Should you invest in solar as an asset class? 3 experts answer

Different platforms are making it easier for investors to invest in this asset class. There are three main ways to invest in solar as an asset class.

Also Read: Avaada Energy secures 1,050 MWp solar power project from NTPC

LLPs

Here’s a small example of how solar investing works if you are investing in solar assets through a Limited Liability Partnership (LLP).

Initiation by an Organization: An organisation or housing society wants to set up cost-effective solar power for their consumption and have another source of energy. They don’t want to do it on their own as they are not sure about the initial investments.

Role of the Leasing Platform: Now, a leasing platform steps in, instals, and maintains the solar panels. The organisation or the society agrees to pay for the power that they have consumed.

Funding by Investors: The leasing platform invites investors like you to contribute funds. Once the required investment capital is gathered, a LLP is formed. Each investor becomes a partner in this LLP and therefore has a stake in the solar project.

Operation and Management: The solar project becomes operational. The platform manages and supervises its functioning, receiving revenue for the power consumed.

Revenue Distribution: The platform disburses monthly returns or payments to the investors, who are now LLP partners.

Monitoring and Reporting: Continuous maintenance and monitoring of the solar plant is essential.

End of Contract: When the contract ends, the solar panels are typically transferred to the organisation and they can take ownership. The leasing platform can also sell these assets and the amount can be divided among the investors. The annual degradation rate of the panels is considered at 1% during the sale of the solar panels.

Also Read: Biden Seeks to Bolster Solar Manufacturers With Tax and Trade Moves

Leasing solar panels

Another way to invest in solar is to lease the solar panels. Here, investors buy the solar panels which are leased out to the platform.

Vested Finance is one of the platforms that works on this model.

Viram Shah, Co-founder & CEO, Vested Finance shares their process.

Sourcing Solar Projects: Vested identifies potential sites for solar installations, such as residential/corporate buildings, schools, or hospitals. Each project undergoes due diligence, assessing technical parameters like sunlight exposure, available space, and weather conditions. The power consumption of the end consumer is evaluated to ensure the project’s viability. Feasible projects are then listed on the platform.

Buying Solar Panels: Once a project is listed on the platform, individuals can purchase the actual panels for the project from the platform. The cost of a panel includes manufacturing costs and upfront installation expenses. Investors have the option to purchase one or multiple solar panels. These panels are then leased out to Vested for installation and operation of the solar plant.

Solar Project Installation: Once all the panels are sold, it typically takes up to 3 months to complete the installation and bring the project to life. After installation, the organization begins receiving sustainable clean energy, and investors start earning income from the electricity their panel is generating.

Earn Monthly Income: Investors enjoy regular income from their asset-backed investments.

He also mentions that the investors are updated on the performance of the solar project including metrics such as solar energy generated, CO2 emissions saved, and income earned.

This is a standard process that is mostly followed by other platforms irrespective of the model as well.

Securitized debt instruments

Another way to invest in this asset class is through Securitized Debt Instruments (SDIs). While no platform in India utilises this model but few platforms might be launching this model shortly.

Here’s the process:

• Future receivables from a solar plant’s energy generation are securitized. This would be payments from consumers.
• The pooled receivables and the physical assets of the solar plant (solar panels, inverters, etc.) are transferred to a Trust acting as a Special Purpose Vehicle (SPV).
• The Trust issues Pass-Through Certificates (PTCs) to investors, representing shares in the future cash flows from the solar plant’s energy production.
• Investors receive monthly payouts derived from the energy generation receivables by subscribing to these PTCs.
• The underlying asset is a SEBI-compliant debt instrument, ensuring legal and regulatory standards are met.

Solar as an asset class

Now that we are aware of the process associated with the two main methods, let us look at some of the other aspects associated with solar as an asset class.

Returns: Solar investments might provide stable and predictable returns over the long term. “Once a solar project is operational, it generates revenue through the sale of electricity, often through long-term contracts with fixed prices. This steady income stream can offer a reliable source of returns for investors,” said Viram.

Viram said that in terms of returns, projects generate anywhere between 10-12% IRR over a period of 10 to 15 years after deducting all maintenance costs. “In our model, a fixed monthly income is not guaranteed, the income varies on the electricity generated by the panel in that particular month. Summer months would mean higher income while generation in monsoons would be lower. Overall over the long-term, projects do deliver at least 10-12% IRR,” he said.

Hardik Bhatia, CEO & Co-founder, SustVest mentioned unlike other assets, solar as an asset class is immune to market speculation as it is dependent on sunlight. “Investors can earn up to 13-14% XIRR pre-tax for a long duration and can be used to create long-term passive income,” he said.

Asset-backed Investment Option: This investment option is backed by solar panels. Irrespective of the type of investment model, the platform can use the solar panels to recover some of the investment cost in case of a default.

Minimum Investment Amount: The minimum investment amount depends on the platform and model. The minimum amount might vary from ₹500 to ₹ 1 lakh.

“In our case, the minimum investment amount is around ₹25,000 to ₹33,000 as that is the price of one solar panel,” said Viram.

The minimum investment amount may also be ₹1 lakh.

Taxation: The taxation depends on the investment model.

LLP: All net income of the LLP will be taxed at a flat rate of 30%, and the after-tax returns will be distributed to the partners according to their shares.

Direct Leasing: Income from direct asset leasing falls under “Profits and Gains from Business or Profession (PGBP)” and can be computed in two different ways.

“The income is considered as business income so one can offset depreciation costs to reduce tax,” said Viram.

SDIs: Interest income is taxable as per the investor’s tax slab. “Most of the SDIs that we are planning on introducing will have a time period greater than 1 year and the interest will be taxed at 10%,” said Hardik.

It would be best to consult your own tax practitioner to know more.

Things to look at before investing in solar as an asset class

Here are some important aspects that you need to know before investing in solar:

1. PPA Agreement: The Power Purchase Agreement is a long-term contract between the solar power producer (platform) and the consumer. It specifies the terms under which solar energy will be sold, including the duration of the contract (e.g. 10 years), the price of electricity, and other conditions such as maintenance responsibilities and performance guarantees. You need to go through it properly.

2. Return of Capital: If you want to exit before the maturity period, then the capital that will be reimbursed to you will depend mainly on the interest that you have received and the rate of depreciation of the solar panels.

3. End consumer: Before investing, it is important to look at the end consumer who would be using the electricity generated. “The biggest risk in this model is that the end consumer stops paying electricity bills either due to default or wrong intentions. Profitable companies with a reliable track record or residential societies or schools/colleges are all potentially good end consumers,” said Viram.

4. Insurance: It is also essential to make sure that the solar plant is insured against unforeseen circumstances such as calamities, theft and fire.

5. Illiquidity: Compared to other asset classes, this asset class can be highly illiquid as the time frame can extend up to 20 years. You might be stuck to the investment if the platform can’t find another buyer for you. “Investors need to invest in this keeping in mind that secondary sale at par value will not be possible unless Indian debt markets mature like that of the US and Europe,” said Hardik.

6. Complex: The PPAs can be complex and might need technical expertise to negotiate and manage. This might lead to increased expenses for legal and financial advice.

7. Risks: No investment is risk-free and customer defaults can happen. Hence, it is vital that investors are aware of the risks associated with such investment and invest based on its risk vs reward profile.

8. Not Regulated: Unlike other investment options such as mutual funds that are heavily regulated by SEBI, solar as an asset class doesn’t yet fall directly under the purview of SEBI or any regulatory body. “There is no regulatory body but it is not illegal,” said Yash.

In conclusion, alternative investment options including solar panels can be an exciting investment proposition. However, it is important to understand that it comes with risks as well.

Yash mentioned that the best way to invest in this asset class is through the SDI route, as it is regulated by SEBI.

Experts recommend that investments in these asset classes should comprise only 2-3% of your total investment portfolio and are best suited for experienced investors.

Padmaja Choudhury is a freelance financial content writer. You can reach out to her at padmaja@padmajachoudhury.com.

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Published: 27 May 2024, 05:33 PM IST