Solar Power ROI: When Will Your System Pay Off?
More and more roofs in the country are making way for solar energy, and a new law could attract more businesses to do the same.
Under the new Investment Boost scheme, businesses can claim a 20% tax incentive for new assets, including solar energy system installations completed on or after 22 May 2025. This is on top of the asset’s normal depreciation value. (1)
Unlike in other countries, however, there’s no nationwide subsidy for switching to this renewable energy yet. Business leaders might be asking if it’s worth the plunge, particularly with the considerable installation costs.
Finding the answer to this question requires you to determine the return on investment (ROI) and a few more essential aspects.
Evaluating Potential Investments
So, what’s the average payback period for commercial solar installations? The quick answer is at least five years on average, per our estimates. There are two metrics, net present value (NPV) and internal rate of return (IRR). These figures are useful in determining if a project is worth investing in or not. Let’s start by understanding these concepts.
NPV in a Nutshell
NPV represents the total value of all future cash flows from your solar systems, discounted to their value in today’s money. Let’s say your investment in solar was worth NZD$50,000, and the future cash flow puts it at NZD$75,000 present value at a 15% discounted rate. This translates to an NZD$25,000 NPV. The higher the value, the more valuable the investment.
Understanding IRR
IRR represents the effective annual rate of return the solar power system is expected to generate. You use the same cash flow data as for NPV, but instead of using a known discount rate, you solve for the rate that makes the present value of your cash inflows equal to your investment (or zero).
Recent research by the Energy Efficiency and Conservation Authority (ECCA) has shown that the IRR of residential solar systems can reach up to 14% annually in Queenstown City, where solar generation is high and power prices are moderate. Good solar investments show a higher IRR than your required rate of return. (2)
Choose NPV to know how much more value your investment can add to your income. If you want to see the percentage return of an investment, IRR could be enough.
Calculating Your Solar Payback Period
There’s a straightforward computation if you expect the system to generate the same amount of cash each year.
Here’s the formula:
Payback Period = Total System Cost- Incentives/ Annual Energy Savings
The total system cost includes all the components, solar installation, and other associated fees. You then subtract federal tax credit, tax incentives, and other discounts. Then, check your current monthly payments and multiply by 12. This is the amount of money you’ll no longer be paying to the utility company.
Let’s take the Go Media Stadium’s 1,600 solar panels as an example. The report says the current setup supplies 60% of the facility’s annual power needs and reduces its electricity bills to NZD$150,000 per year. If they paid a net amount of NZD$1,000,000 for it, the solar panel payback period would have been 6.6 years. (3)
You can also find solar panel ROI calculators online to make your life easier. In reality, you need to consider multiple aspects when determining your payback period.
Factors That Make or Break Your Returns
While the calculation method above is a good starting point, many factors influence how long it takes to get your investment back. Your figures can vary wildly from other businesses because of these elements:
Your Location and Climate
For obvious reasons, sunlight availability is one of many aspects to consider before any commercial solar panel installation. The amount of sun you get affects energy production. You’re likely to enjoy a faster payback period if your business is in a sunny location.
The Cost of Electricity
A recent study showed that regions with the lowest income have the highest power bills. Consumers in the Far North pay the highest at 45.59 cents per kilowatt hour (kWh). Wellington users pay the lowest at 31.17 cents/kWh. Local electricity costs vary for many reasons. People pay more in remote areas because it’s more expensive to distribute power there, and only a few paying consumers can share a portion of such costs. (4)
Moreover, business consumers have higher electricity bills than residential users because of different pricing structures and consumption requirements. Regardless, a commercial solar panel investment in a high-cost environment leads to significant electricity bill savings.
Government Incentives
Some local councils offer solar incentives and grants, and green power energy suppliers have financing options. This means reduced upfront costs and potentially shorter payback periods.
Net Metering Policies
Solar installations often operate on a grid-tie system. It allows your solar system to send back excess energy to the grid in exchange for credits to your bill. Solar buy-back rates vary among retailers.
Solar System Size and Efficiency
An average system size can generate ample power to save you a few hundred dollars per month. If you go for a bigger system, you’ll get bigger savings, but you also need to pay more upfront. Finding the right balance is key.
Efficiency and quality also impact your solar panel ROI, particularly if you have limited commercial roof space. Photovoltaic (PV) solar panels work great, but some get a PV optimiser system for better solar system efficiency.
System Design and Installation
The angle, tilt, and orientation of your solar array affect its performance. That’s why you should leave the planning, design, and installation to solar experts. They’ll maximise your system’s output and help shorten your payback period.
It’s a good idea to work with professionals to help determine the potential ROI for a solar energy investment. Moreover, long-term partnerships are required to maintain an optimal, well-performing system that provides free electricity for decades.
Is It Worth It?
Calculating ROI is important for businesses eyeing solar panel installation. While there’s no straight answer in terms of payback period, know that solar power systems have become more efficient and affordable than ever, giving you higher operational savings in the long term.
Its business advantages aren’t exclusively financial. Generating your own power makes you less dependent on the electric grid. This capability provides you with peace of mind in the face of supply issues and destructive weather disturbances. Going green also reduces your carbon footprint and contributes to a cleaner future.
References
- "New assets – Investment Boost", Source:https://www.ird.govt.nz/income-tax/income-tax-for-businesses-and-organisations/types-of-business-expenses/new-assets---investment-boost#:~:text=Investment%20Boost%20is,Investment%20Boost%20for
- "Understanding the value of residential solar PV and storage in New Zealand", Source:https://www.eeca.govt.nz/insights/eeca-insights/understanding-the-value-of-residential-solar-pv-and-storage-in-new-zealand/
- "Warriors match first major sports game to be mainly solar powered", Source:https://www.rnz.co.nz/news/national/568085/warriors-match-first-major-sports-game-to-be-mainly-solar-powered#:~:text=An%20enormous%20array,annual%20energy%20needs.%22
- "Lowest income New Zealanders paying highest power prices, data reveals", Source:https://www.nzherald.co.nz/northern-advocate/news/lowest-income-new-zealanders-paying-highest-power-prices-data-reveals/KUNCWICE5BBYZEGILGR5LTW4RI/
