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PAYBACK FOR BUSINESSES

By Solarbair, LLC © February 21, 2010

Installing solar thermal or other renewable energy equipment for businesses makes good economic sense.  All other things being equal, businesses can reap advantages residences cannot.  Depreciation, tax deductable interest, low interest loans, tax credits and a green image combine to make an enticing case for renewable energy.  Prime candidates for solar thermal are: car washes, hotels, gyms, laundries, apartment complexes or anywhere hot water is needed in quantity year round.

Consider the sample spread sheet below.  A business is doing a financial analysis of a solar thermal system.  The system will cost $50,000 installed and is estimated to save $3,500 in energy costs in the first year.  The business is eligible for a federal tax credit of 30% or $15,000.  Unfortunately for this business there are no state credits available, but there may be in your state (see www.dsireusa.org).  There may also be utility based incentives, so check with your provider.   A 3% fuel cost inflation rate is assumed which may be low, consult your crystal ball.  The business is in the 30% tax bracket and yearly maintenance is estimated at $100 per year.  Good financing from the state Alternate Energy Revolving Loan Program is available through a 15 year 4% loan.   

OG-100 Rating Page for Sun Earth EC-40 Collector

As a companion to this article the BUSSINESS PAYBACK CALCULATOR is available on www.solarhotwaterinfo.com under calculators or click the link above.  Input your specifics to see the payback on projects you are considering.  You can barrow more than the basis of the project to increase the immediate gain, toy with the terms of the loan and enter the tax credits available in your location.

In the Fuel Savings column we see what 3% fuel cost inflation means in terms of escalating costs saved.  The Depreciation column reflects the amount of depreciation which can be claimed each year based on a five year depreciation period (in 2009 some alternate energy projects were eligible for bonus depreciation which allows for 50% depreciation in the first year, 2010 will probably be the same).  If you start with the amount spent on the project and consider Fuel Savings, Yearly Maintenance, Tax Bracket and Depreciation, you get the column Cumulative Net Gain without Loan.  The formula even takes into account the pre-tax nature of the fuel cost savings and the deductibility of maintenance costs.  This column shows that if the business pays for the project without barrowing they can expect to recover the invested capital in about nine years.  From that point on, they can anticipate an additional savings of approximately $50,000 over the 20 to 25 year life of the system.

Sun Earth EC-40 collector performance graph at 300 Btu insolation

 The Annual Loan Payment, Loan Interest and Principal Interest columns reflect the terms and status of the loan.  The Yearly Net Gain with Loan column compiles Fuel Savings, Depreciation, Loan Payment, Loan Interest, Tax Bracket and Maintenance fees to show yearly net gain.  Cumulative Net Gain with Loan is the sum of Yearly Net Gain with Loan for previous and current years. 


Flat plate vs tube collector performance graph.jpg

The business can finance the entire basis of the project and receive a positive net gain every year.  You can see how the depreciation increases the viability of the project by boosting Yearly Net Gain in the first five years. 

It is interesting to note that financing the project compares quite well to paying up front.  This is the result of the low interest rate coupled with the tax deductibility of the interest.  If we look at the bottom lines of the Cumulative with Loan and Cumulative without Loan columns we see that the difference is precisely (1-Tax Bracket) times total interest paid.  In effect, the after tax interest rate is only 2.8% on the 4% loan.  It would seem that financing the project makes good financial sense. 
In this case the business would most likely choose to install the system with the low interest financing available especially when they consider the environmental and marketing advantages of being a green business.

How does this compare to residential payback?  In most cases the scale and regular year round energy demands of a business work to their advantage by lowering the cost per energy unit produced.  This, in conjunction with deductable depreciation and maintenance costs makes solar thermal more advantageous for businesses.   Most businesses can also benefit from the associated green image as well. 

If you want to do some financial analysis of your own see the BUSSINESS PAYBACK CALCULATOR. Be advised the calculator uses the Excel program.