4 Elements that Create a Great Commercial Solar ROI
Installing commercial solar is a financially savvy move that not only can help your business but can also serve to benefit the local community. When you reduce your organization's utility costs by going solar, you demonstrate a commitment to the environment and to the health of future generations. Add into the mix the availability of lucrative state and federal tax incentives, and the decision is a no-brainer.
Commercial solar has been on the rise for decades due to these attractive reasons. Many owners are surprised at just how much operating capital they're able to save through the addition of a commercial solar energy system. But exactly how much does your organization, with its unique energy profile and goals, stand to gain?
This is an important question that we won't be able to answer fully in the form of a short blog. But to help get your gears turning about your potential solar gains, we've listed the 4 most important elements of a commercial solar system that impact your company's ROI.
1. Payment & Financing Options
In general, there are four common ways to pay for a commercial solar energy system: cash and loans, leases, Power Purchase Agreements (PPAs), and public funding. We recommend cash purchases whenever it's financially feasible for the owner, as it ensures the most favorable returns, simplifies ownership, and maximizes federal and local tax incentives -- ensuring that the full amount goes back to the business rather than your lender.
The next best payment option to maximize your ROI is traditional financing programs. Low-interest loans or lines of credit with an existing banking relationship generally offer the fastest and most lucrative return outside of an all-cash purchase. We generally recommend financing only the necessary portion of the net cost after incentives are applied to achieve the best payback.
After cash and loans are leases. One of the biggest benefits to leases is that there's no upfront capital required to secure one. However, a lease usually does not translate into direct ownership and there's no direct way to take advantage of federal tax incentives. With the federal solar investment tax credit offsetting 30% of a commercial solar purchase, it can be a slower process to reach a lucrative ROI on this kind of investment without it.
Another financing option are PPAs, or Power Purchase Agreements, also called Solar Service Agreements. These have long been used by utilities to finance the purchase of electrical generating facilities. PPAs are a common way to finance solar installations at commercial and institutional facilities in certain states. At Sun Valley Solar Solutions we offer PPA programs exclusively for qualified 501 (c)(3) non-profits, municipalities, and schools.
While not as common as the other commercial solar financing options on this list, public funding is another one that can be feasible for many organizations. This alternative includes financing such as grants, bonds, and other incentives available to specific rural businesses or non-profits. The main drawback to this choice is it's typical organizations will need a combination of other financing to reach the full amount needed.
A qualified solar installation company will be able to assess your organization's financial situation and help you decide which payment method would be best.
2. Roof Type & System Design
Although roofs are usually out of sight and out of mind for most business owners, they actually play quite a large role in calculating your potential solar ROI. The most common types of commercial roofs are those of flat manufacturing-style buildings, which provide ample design space for a solar energy system. These types of buildings usually have unobstructed roof space as well, which helps maximize sunlight capture. There are both ballasted (zero penetrations) and penetrative racking systems available to best suit your goals and structure.
Some companies opt to install a rooftop solar system along with solar carports, or just the solar carports themselves. This is a great option for organizations that might not have a lot of roof space for a full solar array, or for those who want to provide some shade to employees and visitors alike. We recommend speaking to a qualified commercial solar company to see what system design and size would maximize your return on your solar investment.
3. Local Solar Incentives
Depending on where your organization is located, there might be local incentives that will help improve your commercial solar ROI. These might come from your utility or local jurisdiction. A qualified local installer will be able to inform you of what's available for your business. It's also important to consult an installer with well-established local utility and AHJ relationships. Sometimes these long-established relationships mean the installer has inside information on what incentives may be on the way that aren't yet announced publicly. This is a huge benefit in shopping locally for your commercial solar system.
4. Federal Solar Tax Incentives
The most lucrative solar incentive for organizations is the 30% federal solar tax credit. This incentive offsets up to 30% of a commercial solar purchase in the form of a federal incentive tax credit. To qualify, the organization must have a tax liability upon filing. In other words, if the business owner is going to receive money back from their tax return, then the credit will not be applied for that year, and will simply roll forward.
Every commercial solar system also qualifies for the Modified Accelerated Cost Recovery System (MACRS), which was established in 1986 as a method of depreciation in which a business's investments are recovered, for tax purposes, over a specified period of time via annual deductions. Qualifying solar equipment is eligible for a cost recovery period of up to five years.
If you're wondering whether or not solar makes sense for your organization, we invite you to download our free guide Is Solar Right for My Organization? In it, you'll learn the various factors that make up a commercial solar purchase. Or, if you're ready to request a free commercial solar consultation, simply click here.