CALCULATING ROI

After you’ve made it through the payback period — which is usually between 5 and 10 years, and received your government solar tax credits, your PV system will have paid for itself, which means you’ll start making a profit. It’s important to know that there are many different factors that affect your solar ROI, but at its simplest, the calculation for your return on investment in solar is: 

Lifetime cost of electricity from utility – lifetime cost of solar = solar ROI

1. Determine your lifetime cost of electricity from utility. Here’s how to calculate lifetime cost of electricity: Cost of electricity per kWh x monthly kWh usage x 12 months x 25 years.
2. Subtract your lifetime cost of solar from step 1, your lifetime cost of electricity. Your lifetime cost of solar will include:

• Equipment
• Shipping
• Permitting & inspection
• Installation
• Incentives & rebates (federal tax credit applies to all above line items)
• Financing fees (if applicable)
• Grid connection fees
• Part replacements

Again, there are many factors that can influence the ROI of your solar system, which is why it helps to have a trusted installer like Design My Solar help you through the calculation process. Here are some top contributors that affect the ROI of your solar investment:

• Installation costs
• Tax incentives
• Fees & permits
• Utility billing structure
• Net metering agreements

CALCULATING INTERNAL RATE OF RETURN (IRR)

The IRR measures the net present value of all cash flows from a particular investment, and companies typically have a minimum IRR threshold for projects. We believe that IRR is a relevant metric to determine whether to invest in a solar PV system instead of other projects during the capital budgeting process or to other investment vehicles more generally.

Texas commercial solar projects often have an IRR above 10% and typically closer to 15%, which tends to be above the minimum acceptable rate of return for many companies. You can use this figure in order to ballpark estimate IRR on your system.

CALCULATING INCREASED PROPERTY VALUE

The capitalization rate measures the value of an asset based on what it produces in terms of income, which is an important component of commercial solar ROI. The income capitalization approach is the preferred method of the National Appraisal Institute to valuate all solar projects, both commercial and residential. Solar is considered a fixture, so the value flows to building itself rather than being measured separately.

So when it comes to property value, how much does a solar installation increase that number? Like our previous calculations, it depends on a few different factors and will vary depending on the setup, location, energy usage, and financial incentives; however, this study will help give you a ballpark range of what to expect: The Lawrence Berkeley National Laboratory produced a calculation of a $5,000 resale value increase for every kilowatt (kW) of solar installed. For example, if your business owns a 9.6kW system, you’d be looking at a $48,000 property value increase (9.6 x $5,000 = $48,000). 

CALCULATING COMMERCIAL ENERGY SAVINGS 

Your annual energy savings can be calculated by multiplying the above 16 kWh average usage by your utility’s cost of electricity. The national average electricity consumption per square foot for office buildings is 16 kWh per square foot. Here’s how to determine the size of a system that would meet 100% of your electricity usage:

• Multiply your building’s square footage by 16 kWh
• Divide that number by a conservative solar production multiplier of 1,400

To calculate the estimated cost of an average system, multiply the system size in kW by $2.00 per watt. For example, a 50 kW system x $2.00 = $100.00.