A photovoltaic plant is a future-proof direct investment in a tangible asset, similar to real estate. But take care: in place of troublesome tenants or fluctuating rents, other risks must be managed and controlled. You can learn about common risks and how to protect your investment from them in this article.
Why photovoltaic projects fail
However, the times when double-digit returns were achievable are long gone. Today, investors generally expect mid-single-digit returns when buying a photovoltaic system.
This means that the projects that are purchased today are often so tightly budgeted that unexpected negative deviations in the yield and cost structure can quickly lead to the operating companies becoming insolvent.
The cases in which PV plants are taken over by financing credit institutions or sold during insolvency proceedings are increasing because technical deficiencies, incorrect yield and/or liquidity forecasts or a lack of transparency in operating costs have a negative impact on the profitability of the photovoltaic plant.
In the rest of this article, we will list the most serious and most frequent reasons for a failed investment in a PV system.
1. Incorrect profitability forecast
Anyone considering investing in a new or an already-operating plant will first carry out a simulation of the predicted yields, after deducting all costs. There many simple and inexpensive tools available on the market for this purpose, which provide a good initial overview of an investment.
The calculation is no witchcraft: if you know how high the annual electricity yield and the feed-in tariff of a plant will be, you can easily calculate the corresponding income.
If you subtract the running costs, the financing costs and any taxes from this, you get the monthly or annual surpluses or losses, which then determine the liquidity of the investment.
But the difficulties are hidden in the details: how high are the actual running costs and the additional purchase costs for the PV system under consideration? Can I rely on the cost data provided by the seller and have sufficient reserves for future replacement investments been taken into account?
Are the seller’s statements on income realistic? Have the liquidity inflows and outflows been simulated correctly so that the ability to pay is always given?
Before making a purchase decision, the investor should carry out a valid calculation of the actual cost factors. Liquidity planning is also important, especially from a tax point of view, if, for example, special depreciation allowances and the like are used. The tax advisor should be the first point of contact here.
2. Technical deficiencies in planning and construction
Many investors in small and medium-sized projects are often only superficially familiar with the relevant technical details of photovoltaic systems. Planning and implementation – possibly even operational management – are often carried out by one and the same company.
On the one hand, this makes sense, as these EPCs are usually very well versed in the technical details and the costs are lowest for the investor this way.
The disadvantage, however, is that the investor must trust that the provider is not only reliable but also competent in all areas. You should carry out an external independent review of the technical documentation and, if applicable, the contract (from a technical point of view) in any case.
It is also advisable to schedule an on-site appointment at least for the building inspection or the inspection of the existing system. Experts who specialise in acceptance reports and construction supervision can provide support here.
A very important, but often ignored point is the yield forecast. The contents are not only decisive for the profitability calculation of a photovoltaic system, but should also form the basis for the pricing of an investment.
After all, the electricity yield determines the income. Far too often, even experienced investors rely on the providers’ forecasts without checking them thoroughly. Before making any investment decision, an independent forecast or an expert opinion to assess the yield should provide certainty.
An inspection of the technical details of a photovoltaic plant should cover the following components:
- Inspection of project planning for new plants
- On-site inspection including professional evaluation for existing plants
- Evaluation of the plant components and design
- Inspection of the resilience of existing yield forecasts
- Performance check (for existing plants)
- Contract evaluation from a technical perspective
3. Contractual errors and legal pitfalls
Unfortunately, legal texts, regulations, but also the contracts for lease, purchase or construction, direct marketing, operation, etc. are often difficult to understand for many new investors. They can be so lengthy that a self-examination is complicated and time-consuming.
Nevertheless, it is of course important that a project is set up in a legally sound manner right from the start.
In the meantime, there are many law firms that specialise in renewable energies and can provide the investor with the necessary security. In general, a distinction can be made between two types of advice:
1. Legal purchase advice: here the specialist lawyer helps with the assessment and examination of all relevant evidence and contracts relating to the purchase of a PV system:
- Purchase or GU contract
- Permits for construction and operation
- Entitlement to subsidies under the EEG
- Lease and utilisation contracts
- Maintenance and monitoring contracts
- Guarantee and warranty rights
- Possible direct marketing contract
- Other contracts or required documents
2. Legal advice in the event of a dispute: Normally, investors operate their plants over a period of several years. During the long period of operation, disputes may arise again and again. Here it is worthwhile to consult a lawyer if necessary. Common disputes are:
- Unclear contracts with owners of land and buildings
- Disputes with insurance companies in the event of damage
- Warranty cases
- Problems with service companies
- Damage caused by third parties
In particular, risks during operation can be minimised even before the purchase of a photovoltaic system if the contracts with the supplier, the general contractor, the maintenance company and other partners have been drawn up or checked in a legally sound manner.
Conclusion: minimise risks and profit
Dangers lurk in every investment, both during the transaction process and during the long period of operation of a photovoltaic system. Unfortunately, not all risks can be eliminated – for example, one has little influence on fluctuations in solar radiation.
It is also difficult to predict how electricity prices will develop in the long term, and therefore what the revenues will be from direct marketing or savings from own electricity consumption.
Most dangers can, however, be turned into calculable risks, if the investment is well examined. For example, the examination of the yield report provides certainty about the yields that can be expected with realistic solar irradiation.
In the same way, a valid profitability forecast with a professional analysis of sensitivities can help to put the investment on a solid financial basis from the outset.
If an investor is not able to carry out all the tests on his own, external professional help should be sought. However, this also incurs additional costs, which, depending on the scope of services, can quickly reach the lower five-digit range.
Particularly for small and mid-sized projects, these costs already have a significant influence on the investment’s profitability and should therefore be properly weighed.
In order to offer investors an economical way to professionally evaluate their long-term investments, we have therefore developed a standardised security package together with our partners.
In addition to a standardised profitability calculation, which is also accepted by leading banks, we also offer low-cost inspection and appraisal services through our partner network.
This is a free translation. To read the original article in German: click here.