Commercial electricity costs are increasing across much of the United States, boosting operating costs. When energy costs increase, it creates uncertainty about future electricity rates, making it difficult to plan. This is especially true of businesses that use a lot of electricity. However, solar panels for commercial buildings can drastically reduce energy costs while also helping the environment. Currently, there are two tax benefits available for solar for commercial buildings that significantly reduce the total system cost.
Understanding the commercial solar panel market is critical for expanding your solar business and reaching new potential customers. So, let’s explore this vital segment of the industry to better capture this business opportunity.
Solar for Commercial Buildings Provide Green Marketing
Consumer demand for green products and services has skyrocketed in recent years. As a result, many large corporations have created carbon-neutral goals to help curb climate change by reducing greenhouse gas emissions and fossil fuel consumption. Typically, transitioning to renewable energy is a critical step to reducing their carbon footprint.
Although they may not have formally created environmental goals, many small and medium-sized businesses are wanting to use more sustainable energy sources. In addition to helping the environment, it can increase customer loyalty, help attract talented employees, and promote brand reputation.
Commercial solar systems can be highly visible and make a bold statement about supporting the clean energy movement. Communicating about solar for commercial buildings can be a smart marketing strategy. Some companies even include solar power system information to customers to highlight the benefits, such as a plaque on the wall, a press release, or a page on their website.
How Solar Panels for Commercial Buildings Decrease Operating Costs
Businesses must pay for electricity but later have nothing to show for it. This is because most companies basically rent their power instead of owning it. The solar panels can either be installed on company property or at another site. When transitioning to solar energy, companies either enter a power purchase agreement (PPA) or purchase commercial solar panels.
Solar PPAs for Businesses
With PPAs, businesses often save considerably on electricity bills each month because solar energy is usually cheaper than grid power. However, a third party actually owns the solar panels, not the company using the power. Therefore, companies can often go solar for no money down, which can be a great selling point. In addition, the company using the solar electricity isn’t responsible for panel maintenance and upkeep, but they also do not receive the tax incentives.
Purchasing Commercial Solar Panels
When owning a solar power system, a company can enjoy many years of “free” power, after the system has paid for itself in savings. Your client would then be eligible for a federal tax credit and bonus depreciation if they have a sufficient tax appetite, which is a fantastic opportunity. It is essential to ask clients to speak with a tax expert to determine if they qualify for the solar investment tax credit (ITC) and depreciation and be careful not to offer tax advice.
Advantages and Disadvantages of Owning Solar Panels for Commercial Buildings
Pros | Cons |
Significant cost savings by lowering operating expenses from energy bills | High upfront installation costs |
Environmental sustainability and reduced carbon footprint | Dependency on sunlight for power generation so better suited for sunny climates |
Potential for revenue generation through excess energy sales | Space requirements for larger solar panel installations on commercial buildings |
Positive public relations and brand image | Aesthetic concerns for some businesses |
Energy independence and resilience | Need for ongoing maintenance and occasional panel replacement |
Eligibility for tax incentives and rebates | Regulatory and permitting complexities |
Long-term financial stability and energy cost predictability | |
Increased property value |
Potential Increase In Property Value With Solar Panels for Commercial Buildings
Numerous studies have shown that solar power systems increase home values, so the same is likely true for commercial property owners with solar PV systems. This is because properties with solar are cheaper to maintain, thanks to lower energy bills. Keep in mind that your customer must own the solar panels on commercial buildings for the building owner to benefit from an increased property value.
Tax Breaks For Solar on Commercial Buildings
Another big benefit of solar energy for commercial buildings is the potential eligibility for two federal tax incentives. These financial incentives help boost the return on investment of the solar system while reducing the payback period.
In addition, some states and utility companies offer additional tax credits or rebates for commercial solar systems. It is critical to also understand these incentives to provide this information to potential customers.
Solar Tax Credit
A 30% tax credit is available to companies that purchase solar systems before 2033. However, this incentive will decrease to 26% in 2033, so it makes sense to encourage potential commercial clients to go solar before it tapers down.
Depreciation of Solar Panels for Commercial Buildings
Businesses can either apply 100% of the depreciation in year one with bonus depreciation or follow the Modified Accelerated Cost Recovery System (MACRS) to deduct the system over 6 years. There is a MACRS depreciation schedule, and a different percentage of the system is depreciated each year.
Bonus Depreciation of Commercial Solar Panels
Congress increased the allowable bonus depreciation for commercial solar energy systems, enabling businesses to claim 100% depreciation in the first year instead of spreading it out over a period of six years. Thus, 100% bonus depreciation accelerates the offsetting of installation costs, providing businesses with a quicker financial advantage.
Accelerated Depreciation
Commercial solar equipment depreciation reduces a company's tax liability. The depreciation value is calculated by multiplying the depreciation amount with the business tax rate. Consult the five-year MACRS depreciation schedule in IRS Publication 946 Table A-1, to determine the deductible portion of the commercial solar panels for each year:
Year | Commercial solar panel depreciation |
1 | 20% |
2 | 32% |
3 | 19.2% |
4 | 11.5% |
5 | 11.5% |
6 | 5.8% |
Financing Options For Solar Panels for Commercial Buildings
Because the upfront cost of a solar energy system is significant, it is critical to ensure that your client can finance the project. There are a few options to cover the cost of commercial solar.
Purchase Power Agreements (PPAs) Or Leases
With solar PPAs and leases, a third party owns the system, and your client merely pays for the energy produced from it or rents the solar equipment. Typically, these systems are installed for no money down by the party using the electricity.
Solar Loans
There are a variety of loan programs that can help finance a solar system. In addition, there are certain loans that might be available to commercial solar customers that aren’t available to residential clients.
For example, the Small Business Administration can guarantee loans for small businesses. The benefits of SBA loans are that they can have long repayment terms and low rates, but the application process can be quite rigorous. Another option is equipment loans, but businesses may be required to come up with a cash down payment.
Cash
If a commercial client has it, cash can be an excellent way to purchase a solar system. This eliminates interest payments, and clients can put that money to work, reducing operating costs.
Calculating Payback Period for Solar Panels on Commercial Buildings
Solar design software will often estimate the solar payback period, but it is also possible to crunch the numbers.
Payback period in years = (Total solar system cost minus solar incentives and rebates) / annual cost savings
Estimating the payback period for solar panels on commercial buildings involves several steps.
Determine Total Installation Costs:
Sum up all costs related to purchasing and installing the solar panels, including equipment, labor, permits, and any additional expenses.
Consider federal and local incentives, such as tax credits, rebates, and grants, which can significantly reduce upfront costs.
Assess the expected energy production of the solar panels based on factors like system size, location, and efficiency. Multiply this by the local electricity rate to estimate annual savings.
Subtract any ongoing maintenance costs from the annual energy savings to determine the net cash flow generated by the solar panels.
Divide the total installation costs by the annual cash flow to calculate the payback period. This represents the number of years required to recoup the initial investment.
What Are The Disadvantages Of Solar Panels For Commercial Buildings?
Commercial solar energy has few disadvantages when quality equipment is properly installed by a reputable solar company. However, getting the project built can be challenging.
For example, the upfront cost of the solar system is a common obstacle. Also, if a property has a lot of shade, it might not produce sufficient solar electricity to justify the investment. Likewise, permitting and interconnection can be difficult processes, but the GreenLancer team is available to help remove roadblocks with our solar permitting, interconnection, and engineering services.
To learn more about GreenLancer solar permit design, engineering, and interconnection service, create an account. You can then shop for GreenLancer services.
Solar Panels for Commercial Buildings FAQs
Let's explore some common questions regarding commercial solar panel installations.
What is the payback period for solar for a commercial building?
A commercial solar system's payback period varies based on system size, installation costs, energy savings, and available incentives. On average, commercial solar systems have a payback period ranging from 5 to 10 years and a return on investment (ROI) between 10 and 20%. However, specific circumstances and local conditions can influence commercial solar panel payback.
Solar energy savings, impacted by the local solar resource, electricity rates, and building energy consumption, play a crucial role. Financial incentives, such as commercial solar tax credits and rebates, can significantly shorten the payback period. Careful consideration of these variables, along with efficient system design and maintenance, is essential for accurately assessing and optimizing the payback period of a commercial solar investment.
What is the lifespan of solar panels on commercial buildings?
Commercial solar panels typically operate effectively for about 25 to 30 years, with many continuing to generate electricity beyond this duration. The longevity of the panels is influenced by factors such as the quality of materials, manufacturing standards, and the operating conditions at the installation site. Regular maintenance and proper care can contribute to extending the effective operational period of commercial solar panels.
Does solar for commercial buildings require permits?
Yes, commercial solar systems typically require permits. The permitting process ensures compliance with local building codes, zoning regulations, and electrical safety standards. Solar permits may also be needed for various aspects of the solar PV installation, including structural integrity, electrical connections, and environmental impact.
It's essential to check with local authorities having jurisdiction to understand and obtain the necessary permits before installing a commercial solar system. Commercial solar systems often require solar engineering reviews and PE stamps from a licensed engineer. GreenLancer specializes in solar engineering and permitting and works with solar contractors to obtain solar permits for commercial buildings.
Do I need to replace the roof before installing solar for commercial buildings?
We recommend assessing the condition of the roof before installing solar panels on a commercial building. If the roof is in poor condition and nearing the end of its lifespan, it is prudent to replace or repair it before installing solar.
This ensures a solid foundation for the solar array and prevents potential complications in performing roof work. Consulting with a roofing professional can provide a comprehensive evaluation and guidance on performing roof work before installing commercial solar panels.
Solar Panels for Commercial Buildings Can Benefit Businesses
Knowing the answer to common questions and being able to describe the key benefits of solar panels to businesses will help installation companies capture an important – and rapidly growing – market sector.
At GreenLancer, we work with installers on commercial solar projects of various sizes. Click here to sign up and talk to a rep today, or complete the submission form below.
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