What interest rate is suitable for a commercial solar loan?

Commercial solar systems can achieve a payback period of less than six years under favorable local conditions. However, the payback period only applies to users who pay for solar installations with their own capital. Many building owners decide to finance their solar energy systems with loans and then use the energy savings to cover loan payments.

If the electricity savings achieved by a solar panel are greater than your loan payments in the first year, you will immediately achieve positive cash flow. The direct cost becomes zero and as a result the payback period is also reduced to zero. However, this strategy only works if you can find a loan with a suitable interest rate.

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In this article, we will discuss how you can decide if a loan is right for a commercial solar installation . As project conditions and electricity prices vary by location, the interest rate at which loan financing is viable also changes. For this reason, we cannot calculate a specific value that works for all solar installations.

Step 1 – Know your monthly savings

To know if a commercial solar installation can pay off a loan, we must first know the monthly savings, as there are also maintenance and insurance costs. Assuming you have a good site for solar panels in southern NY, each peak kilowatt of installed capacity can yield about 1,400 kWh/year.

• Based on this number, a 300 kW solar panel would generate about 420,000 kWh/year.
• At 20 cents/kWh, that equates to $84,000/year in savings, or $7,000/month.

Assuming an installation price of $2/watt, the entire system would cost $600,000. Annual insurance costs for solar PV systems are typically around 0.50% of CAPEX, while maintenance is typically around 0.70% of CAPEX. These expenses are much lower than the savings:

• Insurance = 0.50% of CAPEX = US$3,000/year (US$250/month)
• Maintenance = 0.70% of CAPEX = US$4,200/year (US$350/month)

Subtracting insurance and maintenance costs, you'll still have about $6,400 in monthly energy savings. Any loan with monthly payments below this amount is viable, as the project pays off in full with zero net cost to you.

Step 2 – Subtract any available discounts

Since this commercial solar system is located in NY State, it qualifies for the NYSERDA Incentive . Funding for the program is currently exhausted on Long Island, but solar installation in the Con Edison and upstate New York areas qualifies. A 300 kW commercial solar panel would receive $1.00/watt in Con Edison territory and $0.35/watt in Upstate New York.

Assuming this project is located in New York (Con Edison), it receives a $300,000 incentive and the net price is effectively cut in half. You only need a loan of $300,000, not the full amount of $600,000. Also consider the tax benefits:

• Solar Investment Tax Credit: 30% federal tax credit on your next return
• Accelerated Depreciation (MACRS): You write off 85% of the asset's value in just five years, even when the useful life is 25 years or more.

Because tax benefits are claimed over time, you still need to get a $300,000 loan to cover 100% of the initial costs.

Step 3 – Compare Interest Rates and Loan Payments

In Step 1, we determined that the 300 kW solar panel generates monthly savings of $6,400 after subtracting maintenance and insurance costs. This is the number you should keep in mind when comparing financing options.

The following table estimates the monthly payment if you obtain a $300,000 loan with a 10-year term, assuming monthly payments and various interest rates. As you can see, net monthly savings decrease as the interest rate increases, since a greater portion of your savings is used for debt service:

Given that this project saves electricity at 20 cents/kWh and at the same time obtains a 50% discount, it remains viable with high interest rates. We can assume another scenario in upstate NY, where the discount is reduced to $0.35/watt. In this case, the total rebate amount drops from $300,000 to $105,000 and the initial cost increases to $495,000 (this is the loan amount you need).

You need an interest rate below 10% to finance the loan in this specific example. This happens because the initial cost is higher and, as a result, the monthly payments also increase.

In the first example, loan financing remains viable at interest rates as high as 20%, since initial costs are greatly reduced by the $1.00/W incentive. However, you'll still want to find the lowest interest rate possible to maximize your monthly savings.