When a CFO evaluates a capital investment, the question is never simply "will it save money?" The real questions are: how does it affect the P&L, balance sheet, and cash flows? What are the financing options? How does it compare to other capital deployment opportunities? And how robust are the projections?
Commercial solar is increasingly being treated as a strategic financial decision rather than an ESG checkbox. In India, where commercial and industrial (C&I) electricity tariffs regularly exceed ₹7–12 per unit and climb an average of 6–8% annually, solar offers a compelling risk-adjusted return. This article gives CFOs the analytical framework to evaluate a commercial solar project rigorously.
The Benchmark Numbers
Understanding LCOE: The Real Cost of Solar Energy
The Levelised Cost of Energy (LCOE) is the most useful starting metric for any CFO. It represents the total lifetime cost of generating electricity from the solar system, expressed as a per-unit (per kWh) cost, allowing direct comparison with grid tariffs.
LCOE is calculated as:
LCOE = Total lifetime costs ÷ Total lifetime energy generation
For a typical 500 kW commercial rooftop installation in India:
| Parameter | Value |
|---|---|
| System cost (installed, per kW) | ₹38,000–₹44,000 |
| Total project cost (500 kW) | ₹1.9 Cr – ₹2.2 Cr |
| Annual generation (Rajasthan, ~5.5 PSH) | 7,00,000–7,50,000 units/year |
| 25-year lifetime generation | ~1.6–1.7 Cr units |
| Annual O&M cost | ₹1.5–2 lakh/year |
| Calculated LCOE | ₹1.5–2.2 per unit |
| Current grid tariff (commercial HT) | ₹7–12 per unit |
| Cost advantage | ₹5–10 per unit |
The implication is stark: for a business consuming 7 lakh units annually at ₹9/unit (₹63 lakh annual bill), replacing that consumption with solar at ₹1.8/unit saves ₹50+ lakh per year — effectively reducing the energy cost by over 80%.
Capital Expenditure vs. Operating Expenditure: Which Model?
CAPEX Model (Own the Asset)
- Company purchases and owns the system outright
- Immediate 40% accelerated depreciation benefit in Year 1
- Full savings accrue to the company from Day 1
- Asset on balance sheet; increases net worth
- Typical payback: 2.5–4 years
- Best for: Companies with capital, strong cash flows, or access to low-cost debt
PPA / OPEX Model (Third-Party Owned)
- Developer owns the system; company pays per unit generated
- Zero upfront capital required
- PPA tariff typically locked at ₹2.5–4.5/unit for 15–25 years
- No asset on balance sheet; treated as operating expense
- Lower P&L impact; immediate savings from grid tariff arbitrage
- Best for: Asset-light businesses, startups, companies conserving capital
For most manufacturing businesses and larger enterprises, the CAPEX model delivers superior long-term returns. The combination of accelerated depreciation and high savings makes it one of the best risk-adjusted capital investments available in the current Indian market.
The 40% Accelerated Depreciation Advantage
This is frequently the most overlooked financial benefit of commercial solar in India. Under Section 32 of the Income Tax Act, solar energy equipment qualifies for 40% accelerated depreciation in the first year of installation.
What this means in practice: For a ₹2 crore solar installation, a company can claim ₹80 lakh as a depreciation expense in Year 1. At a corporate tax rate of 25.17% (new regime), this creates a tax shield of ₹20.1 lakh in Year 1 alone.
Over five years, applying Written Down Value depreciation at 40%, the depreciation benefits look like this:
| Year | Opening WDV | Depreciation @ 40% | Tax Shield (25.17%) |
|---|---|---|---|
| Year 1 | ₹2,00,00,000 | ₹80,00,000 | ₹20,14,000 |
| Year 2 | ₹1,20,00,000 | ₹48,00,000 | ₹12,08,000 |
| Year 3 | ₹72,00,000 | ₹28,80,000 | ₹7,25,000 |
| Year 4 | ₹43,20,000 | ₹17,28,000 | ₹4,35,000 |
| Year 5 | ₹25,92,000 | ₹10,37,000 | ₹2,61,000 |
| 5-Year Total | ₹1,84,45,000 | ₹46,43,000 |
Combined with operational savings, accelerated depreciation effectively brings the true payback period below 3 years for most profitable commercial entities.
Payback Period Calculation
A realistic payback calculation should account for actual energy savings, depreciation tax benefit, and financing costs if applicable. Here is an example for a 500 kW industrial rooftop:
- Total project cost: ₹2.0 Cr (financed: ₹1.4 Cr bank loan at 10%, ₹0.6 Cr equity)
- Annual energy savings: ₹52 lakh (7 lakh units × ₹7.5/unit saved)
- Annual O&M cost: ₹1.8 lakh
- Annual loan repayment: ₹22 lakh (approximately)
- Year 1 depreciation tax shield: ₹20.1 lakh
- Net Year 1 cash benefit: ₹52L - ₹1.8L - ₹22L + ₹20.1L = ₹48.3 lakh
- Simple payback (equity portion): ₹60L ÷ ₹48.3L = approximately 15 months
Solar is the only capital investment I have seen where the tax depreciation alone pays back a significant portion of the equity investment in Year 1. Add operational savings and you have an IRR that beats most financial instruments available to Indian corporates today. — CFO, Pune Manufacturing Group (FGPS Solar client)
IRR and NPV Analysis
For a complete financial evaluation, CFOs typically want to see IRR (Internal Rate of Return) and NPV (Net Present Value) over the project's 25-year life.
Using the same 500 kW example with conservative assumptions (5% annual tariff escalation, 0.5% annual system degradation, discount rate of 12%):
- 25-year cumulative savings: ₹19.8 Cr (including tariff escalation)
- Total lifetime O&M costs: ₹55 lakh
- Net cumulative benefit: ~₹17.4 Cr on ₹2 Cr investment
- Project IRR: 24–28% (depending on financing structure)
- NPV at 12% discount rate: ₹6.8–8.2 Cr
Compare this to a fixed deposit (6–7%), corporate bonds (8–9%), or equity market average returns (12–14%). Solar is not just competitive — for businesses with high C&I tariffs, it frequently outperforms most alternative capital deployment options on a risk-adjusted basis.
Impact on P&L and Balance Sheet
Understanding how a solar investment flows through the financial statements helps CFOs frame the decision correctly for boards and audit committees:
- P&L — Electricity cost line: Directly reduced. A company spending ₹50 lakh/year on electricity might reduce that to ₹5–8 lakh, improving EBITDA by ₹42–45 lakh annually.
- P&L — Depreciation: Added as a non-cash charge, reducing PBT. This is beneficial for tax purposes but reduces reported profit in early years.
- Balance sheet — Fixed assets: Solar system capitalised as a fixed asset (PP&E), increasing total assets.
- Balance sheet — Debt: If financed, term loan appears as a liability; must be modelled against savings to ensure positive free cash flow from Year 1.
- Cash flow statement: Lower operating cash outflows (electricity bills) from Day 1; higher capex in Year of installation; positive incremental free cash flow from Year 1 in most scenarios.
Case Studies: Real Commercial Installations
Pune Manufacturing Unit — 500 kW Rooftop
A mid-size auto components manufacturer in Pune installed a 500 kW rooftop system in early 2024. Their previous monthly electricity bill averaged ₹42 lakh annually. Post-installation, the electricity bill dropped to ₹5.8 lakh annually — a reduction of ₹36 lakh per year. The project cost ₹1.95 Cr. Including accelerated depreciation benefits, the effective payback was achieved in 28 months. The company financed 70% via a green energy loan at 9.5% and generated a project IRR of 26%.
Hyderabad IT Campus — 200 kW
A software company chose the PPA model (zero capex) for their 200 kW campus installation. Their grid tariff was ₹8.4/unit; the PPA tariff was locked at ₹3.2/unit for 20 years. With annual consumption of 2.8 lakh units, their savings from Day 1 are ₹14.6 lakh per year — entirely from a tariff arbitrage with zero capital outlay. The PPA escalation clause is capped at 3% per year, ensuring the savings gap only widens as grid tariffs rise.
Key Risks and How to Mitigate Them
- Grid curtailment (for plants with net metering surplus): Size the system to self-consume at least 85% of generation. Avoid oversizing relative to consumption.
- Tariff changes: Net metering policy changes can affect export revenue. Conservative models should assume zero export income and plan for self-consumption only.
- System performance degradation: Panels degrade approximately 0.5–0.7% annually. Factor a 15% total generation reduction at Year 25 in long-term models.
- Counterparty risk (PPA model): Ensure developer creditworthiness, escrow structures, and performance guarantees are documented in the PPA agreement.
- Inverter lifecycle: String inverters typically require replacement at Year 10–12 (cost: ₹2–4 lakh for 500 kW systems). Provision for this in the financial model.
Commercial solar, modelled rigorously, is one of the most compelling capital investments available to Indian businesses today. The combination of high grid tariffs, accelerated depreciation, and 25-year operational lifespan creates a financial profile that deserves serious evaluation — not just from sustainability teams, but from the CFO's office directly.
