Financial funding in the renewables sector is rising at a remarkable rate. There are multiple pathways and directions that can be taken for both the residential and commercial sectors. It’s a long term investment and one that requires careful navigation. Ecogeneration spoke to renewable energy finance expert Gregory Ferrett about the state of the current market and where financing for renewables is heading in the future.
What does ASM Money do and who is your market?
ASM Money design and implement finance solutions for the commercial renewable energy market. All out team are renewable energy experts and finance experts.
Our catch phrase is ‘It’s the cash flow, not the cash’.
Commercial organisations expect to be sold to by experts in solar, business and finance. A business owner assumes the person they are receiving advice from knows what they are talking about and has a full understanding of technology available and financial options suited to their business. As the banking royal commission, however, is showing us, an ‘advisor’, when allowed, sells what they make the most commission from and not what is in the client’s best interest.
The Clean Energy Council does have a ‘Solar Retailer Code of Conduct’, and there are a lot of organisations signed up to this voluntary code, however, the section on ‘finance’ is consumer focused and, by my reading, the sales person should have their own finance qualification or have their own credit licence to meet the guidelines. This would be a rare person indeed.
What sort of finance model do you use and are there differences between financing residential and commercial projects?
Residential finance is highly regulated and requires the person discussing finance to have a credit licence or be a licenced credit representative of a licence holder. This regulation protects the consumer and makes obtaining finance for a consumer more difficult and time consuming than commercial finance. For consumers, as the amount financed is small, the simplest way to finance a purchase is a redraw on their mortgage or a small personal loan. Most installations of solar are on homes owned by the purchaser so even a credit card linked to a mortgage can be reasonable priced. Most banks will lend up to $20,000 to their mortgage clients if they are up to date on their mortgage payments. There are several specialist lenders who provide consumer loans specifically for solar over periods up to 10 years to ensure the solar installation is cash flow positive immediately.
There are also a few finance companies offering ‘interest free’ loans for solar. These have been popular in the past and continue to take a large proportion of finance in the residential market. The main difference with ‘interest free’ is the solar retailer pays the interest up front to the finance company and increases the price of the goods to compensate for this. The reason this is such a popular way to finance solar is that sales people like to use this product to ‘close the sale’ quickly. A consumer, once they have signed a contract and have their finance approved at the same time, tend to not take advantage of cooling off periods. The main downside of this finance is even if you pay it off early you still pay the full amount including the interest already paid for by the supplier. With a personal loan you pay a smaller amount for the installation and can pay out the loan early without penalties.
Commercial finance, on the other hand, is NOT regulated even though the government has brought in new regulations to make commercial finance for smaller businesses more like a consumer loan. I anticipate SME commercial finance regulations will continue to tighten up to make it more difficult to hide costs and commissions. Commercial financing for larger customers and projects is largely unregulated.
How do chattel mortgages work in the renewable sector?
Chattel mortgages are the commercial renewable energy markets ‘enemy’.
Assume a tax paying commercial organisation is planning to invest $90,000 ex-GST in a renewable energy project. This is net after STC rebates.
As this is a renewable energy project designed to specifically reduce their energy bill the first thing to happen is their power savings drop to the bottom line where the tax office can gleefully claim up to 30% of the savings as increased company tax.
If the company has borrowed the money from the bank as a loan or chattel mortgage repayments on this loan are not tax deductible. The only amounts a company can claim as a deduction are depreciation over twenty years (5% of the net ex-GST price a year straight line) and interest.
This means a $90,000 ex-GST solar project, installed in NSW, with a chattel mortgage is likely to cost, in cash terms in 2018 dollars, about $103,000 PLUS up to $28,000 in additional company tax payments.
Even if they were to pay cash the project is likely to cost, in cash terms, about $84,600 PLUS up to $28,000 in additional company tax payments.
With an ASM Money solar lease / solar rental the exact same system, over 48 months, in cash terms in 2018 dollars, will be about $74,500. In addition, as all solar lease / solar rental payments are 100% tax deductible, the additional payments to the ATO are likely to be zero. This includes an estimate of a transfer of ownership fee at the end of 48 months.
Using the tax system and the correct financial product, this represents a 48-month saving of $38,000 over even paying cash for the system.
Is the boom in renewable financing impacting the small to medium market?
I find it interesting that there is so much money being invested in utility scale solar when solar can have a much more profound impact when installed at the commercial premises if space is available. Phillip Lasker, business reporter with the ABC, wrote an excellent article ‘We have a gold-plated electricity grid consumers can’t afford’ (Gold Plated Link) talking about the cost of moving power form the source of generation to the business consumer. What staggers me is the price of generating power per kW can be in the $0.04 to $0.05 range yet, with the cost of getting this power to a business, the prices needed to make a profit can be in the $0.18 to $0.25 a kW. If a business installs a renewable energy project they can eliminate the transport cost by generating on site.
My take is the boom in renewable financing at the utility scale will continue in the short term. Medium term, however, installation of commercial projects on a commercial organisations site will grow very rapidly as the economics of this type of project become more obvious.
Commercial organisations without room to install a renewable project will continue to purchase all their power from the ‘Gold Plated’ grid.
Are global market forces driving the sector in Australia?
The main global force impacting on Australia, in terms of finance, is the continued downward push of prices.
With Donald Trump trying to reduce the importation of Chinese panels into the USA this may have a short term downward impact on prices as well if factories try to ‘dump’ panels and inverters into our market.
The NAB came out recently and said the sector had reached a tipping point in investments. Has financing reached a tipping point?
Mike Baird of the NAB is right to state the market is at a ‘tipping point’. In my view we are unlikely to see any new major investments in energy other than in renewables. Sustainability is the catchcry not just in energy but in all industries. We have already passed the point where the world can sustain the current population using technology from the 20th century.
In energy the six technologies I expect to see delivering power to the next generation are;
- Solar
- Wind
- Hydro & Pumped Hydro
- Wave / tidal
- Thermal & Geo Thermal
- Energy storage and super capacitors
Each of these can deliver sustainable and long-term energy supplies and has their place in the energy market. I expect all major investments to be made in these and other, as yet to be proven, technologies.
There was a 150% investment increase in 2017. Is 2018 shaping up to be similar or is the trajectory even greater?
If you take out investments in Utility scale solar farm installations, we expect the business scale (15kW to 100kW) and small-scale power stations (100kW to 5MW) to double in 2018 and then double again in 2019. We anticipate the Dad & Mum residential market to continue to be strong and grow despite the ongoing reduction in the government rebate.
Where do you see the sector heading in the coming years?
Solar is easy to sell and does not require much of an investment to get started. This market will continue to grow.
The future is larger commercial renewable projects with complex interaction between various technologies. This requires specialist sales people who understand renewable technology across the board and the impact the financing of these projects has on a businesses cash flow. Delivering power, with minimal reliance on grid power, to a 24 hour a day seven day a week manufacturing organisation is now possible.