In order to sell solar PV projects, especially commercial projects, you need to understand finance. Understanding finance will allow you to calculate and communicate the financial benefit of a system to your client.

This is the follow-up to Finance 101 for Renewable Energy Professionals. In that post I did walk-throughs and provided examples of all the financing terms you will need to know (IRR, NPV, discount rates, nominal cash flows, etc.) and how the terms of your financial analysis will impact the returns.

In this article I’m going to discuss how finance applies to residential and light commercial solar PV.  I’ll discuss how to plug solar-specific installed costs, incentives, etc. into a financial model so that you can properly understand the returns of a specific project and then communicate those returns to a client.

The post is a basic walk-through of solar PV financing, but some of these topics get complex quickly and are dependent upon specific customers, utilities, and geographic areas.  I’ll try to keep it basic but provide further reading and note where and why subjects get more complicated so you can do your own research.

I’m going to use Massachusetts-specific numbers because that’s the market I understand best. I will note if you should look into different elements depending on where you are located. For example, you may have time-of-use electric pricing in your area and you may not have SRECs, like we have in Massachusetts.

Here is the outline of what I’m going to discuss:

1. Government Rebates

  • The difference between one-time and production-based incentives
  • The value of tax credits vs rebates versus depreciation
  • How to calculate MACRS for commercial clients

2. Installed Costs: Gross and Net

  • Where to find good industry averages for installed costs
  • How to find gross and then net installed costs for a project

3. Operations and Maintenance Costs

  • The variables that drive operations and maintenance costs
  • How to calculate O+M costs based on a percentage of installed costs or by dollar amount of kW installed per year

4. Value of a Solar kWh based on Customer Type

  • The value of a solar kWh is worth EXACTLY the cost of the power it is replacing
  • Understanding how a residential client can be billed
  • Demand charges versus usage rates for commercial clients

5. Conclusion and Example Customers

  • Lastly, we’ll run through a few examples of different residential and commercial clients and determine the financial viability of the projects based on their IRRs and NPV, given a discount rate.
  • What is the impact of commercial client’s demand charges on the value of a solar project?
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1 – Government Incentives

Understanding government incentives is key to running any financial analysis on solar PV projects.

There are two key things to understand about incentives:

a. One-Time Vs Production-Based Incentives:

  1. One time payments are exactly how they sound, a lump sum payment, typically at the beginning of a project. Like the 30% investment tax credit.
  2. Production based incentives are determined based on the actual production of the array. These are either Solar Renewable Energy Credits (SRECs) or Feed-in tariffs (FITs)

b. Rebates versus Tax Credits versus Depreciation

  1. Rebates are cash payments based on installed capacity. Because rebates are cash, they are worth their face value, i.e. $100 in rebates is worth $100 cash.
  2. Tax credits reduce an organization’s tax burden. However, an organization must have a tax appetite in order to use a tax credit. Thus, non-profits and public projects typically cannot use tax credits the way a private client could.
  3. Commercial clients are allowed to accelerate the depreciation of their solar asset that will, eventually, reduce their tax burden. Two key things to remember about depreciation: (1) Again, a company must have a tax burden to use the depreciation expense and (2) The value of depreciation IS NOT worth its face value. It is worth the amount of depreciation multiplied by the client’s tax rate. For example, $250 more in depreciation expense will decrease a company’s tax burden by $75, $250 x 30% (a simple corporate tax rate) = $75.

Now that we have that out of the way, let’s discuss specific incentives:

Residential and Commercial in Massachusetts

  • 30% Federal Investment Tax Credit (ITC) – This tax credit is worth 30% of the entire cost of installing a solar project. For example, a $100,000 solar system would qualify for a $33,333 federal tax credit. If the organization has a tax appetite but it’s not large enough (for example, their federal taxes are only expected to be $20,000), they are allowed to carry the remainder of the tax credit back one year and then any remainder forward 20 years.
  • Solar Renewable Energy Credits (SRECs) – If you’re new to SRECs, take our free SREC course to understand them. Currently, in Massachusetts spot SREC prices are trading above $500 per MWh, or above $.50 per kWh, but for modeling purposes we’ll be using $285 per MWh because that is the most conservative price. The floor SREC price is $300 per MWh and there is a 20% market fee, equaling $285 /MWh

Residential-Only Incentives


  • The Massachusetts Clean Energy Center (MA CEC), under the Commonwealth Solar 2 Grant program, still has rebates available for residential projects that are under 15kW. The base incentive is $0.40/watt rate DC at standing testing conditions. There are more incentives for using Massachusetts-based equipment and for low-income families.

Commercial-Only Incentives


Modified Accelerated Depreciation Schedule is a way that the federal IRS uses to incentives companies to investment in new equipment. The equipment, like a solar project, actually depreciates over 20 or more years. However, with the MACRS schedule, we can depreciate the full value of the system over a 5 year period.

Here is the MACRS depreciation schedule:

The best article I’ve found on calculating MACRS for solar projects is from SunMath.

Here are the basic steps for a sample system that is 5kW DC installed at $5 per watt, totaling $25,000 in installed cost.

Step 1. Calculate Depreciation Basis. Depreciation basis is 85% of the installed cost, or $21,250. Technically, we’re adding back 50% of the ITC to the cost after the ITC has been applied.

Step 2. Calculate the 50% bonus depreciation. You’re allowed to depreciate 100% of 50% of the depreciation basis in year one in addition to the depreciation from the standard MACRS schedule.

This can be a little confusing so let me walk through how depreciation is calculated in year one and what I mean by 100%, of 50%

  • 50% of the depreciation basis, $10,625 ($21, 250 X 50%), is depreciated in full in year 1.
  • The rest of the 50% of depreciated according to the MACRS depreciation schedule (see below table). In year this would be $2,125 ($10,625 X 20%)
  • Thus year 1 depreciation is $12,750

Step 3. Depreciation for years 2 through 6 is calculated by taking 50% of the depreciation basis (the 50% left after taking the 50% bonus in year 1) and multiplying it by the depreciation schedule above). The depreciation expense for Year 2 through Year 6 can be seen highlighted below.

Step 4. The next step is to calculate the VALUE, in lower taxes paid, of the added depreciation expenses for each year. The calculation is “depreciation expenses X corporate tax rate”. Remember, your client must have a larger tax appetite then what the depreciation will reduce it by in order for them to take advantage of the depreciation. For example, If the value of MACRS is $3,825 in year 1, but the client only has a $3,000 tax appetite, they will only be able to reduce their taxes by $3,000. Technically, you’ll depreciate the whole expense ($3,825) and the company would operate at a loss of -$825, but you won’t get a refund for the $825 so it’s not worth anything.

See the “cash value” highlight column on the right to see the value of the depreciation, given a 30% tax rate.

The MACRS calculation table will be available in the excel file to download at the end of the article so you can play with the amounts based on your clients needs.

Incentives Not in Massachusetts

Feed-in tariffs (FITs): Feed-in tariffs are available in certain locations in Florida, Vermont, Rhode Island, and California. They allow you to earn a set rate for every kWh of solar energy that you produce. FITs are similar to SRECs. The difference is that the rate is set by policy and not by market forces.

Very helpful Wikipedia article on feed-in tariffs

Resources to Understand Rebates

Database of State Incentives for Renewables & Efficiency (DSIRE) is an excellent resource. It provides the most comprehensive overview of all incentives available on the federal and state level. Furthermore, it provides incentive specifics, links to specific tax forms, and the organizations that can provide you with more information.

You need to become an incentives expert for your area.  In addition to the federal government, there are often different incentives available from the state, utility, and municipality.


2 – Installed Costs: Gross and Net

The gross installed cost is the cost before any incentives. Net installed cost is after any lump sum incentives.

For this exercise we’re going to use historic data from Massachusetts. You’ll be able to get the most accurate quotes by talking with a distributor. Permitting costs vary by municipality and utility, and equipment prices are constantly changing, so speaking with a distributor and doing the math yourself will always yield the best results.

Additional Resources:

Pricing for our Examples:

For the sake of this article, we’re going to use the prices listed below.

Residential, under 15 kW: We’ll use $5.00 per watt

Commercial, over 15kW but less then 1MW. We’ll use $4.50 per watt understanding this can change drastically based on a site, labor, or equipment pricing.

What Impacts Installed Costs: The above costs are averages and the cost can be much greater or less depending on the site characteristics. The most common factors that will increase the price of an array are (1) roof condition, age, and structural condition, (2) electrical service condition, (3) clear chase from the roof to utility room, and (4) the existing supply agreements between contractor and distributor or manufacturer.

For simplicity with these examples, we’re going to assume all of these systems are purchased with cash by the system host. In reality, they could be purchased with cash or leased. To understand commercial leasing, read our Guide to Mastering Commercial Solar Finance.

Example: Calculating Gross and Net Installed Costs for Residential and Commercial Projects

For Residential: A 5kW DC system at $5/watt in Massachusetts will cost $25,000 gross and $15,500 net. The net cost will be around $3.10/watt.

For Commercial: A 100kW commercial system at $4.50/watt will cost $450,000 gross and $315,000 net, coming in around $3.15/watt.

3 – Understanding Operations and Maintenance Costs

You must model expected operations and maintenance costs. Again, the best way to determine this is through your own experience. However, for this article, we’re going to use industry averages and be extremely conservative.

We’re going to use $20 per kW installed per year for the life of system. It might be lower then this, but I always think it’s a good idea to be conservative. We’ll use this for both the residential and commercial projects.

Also, a recent SolarPro article on levelized cost of energy (LCOE) uses 0.05% of installed cost per year as the O+M costs.

Additional Resources:

The above report has a great graph about the type of maintenance that should be performed.

Equipment Warranties

You’ll also want to make sure you understand the equipment warranties of your product. Most modules and inverters have 20-year warranties, which is common with other system components as well.


4. Customer Types and the Value of a Solar kWh

With net metering, the value of a solar kWh is worth exactly the same amount that the customer is paying for the power. This is key to understanding the VALUE of the power that an array produces.

Residential cost per kW in Massachusetts. For the sake of this article, we’re going to assume for residential customers. We’ll use $.15kWh.

Make sure you understand the residential electric rates in your area. If you live in an area that has time-of-day pricing, or time of year pricing, or both, you need to understand the rates in different tiers to understand how much the solar power is worth.

Light Commercial Electric Rates

For light commercial projects the client will likely have both have two types of electric bills, demand charges and usage charges.

1 – Demand Charges.

If you’re getting into commercial solar, YOU NEED to understand demand charges.

We’re going to use $6 per kW, yes per kW, as demand charges are measured instantaneous power load on the grid. $6 per kW is the current rate for national grid G2 customers.

Here are two good resources I’ve found to explain demand charges.

You can read more about commercial customer classes and demand charges on the utility websites.

2 – Usage Charges.

Usage charges are the price of electric generation and transmission.

For our example, we’re going to assume the price is $.10kWh. However, in the real world this number can vary widely and will depend on the clients customer class, how much power they use, when, and how exactly they are billed.

Two different customers. The below examples of two different customers will show how different levels of kWh usage and demand charges can impact a utility bill. NOTE: This is extremely simplified, actual utility bills are much more confusing then this 🙂

1 – 5,000 kWh used per month, with max demand of 50kW on average. Their bill would be around $800 per month.

  • 5,000 X $.10 = $500
  • 50kW x $6 = $300

2 – 3,000 kWh used per month, with a max demand of 150kW. Monthly bill = $1,200. Notice, less usage, but higher demand equals a higher bill.

  • 3,000 X $.10 = $300
  • 150 X $6 = $900

A few things to keep in mind about understanding electric rates 

  • Collect  your client’s electric bill to determine what they are paying exactly for electricity. In markets like Massachusetts, transmission and generation are seperate so it’s possible to see a range of prices.
  • There are many markets that have time of day pricing and time of year pricing. If you live in a market with time of day and time of year pricing, you CANNOT use average montly solar power production, you will need to break out estimated solar production by time of year and/or time of day to understand the value of each kWh.
  • For example, if a customer has time of year pricing that was split between summer and winter. You would need to estimate power production in the ONLY the summer months, and then in ONLY the winter months and determine the amount and value of power in each period.
  • For example, if a customer has time of day pricing in 3 tiers, morning, afternoon, evening, you would need to estimate power production of the array by each time and then determine the value of power in each tier.
  • Time of year AND time of day are more complicated but it can still be done. If there are 2 different year prices and 3 different day prices, you’ll have 6 buckets of solar production that you’ll need to estimate for.
  • John Farrell wrote a great piece about the value of solar kWhs in areas that have time-of-day pricing: Electricity Priced by the Hour Boosts Distributed Solar Value by a Third or More

5 – Putting it All Together With a Few Sample Customers

Now we’re going to use what we’ve learned and apply it to 4 specific customers to see how installed costs and the site impact the financials.

  • The “Russel” Residence is a residential project with an okay site but it needs a service upgrade.
  • The “Charles” Residence is a perfect solar site.
  • The Bakery is a commercial site that uses a lot of power in early mornings
  • The Office is a commercial site that uses the most amount of power in the afternoon when the office building is full.
  • All the buildings will be in Boston because I’m just lazy when it comes to production modeling

Russel Residence

  • 4kW Array can fit on the roof
  • Roof is West and 30 Degrees tilt. system is $5.00 per watt plus a 3K service upgrade because they have an old panel
  • Estimated Power Production is 3,982 kWh per year (via PV Watts)
  • The client uses more then 7,000 kWh per month so they can take advantage of all the power
  • The client pays a flat $.15kWh for power
  • We’ll assume a 3% energy inflation rate
  • Here is the financial returns
  • IRR = 7.30%
  • Net Present Value with a discount rate of 4.50% is just under $3,000.
  • Notice how the impact of 1) a service upgrade and 2) a WEST facing array drastically decrease the financials of the system.


  • 5kW array can fit on the roof, $5.00/watt installed
  • It’s facing directly south on a 12 itch roof (45 degrees) with no shading
  • No service or roof upgrade needed
  • Estimate Power Production is 6,441 kWh per year
  • We assume 3% energy inflation
  • Here are the financial returns
  • IRR is 15.10%, very respectable!
  • Net Present Value with a 4.50% discount rate is $13,181.
  • The financials of the Charles project are much better for two simple reasons: First, no service upgrade. Second, the site was much better. The array is only 25% larger then then the Russel project (5kW vs 4kW) but expected output is more then 50% larger per year (6,441kWh vs 3,982kWh). REMEMBER ONE THING: Proper customer selection is KEY.

Commercial Bakery Site

  • Client Electric Power Usage and Rate: 9,000 kWh use per month. $.10 per kWh
  • Demand Charges: Max kW demand is around 100kW around 9am due to heavy use of ovens, etc.
  • Array Size: 70.5 kW DC. The roof can hold 300, 235 watt modules.
  • Installed Cost: $4.50 per watt
  • Array Characteristics: True south, tilt of 10 degrees which is common in flat roof racking
  • Estimated Production: 83,074 kWh produced per year.
  • Demand Reduction: 22.56kW. Full AC array capacity is 56.4 kW (70.5 X 80%) and estimated array output at 9am is 40% of full capacity.

The Financial Returns

  • The system has an IRR of 18.57%
  • With a discount rate of 4.5% it has a NPV of $197,947

A few interesting observations.

  • Notice that the SREC and MACRS values are significant in the return of the system and the value of the electricity and demand charge reduction is rather small.
  • In fact, if you remove any demand charge reduction the IRR only drop’s a small fraction, about 1%. See below. So, while demand charges could be a large percentage of a company’s electric bill, they may not have a huge impact on the economics of a project.

Commerical Office Building

  • Client Electric Power Usage and Rate: 6,000 kWh on average at $.10 kWh.
  • Demand Charges: Maximum demand is around 50kW between 11am and 1pm and in the summer when the office building is most in use.
  • Array Size: 35kW DC. 100, 350 BIPV modules
  • Installed Cost: $4.50 per watt
  • Array Characteristics: 0 Degree Tilt because the modules are flat on the roof
  • Estimated Production: 37, 627 kWh production per year via PV Watts.
  • Demand Reduction: Expected demand reduction is 28 kW AC. From 11am to 1pm full power production is expected. 35kW DC X 80% = 28kW AC X 100%
  • The financials are below
  • IRR of 17.59%
  • NPV of $91,719 with a discount rate of 4.5%.

 Important Note on Commercial Financial Analysis

This is a basic analysis to describe how the process works. There are a number of items I’ve left out that might need to be considered depending on the client.

Here is a list of things that are commonly applied to analyzing the financial viability of a commercial solar project that were not within the scope of this article:

  • Demand can be much more complicated to determine and also to calculate the effect a solar array will have on reduction. One cloudy day minimal solar production is all the power company needs to charge for full demand charges.
  • Usage rates will likely be much different than $.10 kWh
  • System Downtime and Annual Degradation. When performing power production estimates, I did not take into account these two variables but in a real system it would be wise to.
  • Real vs nominal discount rate due to inflation. I simply used a nominal discount rate and calculated inflation as the rise in energy cost
  • Sales Tax and Insurance: Again, these are costs associated with owning an array that the client will want to be aware of.
  • Debt Fraction, Loan Rates, Terms and Cost of Capital. I assumed the project would be bought with 100% cash and the discount rate is just 4.5%. It’s very likely that clients will have different discount rates based on their business, other options they’re looking to invest in in addition to solar, or quality of their banking relationship. It’s also likely companies will want to finance the project with debt, and then you would need to model loan payments and terms to understand the the financial viability of the project.

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Need Advanced Solar Finance Training?

If you need advanced solar pv training, here are two resources

  1. FREE – Sign up for Commercial Solar PPA 101 course. This is the most in-depth and best free class on commercial solar PPAs that you’ll find on the internet. It’s an amazing curated compilation of the most important information.
  2. PAID – Sign up for our Solar Executive MBA. If you need to learn exactly how to finance commercial solar projects from start to finish, and get all of the legal documents, financial models, this is the class for you. The capstone project is working a project from start to finish with expert guidance from the instructors the whole way.