Asset Class: Commercial PV Systems
What are the advantages and disadvantages of investing in commercial PV systems? For whom is it a good option? Find out what makes photovoltaics interesting as an asset class.
Sustainability is becoming an increasingly important consideration in capital investments. Even so, commercial PV systems are still relatively unknown as a direct investment, although they are similar to real estate investments: both are easily tradable and independent of fluctuations in the capital market. In this article, you will learn about the reasons why investors focus on commercial PV systems.
Characteristics of the asset class
A commercial photovoltaic system is a productive asset. You invest in a “generator” that converts radiant energy from the sun into electrical energy and operate it as efficiently as possible in order to sell plenty of electricity. The returns are easy to calculate and the risks can be minimised through forward-thinking management.
Commercial photovoltaic systems are not a generic financial product. Rather, each PV system must be evaluated individually, as it is planned, constructed, and operated individually. The term “commercial photovoltaic system” itself is unprotected. Their typical size starts at around 50 kWp and extends into the double-digit megawatt range. This does not include large-scale power plants and PV systems on private property.
For whom is the asset class suitable?
Private and institutional investors: They appreciate the good predictability of the investment and the independence from fluctuations on the capital market. The returns are easy to calculate. Moreover, PV systems are sustainable.
Commercial energy consumers: Companies that require a great deal of power like to reduce their costs by operating their own photovoltaic systems and at the same time elevate their sustainability performance. They often have suitable sites themselves or can acquire such sites.
Energy cooperatives and energy suppliers: Energy suppliers can hardly build new, large-scale conventional power plants in Europe. That is why they are increasingly relying on commercial photovoltaic systems. Regional energy cooperatives are also doing the same, sometimes marketing the electricity as their own electricity rate or as a rented rate.
What is the relationship between the risks and the returns of commercial photovoltaic systems?
Profit: The income from electricity production can be planned in the long term. Income is generated from the sale of electricity, which is often guaranteed by the state. If you use your own electricity, the opportunity costs of the electricity price can be recognised as income. Since neither the location nor the orientation of the PV system changes, the output depends on the technical efficiency and durability of the solar technology.
Costs: Just like any other producing machine, photovoltaic systems also entail construction and operating risks. However, the costs for planning, system construction and operation are usually easy to calculate.
Risks: Repairs can lead to downtimes and costs, which is why careful management is important. The rare entrepreneurial risk of total loss, for example due to fire, theft, or extreme weather, does exist, but these cases can be insured against.
Trends of the asset class
The investment class of commercial photovoltaic systems is becoming ever more interesting for a broader investor audience, a fact which can be traced to the following market developments:
Growing secondary market: On the growing secondary market for running systems, photovoltaic projects can be traded with a flexibility similar to real estate. Over the last few years at Milk the Sun, we have brokered several hundred running systems, and demand is particularly high for older systems with very attractive remuneration.
Increasing expansion: The expansion trend of renewable energy is continuing. In order to achieve the environmental and expansion targets, the considerable PV potential in the commercial sector must be exploited. The expansion depends, among other things, on political framework conditions and market regulations, but also on the development of electricity prices and PV systems costs. For example, remuneration schemes can undergo changes, as is currently the case with “power purchase agreements” (PPAs), i.e. direct electricity supply contracts.
Increasing efficiency: Technical advances are increasing the efficiency of photovoltaics and reducing their costs. Module and component prices have fallen massively in recent years, also driven by production relocations, innovations, and economies of scale, making many projects ever more economically attractive. This trend is reinforced by digitalisation, which provides greater transparency and more precise monitoring.
Increasingly professional service: The service providers along the value chain are becoming more and more professional, making planning and system operation even more reliable. Long-term experience is coming increasingly into play, and more precise specialisations are emerging, such as new inspection methods or fault analysis techniques. Through outsourcing, you can therefore additionally improve your profitability and simplify operations.
Asset class strengths:
✓ Yields in the mid-single digits.
✓ Volatility is lower compared to capital market investments.
✓ Risk-return ratio is more optimal compared to capital market investments.
✓ Own electricity can be produced cost-effectively and in an environmentally-friendly manner.
✓ Real economic contribution to the energy transition.
This article was published in our investment guide. For all other articles and information on Direct investment in commercial-sized photovoltaic systems, please visit: Milk the Sun – PV Investment Guide.