Which financing option provides the biggest savings in the long run?
Dominique dHotman
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 inverters, generators, and solar panel installation.
Solar has emerged as the most sustain-able solution, but we have yet to see a real, wide-scale shift to off-grid and grid-tied solar power.
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.
Given the reduced barriers to entry that exist through solar financing, and the ease at which systems can be acquired, including a solar system when purchasing a home should by now be a no-brainer. However, with the array of financing options that exist today, more accessible financial cost comparisons are clearly needed.
Heightened demand brings opportunity. Here, it’s important that you compare all the options before simply signing on the dotted line to make sure that you understand the financial implications, and which option offers the biggest savings, in the long run.
To illustrate this point, one needs to critically examine the escalating rental model, in which consumers initially pay less than R2 000 per month. While this may seem to be the cheapest way to get access to a solar system, in the long run, it ends up costing you more.
Often-overlooked solar costs
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: the financing instalment; Eskom’s standard monthly connection fee, and residual usage of Eskom’s power (measured in kWh).
Residual usage is unavoidable, being due to spikes in household consumption beyond the solar system’s capacity, prolonged periods of low sunlight, or even just the less-than-ideal orientation of the house
Financing options unpacked
The pros and cons of each financing option are unpacked as follows:
Asset finance
Both banks and non-bank lenders 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 + 3.5—5%).
Government energy bounce 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, National Treasury works with retail banks to provide concessionary funding, thereby lowering the cost of the solar loan to homeowners.
- Pro: While it operates similarly to asset finance, the interest rates are capped at a much lower level of Prime +2.0% and you own the system outright.
- Con: This scheme has a time limit given its bounce-back intention.
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 prime, or even at a discount to prime. For the third quarter of 2023, ooba Home Loans achieved an average of prime minus 0.44% for its 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, depending on the term of the bond).
Escalating rental model
Individuals choosing a rental agreement, either as an equipment lease or as a power purchase agreement. The monthly rental escalates annually.
- Pro: Lowest initial monthly instalments and a comes in the requirement for the rental company to maintain the system.
- Con: Monthly rental costs escalate each year, and the solar system remains the property of the provider after the contract ends. There are also de-installation fees, which will be payable if the homeowner wants to cancel the rental agreement, or sells the property and can’t get the new owner to take over the rental agreement.
Doing the maths
To compare the starting costs of each of the solar financing options on offer, we use the example of a household in Cape Town 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 remaining 20% of the kWh’s still needed from Eskom or the municipality. With this disclaimer in mind, the year-one savings and monthly costs are broken down in the table below.
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.
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 (see table below).
Home loan finance offers the greatest overall 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. On the lowest end of the scale is solar rental, which equates to a saving of only R9 286 over ten 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 the course of ten years, 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 Solar is 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.
Dominique dHotman, head of ooba Solar. The platform provides consumers with solar installation quotes for compa-rison, and assists them in financing their solar projects.
