Commercial PV Payback

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.

When evaluating the cost of a commercial solar system, there are several important methods for calculating the value of the system – Payback Period, Return on Investment (ROI), internal rate of return (IRR), and net present value (NPV).

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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.

Due to incentives and tax credits available and the rising cost of electricity, most businesses typically have a relatively short payback period.

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Payback Period Formula

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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Return On Investment (ROI)

ROI provides businesses with an overview of a commercial solar project’s economics over its lifetime, about 30 years.

ROI is calculated through a detailed analysis of many site-specific variables, 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.

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.

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.

Contact us at 888-507-6937 to learn more about how installing commercial a commercial solar system can reduce your electricity bills, allow you to put more money into your business, and increase your property value.

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