Solar Energy
Dec 13, 2023

Solar Power Math: Which Financing Option Provides the Biggest Savings in the Long-Run

The demand for alternative power solutions in South Africa has skyrocketed since 2021, with solutions ranging from simple fixes like Uninterrupted Power Supply (UPS) devices to more comprehensive solutions such as invertors, generators, and solar panel installation.

“Solar has emerged as the most sustainable solution, but we have yet to see a real, wide-scale shift to off-grid power,” explains Dominique dHotman, Head of ooba Solar, a platform that provides consumers with solar installation quotes for comparison and assists them in securing financing for their solar projects.  

"Misconceptions persist about solar being a luxury reserved for the wealthy, despite the wide array of solar financing options currently on offer. What’s more, solar solutions are generally priced on a sliding scale - depending on your power requirements.” 

“And given the reduced barriers to entry that exist through solar financing and the ease at which systems canbe acquired, including a solar system purchasing a home should by now be a no-brainer.” 

dHotman does however highlight the need for more accessible financial cost comparisons, given the array offinancing options that exist today. "Heightened demand brings opportunity.Here, it’s important that you compare all the options before simply signing onthe dotted line to make sure that you understand the financial implications, and which option offers the biggest savings, in the long run,” 

To illustrate his point, dHotman points to the escalating rental model in which consumers pay as little as R1740per month. “While this may seem to be the cheapest way to initially acquire a solar system, in the long run, it may end up costing you more.”

Often Overlooked Solar Costs

dHotman explains that when comparing options, many homeowners fail to realise that solar systems are not entirely independent of the Eskom power grid. “You need to consider the total cost of ownership, which includes more than just the monthly financing instalment or rental fee.”

This comprehensive cost accounts for a household's total electricity expenses, combining three unavoidable components:1) the financing instalment;2) Eskom's standard yearly connection fee and 3) residual usage of Eskom's power (measured in kWh) due to spikes in household consumption beyond the solar system's capacity or prolonged periods of low sunlight. 

Financing Options Unpacked

d’Hotman unpacks the pros and cons of each financing option as follows:

1)   Asset Finance: The banks offer tailored loans for solar systems -covering up to 100% of the project’s financing.   

Pro: With a shorter pay-off period, you own the system - in full - after five years.

Con: Monthly instalments are the highest of the various financing options available, due to the shorter financing term and higher interest rate (around Prime +5%). 

2)   Government Buy-back Scheme: Introduced during the 2023 Budget Speech, this scheme operates as a loan guarantee for commercial banks seeking to provide loans to households for solar projects. Under this initiative, theNational Treasury will underwrite the initial 20% of defaults on solar loans, thereby easing the loan approval criteria for lenders. 

Pro: While it operates similarly to asset finance, instalments are capped at a lower rate of Prime +2% and you own the system outright.  

Con: This scheme has a short lifespan (the buyer must sign up before 30 August 2024).

3)   Home Loan Finance: The country’s major banks now offer solar financing through an existing bond or as an add-on to a new bond application.

Pro: This option offers the most affordable monthly instalments, as interest rates are often given at a discount to Prime. “For Q3 ’23, ooba Home Loans achieved an average of prime -0.44% for our customers, so the rate discount is significant.”

Con: An extended financing term means that the system will take longer to be paid off (up to 30 years).

4)   Escalating Rental Model: Individuals choosing self-financing for their solar solution can opt for escalating monthly rental fees or a 'subscription service' through a solar provider.

Pro: Low monthly instalments and a reduced barrier to entry.

Con:  Monthly rental costs escalate each year, and the solar system remains the property of the provider after the contract ends.

Doing the Math 

To compare the starting costs of each of the solar financing options on offer, dHotman uses the example of a house hold with an average monthly spend of R2 250 on municipal electricity(approximately 640 kWh per month). 

“Typically, we look at a solar system that can supply around 80% of the household’s monthly power needs. One must however consider the monthly grid connectivity costs, and the remaining20% of the kWh’s still needed from Eskom or the municipality,” he adds.

With this disclaimer in mind, he breaks down the year-one savings and costs as follows:

“Here, home loan financing is the only financing option that offers initial savings upfront, which is a result of lower, inclusive monthly instalments that are calculated at a discount to Prime,” notes d’Hotman. “Once these initial costings are established, we can look to the total costs and savings of the various solar financing options over a 10-year period.”

"Home loan finance offers the greatest monthly savings until year eight, when asset finance takes the lead. This is because asset finance instalments cease after year five, allowing for extra savings during the following three years,” explains dHotman. 

“On the lowest end of the scale is solar rental, which equates to a saving of only R9 286 over 10-years. In comparison to the likes of asset finance, home loan finance and the government buy-back scheme, these savings are low, especially in light of the fact that the solar system doesn’t belong to you. Here, you miss out on all the benefits associated with asset ownership. Also consider that over a 10-year period, the amount you'll spend on renting will be more than double the cost of purchasing the system outright.”

Deciding which financing option is best can be overwhelming, especially given the sheer number of solutions and pricing options on the market. “The benefit of working with a partner like ooba Solaris that we consult our best-in-class solar suppliers to provide you with a range of quotes, so that you can choose the option best suited to your budget and needs,” dHotman concludes.

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