Evaluating Commercial Solar: Payback, ROI, NPV, and IRR

Harris.Freeman.013How much your business saves over the 25 to 30 year lifetime of a typical commercial solar system depends on many factors, including how you finance it, federal and local incentives, your utility rate, and the amount of sunshine available on your commercial rooftop.

To help commercial and industrial solar customers evaluate the financial benefits of installing solar, REC Solar can provide a free quote and a detailed financial analysis to determine:

  • Payback
  • Return on Investment (ROI)
  • Net Present Value (NPV), and
  • IRR (Internal Rate of Return)

Let’s briefly explore each of these finance evaluation concepts. Some variables will change if financing through a solar lease or solar power purchase agreement (solar PPA).

Payback

“Simple payback” is the length of time it takes for your upfront solar investment to pay for itself through solar energy savings. To calculate it, most commercial installers take the net cost of the solar system after incentives have been applied and divide it by your projected annual electric bill savings:

Net Solar System Cost/Annual Utility Savings from Solar = Simple Payback in Years

As an example, if your net commercial installation cost $50,000, and you saved $10,000 per year in utility savings, your payback would be 5 years.

However, simple payback does not account for inflation, depreciation, maintenance costs, project lifetime, and other factors. So, it doesn’t really give the true value of solar over the full lifetime of a solar system, and it doesn’t give any rate of return.

REC Solar’s proposals go beyond simple payback formulas and include inflation, depreciation, etc, plus other costs specific to a solar installation. For example, energy bill savings from solar represent a cost not spent, and therefore gives money back to the company, which is then taxed as revenue. REC Solar’s payback definition includes the taxes that may be paid on energy savings.

Return on Investment (ROI)

ROI gives you another relatively simple perspective of how much money you’ll save over the entire (typically 25 to 30 year) lifetime of a commercial solar project. A comprehensive ROI formula for commercial solar will include:

  • Your current utility kilowatt-hour (kWh) rate and any demand charges.
  • Your annual bill without solar.
  • The projected annual increase of utility costs over 25 to 30 years based on historical increases.
  • The projected amount of solar kWh your system will produce over 25 to 30 years
  • The lifetime costs associated with the solar installation, including installation costs, inverter replacement, operations and maintenance cost
  • The estimated value of all solar rebates, performance based incentives, and tax incentives received over 25 to 30 years.
  • Any applicable taxes.
  • Any applicable interest/loan costs.

REC’s proposals include ROI values over 10, 20, and 30 years. When all of these negative and positive values are calculated over those time periods, 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 takes into account 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, such as stocks and bonds. This is commonly referred to as the time value of money.

NPV does account for the time value of money. Using a solar NPV formula, REC Solar can show you how the 25 to 30 year lifetime cash flow of a solar project compares in today’s dollars, factoring in for inflation, interest, and other lost opportunity costs.

If you’re not familiar with the concept of NPV, the video below explains it in more detail.

In terms of a solar project, the future value (FV) for each year would include all of the upfront costs of installation, plus the projected net annual utility savings and income from any production based incentives, divided by a discount rate.

Over 25 to 30 years, the typical commercial solar project will show a large and positive NPV.

IRR (Internal Rate of Return)

Whereas NPV can show the project’s net present value in dollars, the IRR reveals the rate of return from NPV cash flows received from a solar investment. So, if your IRR is 12%, it means that your solar energy investment is projected to generate a 12% return through the life of the solar system.

IRR is useful for comparing the returns on two or more investment opportunities. Given the accurate data of each investment, a business can compare the IRR of investing in solar to the IRR of some other capital investment and select the one with the highest return.

If you’re not familiar with the concept of IRR and its formula, the video below explains it in more detail:

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, as well as O&M costs.

Get a Free Solar Financial Analysis

Unfortunately we’ve had to be very general with these terms because each commercial solar project can vary widely.

To get more specific information for your potential solar project, REC Solar offers a free financial analysis that includes estimated costs, finance options, payback, ROI, NPV, and IRR. To receive your free solar estimate and financial analysis, get started here.

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Really Fast Commercial Installs: Two REC Solar Time Lapse Videos

Below are two time-lapse videos filmed at two REC Solar installations.

The first is from IKEA’s southwestern US distribution center in Tejon, California. The 1.8 MW DC system covers 216,000-square-feet of the expansive rooftop, and produced 3.05 million kWh of electric power in 2013, over 110% of expected yearly production.

 

The second time lapse displays an installation for Pandol Bros., Inc., based in Delano, California. This 1.135 MW DC solar array is projected to produce 1,900,000 kWh of solar power annually, powering the Pandol Bros. fresh produce cold storage, packing and shipping facility.

 

 

While time lapse videos do not capture all details of commercial solar installations, large solar projects like these can be completed within 6 months or less, depending on size and permitting requirements. Proper planning for rooftop or ground site preparation, environmental compliance, utility infrastructure upgrades, etc. helps to eliminate potential delays in the construction process.

If you’ve got questions about solar installation times and the construction process for your farm or facility, please let us know.

 

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New Program Solves the Stranded Solar Meter Problem for California Farms

Net Ag MeteringSB 594, a law that went into effect in PG&E utility territory February 2014, now allows property owners to aggregate the electricity load of multiple utility meters scattered throughout a single parcel or multiple continuous parcels and credit the bills with a single “Net Metered” installation.

This new program is called ‘Net Meter Aggregation’ and reduces the cost of installation and increases flexibility for farmers that may alter individual electric meter consumption from year to year. This removes financial and technical barriers to going solar for farmers that have multiple utility meters on a single property or meters scattered throughout many parcels and were unable to take full advantage of  California’s net metering program.

The Old Net Metering Rules

Similar to rollover minutes on a cell phone, net metering allows  a solar  customers electric bill to be credited for any extra power produced by the solar array.

Before Meter Aggregation, however, regulations limited the net metering incentive to the meter that was directly connected to the solar installation. For homes and small businesses, that structure worked fine, but farms often have multiple meters and usage on those meters can change from year to year based on growing crops  on a particular parcel or not. This program now eliminates the cost that was previously required to connect all those meters to a solar system or the bill credits wasted if a water pump is not run for a year while solar is generating.

In the case of agricultural land, a single meter is often installed for each water pump across multiple acres of farmland. For factories, industrial facilities, and large government compounds such as an army base, a utility meter is often installed for each building on the compound.

Under the old rules, only a single meter connected to the solar installation could receive net metering credits. So, even if the solar installation could power all of the water pumps, the landowner would only receive credit for the single water pump tied directly to its meter and the nearby solar installation.

The New Net Metering Aggregation Rules Under SB 594

Under the new rules, multiple electrical accounts can now aggregate the electrical load of all the meters on the property where the solar system is located, or on property that is contiguous to the solar system.

Instead of building multiple solar systems for multiple meters on a large farm, solar companies can install a single  solar PV system in one area. From this single location, the solar power generated—and any net metering credits produced—will offset the electricity used by all of the farm’s various loads, such as water pumps, electric fences, cold storage facilities, etc.

Take for example Bowles Farming Company, Dos Palos, California.  They had over 20 meters scattered throughout hundreds of acres.  Under the old net metering system, a solar system would have to be built for each of those meters and would not be feasible.  Under the new aggregate net metering law, REC Solar will build a ~800 KW solar array to offset 100% of their expected kWh consumption throughout all meters.

The new aggregate net metering rules decrease installation costs for several reasons:

  • A single large solar installation requires less equipment, labor, and time to build than multiple smaller installations producing the same amount of energy.
  • A single solar array can now be installed in the most ideal location on the farm, potentially producing more power than multiple installations tied to individual meters that have less than optimal sunlight.
  • Extra equipment and engineering won’t be necessary to accommodate bad terrain or interconnection issues.
  • It’s now cost effective to build a larger solar array that offsets more utility power.
  • Similar to changing your allocation within an investment portfolio, Solar generation credits are allocated to meters and customers can easily change allocation percentages as usage patterns become different.

Similar to the farm’s meter issues, an industrial facility can now install solar on an adjacent empty plot of land or rooftop and be able to offset the power of all the property’s buildings.

SB 594 Meter Aggregation Limitations

While Meter Aggregation frees net metering’s restrictions, the CPUC did impose some limitations.

  • The maximum size of the solar system is 1 MW. So, if a farm needs to build a larger system, then  an alternative program for larger systems will apply .
  • Net metering is only applied to the maximum load (i.e., energy use) of all of the meters on site. So, if the solar system over produces and generates 110% of the farm’s energy needs, the extra net metering credits will not be as valuable. . Consequently, it’s important for a solar installer to design a system that is optimal and understand every aspect of the project.
  •  This program is only available for a limited time and will end once the current Net Metering program expires.

This last caveat is important. Currently, customers benefit from being  credited at the full retail rate for their solar net metering credits. However, with the passage of a similar piece of legislation, California’s AB 327; the CPUC is now in a process of redefining the value of net metering, effective Summer 2017 – or until 5% of the utility’s customers have Net Metering.

It is unknown whether the new net metering  program will reduce its value to customers, but many insiders suspect it will. In order to take advantage of this opportunity before it expires,  customers must have a system installed  before the new program takes effect. Once your system is installed, you will be grandfathered under the current net metering rules for the next 20 years!

REC Solar will be hosting a webinar on the new net metering aggregation rules. To sign up for the webinar, contact REC Solar, and we’ll let you know the specific date and time.


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Three Key Commercial Solar Tax Incentives Fighting to be Extended in 2014

You can never truly predict what legislation will actually pass through Congress and get signed by the President. Nevertheless, there are several expiring solar tax benefits in the EXPIRE Act of 2014 that we hope will get extended and continue to benefit commercial solar installations.

The Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act is a U.S. Senate bill that is meant to extend a slew of tax incentives for one last time, hence the purposeful “EXPIRE” acronym.

In terms of solar, there are three key pieces of expiring legislation that may or may not make it to the President’s desk:

30% Federal Investment Tax Credit Extension…or not

First, the bad news: As currently written, EXPIRE does not include extending the 30% solar investment tax credit (ITC). This very popular incentive allows tax paying solar owners to receive a federal tax credit that can be used to offset a commercial solar system’s cost by as much as 30%. U.S.Capitol.Building

While the ITC extension did not make it into EXPIRE, it may be included in future omnibus bills. As of right now, only solar projects completed by the end of 2016 will qualify for the 30% ITC. Senate supporters have been attempting to change the wording so that any solar project that is started by the end of 2016 will qualify for the 30% ITC credit. If successful, this “commence construction” wording could allow solar owners and developers to qualify  for the 30% tax credit for complex projects that may not finish completion before the end of 2016.

On the other hand, if the ITC law isn’t amended before 2016, the ITC will be reduced to 10% for solar projects that complete or start installation after December 31, 2016. Consequently, it’s important for large solar projects to begin construction as soon as possible to ensure beating the current 2016 deadline.

Section 179 Deduction Expense

The EXPIRE Act does include several provisions that improve the Section 179 deduction. From 2009-2013, the Section 179 deduction allowed eligible businesses to deduct up to $500,000 of a solar equipment purchase price of up to $2 million, from the taxpayers’ gross income in the first year. This additional tax deduction is on top of the 5 year accelerated depreciation schedule, allowing taxpayers to write off a significant portion their investment in the first year.  Some industry observers have referred to this provision as “super-secret 100% depreciation.”

If EXPIRE doesn’t get signed into law, for taxable years beginning in 2014 and thereafter, a taxpayer may only expense up to $25,000 of the cost of the solar property, up to a maximum $200,000 of the solar equipment’s price tag. These limitations, currently in place, significantly impact the benefit of this tax deduction.

However, if the EXPIRE Act is ultimately signed into law (as currently written by the Senate), it will do several things: First, through 2015, it will restore the maximum annual deduction amount and equipment cost phase-out threshold to $500,000 and $2 million, respectively.

Second, EXPIRE will allow tribal governments and non-profits to allocate the value of the 179 deduction to “the person primarily responsible for designing the property in the same manner as is allowed for public property.” In other words, a tribal government or non-profit can’t typically benefit form tax deductions, but under this provision, a non profit going solar will be able to transfer the equivalent 179 deduction value to a solar installer, who can deduct that value from the total cost.

That being said, non-profits may be more inclined to finance their solar installations with solar PPA financing and other new innovative financing methods. (Contact REC Solar for comparing the best options for non-profits.)

Bonus Depreciation

If EXPIRE is signed into law, one provision will also extend the 50% Bonus Depreciation provision for solar property purchased, installed, and connected to the grid by the end of 2015.

Under Bonus Depreciation, the taxpayer is able to deduct an additional 50% in the first year of the installation. There are no eligibility or project limits under this provision, opening this tax benefit up to all tax payers. So if a business is too large to qualify for section 179, they can still take the bonus depreciation and 5 year accelerated depreciation schedule creating a healthy reduction of their tax burden.

When the tax credit  is used with a solar project, , the owner must reduce the project’s depreciable basis by one-half the value of the ITC. So, this means the owner is able to deduct 85% of the tax basis with the ITC (30% ITC x ½ = 15% reduction in eligible basis).

As a very simple example, if EXPIRE passes and a solar installation’s tax depreciation cost basis after applying the ITC is $650,000, an eligible taxpayer could deduct up to $500,000 in the first year under section 179.

The remaining cost, $150,000, would be subject to the 50% Bonus Depreciation. Thus, the taxpayer would receive an additional $75,000 bonus tax deduction in the first year, resulting in significant tax savings, a reduction in the payback period, and a nice boost to the Return On Investment for a solar project…if EXPIRE makes it to the President’s desk.

The above notwithstanding, the U.S. tax code is very complicated and this is not official tax advice. For the sake of brevity, we’ve simplified explaining these potential solar incentive extensions, so please contact REC Solar for more details about how these proposed solar incentives and other financing options might apply to your solar project.

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Believe it or not, solar is getting hot … in Minnesota? Yes, Minnesota.

Costco.SLO_opt_logoYou might think that a northern state like Minnesota wouldn’t be a hot market for solar energy, but solar works great in northern and colder climates. To capture that solar potential, Minnesota recently enacted several policies and incentives to inspire more Minnesota businesses, municipalities, non-profits, and residents to install solar and reduce their energy costs.

The main driver behind Minnesota’s solar push is the state’s Renewable Portfolio Standard (RPS), which requires the state’s investor owned utilities to generate around 30% of their total retail electricity sales from wind, solar, and other renewable sources by 2020. On top of that, 10% of utility retail electric sales are required to come from solar by the year 2030.

To meet these goals, the state and its major utilities have created several programs targeting both large and small installations:

Growing Community Solar Gardens

Community solar gardens, sometimes known as “shared solar,” lets developers create large solar farms and allow individual “subscribers” to invest in a portion of the farm. By purchasing a subscription, each subscriber gets to offset their utility bill with their portion of the solar power generated by the solar installation.

The program is a huge benefit for those who have homes or businesses that can’t go solar because of shading issues, or because they lease their property, or because there are location or utility interconnection issues.

In a related opportunity, if you have a large plot of un-shaded land or large commercial rooftop and want to host a community solar garden, solar developers can lease your land or rooftop for a potential solar garden installation. (Contact REC for more details.)

As for the incentive, solar garden subscribers receive a payment based on their solar power generated.  Currently, Minnesota regulators have set an interim rate of about 12 cents kilowatt-hour (kWh), but that rate may be replaced when Minnesota’s Value of Solar Tariff (VOST) is set. (See below.)

Community solar gardens are truly meant to be shared, not subscribed by a single individual. Consequently, the law mandates that each solar garden have a minimum of 5 subscribers and that no single subscriber own more than 40% of an array.

Taking Advantage of the Extra Made in Minnesota Solar Incentive

In addition to the above incentives, small commercial, non-profit, and government solar installations up to 40 kW in size may receive an additional production incentive for 10 years when the installer uses officially designated “Made in Minnesota” solar panels. The annual payment will vary based solar production, the solar panel brand and model, and whether it’s a business or government or non-profit installation. Another requirement is that the solar installation has to be within the territories of Xcel Energy, Minnesota Power, Alliant Energy, or Ottertail Power utilities.

Depending on the solar panel chosen, businesses can receive 13 to 18 cents/kWh, and non-profit and government entities can receive 20 cents to 27 cents/kWh generated.

As an example, a business that installs a 30 kW commercial array of Made in Minnesota certified modules and generates 42,516 kWh in the first year would be paid $5,527.07 (42,516 kWh x .13/kWh). If the panels produce the same number of kWh in each of the following 9 years, the business would receive a total of $55,270!  For another Minnesota solar panel brand that qualifies for the 18 cents/kWh incentive rate, that payment could be $7,652 per year or $76,528 after 10 years!

While specific program details are still being worked out, it’s important for interested parties to get involved early to ensure they are ready once these programs go live; new solar incentives tend to reach capacity quickly.

Contact REC Solar to get more details about how these Minnesota solar programs specifically apply to your Minnesota business or organization.

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