The amount your business can save over the 25 to 30-year lifetime of a commercial solar system depends on many factors, including how you finance it, federal and local incentives and your pre-solar utility rate. Business owners in states like California benefit since the state ranks within the top for available sunshine.
How to Determine the Cost of Commercial Solar Panels
To help commercial and industrial solar customers evaluate the many financial benefits of installing solar panels, Solar Technologies can provide a customized solar evaluation and a detailed financial analysis to determine:
- Return on Investment (ROI),
- Net Present Value (NPV), and
- IRR (Internal Rate of Return)
But first, let’s review each of these finance evaluation concepts so we can answer any questions you have during your appointment. Some variables may change if you finance your solar purchase through a lease or power-purchase agreement (PPA).
How is the Solar Panel Payback Period Calculated?
“Simple payback” is how long it takes for your reliable energy system to recoup its cost through energy savings. Commercial solar installers often calculate the net cost of a system by taking its net cost (after applying incentives) and dividing it by your annual projected utility bill savings.
Solar Payback Formula
To calculate the payback period of your system, use this formula:
- Net solar energy system cost / Annual energy savings = Simple payback in years
For example, if your net installation cost is $50,000 and you save $10,000 per year on utility bills—your payback period would be 5 years.
However, simple payback doesn’t account for other important factors such as inflation, depreciation and maintenance costs. It also doesn’t take into account the value of your system over its full lifetime and doesn’t give a rate of return.
Solar Panel Return on Investment (ROI) of Solar Panels
The return-on-investment (ROI) of a solar project gives you an idea of how much you’ll save over the lifetime—typically 25–30 years—of your system. A comprehensive ROI formula for commercial solar is included in every Solar Technologies evaluation and will include:
- The current rate and demand charges for your utility kilowatt-hours (kWh) usage.
- Your annual utility bill without panels.
- Projected annual increases in utility costs over the next 25 to 30 years, which are calculated based on historical increases.
- The amount of kWh energy your system is expected to produce over the typical 25 to 30 year lifetime.
- The lifetime costs of your installation, which includes installation costs, inverter replacement, operations and any maintenance costs.
- The estimated value of the clean energy rebates, performance-based incentives, and tax incentives received over the 25 to 30 years.
- Any applicable taxes.
- Any applicable interest/loan costs.
Solar Technologies’ custom proposals break down the ROI values for your business or organization for the initial 25-year savings period. When we calculate each of the negative and positive values over that time period, we’ll be able to narrow down the payback year and your overall savings.
Net Present Value (NPV)
ROI takes into account the installation costs and financial benefits of going solar, but it doesn’t consider the future value of your investment. That is, it doesn’t take into account inflation, risk, or the lost interest income from investing elsewhere. This is known as the time value of money.
A commercial solar project’s NPV takes into account the time value of money. By using a solar NPV formula, Solar Technologies can show how the expected lifetime cash flow of your 25-year investment compares in today’s dollars when you factor in inflation, interest, and lost opportunity costs.
The future value (FV) of a project would include all upfront installation costs and any production-based incentives, along with net projected annual utility savings. These values are then divided by the discount rate to account for inflation over time.
Over the course of 25 to 30 years, a non-residential solar project is likely to have a positive and large NPV.
IRR (Internal Rate of Return)
Key Differences Between NPV and IRR:
Whereas a solar project’s NPV is the dollar amount that future cash flows are worth today, the IRR shows you how quickly those dollars will be returned from a solar investment. So, if your IRR is 12%, it means that you can expect to see a 12% return on your initial investment. A 12% IRR means your system’s projected return on your clean energy investment is at least 12% through its guaranteed lifetime.
IRR is helpful in comparing the returns of multiple investment opportunities. A business owner can compare the IRR of investing in a commercial clean energy project to other capital investments and select whichever offers higher returns.
Multiple factors are taken into account to calculate the IRR for commercial installations, including how you finance the project. For a loan, data will include:
- the net cost of the system after applying rebates and tax incentives,
- the amount of debt,
- interest rate on that debt,
- debt term(s),
- projected annual cash flow from your utility savings,
- any pre-tax performance-based incentives, and
- O&M costs.
Get Your Free Commercial Solar Proposal and Financial Analysis
Because all commercial solar projects can vary widely, we’ve had to be very general with all of these terms. For more detailed information for your upcoming clean energy project, contact us today for a free financial analysis that includes costs, finance options, ROI and more.