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The list covers the residential, commercial and industrial sectors
In May 2024, the upfront cost of installing a solar power system in South Africa would set you back approximately R150,000 to R350,000 for a small project and up to R3.5 million for a 100kW system.
The high upfront capital cost, which includes panels, inverters, racking, cabling, optional battery storage, installation, and labour, limits the willingness and ability of businesses and households to invest in this carbon-free and sustainable form of electricity generation.
As the market has grown, innovative funding solutions have developed.
Here are seven financing options for the residential, commercial and industrial sectors to consider:
Power Purchase Agreements
PPAs are a popular choice among intensive energy users since the service provider fully covers the system’s pre-site preparation, installation, and long-term O&M. This funding mechanism usually includes insurance and performance guarantees and can result in electricity cost reductions from the outset.
Following the signing of a long-term agreement, a solar tariff is billed monthly, based solely on the amount of energy the installation produces. This tariff can increase annually at a fixed escalation, allowing businesses to predict future energy costs more accurately.
Entry-level PPAs usually span 10-15 years, while more comprehensive PPAs are commonly up to 25 years. The agreement will include a tariff increase of 1-5% annually to account for gradual decreases in system operational efficiency, operating and maintenance costs, and increases in the retail electricity rate. The tariff can be as much as 40% cheaper than the national grid, providing significant savings over the PPA’s lifetime.
Businesses that use large amounts of daytime power and operate five to seven days a week are likely to generate the highest savings from this funding model. While ownership of the project remains with the service provider until the end of the agreement, business owners can purchase the system during that term and have various PPA exit options.
Fixed roof rental
Fixed roof rentals have become a favoured choice for the owners of residential complexes, commercial shopping centres and strip malls, as a long-term roof rental agreement monetises their previously unused roof space.
The solar services provider pays a fixed monthly payment to the property owner for the use of the building’s roof space, which, in turn, produces solar energy for the property.
The property owner pays the solar services provider for the energy used based on the energy regulator or municipal rates, while all other costs, such as system maintenance, operations and insurance, remain with the services provider.
Lease agreement/equipment rental
Under a solar lease agreement (or equipment rental contract), the solar PV provider pays for the installation, maintenance and management of the solar panel and its components. The lessee pays a fixed monthly lease payment for the duration of the lease term.
The monthly payment is determined based on the estimated annual production of the solar system. A lease agreement differs from a PPA in that the consumer pays a fixed monthly amount rather than agreeing to purchase the power generated by the system at a set price per kilowatt-hour.
The monthly payments remain the same throughout the year, with yearly increases applying. The risk associated with the volume of solar energy produced and consumed resides with the lessee.
Upfront capital investment
Companies able to fund their solar PV project from existing cash reserves may find the upfront costs startling but the benefits appealing.
In 2024, the average cost of a 100kWp setup was approximately R1.5 million to R3.5 million, depending on whether battery storage is included, the location of the premises, and any challenging factors such as roof accessibility.
This price tag includes solar panels, inverters, mounts, cables and other necessary equipment. However, the business is also solely responsible for all ongoing annual costs, such as installation, insurance, performance monitoring and management, and exposure to the system’s performance risk.
In South Africa, the benefits of cash-funded systems include VAT deductions, Section 12b tax benefits (expiring 28 February 2025) and carbon credits, which can result in additional cost savings.
Commercial bank financing
Responding to increased interest in industrial and manufacturing energy consumers in solar PV solutions, several banks have structured innovative finance agreements. These commercial banks offer loans for solar PV installations, with primary instruments being term loans, instalment sales agreements, asset and property finance, mortgage-backed business loans and access bonds.
The lending period for commercial installations ranges between 5-10 years, while the collateral requirement for debt funding is often taken against the underlying property and the system. The solar production risk remains with the project owner.
Project financing
Project finance is transformative for developers, enabling them to isolate risks, secure more borrowing, and accelerate development. Unlike corporate financing, project finance involves creating a Special Purpose Vehicle (SPV), where loan repayments come solely from the project’s cash flows, typically generated by selling solar energy.
This method confines revenue risks to off-taker or counterparty risks, avoiding complications from other corporate activities. It usually features a non-recourse structure, limiting collateral to SPV assets and protecting the corporate owner’s balance sheet.
Equity financing
Equity financing often fills the funding gap left after securing debt for capital-intensive projects. Typically, if a project is 60-80% debt-financed, the remaining 20-40% is covered by equity or shareholder loans, which can be even more efficient.
This involves issuing project equity in exchange for funding. Unlike loans, equity financing doesn’t require repayment; instead, investors receive a share of the project’s profits, which allows project owners to maintain control while providing investors with potentially high returns, incentivising them to undertake higher risks associated with early-stage renewable projects. ESI |
