A manufacturing factory consulted Inspecro on electricity cost savings. So, we recommended a 77.5 kW solar power plant / PLTS. Then, the Managing Director asked, “Is this project profitable?”

To answer that, we can calculate the present value of future savings:

This might look confusing. But I promise you it will get easy very shortly.

Electricity cost savings. Our engineering study found that the PLTS will produce 123,100 kWh of electricity, every year. Meanwhile, the 2019 PLN Tariff is Rp 1,035 per kWh. By multiplying the two numbers, we knew the factory will save Rp 127 millions, before any increase in PLN tariff.

Savings growth rate. PLN tariff will not stay the same forever, right? Therefore, isn’t it safe to say the PLN tariff will rise? Let us forecast that PLN tariff increases by 5% per year. However, honest installers will also tell you that solar panels degrade by 0.7% per year. Therefore, the “ethical” savings growth rate is 4.3%.

Opportunity cost of capital. What is the return of your next best investment with similar risk? With a 25 years warranty on solar panels, isn’t the risk extremely low? So, the only investment with the same level of safety is 25 years Indonesian Government Bond, right? (It’s hard for a government to go bankrupt.) At the time of this writing, its yield is 8.5% per year. Therefore, your opportunity cost of capital is 8.5%.

Lifetime years. This one is easy. With a 25 years warranty on solar panels, isn’t the lifetime 25 years as well?

Now the fun part, putting the numbers:

We found that the present value of future savings is Rp 1.9 billion. Meanwhile, the investment is Rp 1 billion. This means, literally just by saying yes to the PLTS, wouldn’t the Managing Director be contributing Rp 900 millions of present value profit to his company?

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