Good preparation will make or break a successful direct investment in PV projects. This article offers a quick overview of what points should be clarified before you invest. Thorough research will protect you from unpleasant surprises. You should carefully examine the investment property in order to turn unnoticed dangers into calculable risks. Professional service providers can assist you with the project review, the costs of which are money well spent considering the investment amounts involved.
On the earnings side, risks might include concealed defects in plant engineering or errors in plant planning, inaccurate profit forecasts, or incorrect filings for single-price tariffs. On the costs side, information regarding operating costs may be missing, which will have a negative impact on profitability. Incorrect liquidity forecasts or an uncertain grid connection could even force the operating company into insolvency. It is therefore vital to obtain a realistic picture of the asset so that the direct investment delivers.
Direct investments in photovoltaic plants promise cyclical stability similar to that of real estate. As a rule, they are more crisis-resistant than bonds or shares and offer an interesting long-term return in the mid-single digits. Functioning marketplaces also allow you to resell the real investment relatively easily if necessary.
What exactly am I looking for?
Before starting your search, define your criteria and investment objective. This will determine which of the different types of PV projects are a good fit for you.
You should clarify the investment objective with the following questions:
- How strong should your influence be on the development of the PV plant and are you willing to take on development and construction risk for a potentially greater return? (e.g. project rights)
- Or is low-risk more attractive, even with lower returns? (e.g., portfolio)
- How long are you willing to have your capital be tied up?
One of the most important factors is the budget. Possible investments range from an amount of several thousand euros, extending into the millions. You will also need to work out whether an already operating or a new PV plant is a better fit for your goals and budget. Location also plays a role, in the case that you want to take over the technical management in whole or in part yourself.
If you are investing in a solar plant for the first time, you should be aware of what a direct solar investment means. You will become a power generation entrepreneur who must actively organize the proper operation of the photovoltaic system in order to collect the expected return on the investment.
For the most part, revenues and risks can be planned quite well. In terms of commercial and technical management, almost all tasks can be delegated or, depending on your level of knowledge, willingness to learn, and time, implemented by yourself. If you want to commission service providers, you can structure the services to match the project size. If you manage the existing risks well and actively optimize the PV investment, you are likely to find success. But in the worst case, management errors can also lead to the insolvency of the project company, which brings us right back to good preparation.
Request and check documents
Once you’ve found a project, you should gather all documents for review. You can learn which documents are important for a PV investment here. Completeness is the watchword. A completely and properly documented PV system is the first item on the list. You can start by sifting through the documents yourself and evaluating them just based on common sense. But for a final evaluation providing a sound basis for decision-making, extensive expertise and experience with PV plants will be required.
Determine the value of the PV project
The value of a PV project, i.e. the expected returns and the purchase price, depends in large part on the yield of the PV plant. You should not rely on the provider, but rather have an independent yield appraisal prepared. For existing plants, you can have the “performance ratio” determined based on past data. In both cases, you can contact independent photovoltaic experts who you should also consult for additional technical and commercial questions. Keep the invoices for any such services, as you can later claim them for tax purposes.
Of course, the actual project yield depends not only on the output, but also on the costs for insurance, maintenance, financing, lease, etc. You can get a good initial overview of project returns online with a PV project evaluation. Comparative values can also be used to determine whether the economic efficiency of the project can be further optimized. This is where we arrive at the first break-off point. If the project still looks attractive, you should move on to the detailed examination.
Check the resilience of the PV project
A direct investment in photovoltaics is based on functioning plant technology. Before making a purchase, you should be sure that there are no concealed defects or errors in planning. This is where independent photovoltaic experts once more come into play. The technical aspects of the project are checked in the framework of due diligence.
For new plants, project planning is reviewed to minimize the risk concerning construction and grid connection. Existing plants are inspected on site for technical defects and checked against their documentation. Experts also go over all contracts, in order to catch issues such as unrealistic project schedules, poor plant design or unfavorable maintenance contracts at an early stage. This tells you whether the project involves acceptable or manageable risks, or whether it is better to stay away from the purchase.
You should also bring the appraiser to the project handover to ensure that all technical purchase requirements are met and that the plant documentation is complete.
Alongside comprehensive due diligence, there are other aspects of investment for which you can call on the services of lawyers and tax advisors.
Bring in a specialized lawyer
The best time to minimize any legal risks that may occur during operation is before purchasing an existing PV plant or a new PV project. Consult a lawyer specialized in renewable energies. Independent audits are complicated and time-consuming, as the legal texts, regulations and contracts are extensive and difficult to understand, particularly for most new investors in photovoltaics, and are constantly changing on top of it all.
Have the contracts checked at an early stage or have them drawn up properly. A PV project involves not only a purchase contract or, in the case of project rights and new plants, the plant construction contract with a general contractor, but also contracts with landowners, maintenance companies, and other partners. Legal due diligence also checks that the installation area, the grid connection and the remuneration are legally secured and that all the necessary documents are available.
Involve a tax advisor
If you are becoming a PV entrepreneur and PV system operator for the first time with this investment, then you should first have the basics of sales and business tax explained to you. You can also discuss investment deductions with your tax advisor, which may lead to tax benefits thanks to the option of shifting the investment’s depreciation potential to a fiscal year prior to the sale of the asset.
Tax advisors familiar with renewable energies can also carry out commercial due diligence. This checks which obligations and liabilities are also purchased with insurance or maintenance contracts, how the plant is financed, contractual regulations for remuneration and which guarantees, liability claims, and obligations exist. The tax situation of the operating company is also examined. The costs of such a commercial inspection depend on the transaction type and whether it concerns an asset deal or a share deal.
Ask a bank
As soon as all the key data regarding the PV project has been gathered, to be received in an initial PV project evaluation, you can submit a financing request to a bank.
If the bank gives you an indication, i.e. informs you about possible terms and conditions without obligation, you can then apply for a loan. You’ll need all required financing documents, and these must be available by the time of payment at the latest. You will then receive a loan offer ready to be signed. This includes a draft contract, which you should compare with the previous offer.
When selecting a bank, your main bank is not always the best option. In Germany, for example, some banks are subject to the Regionalprinzip, the ‘regional principle’, which may conflict with the location of the plant. There are also banks which specialize in financing PV projects. Of course, you can obtain several offers if desired. Refinancing at better conditions is also an option for plants that are already in operation.
So long as less interest must be paid on debt than can be generated with equity, this equity can be used to bring the so-called leverage effect into play. This effect can be weakened or outweighed by potential changes in interest rates, which may be an argument in favor of securing good financing conditions quickly and for the long term. Banks are generally happy to finance photovoltaic plants because the technology is tried and tested, and the remuneration is fully or partially regulated and additionally legally secure. Bankers appreciate the easily plannable cash flows which result.
Using the concrete financing conditions, the negotiated purchase price and the above-mentioned examination steps as a basis, you can make a final evaluation to determine which yields are realistic.
To run through it all again: Before purchasing a plant, check the technology and the commercial and legal situations so that you can be sure there are no unpleasant surprises waiting. You should also carry out a yield appraisal to determine whether the expected yields are realistic. Based on this examination, you’ll learn the appropriate purchase price and which risks exist. With this foundation, you’ll put your investment decision on solid footing.