Solar Plant as an Investment

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We all know that solar plants convert sunlight into electricity to be used in our homes and factories etc. However, there is much more in the story than just electricity generation from solar plants. People, generally think of solar plants as either an electricity saving scheme and hence, saving money. Or, they think of it as a backup supply during power shortages and cuts. Many people also think of it as an environment friendly power generation source, which it actually is. But most people miss on various financial benefits one gets on installing a solar plant. Most people still don’t find solar energy a worth for the money. This is because, it is hard to understand the working of solar plant and various government policies associated with it. Due to these factors, people don’t look at solar plant as an investment.

Yes, you can view solar plant as an investment scheme which generates income over a period of time. As the biggest investor of all time, Warren Buffet, said,

Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.

Our favorite holding period is forever.

He clearly hints on investing for a long period of time to gain what you want from your investment. Nobody becomes successful / rich in a day. Installing a solar plant is this kind of investment. Solar panels are long living electricity generation devices having life of more than 25 years. Also, they require minimal maintenance, mainly in form of washing solar panels when dust accumulates on them. The interesting part is, you will always need electricity and the price and consumption will go on to increase over a period of time. This means you are earning money from something you’ll definitely use and pay. Depending on the capacity of solar plant one installs, one can earn thousands, lakhs and even crores of Rupees (INR) in 25 years.

Yes, you read that right, you can even earn crores of Rupees on your investment in 25 years, which is effectively thought of as the lifetime of a solar plant. One can get Return on Investment (ROI) in just around 3 to 4 years and can generate income for next 21 years. 

So, the question arises, how can a solar plant pay you so much?

To answer this question, let’s first have a look at the incentives provided by the Government of India (GOI) to install a solar plant.
  • Government provides subsidies of up to 30% for Solar Plant installation on residential, institutional and non-profit organisations. This significantly reduces customer’s investment and the payback period. This allows customers to get better returns in 25 years.

  • Just as incentives to non-profit sector, Government of India provides Depreciation Tax benefits for profitable organisations such as companies, offices, commercial hospitals and factories etc. under Section 32 of The Income Tax Act. Currently, commercial / industrial sector investors in solar power plants can avail 40% Accelerated Depreciation Tax Benefits on investment in the first year and 40% of the remaining project cost in the subsequent years, and so on. However, this depends on the number of days, the solar has been in operation. This again reduces the equity payback period and provides better returns on investment.

  • To make it more lucrative, Government of India has proposed in Budget 2018 to decrease tax (from 30% to 10%) on income from carbon credits for industries to reduce emissions.

  • Electricity bill generally have slabs of different rates depending on the consumption. The cost of electricity per unit increases with the increase in consumption of electricity. Since, solar plants reduce your import of electricity from the grid, your consumption may fall in the slab with a lower rate as compared to the one you are paying for without solar plant. This increases the rate of return.

Return on Investment (ROI) sheet and Cumulative Cash Flow graph

At this point, let’s take a look at the Return on Investment (ROI) sheet and Cumulative Cash Flow graph on it for a 5 kWp On-Grid Solar Plant for residential or non-profit making customer created by Zonfos India Private Limited in the picture below: 

Return_on_investment_5kWp

In the picture above, we have assumed that your current price of electricity is Rs. 5/- per unit which will increase at the rate of 2% per year and the rate of reduction in electricity generated from solar panel is assumed to be at 1% per year.

Now look the last column of the table in the picture, Cumulative Cash Flow and its graph above the table. This clearly shows that, you can get the Return On Investment (ROI) in 5 years and will earn a total of Rs. 8,17,050.89 in 25 years. This means, you can have a Return of approximately 10% per year on your investment over 25 years. This will increase as the capacity of solar plant increases.

Now have a look at the Return on Investment (ROI) sheet and Cumulative Cash Flow graph on it for a 100 kWp On-Grid Solar Plant for a  commercial customer created by Zonfos India Private Limited in the picture below: 

return_on_investment_commercial

In this case, you can get the Return On Investment (ROI) in mere 2 years and will earn a total of Rs. 3,68,77,230.13 in 25 years. This means, you can have a Return of almost 28% per year on your investment over 25 years.

Now, if you think, this rate of return is not much as compared to other investment options. Firstly, consider that, one earns a high rate of return when he invests at a high risk. This is one of the least risky investment options. Secondly, you are gaining money on something you are initially paying for and that consumption and price of electricity will definitely going to increase in the future. So, you will have to shell out more money as compared to present for electricity. By installing solar, you are not only saving money on electricity, but are actually earning from it or we can say that, you are getting paid to consume electricity.

Let me explain this with an example. Let’s suppose you invest the same amount of money as solar plant cost in a scheme at 20% rate of return instead of installing a solar plant which may have paid you around 10% return. Now, as I said, electricity is an essential commodity and you will definitely use it. But, now, you are paying for it and are getting no return from it. Which means, from the lakhs you are earning from that scheme, you are paying a big part as your electricity bills. This reduces your returns from that scheme, as spending on electricity is again your expenditure. So, effectively your return from that scheme decreases to 10% which you may have got from solar plant installation at a lesser risk. This makes solar plant installation, a great investment option.

This post is just to show how is solar plant a great investment scheme. We are not diving into other benefits of solar plant. To know about more benefits of solar plant, click here.

So, you need to think of solar plant as an investment plan for a period of 25 years with a calculated rate of return. This does not mean that your investment gets blocked for 25 years. You will get Return on your Investment within 5 years. Think of it as a long term investment option which will surely pay you and will also make your other investments more lucrative by eliminating / decreasing one of the major expenditures.

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