Your facility needs dedicated solar power.
₹100 crore investment. Two financial structures. Completely different balance sheet impact.
Option 1: Captive (you own) = ₹100 crore asset + debt on balance sheet Option 2: PPA (we own) = Zero balance sheet impact, pure opex
The financial structure decision
CFOs face a capital allocation question:
Available Capex: ₹200 crore for the year
Uses competing for capital:
- New production line: ₹80 crore
- Solar power plant: ₹100 crore
- Warehouse expansion: ₹60 crore
- Equipment upgrades: ₹40 crore
- R&D facility: ₹50 crore
Total needs: ₹330 crore. Budget: ₹200 crore.
Question: Should solar consume 50% of available capex?
Captive solar: On balance sheet
₹100 Crore Captive Plant Ownership
Assets:
- Fixed asset: ₹100 crore
- Depreciation: 80% over 2 years
- Net book value: Declining
Liabilities:
- Debt (70%): ₹70 crore @ 9%
- Equity (30%): ₹30 crore
- Debt service: ₹8 crore/year
P&L Impact:
- Depreciation: ₹40 crore/year (Year 1-2)
- Interest: ₹6.3 crore/year
- O&M: ₹1.5 crore/year
- Total P&L impact: ₹47.8 crore/year (first 2 years)
Financial Ratios:
- Debt-to-equity: Increases
- Asset turnover: Diluted
- Return on assets: Impacted
- Debt service coverage: Pressure
Solar PPA: Off balance sheet
₹0 Capex, ₹9.6 Crore/Year PPA Payment
Assets:
- None (we own the plant)
Liabilities:
- PPA payment obligation (footnote disclosure)
- No debt on books
P&L Impact:
- Power purchase: ₹9.6 crore/year (opex)
- No depreciation
- No interest
- Total P&L impact: ₹9.6 crore/year
Financial Ratios:
- Debt-to-equity: Unchanged
- Asset turnover: Improved
- Return on assets: Enhanced
- Debt service coverage: Protected
5-year financial comparison
50 MW Facility — Two Structures
Option 1: Captive Ownership
- Year 0 capex: ₹100 crore
- Equity outlay: ₹30 crore
- Debt raised: ₹70 crore
- Annual debt service: ₹8 crore
- Annual O&M: ₹1.5 crore
- Depreciation benefit: ₹20 crore tax savings
- 5-year cash outflow: ₹77.5 crore
- Balance sheet: Asset ₹100 crore, Debt ₹70 crore
Option 2: Solar PPA
- Year 0 capex: ₹0
- Equity outlay: ₹0
- Debt raised: ₹0
- Annual PPA payment: ₹9.6 crore
- No O&M (we handle)
- No depreciation benefit
- 5-year cash outflow: ₹48 crore
- Balance sheet: Zero impact
PPA saves ₹29.5 crore cash in first 5 years
When captive makes sense
Strong Balance Sheet Required:
- Debt capacity available
- Low leverage currently
- Strong credit rating
- Banks eager to lend
Tax Benefits Matter:
- ₹20+ crore annual tax liability
- Can utilize depreciation shield
- Effective tax rate >25%
- MAT credits not constraining
Long-Term Ownership Desired:
- 25+ year operations planned
- Minimal debt on books acceptable
- Lowest total cost priority
- Asset ownership strategically valuable
Capital Available:
- Capex budget unconstrained
- Other investments not competing
- Shareholder approval easy
- No liquidity concerns
Captive ROI: 18-22% IRR if conditions above met
When PPA makes sense
Preserve Debt Capacity:
- Existing leverage high
- Need debt capacity for core business
- Lenders watching ratios closely
- Covenant compliance critical
Capex Constrained:
- ₹100 crore needed for production expansion
- Solar would crowd out growth capex
- Shareholders prefer core investments
- Board won't approve solar capex
Tax Position:
- Limited tax liability
- Depreciation benefit not valuable
- Tax shield timing mismatch
- MAT credits limiting benefit
Risk Transfer Preferred:
- Performance risk on us
- Technology risk on us
- O&M responsibility on us
- Simpler accounting
PPA ROI: Immediate savings + preserved capital for higher-return core investments
Balance sheet impact analysis
Before Solar (Baseline):
- Total assets: ₹500 crore
- Total debt: ₹200 crore
- Equity: ₹300 crore
- Debt-to-equity: 0.67
- Return on assets: 15%
After Captive Solar:
- Total assets: ₹600 crore (added ₹100 crore)
- Total debt: ₹270 crore (added ₹70 crore)
- Equity: ₹330 crore (added ₹30 crore)
- Debt-to-equity: 0.82 (deteriorated)
- Return on assets: 13.8% (diluted)
After Solar PPA:
- Total assets: ₹500 crore (unchanged)
- Total debt: ₹200 crore (unchanged)
- Equity: ₹300 crore (unchanged)
- Debt-to-equity: 0.67 (unchanged)
- Return on assets: 15% (unchanged)
PPA preserves financial ratios
Accounting treatment
Captive Solar:
- Asset capitalized on books
- Depreciation expense (P&L)
- Interest expense (P&L)
- O&M expense (P&L)
- Complex accounting
- Auditor scrutiny on useful life, depreciation method
Solar PPA:
- Power purchase expense (P&L)
- Off-balance sheet (operating lease structure)
- Footnote disclosure of commitment
- Simple accounting
- Auditor-friendly
- No asset/liability recognition
CFO's accounting team prefers PPA: Less work, cleaner books
Credit rating impact
Captive Solar:
- Debt increases
- Leverage ratios worsen
- Credit agencies review
- Potential rating pressure
- Lender covenants tested
Solar PPA:
- Operating expense only
- Debt ratios unchanged
- Off-balance sheet treatment
- Credit rating unaffected
- Lender covenants unaffected
Rating agencies prefer PPA for maintaining ratios
Real CFO decision
45 MW Textile Mill — CFO Analysis
Board Asked: Should we invest ₹90 crore in captive solar or sign a PPA?
CFO Analysis:
Captive Option:
- ₹90 crore investment
- Uses entire year's capex budget
- Delays new weaving unit (₹60 crore) by 2 years
- New weaving unit IRR: 25%
- Solar captive IRR: 18%
- Decision: Wrong capital allocation
PPA Option:
- ₹0 capex
- ₹8.6 crore/year opex
- Weaving unit proceeds immediately
- Weaving unit contributes ₹15 crore/year
- Solar saves ₹5 crore/year
- Total value: ₹20 crore/year
Board Decision: Sign PPA, build weaving unit, maximize shareholder value.
CFO quote: "We're a textile company, not a power company. Let solar experts own solar. We'll own looms and capture ₹15 crore annual margin."
Hybrid structure option
Don't choose just one:
Mixed Model:
- 30 MW PPA (off balance sheet)
- 20 MW captive (on balance sheet)
- Total 50 MW coverage
Rationale:
- PPA provides immediate savings, zero capex
- Captive captures depreciation benefit on smaller amount
- Risk diversified
- Balance sheet impact manageable
- Board sees both options validated
Result:
- Capex: ₹40 crore (not ₹100 crore)
- Depreciation: ₹8 crore tax benefit
- PPA savings: ₹3 crore/year
- Best of both structures
The CFO decision framework
Choose PPA If:
- Debt-to-equity >0.7
- Capex budget constrained
- Growth investments competing
- Tax shield not valuable
- Core business needs capital
- Priority: Preserve balance sheet flexibility
Choose Captive If:
- Debt-to-equity <0.5
- Capex budget unconstrained
- Tax liability high (₹20+ crore)
- 25+ year operating horizon
- Asset ownership strategically valued
- Priority: Minimize total 25-year cost
Choose Hybrid If:
- Balanced approach desired
- Some capex available
- Risk diversification valued
- Board wants both options
- Financial flexibility important
- Priority: Optimize across multiple objectives
The financial structure reality
There's no "best" option universally.
Captive: Lowest total cost, but capital-intensive. PPA: Higher 25-year cost, but zero capex and preserved flexibility.
Right answer depends on YOUR balance sheet, capital availability, and strategic priorities.
Most CFOs choose PPA: Capex scarcity beats total cost optimization.
For CFOs evaluating solar financial structures.
For finance teams analyzing opex vs capex tradeoffs.
For boards deciding capital allocation priorities.
We offer both structures. PPA (we own, you pay per kWh) or EPC+Financing (you own, we build). Same solar. Different balance sheet impact. You choose based on your capital position.
Request a financial structure analysis—we'll model both PPA and captive options with your balance sheet data and show which preserves financial flexibility while delivering reliable power.
Disclaimer: All financial projections, balance sheet impacts, and accounting treatments are illustrative examples. Actual accounting treatment depends on specific contract terms and applicable accounting standards. Financial ratio impacts will vary based on company-specific balance sheet composition. Tax benefits depend on company tax position and applicable regulations. Debt capacity and covenant compliance require analysis with your lenders. This content is for informational purposes only and does not constitute financial or accounting advice. Consult your auditors and financial advisors for actual accounting treatment and financial impact analysis.