CAPEX Model

What Is CAPEX Model?

The CAPEX (capital expenditure) model in solar is the traditional purchase arrangement where the customer buys the solar plant outright. The customer pays the full system cost upfront or finances it through a loan and owns the plant completely. The customer captures all benefits including electricity savings, tax incentives, and asset value appreciation.

This model is the default choice for residential solar adopters and for commercial customers with sufficient capital and tax-paying capacity. It contrasts with the OPEX/RESCO model where the developer owns the plant and the customer pays only for the electricity consumed.

For taxable businesses with strong financials and capital availability, CAPEX typically delivers the best long-term economics. The combination of Accelerated Depreciation, GST input credit, and full ownership benefits produces an effective project IRR significantly higher than OPEX-equivalent savings. A 100 kW commercial CAPEX plant in Gujarat can deliver 20% to 25% IRR over 25 years when tax benefits are fully captured.

The CAPEX model places full responsibility on the owner for operations and maintenance, though most owners outsource this to the EPC contractor through an Annual Maintenance Contract. The owner also bears the technology risk, but solar panel warranties of 25 years and inverter warranties of 10 years mitigate this exposure.

Why CAPEX Model Matters

CAPEX matters because it delivers the highest long-term returns for customers who can afford the upfront investment and absorb the tax benefits. In India’s solar market, where grid tariffs rise 3% to 5% annually, owning a solar asset that generates fixed-cost electricity for 25 years creates a powerful hedge against energy inflation.

For residential customers, CAPEX with the PM Surya Ghar subsidy reduces net investment by up to Rs 78,000, cutting payback to 4 to 6 years. After payback, every unit of solar electricity is essentially free for the remaining 20+ years of system life. A 5 kW residential system in Ahmedabad generating 7,500 kWh annually saves approximately Rs 52,500 per year at current grid tariffs. Over 25 years, cumulative savings exceed Rs 18 lakh against an initial investment of under Rs 2 lakh after subsidy.

For commercial and industrial customers, the tax benefits are transformative. Accelerated Depreciation allows 60% of the plant cost to be depreciated in year 1, generating tax savings of 18% of CAPEX for a 30% tax rate company. GST input credit recovers 12% to 18% of equipment cost. Combined, these benefits recover 25% to 35% of the investment in the first 1 to 2 years.

CAPEX also provides balance sheet benefits. The solar plant is a depreciable fixed asset that improves the company’s asset base. Unlike OPEX payments, which are operating expenses, CAPEX creates an owned asset with residual value. For businesses planning long-term facility ownership, CAPEX aligns solar investment with property value.

How CAPEX Model Works

The CAPEX model follows a structured process from initial assessment to long-term operation:

1. Site assessment and energy audit: The EPC contractor evaluates roof condition, structural load capacity, shading patterns, and electricity consumption history. This determines optimal system size and expected generation.

2. System design and quotation: The contractor designs the solar plant, selects components (ALMM-listed modules, MNRE-empanelled inverters), and provides a detailed quotation with generation estimates, payback analysis, and warranty terms.

3. Contract and approvals: The customer signs an EPC contract with milestone-based payment terms. The contractor secures DISCOM net metering approval, structural stability certification, and electrical inspector clearance.

4. Installation and commissioning: The contractor installs modules, inverters, mounting structures, cabling, and protection equipment. After testing, the system is commissioned and connected to the grid through a net meter.

5. Subsidy and tax benefit claims: For residential projects, the contractor assists with PM Surya Ghar subsidy application on the national portal. For commercial projects, the customer’s chartered accountant claims Accelerated Depreciation and GST input credit in tax returns.

6. Operation and maintenance: The customer operates the plant, typically through an AMC with the EPC contractor, following a structured annual maintenance schedule. Regular cleaning, inspection, and monitoring ensure optimal performance.

7. Long-term ownership: After payback, the plant continues generating free electricity. At year 25, panels may be replaced or the system decommissioned, though many panels continue producing at 80% or higher of original capacity.

Payment terms typically follow a milestone structure: 30% advance on order, 40% on material delivery, 20% on installation completion, and 10% on successful commissioning and net meter installation.

Visual Explanation

Real-World Example

A pharmaceutical manufacturing unit in Ahmedabad decides to install a 500 kW rooftop solar system under the CAPEX model. The facility operates 24/7 with an annual electricity consumption of 8 lakh kWh and a grid tariff of Rs 9.50 per kWh.

Investment breakdown:

• Gross CAPEX (excluding GST): Rs 2.35 crore
• GST on equipment (18% on balance of system, 12% on modules): Rs 32 lakh
• Total gross investment: Rs 2.67 crore
• GST input credit recovered: Rs 32 lakh
• Net effective investment after GST credit: Rs 2.35 crore

Year 1 tax benefits:

• Accelerated Depreciation: 60% of Rs 2.35 crore = Rs 1.41 crore
• Tax savings at 30% rate: Rs 42.3 lakh
• Net effective CAPEX after Year 1 benefits: Rs 1.93 crore

Annual performance:

• Expected generation: 7,75,000 kWh (CUF 17.7%)
• Annual electricity savings: Rs 73.6 lakh
• Annual O&M cost (AMC at Rs 350/kW): Rs 1.75 lakh
• Net annual savings: Rs 71.85 lakh

Returns:

• Simple payback: Rs 1.93 crore / Rs 71.85 lakh = 2.7 years
• 25-year cumulative savings: Approximately Rs 16 crore
• 25-year IRR: 24% to 28%

The company finances 70% of the project through a solar loan at 10.5% interest over 7 years. The EMI of Rs 3.8 lakh per month is fully covered by electricity savings of Rs 6.1 lakh per month. From month 1, the company is cash-flow positive. After loan repayment in year 7, the full savings accrue to the bottom line.

Technical Specifications / Benchmarks

Important: Commercial CAPEX figures assume full tax benefit absorption (30% corporate tax rate). Customers with lower tax rates or tax losses will see extended payback periods. Always model with your actual tax position.

Benefits / Advantages

• Maximum long-term IRR: CAPEX delivers 18% to 28% IRR for taxable commercial customers over 25 years, significantly higher than OPEX effective savings of 8% to 12%. Full ownership captures all value created by the solar asset.

• Substantial tax benefits: Accelerated Depreciation (60% in year 1) and GST input credit (12% to 18%) recover 25% to 35% of investment in the first 1 to 2 years. These benefits are exclusive to the asset owner.

• PM Surya Ghar subsidy for residential: Central Financial Assistance of up to Rs 78,000 directly reduces net investment for residential systems of 3 kW and above, cutting payback by 1 to 2 years.

• Full electricity offset: The owner captures 100% of electricity savings rather than paying a per-kWh tariff to a developer. As grid tariffs rise, savings widen disproportionately.

• Balance sheet asset: The solar plant is a depreciable fixed asset that adds to company net worth. Unlike OPEX expenses, CAPEX creates owned infrastructure with residual value.

• Energy price hedge: Solar generation cost is essentially fixed after installation. Rising grid tariffs (3% to 5% annually) make the solar asset more valuable over time.

• Flexible financing options: Solar loans from PSU banks at 7% to 9% for residential and 9% to 12% for commercial enable CAPEX ownership without full upfront payment. EMI is often lower than electricity savings.

• Saleable asset: The solar plant can be sold or transferred with the property. This adds real estate value and provides an exit option if needed.

• Direct control over O&M: The owner chooses the O&M provider, maintenance schedule, and component quality. There is no dependency on a developer’s service standards.

Limitations / Drawbacks

• Large upfront capital requirement: CAPEX demands significant initial cash outlay or loan commitment. Businesses with tight working capital may struggle to allocate funds.

• Full O&M responsibility: The owner bears all maintenance cost and effort, though AMC contracts transfer operational responsibility to contractors for a fixed fee.

• Technology degradation risk: If panels experience faster-than-expected degradation or inverters fail prematurely, the owner bears replacement cost after warranty periods.

• Tax benefit dependency: The full economic case assumes tax benefit absorption. Companies with tax losses or low tax rates cannot capture Accelerated Depreciation value.

• Asset illiquidity: Solar plants are specialised assets with limited resale markets. Valuation depends on remaining life, grid tariff trajectory, and buyer’s energy needs.

• Subsidy uncertainty: Residential subsidy rates and eligibility criteria change with government policy. Projects planned around specific subsidy levels face risk if policies shift.

• Net metering policy risk: Some states have reduced net metering compensation rates or imposed capacity caps. Future policy changes could affect savings calculations.

Comparison Section

Applications

• Residential homes with PM Surya Ghar subsidy: Homeowners across Gujarat, Maharashtra, Rajasthan, and Karnataka use CAPEX to own rooftop systems of 3 kW to 10 kW. Subsidy reduces net cost by 30% to 50%, making ownership attractive.

• Commercial and industrial rooftops: Factories, warehouses, cold storage facilities, and office buildings with strong tax positions and 25-year facility horizons prefer CAPEX for maximum IRR. Textile, pharmaceutical, and food processing sectors are major adopters.

• Government buildings and institutions: Schools, hospitals, and municipal buildings with capital budgets and long-term occupancy install CAPEX systems. While these entities cannot claim AD, they benefit from low-cost capital and long payback horizons.

• Ground-mount solar parks: Agricultural landowners and industrial estates develop ground-mount CAPEX projects of 1 MW to 10 MW for self-consumption or open access sale. Pile foundation design for ground-mount systems determines structural cost and long-term stability at this scale.

• Group captive arrangements: Multiple companies jointly own a solar plant through a special purpose vehicle, sharing CAPEX and benefits proportionally. This structure combines CAPEX economics with risk sharing.

• Solar-plus-storage projects: CAPEX ownership extends to battery storage systems, enabling peak shaving, backup power, and time-of-day arbitrage for commercial customers.

Industry Standards & Regulations

CAPEX solar installations in India operate within a comprehensive regulatory framework:

• MNRE Technical Guidelines: Specify ALMM-listed modules, MNRE-empanelled inverters, and minimum system performance standards for subsidy-eligible projects. See how the ALMM list affects solar BOQ decisions for procurement details.

• BIS Certification: Solar modules must carry BIS certification (IS 14286, IS 61730). Inverters require IS 16221 compliance.

• Income Tax Act 1961, Section 32: Governs Accelerated Depreciation for solar power plants. Currently 40% in year 1 plus 20% additional for second-half commissioning, totalling 60%.

• GST Act 2017: Solar modules attract 12% GST; balance of system components attract 18%. GST-registered businesses can claim full input credit.

• State SERC Net Metering Regulations: Each state’s Electricity Regulatory Commission defines net metering technical standards, capacity limits, and compensation mechanisms. Gujarat, Maharashtra, and Rajasthan have the most favourable policies.

• CEA Technical Standards 2019: Grid connectivity standards for distributed generation, including protection settings and power quality requirements.

• PM Surya Ghar Muft Bijli Yojana: Central subsidy scheme providing up to Rs 78,000 for residential rooftop systems. Requires ALMM modules, MNRE-empanelled inverters, and domestic content for certain components.

• RBI Solar Lending Guidelines: Direct banks to classify solar loans under priority sector lending, improving loan availability and rates for residential customers.

India-Specific Context

The CAPEX model dominates India’s residential solar market and commands a significant share of commercial installations. PM Surya Ghar has turbocharged residential CAPEX adoption, with over 10 lakh applications received since launch. Gujarat leads in residential penetration, with Ahmedabad, Surat, and Vadodara showing the highest per-capita installation rates.

For commercial customers, CAPEX adoption correlates strongly with corporate tax position. Manufacturing sectors with 25% to 30% effective tax rates show the highest CAPEX preference. IT and service sectors with lower tax rates or SEZ status often prefer OPEX despite capital availability.

Financing availability has improved dramatically. SBI, Bank of Baroda, Canara Bank, and PNB offer residential solar loans at 7% to 9% under PM Surya Ghar. Commercial solar loans from HDFC Bank, ICICI Bank, and NBFCs like Tata Capital range from 9% to 12%; a detailed solar loan EMI comparison across these lenders helps customers pick the right financing route. Some EPC contractors offer in-house EMI schemes for residential customers.

Gujarat’s DISCOMs (UGVCL, MGVCL, PGVCL, DGVCL) have streamlined net metering approval for CAPEX systems, with online application and 30-day approval targets; the UGVCL net metering process guide walks through the state’s specific documentation requirements. The state’s high solar irradiance (5.5 to 6.5 kWh/m²/day) and supportive industrial policy make CAPEX particularly attractive.

Common CAPEX pitfalls in India include: choosing non-ALMM modules and losing subsidy; failing to claim AD in the correct assessment year; underestimating O&M costs in desert and coastal regions; and ignoring state-specific net metering caps that limit export compensation.

Future Trends

The CAPEX model is evolving in response to technology advances, policy shifts, and market maturation:

• Declining equipment costs: Module prices have fallen 40% since 2022, and inverter costs continue declining. By 2028, residential CAPEX per kW could drop below Rs 35,000, further shortening payback.

• Battery integration: Falling lithium battery prices (now below Rs 8,000/kWh) make solar-plus-storage CAPEX projects economically viable. Commercial customers use batteries for peak shaving and backup, improving project economics.

• Green financing: Banks and NBFCs are launching green loan products with preferential rates for solar CAPEX. SBI’s Green Rupee Term Loan and HDFC’s Solar Financing Scheme offer rates 50 to 100 bps below standard commercial loans.

• Peer-to-peer energy trading: Pilot projects in select Indian cities enable CAPEX solar owners to sell surplus directly to neighbours through blockchain platforms. If scaled, this could increase export revenue beyond net metering rates.

• Carbon credit monetisation: Large CAPEX installations may qualify for carbon credits under voluntary markets. While currently small, this could add 2% to 5% to project IRR as carbon markets mature.

• Asset securitisation: Solar CAPEX portfolios are being packaged into investment instruments, providing exit liquidity for owners and attracting institutional capital to the sector.

• Improved monitoring and AI: Advanced analytics platforms predict maintenance needs, optimise cleaning schedules, and detect underperformance automatically. These tools reduce O&M cost and improve generation, enhancing CAPEX returns.

Common Mistakes & Misconceptions

• Underestimating O&M cost and effort: Annual O&M of Rs 200 to Rs 500 per kW adds up over 25 years. Dusty environments like Rajasthan and Gujarat need more frequent cleaning than assumed in initial models.

• Mismatching plant size to consumption: Oversized plants export surplus that may not be valued at retail tariff in some states. Always size to 80% to 100% of annual consumption for optimal economics.

• Skipping ALMM verification: Subsidy is denied for non-ALMM modules. Verify ALMM list status at the time of procurement, as the list updates frequently.

• Not capturing AD properly: Tax planning is essential to realise full Accelerated Depreciation benefit. Engage a chartered accountant familiar with solar depreciation rules.

• Going with the cheapest contractor: Lower-quality installations have higher long-term cost through faster degradation, more failures, and poor service. Evaluate bankable EPC contractors on technical capability, not just price.

• Ignoring grid escalation in payback projections: Grid tariffs rise 3% to 5% annually. Static tariff assumptions understate long-term savings. Always model with escalation.

• Assuming subsidy is guaranteed: PM Surya Ghar subsidy requires portal registration, documentation, and post-installation inspection. Delays or rejections are common if paperwork is incomplete.

• Forgetting insurance: Solar plants need insurance against fire, theft, and natural disasters. Premiums of 0.1% to 0.3% of asset value are small but essential.

• Neglecting structural assessment: Old or weak roofs may need reinforcement before solar installation. Structural costs of Rs 50 to Rs 200 per sq ft can surprise unprepared owners.

Key Takeaways

• CAPEX model means outright purchase and ownership of the solar plant, delivering maximum long-term returns for customers with capital and tax capacity.
• Commercial CAPEX with Accelerated Depreciation and GST input credit achieves 18% to 28% IRR with 3 to 5 year payback.
• Residential CAPEX with PM Surya Ghar subsidy achieves 15% to 25% IRR with 4 to 6 year payback.
• Tax benefits recover 25% to 35% of CAPEX in the first 1 to 2 years for taxable businesses.
• Solar loans at 7% to 12% enable CAPEX ownership without full upfront payment, with EMI often covered by electricity savings.
• The owner bears O&M responsibility, typically outsourced through an AMC costing Rs 200 to Rs 500 per kW per year.
• ALMM-listed modules and MNRE-empanelled inverters are mandatory for subsidy eligibility and bankability.
• CAPEX suits taxable corporates, capital-rich residential owners, and long-term facility operators.
• Future trends include battery integration, green financing, peer-to-peer trading, and AI-driven O&M optimisation.
• Always verify structural readiness, ALMM status, tax position, and net metering policy before committing to CAPEX.

Related Glossary Terms

• OPEX Model
• RESCO Model
• Power Purchase Agreement
• Accelerated Depreciation
• GST Input Credit
• IRR
• Payback Period
• AMC
• PM Surya Ghar Yojana
• Net Metering
• Open Access Solar
• Group Captive

Related Resources

• OPEX vs CAPEX Solar: Which Model Suits You
• Accelerated Depreciation for Solar in India
• GST Rates on Solar Equipment
• Solar Payback Period Calculation Guide
• Is Solar Worth It in India
• How to Read a Solar Quote
• Solar Savings Calculator
• Residential Solar Solutions
• Commercial Solar Solutions

Sources & References

1. MNRE Rooftop Solar Guidelines 2024, mnre.gov.in
2. PM Surya Ghar Muft Bijli Yojana Operational Guidelines 2024
3. Income Tax Act 1961, Section 32, Accelerated Depreciation for Solar Power Plants
4. Central Goods and Services Tax Act 2017, Solar Equipment Tax Rates
5. CEA Technical Standards for Connectivity of Distributed Generation Resources 2019
6. Gujarat Electricity Regulatory Commission Net Metering Regulations 2021
7. RBI Circular on Priority Sector Lending for Renewable Energy Projects
8. Solar Power Developers Association (SPDA), Market Report 2025
9. Bridge to India, India Solar Compass Report 2026
10. Heaven Green Energy Internal Project Data, 500+ CAPEX installations across Gujarat