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Solar panel ROI for businesses: Calculate your return on investment
Is solar a worthwhile investment for your business? With volatile energy prices and sustainability rising on the corporate agenda, this is an increasingly important question for many organisations.
A commercial solar installation can be a highly effective investment, but the financial return varies from site to site.
To provide clarity, we’ve built a calculator that enables businesses to input their own data and independently assess the potential return on a solar investment.
Solar ROI calculator for businesses
Use our free commercial solar ROI calculator below to obtain an independent estimate of all ROI measures for a quoted solar project.
Our calculator takes into account geography, your energy contracts, as well as maintenance and equipment replacement costs, to provide a realistic estimate of the financial return from investing in a solar installation.
What is ROI on solar panels?
Return on investment (ROI) is a financial measure that shows how profitable an investment is compared with its cost. For solar panels, it indicates how much money a business will make (or save) over time relative to what it spent on the system installation.
There are several ways in which commercial solar companies present ROI, often distilling the calculation into a single figure:
Payback period
The payback period is the number of years it takes for the savings and revenues from the solar system to equal the upfront cost.
For example, if a business invests £100,000 in solar, and the power generated saves £25,000 each year, the payback period is four years.
Lifetime savings
Lifetime savings is a measure of the total financial benefit a business is expected to gain from a solar investment over its full lifetime, after accounting for upfront and ongoing costs.
Lifetime savings is calculated as:
Using the example above, if the £100,000 initial investment is expected to yield financial gains of £300,000 over its lifetime, then the lifetime savings are £200,000.
Lifetime ROI percentage
Lifetime ROI percentage is a way of measuring the total financial benefit of a solar system compared with its initial cost.
Lifetime ROI percentage is calculated as:
In our example, lifetime savings of £200,000 on a £100,000 initial investment, expressed as an ROI percentage, is 200%.
Annualised return
Annualised return on investment is a measure more commonly used by finance teams. It shows the percentage financial return the solar investment generates each year.
An annualised return figure allows direct comparison of investment opportunities, such as comparing the annual return with alternative uses of the money, like placing it in a savings account to earn interest.
The annualised return percentage is calculated as:
Where n is the lifetime of the solar investment.
In our example, a solar investment with a 200% ROI over a lifetime of 25 years has an annualised return of 4.5%.
How to calculate ROI on solar panels for businesses
The calculation of solar ROI takes into account the costs, the financial benefits, and the lifetime of a solar system.
In this section, we explain each input to a solar ROI calculation and how our calculator estimates these figures.
Solar installation costs
The vast majority of costs associated with commercial solar systems are incurred upfront on installation. These include the purchase of solar equipment and the labour required for installation.
When considering investment in commercial solar installation, we recommend arranging bespoke quotes for your business that take into account factors such as mounting system requirements, local DNO approval costs, planning requirements, and current equipment market prices.
Visit our full guide to the cost of commercial solar panel installations, which explains all the cost elements involved in installing a commercial solar system.
💡 The VAT on commercial solar costs should not be included in the ROI calculation, since businesses can typically recover this from HMRC.
Capital allowances
The purchase of a solar installation qualifies for a corporation tax deduction in the year of purchase, either through the Annual Investment Allowance or the First Year Allowance.
In our calculation, this provides a 25% deduction on initial costs for businesses that pay corporation tax, based on the current corporation tax rate.
Solar maintenance costs
At a minimum, commercial solar panels require an annual inspection to ensure the system’s safety and compliance with manufacturer warranty and insurance requirements.
In our calculator, we have estimated annual maintenance fees at 2.5% of the initial installation cost, in line with advice from professional solar installation firms. Find out more in our guide to commercial solar maintenance.
Equipment replacement costs
Our ROI calculation uses a 25-year expected lifespan for solar panels, as this is the length of the power warranty typically provided by manufacturers.
However, our calculator also factors in the likely replacement of inverters during this period. Solar inverters are usually covered by an equipment warranty lasting between 10 and 15 years.
Power generation
To calculate the savings or revenue from a commercial solar system, it is necessary to estimate the system’s annual power output in kWh.
Our calculator uses figures from the European Commission’s PV performance calculator to estimate power output, based on the peak power of each panel, the number of panels, and the location of your business in the UK.
The figures used in the calculator assume optimal positioning and mounting of your solar panels.
Savings on business electricity bills
Our solar ROI calculator asks you to estimate what proportion of the power produced by the commercial solar array will be used to offset power drawn from a business electricity connection.
Business electricity prices per kWh are significantly higher than the rates available under the Smart Export Guarantee. Therefore, the greater the proportion of self-consumption, the higher the return on investment.
Our calculator allows you to enter your current business energy contract rates to calculate the savings on your business electricity bills.
Export revenue
The Smart Export Guarantee (SEG) scheme enables businesses with solar power to be paid for feeding unused electricity back into the national grid.
Our ROI calculator allows you to enter the current SEG tariff rates you have agreed with your supplier to calculate the export revenue you are likely to receive for any surplus power generation.
Degradation of solar efficiency
Although solar panels have a warranty-backed lifespan of 25 years, their efficiency gradually declines due to wear and environmental exposure.
A system that generates 100,000 kWh at installation might still generate around 88,000–90,000 kWh in year 25. Manufacturers typically guarantee at least 80–85% of original performance after 25 years.
Our commercial solar ROI calculator assumes a 0.5% annual degradation rate, which is the average for modern monocrystalline solar panels.
What affects the ROI of solar panels
Our solar ROI calculator for businesses factors in all the key inputs that influence the return on investment from solar. However, it is important to be aware of the following considerations when evaluating a solar project.
Geography and solar irradiance
Solar panels work best closer to the equator, where the amount of solar energy received per square metre, known as solar irradiance, is highest.
The further north you go, the lower the solar irradiance. For example, a solar array in Surrey will produce more power and achieve a better ROI than one located in Scotland.
The size of the solar array
The return on investment of a commercial solar installation generally improves as the system size increases, due to the economies of scale associated with solar projects.
Larger systems usually have a lower initial cost per panel installed, since fixed project costs, such as design, surveys, grid applications, and scaffolding, do not rise in proportion to system size.
As a result, a 50 kW installation might cost around £1,000 per kW, whereas a 500 kW system might drop to below £700 per kW.
Energy price trends
The principal financial gains from a commercial solar system come from reducing a business’s electricity bill by lowering consumption from the grid.
Unlike business electricity tariffs, where companies are charged for each kWh consumed, electricity generated from solar panels is cost-free. The higher the price of grid electricity, the greater the financial return from offsetting these costs with solar.
A key challenge with ROI calculations is that they must estimate electricity prices over the 25-year lifetime of the solar system. If wholesale electricity market prices rise during this period, the ROI will increase; if they fall, the ROI will decrease.
Battery storage capacity
A commercial solar battery is an optional component of a solar system that can increase the return on investment by maximising self-consumption of generated solar energy.
Because of the underlying network costs involved in delivering electricity via the grid (TNUoS, BSUoS and DUoS charges), the unit rates under an SEG tariff are always significantly lower than equivalent business electricity prices.
A battery enables a business to store excess solar electricity generated during the day for use at night, rather than earning comparatively unfavourable revenue from the SEG scheme.
Investing in a solar battery is a trade-off: it increases the upfront cost of the system and requires replacement every 10–15 years. We recommend consulting a solar specialist to assess whether installing a solar battery is likely to increase the ROI of a proposed solar system.
Smart Export Guarantee tariff
The Smart Export Guarantee (SEG) enables businesses with solar panels to be paid for any surplus electricity they export back to the grid. Instead of wasting excess generation when on-site demand is low, the scheme allows businesses to receive a financial benefit for all the power their panels generate.
It is important to note that SEG rates vary significantly, from as little as 3p up to 16.5p/kWh. Visit our guide on Smart Export Guarantee tariffs for businesses to find the latest rates available under this scheme.
Our business electricity comparison service can help you switch to a business energy supplier offering the most favourable SEG tariff rates.
How financing options affect ROI on commercial solar panels
Our solar ROI calculator for businesses assumes that a business makes a cash purchase of the installation costs upfront. The financial return is then realised through lower electricity bills and SEG export income over the system’s lifetime.
It is important to be aware of alternative financing options, which avoid the upfront cash commitment but reduce overall ROI due to finance charges:
- Power Purchase Agreement (PPA): Under a PPA, a third party invests in the solar panels and sells the electricity they generate back to your business at an agreed rate over their lifetime.
- Energy as a Service (EaaS): Under an EaaS agreement, a third party installs, maintains, and manages solar panels at your site in exchange for a fixed monthly fee over the system’s lifetime.
- Equipment financing: In a debt or finance lease arrangement, a business pays for the solar equipment over a fixed period rather than upfront, in exchange for paying an agreed interest rate.
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