SPIS Toolbox - Assess Financial Viability

Assess Financial Viability

Solar-powered irrigation systems have become a financially viable alternative to electric and diesel water pumps for irrigation of agriculture crops. This is mainly due to the fact that:

• PV module costs have declined in recent years;
  
• systems are more reliable and cost effective;
  
• PV equipment is more accessible in many parts of the world, including expertise for setup and maintenance.

The following key indicators and financial statements help to assess the financial viability:

Assessment criteria	Used as it shows:
cf - Cash flow analysis	...if a project generates enough cash in order to stay liquid; i.e. it can pay all cash.
PP - Payback Period	...how long it takes for the cost of an investment to be recovered; very basic calculation.
NPV – Net Present Value	...if a project generates sufficient income (and surplus) to finance the employed capital and interest on that capital.
IRR – Internal Rate of Return	…the estimated profit rate generated by the project / investment over its life-span.
Total life cycle cost	...differences in costs between project alternatives over the entire life cycle of these alternatives.

Assessing the financial viability of the SPIS is a complex procedure which should be accompanied by financial experts. This part of the module only gives an overview of key data and indicators to be generated. Note that all projections and calculations:

• need to be based on prices which can be determined but also on estimates and assumptions;
  
• will be contemplating the current situation and future scenarios;
• should compare options for alternative pumping systems (electric, diesel).
  

The financial analysis builds on three major inputs:

1. the revenues from

1. direct: selling goods/services;
2. indirect: avoided payments (e.g. consumption of food produced, or energy costs).

2. Capital expenditure (CAPEX)=long term, one-time, investments in non-consumable parts of the business, like

1. costs for solar pumping system, reservoir, irrigation system;
2. (opportunity cost for) labor for construction and set up;
3. equipment for processing, storage;
   
4. reinvestment costs.
   

3. Operating expenses (OPEX)= ongoing operational and maintenance costs (fixed and variable)

1. seeds, fertilizer, pesticides and other inputs for production;
   
2. costs for processing such as cleaning, packaging, quality control;
3. maintenance, transport and advertising costs;
   
4. labor costs, incl. opportunity cost for producers own work;
5. depreciation and maybe credit costs to pay back a loan.
   

Outcome / product

• • Cash flow projections;
  • Payback Period (pp);
  • Net Present Value (NPV);
  • Internal Rate of Return (IRR);
  • total life cycle costs of the SPIS investment.

Data requirements

Research, collect, analyze, cross-check:

• • project/SPIS functional lifetime;
  • capital expenditures / initial capital investment (i.e. prices for components to be financed) for solar and alternative options
  • sales revenues (market prices);
  • operating and maintenance costs (prices);
  • macroeconomic variables (inflation, interest rates, etc.);
  • tax policies (corporate income taxes, VAT dynamics, etc.); 

Compute, prepare:

• water unit cost;
  
• annual revenue and operating expenses (OPEX) and annual gross margin of production (current and future + other energy options);
• CAPEX (capital expenditure); i.e. total/annual sum for financing investment in SPIS (and alternative system).

People / Stakeholders

• Agricultural service provider;
• financial service providers;
• public entities promoting or/and subsidizing SPIS initiatives;
• farmers, associations of producers / potential lenders;
• market analysts/consultants;

important Issues

When comparing PV systems to diesel or electric pumping systems the following statements apply:

• CAPEX: Initial capital costs needed for a Diesel-based system are lower than PV solutions; however replacement costs for Diesel systems occur more frequently.
• OPEX + cash flow:   
• diesel and electric systems have higher regular operating expenses (petrol cost + transport/energy price + grid connection) than PV;
• maintenance costs for the PV system are low (see MAINTAIN  module);
• due to the high initial investment of PV systems they risk having higher regular financing costs (loan instalments and interest rate payments) when compared to diesel-based systems.

These factors influence the financial viability of the different options; hence, different scenarios should be elaborated before taking a decision.