply discount the ARR, in this case, use 10% per year.

Similarly, the NPV can use a MARR, a result that represents the additional capital that the investor accumulates in relation to the investment used for criteria reference and a return of 10% per year. O payback for a financing simulation it was higher, but the total capital invested was lower.

In this example, the client's largest exposure was R $ 10.8 million, as the loan installment was greater than the annual savings by around 20%, accumulating or paying off over the five years of the loan and then returning the value in less than two years.

Another calculation that can be used to present a commercial proposal is the Levelized Cost of Energy, better known by the acronym LCOE (Levelized cost of energy). Represent the average price paid, in present values, for the unit of energy considered (kWh).

Technically, this calculation must be made for a comparative study between different sources of energy generation when evaluated in a project. Thus, the consumer can use this method to compare the price of solar photovoltaic energy with a distribution network.

The calculation is simple, carried out by dividing the total investment over 25 years (including O&M expenses) by the total net generation in the same period. For example, 8 kW used in this work, or the average cost of solar PV energy was R $ 0.16 / kWh, compared to the value of R $ 0.8 from the distribution company, i.e. five times lower.

In addition to these economic indicators and statistics, other models can be explored, considering investments in variable income, stock markets, other securities and more complex discounted cash flows.

The main issue is that the company must understand the customer's profile and offer solutions within the individual resources of each consumer. An economic and technical approach should not be the same for a medium-sized home, a small business and a large factory.

All of these are important, however, each of them means the economy differently and may be subject to different markets, or changes perceptions of risk, economic return and attractiveness of new projects.

There is no doubt that technical knowledge, understanding the customer and working with diversified product offerings are success factors for companies in the photovoltaic solar energy sector at all times.