How are the financials calculated for a commercial solar system?
Solar economics depend on four key inputs: how much energy the roof can produce, what the system costs to build, how much electricity the building consumes, and what those avoided grid purchases are worth.
Evaluating the financials of a commercial solar installation involves sizing the system to maximize return while accounting for physical, economic, and policy constraints. Here's the general framework.
First, determine the technical potential. This starts with solar yield — the number of kWh each kW of installed capacity will produce annually, based on local weather data (typically using TMY3 data from the nearest weather station) and site-specific factors like panel tilt, azimuth, and system losses. Roof capacity is estimated based on available area, accounting for obstructions (typically around 30% of the roof is unusable), installation setbacks, and panel power density (roughly 14 watts per square foot for standard crystalline silicon modules).
Second, calculate the build cost. Capital costs (CAPEX) scale with system size — larger systems generally have a lower cost per watt. Federal incentives like the ITC and any applicable state rebates or performance incentives are subtracted from the gross cost to determine the net investment.
Third, size the system to maximize net present value (NPV). The optimal system isn't always the biggest one the roof can fit. If the building's energy consumption is lower than the roof's solar potential, oversizing creates excess generation that gets exported to the grid. In markets with strong net metering, exports are compensated at or near the retail rate, so oversizing can still make sense. But in markets with net billing or low export compensation (like California's NEM 3.0), the financial return drops off quickly once the system exceeds the building's consumption. The goal is to find the size where the marginal panel still earns a positive return.
Fourth, calculate the avoided cost. Each kWh of solar production displaces a kWh of grid electricity. The value of that displacement depends on the charge type: energy charges are typically 100% avoided, demand charges are partially avoided (roughly 30%, since solar production doesn't perfectly align with peak demand), and fixed charges aren't avoided at all.
Finally, the payback period is determined by comparing the discounted future savings stream against the initial investment. Most models use a discount rate (commonly around 10%) to account for the time value of money.