We cover key terms, how we set rates & Voltaic’s due diligence requirements
Key terms
Below is a summary of the key terms in Voltaic’s PPAs:
Rate – the most important term is the rate at which the business buys electricity from Voltaic. Voltaic determines the rate with reference to a number of factors, including: the length of the PPA (a 20 year PPA will have a lower rate than a 10 year PPA), the cost of the installation, the location of the site (expected solar generation) and expected running costs (eg: cleaning and maintenance)
Term – how long the agreement will go for. The longer the term of the PPA, the lower the rate. The minimum PPA term is typically 10 years; any shorter and the rate becomes too high.
Buy-Out – the business will have the right to buy out the solar system throughout the term of the PPA according to an agreed schedule. The Buy-Out price usually starts as the initial installation cost and decreases throughout the term of the PPA
Exit Options – there are typically three options for businesses which seek to leave the premises at which the solar system is installed
- Buy-Out – the business can purchase the solar system
- Transfer – the business can transfer the PPA to a new tenant or landlord
- Relocation – the business can transfer the solar system to a new location and the PPA continues
Other terms – include the business not interfering with the system, not building new structures which might cause shading on the system and the business must maintain insurance over the solar system
How we set rates
Voltaic has a responsibility to its investors to generate a return on their investment. At the time of writing, Voltaic seeks to generate a high single digit return.
This usually means electricity rates between 8c/kWh and 13c/kWh, depending on the factors mentioned above.
Rates can be fixed or increased according to an agreed schedule. The PPA protects businesses from significant energy price increases. This is crucial. Voltaic believes energy prices will surge over the next decade as Australia’s energy system transitions from fossil fuels to renewables. For example, as coal plants shut down, we expect periods of higher prices until renewables can fill the gaps. Solar systems, batteries and Voltaic’s PPAs combine to provide businesses with energy independence and protect them from energy price hikes.
As interest rates have increased, the return expected by investors has increased. For example, US Government Bonds now offer around 4-5%. Voltaic needs to offer both a risk premium and liquidity premium to benchmark rates. Investing in Voltaic is more risky than investing in US Government Bonds (considered the “Risk-free rate).” US Government Bonds are liquid, meaning they can be sold at any time. Solar systems, on the other hand, are not and Voltaic needs to compensate investors for this lack of liquidity.
Voltaic’s due diligence requirements
Voltaic goes through an extensive due diligence process to assess the suitability of the businesses with which it contracts. Voltaic is entering into long-term agreements and needs to be selective to reduce and understand risks.
Voltaic will seek the following:
- Meeting with management to understand their business including expansion or consolidation plans, previous business operations, length of operations and industry information including competitive landscape
- Landowner/leaseholder – how long does the business plan to stay on the premises? Details of current lease (if applicable)
- Prior 3 years financials and tax returns
- Information about the business’ electricity usage – any proposed system needs to match up with the business’ usage. Voltaic believes excess usage in future will be curtailed (i.e. restricted, or even wasted) and will not earn a return. It is important that the business consumes as much of the generated electricity as possible
Further Reading
Power Purchase Agreements: The Basics