CAPEX vs. OPEX Solar Models: What’s the Difference?
When it comes to the investment options in rooftop solar systems, the two most prominent investment models in India are – OPEX and CAPEX. Both these models have their own unique features along with pros and cons. It all depends on you to choose the right business model so as to minimize the risk and maximize your Return on Investment.
We’ve gone over what each of these solar business models entails, and why each one makes a compelling argument for rooftop solar.
OPEX MODEL
The operating costs model, often known as the OPEX model, is a scheme in which the developer owns the solar project and the consumer just pays for the energy produced. The OPEX model requires users to commit to a long-term, legally enforceable agreement for the roof on which the solar system is installed. In addition, they must sign a long-term Power Purchase Agreement (PPA) for the supply of power. The PPAs can last up for a period of up to 25 years, with the consumer agreeing to pay a pre-determined rate over that time. Any extra electricity produced can be fed into the grid. In this arrangement, the developer is responsible for all capital costs and risks. The developer owns the system for the rest of its life and is responsible for its operation and maintenance throughout its lifetime. A major advantage of the OPEX approach is that it allows you to go solar without a huge upfront expenditure.
However, not all installers may be willing to offer rooftop installations in the 5 KWh range using the OPEX model. To make it profitable, they’ll need a minimum capacity of 500 KWh or more. As a result, the commercial and industrial (C&I) sector is the key consumer base for developers. Ownership of the rooftop project will be transferred to the customer once the PPA expires. Companies, on the other hand, incorporate a clause that allows them to acquire back the project before the PPA expires. This permits the consumer to return the product to the creator at a pre-determined rate after five years.
The OPEX Solar model is appropriate for individual consumers who are skeptical about making long-term capital investments in technology they have less understanding about. After a five-year trial period, they can choose to exercise the buy-back provision on their PPAs. It is also ideal for smaller companies aiming to meet their green goals as they expand. Depending on the tariffs set by their various state distribution firms (DISCOMs), they can save roughly 30-40% on their electricity bills.
CAPEX MODEL
The CAPEX (capital expenditure) model, on the other hand, is a self-funding model in which consumers are responsible for all upfront capital costs associated with installing a rooftop system. The expenditure used to set up, manage, and operate the project is included in these costs. They also take into account the price of the equipment, labour, upgrades, and other materials. Consumers who want to save money on electricity should contact EPC (Engineering, Procurement, and Construction) installers to put up a rooftop solar system via this model. Any excess generation or residual electricity can be put into the grid.
The CAPEX route is useful to those organisations or individual consumers who have surplus cash in their books and are interested in availing GST and depreciation benefits. These projects normally have a payback period of no more than four years. In addition to these benefits, the CAPEX model gives customers entire ownership of the product. They are in charge of the technology employed and, more significantly, the quality of the components used in their projects. Consumers gain from a cheaper Levelized Cost of Energy (LCOE) in the CAPEX route, in addition to GST input and accelerated depreciation.
One disadvantage of this model is that the project owner would be responsible for all risks associated with owning and operating the rooftop system. This includes things like operations, management, and upkeep. Consumers, on the other hand, recover their investments quickly under this route. Consumers can expect to see returns on their capital investments in as little as four years. Consumers and businesses with significant financial reserves should choose CAPEX because they can claim depreciation and GST benefits totalling roughly 40%. This makes sense for residential customers as well, especially when combined with government incentives.
WHICH ONE IS THE BEST?
So, which option makes more sense and is more beneficial for consumers with serious green ambitions?
Small and medium-sized businesses and retail players favour the CAPEX model since it is less expensive than the OPEX model. Although there is an upfront investment, it allows buyers to claim tax benefits based on the asset’s depreciation model. The OPEX model’s customers, on the other hand, are mostly multinational corporations and large-scale enterprises.
The CAPEX model’s higher upfront expenditures are partially compensated by the fact that funds can be recovered quickly – within four or five years – and consumers have complete choice over the quality of components utilised. Combined with state and central subsidies for the residential sector, this would be excellent for customers in this segment, as well as larger enterprises.
If you have untapped cash reserves, CAPEX is the way to go because the payback period is relatively quick. If you are concerned about operational hazards, technology, or warranties, among other things, you should opt for an OPEX installation, which would save you roughly 30-40% on your power bills.
THE DIFFERENCES
It is important to evaluate both models for an in-depth analysis of each model in order to analyse what suits a particular business better.
OPEX
1. Zero Investment is required as the customer does not have to bear the cost of financing the plant.
2. The EPC (Engineering, Procurement, and Construction) company himself handles O&M of the plant installed.
3. All risks are borne by the EPC (Engineering, Procurement, and Construction) company. In case of system failure, the replacement and repair of the components are undertaken by the investor during the warranty and post-warranty period till the PPA tenure.
4. The customer enjoys cheap electricity and pays for the power generated under a long-term power purchase agreement (PPA) at an agreed tariff for a fixed tenure.
5. Any risk of solar plant under-performance is to be borne by the investors.
6. There is no tax benefit for the customer as the asset is owned by the developer.
CAPEX
1. High Initial Investment as 100% of the investment has to be borne by the customer and he holds ownership of the asset.
2. The customer has to pay additional charges for O&M.
3. The customer bears all risks and in case of system failure, the components replacement and warranty claims have to be managed by the customer.
4. The customer enjoys savings from the electricity produced from the power plant during its lifetime.
5. Any risk of solar plant under-performance is to be borne by the customer.
6. The customer can claim tax benefits via accelerated depreciation.