Business solar payback and ROI

Simple payback, and why it understates the return

Simple payback divides the net cost by the annual saving: the years until the system repays what it cost. For a well-matched business system that lands at roughly four to seven years before tax relief. But it ignores two things a business owner should care about. First, the tax relief you claim in year one. Second, that the system keeps generating for 25 years or more after it has paid for itself, degrading only about 0.3 to 0.5% a year and usually warrantied to 80 to 92% of nameplate at year 25. Factor in the Annual Investment Allowance, which returns roughly a quarter of the cost as year-one corporation-tax relief, and the effective payback on the net cost drops to nearer three-and-a-half to five years. The headline payback is the pessimistic number, not the real one.

ROI, IRR and NPV: the measures your accountant trusts

Lifetime return on investment is high because the asset runs for two decades on sunlight after a short payback. Internal rate of return, which annualises that return so it compares like for like against other uses of your capital, typically sits in the 10 to 20% range for an unleveraged business system, and is quoted higher, sometimes 15 to 25%, on sites with strong daytime demand and good self-consumption. Treat anything above 20% as best-case and check it per project. Net present value, which discounts all the future savings back to today's money, is comfortably positive at any sensible discount rate over a 25-year life. All three look strong for the same reason: you are replacing power bought at 26 to 32p with power generated at a far lower levelised cost, and doing it for decades.

How the funding route changes the return, and how it does not

Here is the point most owners miss: the payback and IRR belong to the system and your consumption, not to how you pay for it. Owning it, from cash or a business loan, gives the highest return because you keep every unit of saving, all the export income and all the tax relief. Financing it on hire purchase or asset finance keeps most of that return while spreading the cost, and the deal can be cash-flow positive from year one whenever the monthly saving beats the monthly payment, even though the underlying asset payback is unchanged. A Power Purchase Agreement gives you the lowest lifetime return because the funder owns the asset and keeps the allowances and export income, but it needs no capital and carries no maintenance risk. There is no single right answer, only the right one for your cash position and how long you will hold the building, which is exactly what the calculators here let you test.

Four ways to measure the same investment

Payback and return get used loosely, but if you are taking this to a co-director or an accountant it pays to separate four measures, because each answers a different question and they can point in different directions on the same system.

• Simple payback is net cost divided by annual saving: the years until the system repays its own cost. It ignores the time value of money and everything the asset earns after payback, so it understates the real return.
• Return on investment (ROI) is total lifetime saving against what you paid. Because a system generates for 25 years or more after a short payback, lifetime ROI is high, though it says nothing about timing.
• Internal rate of return (IRR) annualises the return so it compares like for like against other uses of the money. For an unleveraged business system it typically sits in the 10 to 20% range.
• Net present value (NPV) discounts future savings back to today's money at a rate you choose. A positive NPV means the investment beats that rate, and over a 25-year life a well-matched system is comfortably positive.

Simple payback is the number most people quote, but IRR and NPV are the ones a finance director tends to trust, because they respect timing and the cost of capital. If you only look at one figure, look at the effective payback after tax relief, and then sanity-check it against the IRR.

Why self-consumption is the biggest lever

The largest single driver of all four measures is how much of the generation you use on site rather than export. Power you self-consume displaces electricity you would otherwise buy at the full grid rate, currently around 26 to 32p a unit, so it is worth the whole price you avoid. Power you export earns a payment under the Smart Export Guarantee, which replaced the Feed-in Tariff and covers exported generation up to 5 MW, but at an indicative 12 to 16p per unit the export price sits well below the import price. In practice a self-consumed unit is worth roughly double an exported one, which is why a warehouse or factory running daytime load pays back years faster than a building that sits empty in daylight, on an identical system. A well-matched daytime load typically self-consumes 50 to 80% of what it generates. Sizing the array to your actual half-hourly demand, not to the roof space available, is usually the difference between a strong return and an average one.

How year-one tax relief shortens the effective payback

Simple payback measures gross cost, but the amount your business actually funds is lower once first-year tax relief is applied. Solar PV is classed as special-rate plant and machinery, so it does not qualify for 100% full expensing, which is main-rate only, or the newer 40% first-year allowance. It does qualify for the Annual Investment Allowance, which gives 100% first-year relief on qualifying spend up to £1 million a year. Because most business rooftop installs sit below that cap, the whole cost usually attracts full relief in year one, cutting your corporation tax bill by about 25p per £1 spent at the 25% rate. Where qualifying capital spend runs past the £1 million cap, the balance on the solar asset can use the 50% special-rate first-year allowance, available to companies, with the remainder written down at 6% a year on the reducing-balance basis.

Two further points help the cashflow. VAT on business solar is charged at the standard 20% rate, not the 0% domestic rate, but a VAT-registered business normally reclaims it through the return. And rooftop solar generating power for your own use is 100% exempt from business rates in England from April 2022 to March 2035. Together these shift the effective payback from the pre-relief four to seven years towards three-and-a-half to five. This is general information rather than tax advice, so confirm your position with your accountant before you commit.

How financing changes the cashflow, even when payback does not

The payback and IRR on the asset itself are a property of the system and your consumption, not of how you pay for it. What financing changes is the shape of your cashflow. Buy outright and you take the full cost up front, then keep every saving as the asset pays back on its own timetable. Fund it with hire purchase, asset finance or a business solar loan and you spread the cost over a term, so the deal can be cash-flow positive from year one whenever the monthly saving exceeds the repayment, even though the underlying asset payback is unchanged. A Power Purchase Agreement removes the capital entirely, but the funder owns the system and keeps the tax reliefs and export income, which lowers your headline return in exchange for a zero-capital, zero-maintenance start.

The only reliable way to see all this for your own business is to model the same system across every route on your own numbers. We are independent business-solar-funding specialists, not a lender, installer or financial adviser. Start by modelling the timing on the finance calculator and the payback on the savings calculator, weigh the trade-offs on the funding options compared page, and when the case holds up we introduce you to vetted MCS-certified installer and funder partners for a costed quote. For a payback deep-dive on the cost side of the equation, commercialsolarpayback.co.uk takes the return question further still.