How to Calculate A Commercial Solar Investment
Evaluating Payback, ROI, NPV, IRR, ITC & LCOE
Many California agricultural, commercial & industrial businesses have reaped the financial benefits of installing commercial solar panels – Revel Energy helps clients determine how to calculate the value of their investment potential by evaluating return on investment (ROI), payback period, internal rate of return (IRR), net present value (NPV) Investment Tax Credit value (ITC) and levelized cost of energy (LCOE). Along with the proven financial benefits of solar, there are growing intangible benefits that bolster project economics, such as employee recruiting and retention, customer satisfaction, company image and reputation in their community along with other factors that help businesses stand above their competitors.
For many businesses in 2024, reducing rising monthly electricity costs alone is enough to make commercial solar a valuable investment. By offsetting utility bills with free electricity generated on-site from the sun, businesses can protect themselves from constantly-increasing utility rates. This allows them to be more competitive and increase cash flow through reduced operating costs, with the added benefit of increased property value as a result of adding solar to their building.
Commercial Solar Investment Financing - Payback Period
There are many ways California businesses can finance a commercial solar investment. An outright cash purchase allows businesses to take advantage of all available incentives and typically has a short payback period between 3 and 7 years – benefiting from programs like the solar investment tax credit.
The largest percentage of the eligible tax incentives are recovered in the 1st year the system is operational, allowing system owners to have an accelerated payback period.
Commercial solar panel installations quickly pay for themselves by generating electricity for the facility through offsetting their electricity demands from the utility with solar energy, resulting in significantly reduced electricity bills. As electricity costs have continued to rise faster than expected, Revel has observed an equally unprecedented increase in solar savings year over year. With many of Revel’s clients who had looked into solar in past years reaching out to look at it again and finding ROIs even shorter and missing years of great savings.
An important factor, but calculating commercial solar investment feasibility is more than a payback period, as it doesn’t account for inflation, maintenance, depreciation, project lifetime & other variables like rate of return.
Solar Return on Investment (ROI) for Businesses
Return on investment (ROI) provides businesses with an overview of a commercial solar project’s economics over its lifetime. These solutions are designed to last over 25 years, with solar panels maintaining approximately 85% of their original output power at 25 years.
Revel Energy calculates agricultural, commercial and industrial solar installation ROIs through conducting a detailed analysis and considering many site-specific variables; these include:
- 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.
- System installation costs, inverter replacement, operations and maintenance.
- Calculated lifetime value of all incentives and programs like ITC and NEM.
- Additional costs like permitting, utility infrastructure upgrades, connection fees, taxes, interest or loan costs.
At Revel Energy, we strive to design sustainable systems with lifetime benefits like positive cash flow from lower and predictable energy costs. These financial benefits provide consistent return on investment, and beyond this there are other intangible benefits. These benefits include reducing vulnerability to utility price increases, reliance on fossil fuels, and being a sustainable business and good steward to the community. There are some factors ROI does not represent, like the value of the money being invested when factoring in inflation, risk, or other lost opportunity costs.
Solar Investment Net Present Value (NPV)
Net present value (NPV) considers the overall time value of money involved with an investment. For example, in a commercial solar investment we calculate NPV to show the 30-year project lifetime cash flow compared to that value today. Importantly for this calculation, we look forward and account for inflation, risk, and other lost opportunity costs like potential alternative investments.
Present value compared against future value is an important consideration for any commercial solar investment. To project a future value, we include all upfront costs of installation, plus the projected electricity bill savings, divided by a discount rate. After significant project experience, Revel has proudly proposed many projects to customers with accurate and positive NPV estimations.
Internal Rate of Return (IRR) of a Solar Investment
While NPV can show the value of an investment over time, internal rate of return (IRR) reveals the rate of return from NPV cash flows that agricultural, commercial and industrial solar investments generate. This metric is particularly valuable when identifying a solar investment’s value compared to other projects during the capital budgeting process.
Determined by many variable factors, similar to NPV and ROI, our proposals target an IRR between 10% and 15% which is higher than the minimum acceptable rate of return for many companies.
Solar Investment Tax Credit (ITC)
The Federal Investment Tax Credit (ITC) offers a substantial 30% tax credit for businesses investing in solar, energy storage, and EV charging stations, significantly reducing the initial cost of these sustainable technologies. Newly introduced features of the ITC now include the option for a direct payment to tax-exempt entities, such as non-profit organizations, enabling them to benefit from these incentives without tax liability. This enhancement broadens the accessibility of clean energy investments, promoting wider adoption across diverse sectors.
Evaluating Different Solutions Through Levelized Cost of Energy (LCOE)
Some investment decisions benefit from evaluating the value of energy production divided by the lifetime costs associated with the system; this long-term evaluation is the levelized cost of energy (LCOE). This metric considers capital costs, operations and maintenance (O&M), performance, fuel costs of renewable energy technologies and is particularly helpful when comparing different alternative energy solutions to solar like wind or natural gas.
LCOE presents a unique method of showing the present value of the total cost of building and operating an energy solution over its assumed lifetime. By comparing this against the current cost of energy, renewable solutions often prove to be significantly positive investments over long periods of time. The National Renewable Energy Laboratory (NREL) has a terrific resource to help calculate LCOE here.
Calculate Added Property Value with a Commercial Solar Investment
As more and more California businesses realize the potential of commercial solar investments, they add significant value to their properties. Adding new sustainable technology increases a building’s value in several ways, most tangibly by increasing annual income by lowering operating expenses, which is then divided by the cap rate, thus growing property value.
Sustainable buildings are more attractive to prospective tenants; this gives green building owners an advantage over competitors. For existing tenants (i.e. a tenant 4 years into a 10-year lease), solar provides an opportunity to extend and/ or renegotiate leases, thus increasing the Net Present Value (NPV).
The Power of Power Purchase Agreements (PPA) for California Businesses
An increasing number of businesses are turning to Power Purchase Agreements (PPA) as a cost-effective way to install commercial solar. PPAs offer a way to utilize existing budgeted operating expenses to gradually finance a more sustainable electricity source.
By entering into a PPA, businesses can secure solar energy at a fixed, predictable rate, often lower than the utility’s rate. This approach mitigates the impact of rising electricity rates and also aligns with the growing prevalence of environmental sustainability goals.
A solar PPA protects businesses from a certain future of rising electricity costs by locking in a predetermined escalation rate, using solar generation to offset electricity bills to provide financial and operational flexibility.
Contact our expert team to learn if your business can benefit from commercial solar through a Power Purchase Agreement (PPA).
Calculating Agricultural, Commercial & Industrial Solar Investment Feasibility
Commercial solar investment is a complex and calculated decision and often businesses can be reluctant to invest capital that they could put into other areas of their business. Revel can help businesses evaluate this decision and offer options that won’t require a large up-front capital cost. Property owners and commercial developers holding buildings and facilities with high energy demand, could benefit from commercial solar almost instantly with short payback periods, overwhelmingly positive ROI, NPV and IRR.
Californians pay some of the highest electricity rates in the country, and investor-owned utilities are consistently granted rate increases to pay for both new and aging infrastructure. Solar investments provide many benefits to landlords and tenants alike, first and foremost reducing electricity costs and just as importantly, this sustainable technology adds long-term value to a property.
Revel Energy has helped many business owners, landlords and commercial property owners generate positive cash flow while investing into the future. Contact us today to claim energy independence through installing commercial solar, reducing your electricity bills, allowing you to put more money into your business, increase your property value and get a leg up on your competition.
California Commercial Solar News
Commercial grade rooftop solar is ideal for: manufacturing, warehousing, logistics, industrial, retail, hospitality buildings and more with over 10,000 sq. ft. rooftops.
CARPORT SOLAR
Free standing carport solar generates added solar power for properties with limited rooftop space. Added benefits include shading and protection for employees vehicles.
Crucial for reducing peak demand charges. Automated to supply electricity when your panels won’t. Energy storage is ideal for businesses that incur significant peak charges.
As the popularity of electric vehicles increase, so does the demand for on-site charging. This sustainable amenity has become a parking lot fixture for competitive employers.
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Client Testimonial: Kelemen Company
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Client Testimonial: Tice Gardner & Fujimoto LLP
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