Solar payback for business: how to work it out

A worked example

Here is the illustrative example we use across this site. It is not a quote, and your own figures will differ.

The calculation is the installed cost divided by the annual benefit: £90,000 divided by £18,180 is roughly 4.95 years. Panel performance warranties commonly run for 25 to 30 years, so a system with a 5 year payback has many years of savings left after it has paid for itself.

What drives payback

Self-consumption ratio

This is the share of generation you use on site rather than export. It usually matters more than anything else, because each unit used on site is worth your full unit rate, while each unit exported earns only the export rate.

All figures assume the same 100 kWp system, 24p unit rate and 5p export rate. Sites with steady weekday demand, such as factories, cold stores and offices, tend to use more of their solar. Sites that close at weekends or in summer use less. Half-hourly data from your meter shows the real pattern, which is why the survey includes energy data analysis.

Your unit rate

The higher your unit rate, the more each unit used on site is worth. With 80% used on site and a 5p export rate:

Use your own unit rate from your supply contract, not a national average. If your contract renews soon, test a range of prices.

Export rate

Export rates under the Smart Export Guarantee vary by supplier and contract. In the example, raising the export rate from 5p to 15p lifts the annual benefit from about £18,180 to about £19,980 and shortens payback to about 4.5 years. Dropping it to 1p reduces the benefit to about £17,460, a payback of about 5.2 years. Export rates move payback far less than self-consumption does, unless you export a large share of your output.

Generation and location

A typical UK rooftop array produces roughly 800 to 1,050 kWh per kWp a year: more in southern England, less in northern England and Scotland. Orientation, pitch and shading all matter. East-west layouts on flat roofs produce less per kWp but fit more panels. The survey models generation for your actual roof.

Degradation

Panels slowly lose output over time. The performance warranty states the guaranteed figure, so check it. As an illustration, a 0.5% a year fall would leave the example system producing a little under 96% of its first year output in year ten. Degradation makes little difference to simple payback but matters for lifetime savings.

Maintenance and inverter replacement

Allow for inspections, occasional cleaning and monitoring, plus an inverter replacement, often after 10 to 15 years. Including an illustrative £1,000 a year maintenance budget in the example reduces the annual benefit to £17,180 and stretches payback to about 5.2 years. Our maintenance guide explains what to budget for.

Installed cost

Cost per kWp falls as systems get larger, but scaffolding, roof repairs, structural work, long cable runs and grid reinforcement can add to it. See our commercial solar cost guide for typical ranges.

The effect of tax relief

Tax relief does not change the annual saving, but it reduces the net cost, which shortens payback. Using the illustrative example:

• Company claiming the Annual Investment Allowance: £90,000 deducted from profits is worth £22,500 at the 25% main rate of corporation tax. The net cost falls to £67,500, and payback to about 3.7 years.
• Company claiming the 50% first year allowance: £45,000 relieved in year one is worth £11,250, so the net first year cost is £78,750 and payback is about 4.3 years, with further small reliefs in later years.
• Organisations that pay no tax, such as many charities, get no benefit from allowances, so payback stays closer to the figure before tax relief.

The real value of relief depends on your profits and tax rate. Our capital allowances guide explains the rules, and your accountant should confirm the position before you rely on it.

How payback differs by type of site

• Factories and cold stores often run through the day all year, so they use most of their solar on site and tend to see shorter payback.
• Offices use most of their solar on weekdays but export more at weekends.
• Schools have lower demand in the summer holidays, just when generation peaks, so a battery or a smaller system may give a better return.
• Farms vary widely: dairy units with milking and cooling demand use a lot of daytime power, while some livestock and arable sites use far less.

Lifetime savings, not just payback

Payback tells you when the money comes back, not how much you make overall. In the illustrative example, £18,180 a year over 25 years is about £454,500 before degradation, maintenance and price changes. If output fell by an illustrative 0.5% a year, the 25 year total would be closer to £428,000. Take off maintenance and an inverter replacement, and the lifetime saving is still several times the original £90,000. Price changes in either direction would move this figure considerably.

Common mistakes in payback calculations

• Using the total bill divided by units. Standing charges and capacity charges do not fall when you generate your own power, so dividing your whole bill by your units overstates the saving. Use your unit rate, including any charges levied per kWh, such as the Climate Change Levy where it applies.
• Assuming you use every unit. Few sites use all their solar on site. Use a realistic self-consumption figure based on your meter data.
• Forgetting VAT. Organisations that cannot recover VAT pay 20% more. In the example, a £108,000 cost including VAT gives a payback of about 5.9 years.
• Leaving out enabling works. Roof repairs, asbestos work, structural strengthening and grid upgrades belong in the cost.

What simple payback leaves out

Simple payback ignores future price changes, the cost of borrowing and the savings after payback. For larger projects, finance directors often look at net present value, internal rate of return or the total saving over 25 years as well. A battery can raise self-consumption on sites with evening demand or low daytime use; see battery storage for business.

Try your own figures

Use the calculator on this page to change system size, cost, generation, self-consumption, unit rate and export rate and see how payback moves. It gives an estimate, not a quote. For figures based on your own roof and meter data, request a free survey.