Advice on Solar Photovoltaic Investment (Grid-Connected)

[addison2]

I am considering investing in a grid-connected solar park project in Greece with the following business plan:

• Power output: 500 KWH
• €/KWH: 0.063
• Total cost: ~365000€, 80% loan and 20% equity
• Loan Interest rate/duration: 3.3% / 12 years
• Project duration: 20 years
• Calculated IRR: 6.2%, after ALL costs, including possible unexpected costs (e.g. unexpected damages)

One of the things that trouble me in that this plan includes a 20% increase of the total cost (due to increases in prices worldwide) that reduced substantially the projected IRR from the initial offer. With this plan, I will be getting my money back after 14 years.

Is 6.2% a good IRR for such a project?

Any other thoughts/considerations?

 

[darrin]

@addison2 I'm neither a financial advisor nor an expert when it comes to solar photovoltaic parks as an investment but my father (a mechanical engineer, μηχανολόγος μηχανικός, with 30+ years of expertise) has been working as a manager in the construction and maintenance of such parks for the past ~10 years and I know for a fact that profitability has been steadily declining.

10 years ago the ROI was 6-8 years, then the €/KWH dropped significantly so the ROI got bigger, then some taxes were introduced so the ROI went even further and now the ROI is 14 years as you say yourself.

The Greek government and market is really unstable and unpredictable and what you take for granted now may not hold next year.

I would rather invest my money in real estate and rent them out, you can easily achieve a net 6% APY, at least in some cities.

Actually you can use that amount of money as a down payment to buy a 15-20 unit resort in an island and make 25% APY. In that case you will probably have to be more actively involved than investing in solar parks but the returns are totally worth it.

 

[thehardertruths]

@addison2 I dont think after 14/20 years the solar energy market is going to be similar to today.

We already hear governments talking about taxing energy produced on solar panels for retail. You would probably fall into business with that output and be charged a lot more.

Also, with that amount of cash, you can probably get better returns in shorter timeframes...

 

[thisgeneration]

@addison2 Not a financial advisor. Does the project sell to electricity utility PPC? Note that even excluding the project associated risks (eg panel degradation, yield, sunshine, etc), the revenue quality is capped at PPC credit rating unless someone is guaranteeing their obligations. Google indicates that their corporate bonds recently went for 3.9% (FT, 2021). If this is true, you’d be collecting a theoretical 2.3% interest for assuming all uncovered (eg insured) project related risks.

In addition, think of the liquidity of the investment and how easy it is to exit, if necessary, which has value too.

 

[xianghua]

@addison2 I won’t give you a yes/no answer but here are some thoughts: Since this is a non-traditional investment you have to consider the risk first before comparing it to other investment types.

How stable is the energy market? Can the government fixate prices like in some balkan countries? How would it impact your pricing? What guarantees that there is a buyer for your electricity for the next 20 years? (I suspect there is a contract with the supplier who takes your electricity back to the grid and redistributes it among their customers)
Are there currency risks? I know Greece is in the Eurozone but if the grid owner is supplying to neighbour countries you still might run currency risks if the supplier might be willing to import cheaper electricity instead of buying from you. (it actually depends on the contract)
Questions like this arise then you always have the additional risk of unknown (unforeseen) circumstances.

What is the typical real estate yield in that area? (consider both short-term and long-term) This is important because I guess part of your money would be invested into the plot itself.

 

[addison2]

@xianghua Thanks for sharing your thoughts. So in Greece you basically sign a ~20 year contract with the "state's energy admin authority" that "guarantees" to buy your electricity for that period at a fixed price.

The other concerns you mentioned are 100% right, more so for the historically unstable Greek government(s) and the effects of this instability on the energy market. The problem, as @darrin mentioned, is that the (excessive) risk premium that was once paid is now diminished. Still, this offer is definitely worth considering since these are the LAST small-scale solar pv projects for mid-range investors that will be funded. Future projects will only be done through bidding process (only large scale projects).

I am currently comparing the returns of this project with that of a real-estate investment in my area.

 

[darrin]

@addison2 Except for the returns you should also consider the risk associated with each investment vehicle. As well as the stability of it. My parents have been renting out 2 houses in Thessaloniki for about 10 years now and even though the yearly returns aren't that great ~6% net yearly, it is an investment that is quite safe and easy to manage.

Historically, real estate has been more safe of an investment. Especially if you buy properties in a city packed with students then the risk is even lower.

 

[xianghua]

@addison2 a guaranteed fixed price might sound good, on the other hand it could also mean your profits are capped in case the energy prices would rise. In most countries once the market actors try to raise the percentage of green energy produced it also had the effect of raising prices.