do solar panels for commercial buildings make sense for me-min

How Much Do Commercial Solar Panels Cost?

Commercial solar panels cost is determined by your cost per watt, the size of your commercial solar system, the equipment you choose (panel type, inverter type, etc.) and many other factors.

This article breaks down commercial solar cost according to:

As described below, economies of scale, your geographic location and other factors will affect your up front and lifetime cost of solar.

Commercial Solar Panels Cost In Dollars Per Watt

While every project is different, consider the following national cost per watt benchmarks from NREL and SEIA.

The National Renewable Energy Laboratory (NREL) and the Solar Energy Industries Association (SEIA) estimate national averages for commercial solar panel costs of $1.45 – $1.56 per watt in 2021.1

2021 commercial solar panels cost NREL

These numbers are national averages and the actual cost of commercial solar per watt varies from state to state. 

The cost includes what a solar contractor charges for installation, for solar modules, inverters, design, etc. and is measured in kilowatts of direct current (kWdc). 

Commercial solar costs less than residential solar in dollars per watt… This is because of economies of scale which become meaningful when buying solar for larger commercial systems. 

How much do commercial solar panels cost per watt

Back in 2019, Greentech Media provided the following estimate for residential, commercial and utility scale systems:

  • Residential solar cost per watt = $2.92-$2.962
  • Commercial solar cost per watt = $1.54-$1.56
  • Utility scale solar cost per watt = $0.99 – $1.03

In the examples below, I use a conservative estimate of $1.75 for the “all in” cost per of solar per watt for a commercial solar system.3

Commercial Solar Panels Cost Factors

commercial solar panel cost factors

Every commercial solar project is different in terms of up front cost and lifetime cost because of real estate factors and tax incentives, such as the ITC.

As described below, you can use a free tool called PV Watts to estimate the cost of your commercial solar system.4

PV Watts uses cost factor to calculate your commercial solar system including the following:

  1. Geographic location
  2. Solar panel efficiency and loss factors
  3. Roof compass orientation (aka azimuth)
  4. Hours of direct sunlight per day
  5. Annual kilowatt hours (kWh) of electricity usage
  6. The cost per kilowatt hour (kWh) you pay for electricity

In addition, you should consider your tax appetite, ownership or lease structure for the building you occupy. 

If you are leasing a building or space, you may be able to take advantage of community solar without needing to own a system.

How To Determine Commercial Solar Cost Using PV Watts

Your geographic location and the size of your solar system have a big impact on the cost of commercial solar panels.5

You can use PV Watts to easily estimate how much sun your building gets. 

PV Watts was developed by NREL to estimate the energy production and cost of energy of photovoltaic (PV) energy systems all over the world.

PV Watts uses your building’s address and meteorological data to estimate the amount of sun it receives on a daily basis.

Just enter the address of your building in the “Enter a home or business address” field on PV Watts.

Click “GO”.

Do solar panels for commercial buildings make sense 1

After you hit “Go” the next page will show you the “Solar Resource Data” for your building’s location in longitude and latitude. 

You will see your building’s location on a Google Map. It will also display your building’s proximity to the National Renewable Energy Laboratory (NREL) National Solar Radiation Database (NSRDB) site.

Do solar panels for commercial buildings make sense for you 6

You shouldn’t have to edit this page unless you want to move the location on the map… To proceed click the right arrow that reads “Go to System Info”.

The System Info page (shown below) is where you will enter your preferences and draw the system on your roof. 

Do solar panels for commercial buildings make sense for you 5

By default PV Watts assumes a DC system size of 4 kilowatts (kWdc) – however this will change for your commercial building when you draw your solar system in Step 2 below. 

NOTE: Before you draw your system in Step 2 above, you will want to choose the Module Type (i.e. whether you want “Premium” panels, “Standard” panels or “Thin Film”). 

Do solar panels for commercial buildings make sense?
Select the "Module Type" for your commercial solar panels.

As described below (under Solar Panel Efficiency Factors), “Premium” panels will cost more and produce 25% more energy than “Standard” panels. Solar panels are measured, or rated, in terms of DC, or direct current in watts of power. When a solar installer refers to a solar panel as being a “300 watt panel” or a “280 watt panel”, those watts are DC watts they’re referring to. The size of the panel and the panel’s efficiency are two separate factors to consider.6

Once you have chosen the type of panels you will use, click the map icon on the right under where it reads “Draw Your System“.

This will pull up a Google Map satellite image of your property, as seen below (you may need to adjust the map to get the roof you want in view).

Click a point on your roof, then click another point and PV Watts will start to draw a polygon.

The polygon you draw in red will be an estimate for the size of your commercial solar PV system. 

Do solar panels for commercial buildings make sense for you premium-min
Premium Solar Panels produce 25% more electricity.
Do solar panels for commercial buildings make sense for you
Standard Solar Panels produce less electricity than "Premium" ones.

The images above show two red outlines for the roof of the hypothetical owner-occupied, manufacturing building in New York. On the left (top) are “Premium Solar Panels” and on the right (bottom) are “Standard Solar Panels“. “Premium” panels are more efficient, per square meter, than “Standard” ones.

Note the significant difference it makes in solar system capacity when choosing “Premium” vs. “Standard” solar panels, above.7 

The “Premium” panels are capable of producing >25% more energy DC (608.2 kWdc vs. 480 kWdc) than the “Standard” panels.

PV Watts estimates the rectangle on our building above as being 3,201 square meters and 3,200 square meters (… I couldn’t get them to match exactly!)

Solar Panel Efficiency Factors

Most solar panels are only around 15-20% efficient.

A general rule of thumb is that on a clear day, at high noon, solar energy hits the Earth’s surface at around 1,000 watts per square meter – PV Watts uses this 1,000 watts per square meter rule by default. 

As such, at 15-20% efficiency, a 1 square meter solar panel – under the best conditions – will only produce 150-200 watts of DC power per square meter.

The solar panel array drawn on your roof with PV Watts will be in square meters – and it will assume 1,000 watts of DC power per square meter – in perfect conditions.

As described above, PV Watts lets you choose from three types of solar panels, each with different efficiency ratings.

  1. Standard (crystalline silicon/glass): 15% efficiency
  2. Premium (crystalline silicon/glass with anti-reflective coating): 19% efficiency
  3. Thin Film (thin film/glass): 10% efficiency

By default PV Watts selects “Standard” as the solar module type in the calculator.

module type and solar panel efficiency

However, I chose “Premium” because they are the most productive solar panels.8

The label on the back of a solar panel indicates an efficiency number which is the rated watts DC energy output of a solar panel is based on the most ideal conditions of available.

In general the more efficient the solar module, the greater the cost per watt.

Array Type

PV Watts lets you choose the array type for your solar PV system. A commercial solar array may be fixed or responsive.

As shown in the image from PV Watts below, responsive solar PV systems will track the sun throughout the day, following the sun’s arc, and move along one axis (azimuth) or two axes (azimuth and tilt).9

tracking from PV Watts

PV Watts assumes that your system will be fixed. There are two options for fixed: “Open Rack” or “Roof Mount”.

An example of an open rack solar PV system can be seen in the photo below where the panels are installed on an angled rack system on the roof. 

Open racks allow air to flow underneath and around the solar panels which helps keep them at a nominal operating cell temperature. Solar panels are more productive when they are cooler. 

open rack solar system example

As mentioned above, in this example, PV Watts estimates this solar system to have an area of 3,201 square meters, capable of producing 608,200 watts (608.2 kilowatts (kWdc)).

Roof Compass Orientation - Azimuth

The orientation of your roof and the angle position of your panels has an impact on how much energy your solar system will produce.

Azimuth is the angle clockwise from true north describing the direction that the array faces.

An azimuth angle of 180 degrees is a perfect south-facing array… An azimuth angle of zero is a north facing array.

The ideal angle for a solar array in the northern hemisphere is 180 degrees south. In the southern hemisphere a 0 degree angle is ideal.

You can estimate your azimuth angle using Google Earth or an online azimuth calculator or a simple compass rose as an overlay on a snapshot of your building’s roof.

Hours of Direct Sunlight Per Day

The hours of direct sunlight per day your solar panels receive is determined by your geographic location as well as your building roof orientation, panel angle, weather, climate, shading, etc.

The amount of solar radiation received as the sun rises and sets each day will be unique for every building’s location.

For example, in a place like Arizona you could get 6 or more hours of direct sunlight per meter squared per day under perfect conditions. In the midwest you might get 5 hours per day. On the east coast you would get even less.

5 hours of direct sunlight per day x 365 days equals 1,825 hours of direct sunlight per year (5 x 365 = 1,825).

1,825 hours of sunlight per year hitting a 300 watt solar panel produces 547,500 watt hours (1,825 x 300 = 547,500).

(kWdc)Remember that 1,000 watts of electricity = 1 kilowatt. And 1,000 watts of electricity produced for one hour = 1 kilowatt hour (kWh).

You can convert the 547,500 watt hours to kilowatt hours by dividing by 1,000.

547,500 watt hours/1,000 = 547.5 kWh

A 300 watt solar panel receiving 5 hours per day of direct sunlight will produce 547.5 kWh of electricity.

However, PV Watts estimates that this building will get 4.72 hours of sunlight per day because it is located in New York where it receives less solar radiation. 

With an area of 3,201 square meters of solar panels, this commercial solar system is capable of producing 608,200 watts (608.2 kilowatts (kW) DC) at an angle of 175 azimuth. 

Other Solar Panel Efficiency Factors

Other factors that can impact solar panel system efficiency (or losses) include soiling, shading, snow, mismatch, wiring, connections, light-induced degradation, nameplate rating, age, system availability and temperature coefficient.10

Annual Kilowatt Hours (kWh) of Electricity Usage

Look at your utility bill to see your annual electricity consumption in kilowatt hours – then compare it to the results you get from PV Watts. 

If you own and occupy a commercial building, you may be able to offset a significant amount of your electricity usage with solar. 

If a tenant pays the electricity, your common electricity charges can be offset or you can create a “green lease” so that both you and your tenant benefit from solar. 

If there is excess electricity produced, you may be able to sell the electricity produced to others, as in the case of selling renewable energy certificates (REC) or providing community solar.

The Cost Per Kilowatt Hour (kWh) You Pay For Electricity

Under the “Retail Electricity Rate” section, enter the commercial cost per kilowatt hour that you currently pay for electricity from your utility in the “Rate ($/kWh)” field.

Do solar panels for commercial buildings make sense for you 7-min

PV Watts uses your current cost per kWh for electricity to calculate the amount of money you can save per year by using commercial solar.

You can look up the rate for commercial electricity on your utility bill or through a site that aggregates energy suppliers, like this one

II. PV Watts Results Page

PV Watts results page

Now that you have entered all your information into PV Watts, click the right pointing arrow to “Go To PV Watts Results“.

This page shows you an estimate of how much electricity your commercial solar system can generate. 

You will see four columns on this page with yearly estimates from PV Watts: 

  • The 1st column shows the list of months of the year.
  • In 2nd column is PV Watts’ estimate of the amount of solar radiation in kWh per square meter per day (kWh/m2/day). 
  • The third column indicates how many kWh of AC energy (after being converted from DC power) the system is capable of producing per month. 
  • The 4th column shows the $$ value of all those kWh at the rate you are otherwise paying to your utility.

PV Watts estimates that this building in New York will receive an average of 4.72 kWh per meter squared per day. 

Do solar panels for commercial buildings make sense for you 3-min

The 608,200 kWdc system will generate 804,079 kWh of AC energy which is worth $95,685 over one year.

Now we know the size of our commercial solar system, and how much electricity we can potentially save per year…

But this tells us nothing about how much commercial solar panels cost or whether commercial solar is a good investment. 

As such, we need to know the cost of commercial solar per watt… And how much a 608,200 kWdc commercial solar system will cost to buy. 

We also need to know what solar tax incentives may be available that we can apply to further reduce our up front cost.

Tax Benefits And Financial Incentives

how much do commercial solar panels cost?

Based on the estimates from PV Watts above, we can estimate that this solar system will produce around $95,685 per year for the commercial building owner… 

And the up front investment for commercial solar is $1,064,350.

However, there are three important tax benefits available to commercial solar investors to consider: 

1. Solar Investment Tax Credit (ITC)

In 2022 the federal solar investment tax credit is valued at 26% for commercial solar…

This percentage changes every year, so be sure to check the SEIA website for the current percentage benefit.

You can use this solar net present value calculator to estimate the value of the ITC and your commercial solar panel purchase. 

As such, the up front cost of $1,064,350 will be reduced by 26% ($276,731) so the new cost of commercial solar is $787,619 in the current year of 2022.

HUGE improvement..!

2. MACRS Accelerated Depreciation

Established in 1986, the Modified Accelerated Cost Recovery System (MACRS) is a method of depreciation in which certain investments, such as commercial solar, can be recovered. 

More information on MACRS and solar is available from SEIA

Qualifying commercial solar energy equipment is eligible for a cost recovery period of 5 years.11

3. Bonus Depreciation

Bonus depreciation may also be available to you. 

This ranges from 50%-100% which may be combined with MACRS. The rules regarding applying MACRS and/or bonus depreciation are complex, so consult with a tax professional.

These three tax benefits can make a meaningful difference to you and increase the net present value of commercial solar investments.

Your Ideal Rate of Return (Hurdle Rate)

Hurdle rate and net present value

A hurdle rate is your ideal rate of return

This will affect how you calculate the cost of commercial solar panels.

Your ideal rate of return is the minimum rate of return you require for new investments. 

It assumes not only that you have various options as to where you invest your money, and that you want to achieve the highest rate of return that is reasonable for you to achieve.

Knowing your hurdle rate helps you choose the best investment when there are multiple investments to choose from.

A venture capital investor might want a return of at least 30% whereas your average stock market investor might be happy with historical rates of return.

Some common rates of return for the historical stock and bond markets and high-yield savings accounts are below:

  • Stock Market Historical Rate of Return: 11.69%
  • Bond Market Historical Rate of Return: 5.5%
  • High Yield-Savings Account: 2.35% 12

Once you have your hurdle rate, you compare that rate of return to your investment in commercial solar energy. 

To do this you use an investment calculation called Net Present Value.

Net present value considers your hurdle rate, your up front investment and your hold period so that you can choose between putting the $787,619 in the bank or investing the $787,619 in a commercial solar system that pays you around $95,685 per year.

Net Present Value vs. Simple Payback

Looking at the numbers using simple “back of the envelope” method, it appears that this system has a simple payback of 8.23 years ($787,619/$95,685 per year = 8.23 years).

However, a simple payback is a poor way to evaluate a commercial solar investment because it does not factor in the time value of money, opportunity cost (from alternative investments), other tax incentives (such as depreciation) and solar degradation.

Ignoring the time value of money may lead to your commercial solar investment being less profitable… 

Without profit your investment and business is unsustainable.

As such, when calculating how much commercial solar panels cost, we need to accurately model our potential return on investment (ROI).

A net present value calculation places a value on the time value of money. NPV acknowledges the fact that dollars today are worth more than dollars received at some point in the future.

You would always rather receive $1,000 today than $1,000 one year from now because you could invest the $1,000 today in the stock market or put it in the bank and earn interest on it to generate a compounded rate of return.

Commercial Solar Net Present Value Calculation

Money received in the future is worth less than money received today, the net present value method (aka “present value payback”) reduces the value of future money through a method called “discounting“. 

Discounting is the opposite of compounding.

The formula for net present value is NPV = FV/(1+R)N – i

You can use an online net present value calculator, or you can use the function for NPV in Microsoft Excel or Google Sheets.

Using NPV to determine whether solar panels for commercial buildings makes a lot of sense because solar panels can have a long, useful life. Indeed, solar panels can last for over 35 years. 

This means you’ll be waiting for a long time for some of those future cash flows. 

net present value formula

Just as compounding works so powerfully to grow money over time, discounting works powerfully in reverse to reduce the value of money that isn’t received until some date in the future.

These factors you need to consider when calculating net present value include:

  • NPV = Net Present Value (the discounted value of future cash flows)
  • FV = Future value (i.e. the amount you expect to receive at some point in the future)
  • R = Rate of Return (aka “Hurdle Rate”)
  • n = The number of each time period (or number of periods in the future)
  • i = Your initial investment

For this hypothetical building I use two scenarios: Example A and Example B. 

In both scenarios, I assume that the solar degradation rate is constant at 0.5% (half a percent) each year. 

Everything is constant except the hurdle rate. 

In Example A the hurdle rate is 11.69% and for Example B the hurdle rate is 5.5%, these are the historical stock market return from 1973-2016 and the historical bond market return since 1926, respectively. 

Solar panels are not a volatile investment. Since the value produced by solar panels for commercial buildings resembles the constant, steady stream of income produced by a bond, the latter hurdle rate could be more of a proxy. However, you can use whatever hurdle rate you want for your situation. 

As your hurdle rate is increased, your net present value is decreased.

In the net present value calculations below I show two numbers… the Net Present Value without tax benefits (without ITC, MACRS and bonus depreciation) and the Net Present Value after tax benefits (with ITC, MACRS and bonus depreciation). 

5) Example A: Hurdle Rate = 11.69%

In Example A, the higher hurdle rate produces a negative net present value without the tax benefits of the solar investment tax credit and MACRS accelerated depreciation and bonus depreciation. 

However, these tax benefits are real, so there’s no reason to assume that they couldn’t be used in this situation. 

NPV AI = $ 0
Net Present Value (after incentives) with Hurdle Rate = 11.69% (historical stock market return 1973-2016)
How much do commercial solar panels cost today?

In Example A, the Net Present Value is negative

A negative net present value indicates that you should NOT make this investment… 

However, the after tax benefits Net Present Value is a positive $108,000.82. 

A positive Net Present Value indicates that you should make this investment. 

As such, if you have tax appetite, but a high hurdle rate equal to 11.69%, an investor should consider this investment because of the positive net present value after the ITC, MACRS and bonus depreciation.

6) Example B: Hurdle Rate = 5.5%

In Example B, the lower hurdle rate produces a positive net present value both with and without the tax benefits of the solar investment tax credit and MACRS accelerated depreciation and bonus depreciation. 

NPV AI = $ 0
Net Present Value (after incentives) with Hurdle Rate = 5.5% (historical bond market return since 1926)

In Example B, the Net Present Value is positive at $161,457.97.

A positive net present value indicates that you should make this investment…

The after tax benefits Net Present Value is an even higher positive number: $592,519.72.

A positive Net Present Value indicates that you should make this investment. 

As such, regardless of whether you have tax appetite, if your hurdle rate equal to or lower than 5.5%, an investor should consider this investment because of the positive net present value both before and after the ITC, MACRS and bonus depreciation.

Commercial Solar Insurance Cost

As you have read above, commercial solar panels are an investment that can pay off handsomely over time. 

However, you will want to have a general liability policy and property insurance to protect your investment.

  1. General Liability Insurance: General liability protects your commercial solar system from claims of 3rd party bodily injury and property damage. If a visitor to your solar system gets injured due to a shock or a slip and fall your general liability policy is there to protect your business. 
  2. Solar Property Insurance: Commercial solar property insurance protects your solar panels and the system from physical damage including fire, wind, hail, earthquake, storms and other disasters. Protect your solar assets from physical damage, such as fire, wind or hail, or business interruption with 
  3. Solar Contractor Liability Insurance: Verify your solar contractor’s general liability , umbrella, hired non-owned auto, workers’ compensation and other insurance for appropriate levels of coverage. You should also ensure that proper indemnification is in place between you and all the parties to the solar project. 
  4. Solar Offtaker Insurance: If you are developing a commercial power purchase agreement (PPA), you may want to invest in solar offtaker insurance which guarantees payments to the owner of the system from the offtaker (the purchaser of renewable energy). 
  5. Solar Surety Bonds: Solar surety bonds, such as EPC bonds, community solar bonds, interconnection bonds, etc. ensure your commercial solar project is completed, and that the general contractor or solar developer pays any sub-contractors, suppliers and other vendors to the project. 

Your insurance broker should be able to guide you throughout this entire process. 

The cost of commercial solar insurance will vary based on many factors and the general insurance marketplace. 

  • Commercial general liability insurance for a solar business will depend on your business’s exposure in terms of sales or payroll multiplied by the rate for your GL class codes.
  • Commercial solar property insurance cost may range from $0.20-0.50 cents per $100 of replacement cost value.
  • Solar offtaker insurance starts at $50,000 for up to ten years of coverage.
  • Solar surety bonds range from 2-4% of the value of the bond. 

Your insurance broker should be able to help you prevent problems from occurring by recognizing potential pitfalls and be able to provide resources for all of the above. 

If you have no idea who your insurance broker is, or feel you need to make a change, please schedule an appointment with me. 

Commercial Solar Panel Cost Summary

Use the process above and “PV Watts” to estimate the cost of commercial solar for your particular situation.

In this hypothetical solar PV investment scenario, it appears that solar panels do make sense when the tax incentives are taken into consideration. 

Of course your situation will be different. 

The age of your roof will affect your return on investment, depending on whether it should be replaced along with your commercial solar system.

If you have questions about insurance for your particular situation please schedule a call with me below. 

You may also give me a call at 203-200-0445 or for faster response send me an email.

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