Commercial Solar ROI

ROI provides businesses with an overview of a commercial solar project’s economics over its lifetime, about 30 years. At TENCO SOLAR, we strive not only to design sustainable commercial solar systems with lifetime tangible and intangible benefits for our customers but also to help our customers understand the finances of their solar investment.

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How do I calculate the ROI of a commercial solar system?

When evaluating the ROI of a solar system for your business, there are several important metrics to look at. Payback Period, internal rate of return (IRR), and net present value (NPV) are all important factors when determining the overall Return on Investment (ROI) of a business solar system.

Detailed analysis is important, and there are many variables to consider including:

• Current utility kilowatt-hour (kWh) electricity rates and demand charges.
• Current annual electricity bill without solar.
• Projected annual increase of electricity costs over the system’s life based on historical increases.
• Projected amount of solar kWh your system will produce over 25 to 30 years.
• Lifetime costs associated with the system, including system installation, yearly maintenance, and repair costs.
• Calculated lifetime value of all tax benefits and incentives, like the Investment Tax Credit (ITC) or Bonus Depreciation
• Additional costs like permitting, utility infrastructure upgrades, connection fees, taxes, interest, or loan costs.

When all of these negative and positive values are calculated, you’ll not only see the payback year but also the total amount of money saved by going solar.

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Payback Period

Businesses that are interested in paying for their commercial solar system in cash should pay close attention to the payback period or the length of time it takes to recover the cost of the solar investment.  Commercial solar panel installations quickly pay for themselves by generating electricity for the facility by offsetting their electricity demands from the utility with solar energy, resulting in significantly reduced electricity bills.

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Payback Period Formula

To calculate the payback period, take the Net Solar System Cost divided by the Annual Utility Savings from Solar. (Net Solar System Cost/Annual Utility Savings from Solar = Payback in Years)

Example:
$75,000 (Net Solar System Cost)/$30,000 (Annual Utility Savings) = Payback in 2.5 years

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It's important to note that this simple formula leaves out year-over-year utility rate increases that accelerate payback period. Most of our customers in California have seen their bills rise over 45% in just five years. When you account for rate increases and incentives, most businesses have a relatively short payback period.

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Net Present Value (NPV)

While ROI considers all of the financial benefits and costs of going solar, it doesn’t take into account the future value of the money being invested. That is, it doesn’t factor in inflation, risk, or the lost opportunity of investing in another type of investment, like stocks or bonds. This is commonly referred to as the time value of money.

NPV considers the overall time value of money involved with an investment. Using an NPV formula, TENCO SOLAR can show you how the 30-year lifetime cash flow of a solar project compares in today’s dollars, factoring in inflation, interest, and other lost opportunity costs.

To project a future value, we include all upfront costs of installation, plus the projected utility bill savings, divided by a discount rate.

Over 30 years, a commercial solar project should show a large and positive NPV.

Internal Rate Of Return (IRR)

While NPV can show the value of an investment over time, IRR reveals the rate of return from NPV cash flows that commercial solar investments generate. A 20% IRR means that your solar energy investment is projected to generate a 20% return through the life of the solar system.

This metric is particularly valuable when identifying a solar investment’s value compared to other projects during the capital budgeting process.

Calculating the IRR for commercial solar installations depends on many factors, including how you finance it. For a loan, data will include:

• the net cost of the system after upfront rebates and tax incentives
• the amount of debt
• interest rate on debt
• debt term
• projected annual cash flow from utility savings
• and any pre-tax performance-based incentives
• operations and maintenance (O&M) costs.

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Value of Incentives

Tax incentives are an important factor in reducing the overall cost of investing in solar. There are too many specifics to cover here, so we recommend reading our commercial solar tax benefits guide which gives a detailed overview of the ITC, adders, and bonus depreciation.

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Other Benefits

Beyond the tangible financial benefits like lowering electricity bills and increasing the value of your property, it's important to also take into account the intangable benefits like improved resilience to power outages and lowering your carbon footprint.

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Using these calculations, TENCO SOLAR has helped business owners, landlords, and commercial property investing in the future with solar energy and generate positive cash flow for their businesses.

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Contact us at 888-507-6937 to get a detailed estimate and breakdown of the ROI you can expect of your solar system.