Installing solar power, whether for a commercial, industrial or residential application, involves a financial calculation, which considers the electric bill before and after solar, the cost to install solar panels, and the length of time for the system to pay for itself and begin delivering pure savings.

A Charleston area construction company is wrestling with this very issue for its office. It spends nearly $23,000 annually for power, but could reduce that significantly with a 74-kW solar system mounted on the roof. The Alder Energy Systems proposal that it is considering comes with significant upfront expenditures, but tax incentives reduce the company’s out-of-pocket costs by three-quarters.

The bottom line is that solar power will pay for itself in under four-and-a-half years and deliver an estimated half-million dollars of savings over its 30-year life. That return-on-investment is in addition to the ancillary benefits of using clean energy and becoming less reliant on the electrical grid.

 

The Solar Payback Calculation

The payback on a commercial solar system depends upon a variety of variables, starting with the cost of electricity from the local utility. Companies with different size electrical loads pay different rates; high energy users, such as manufacturing plants, pass less per kWh than small commercial customers do. A customer’s retail energy cost per kWh reflects the value of its solar kWh. The higher the utility’s energy rate, the more money that free electricity generated by the sun is worth.

Also baked into the calculation are the effects of inflation and aging infrastructure on utility bills. Power plants will need to be replaced, particularly as utilities move away from coal towards other power sources.

Over 30 years, utility bills are almost sure to double and could easily triple. But there is no inflation when it comes to the sun’s energy. The cost of power produced by the sun’s rays will be the same in 2050 as they are today: Zero.

Other variables include the cost of installing solar panels, the amount of energy generated by them, the amount of sunlight locally and the amount of energy used. Solar installation is not inexpensive, particularly when done correctly. But much of that cost can be offset by a wide variety of federal, state, and other tax incentives and grants.

As for power production, a solar array with southern exposure in a sunny climate can generate more free energy than one facing north in an area with frequent cloud cover. A solar system need not offset all power usage to be valuable; in fact, most systems pay a fast return-on-investment regardless of how much of the energy loads are offset.

Taken together, a 25-30-year investment in solar should pay for itself in 4-7 years. That leaves 18-26 years of free or very low-cost energy production.

 

Amortizing the cost of solar

Let’s look at this another way. Instead of considering the upfront costs of installing solar in the year they take place, amortize them over the life of the panels. A $30,000 investment in equipment and installation can be seen as a $1,000 annual investment over the 30-year life of the equipment.

The 30% tax credit that reduces the front-end cost by $9,000, slices the annual cost to just $700. Understood from that perspective, it’s easy to understand the potentially immense return on investment of a solar installation.

Solar makes sense for independent retailers too. A South Carolina hardware store can slash its electric bill by 87% with a small solar system. With tax incentives, the outlay amounts to less than $1,000-a-year, as opposed to annual savings of more than $18,000. The system begins generating a profit midway through year four.

That, of course, considers merely the financial return. Each business values the environmental, energy security and public relations benefits differently, but they all have some value.

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