home solar payback

How Much Will Solar Cost Me? Making Sense of PV Payback & ROI

by Cliff on April 7, 2011

in Solar Questions

The question is poisted a thousand times to solar energy consultants and installers across the country every day. The fact is there is no simple answer. There can be as many variables to take into consideration when designing a home solar system than a room addition. Well almost, a room addition on your home will never make you money like a solar system will.

Simple solar payback is a term that came into use in the 1970s by well-meaning advocates of solar energy and it’s still in widespread use. Payback is the number of years it takes an solar system or an energy-efficiency measure to offset its cost through the savings generated.

A fairly simple method that can be used to analyze the relative value of a solar PV or wind system is known as simple return on investment (ROI) the savings generated by installing a renewable energy system expressed as a percentage of the cost.

Simple ROI is calculated by dividing the RE system’s cost into the value of one year’s worth of utility energy that the solar system offset. For instance, a PV system that produces 5,000 kWh of electricity per year at the utility’s rate of 9.5 cents per kWh generates $475 worth of electricity each year. If the grid-tied solar system net cost is $10,710, the simple ROI is 4.4% ($475 / $10,710 = 0.044). If the utility charges 15 cents per kWh, the 5,000 kWh of electricity would be worth $750 and the simple ROI would be 7.0% ($750 / $10,710 = 0.070). Compare this to the March 2009 yields for 30-year treasury bonds at about 3.5%. Even in good economic times, these are respectable ROIs.

Solar payback is calculated by dividing a solar system’s cost by the anticipated annual savings. If the $10,710 PV system produces 5,000 kWh per year and grid power costs 9.5 cents per kWh, the annual savings of $475 yields a payback of 22.5 years ($10,710 / $475 = 22.5 years). PGE (Pacific Gas and Electric) has an average rate of 14.23 cents. Using simple payback, this system will take almost 23 years to pay for itself. From that point on, the system produces electricity for free. While a payback of nearly 23 years seems long, don’t forget that the ROI on this solar system, calculated earlier, was 4.4% a respectable rate of return on your investment. Off-grid solar systems have a higher ROI because of the additional equipment involved.

Interestingly, simple solar payback and simple ROI are closely related metrics. In fact, ROI is the reciprocal of payback. That is, ROI = 1 ÷ payback. Thus, a PV system with a 10-year payback represents a 10% return on investment (ROI = 1 ÷ 10). A PV system with a 20-year payback represents a 5% ROI. Having said that, it is common in California to see Payback around 8 years now and ROI in the 15% range from a custom home system.

Besides being economically misleading, simple payback is a concept we rarely apply in our lives. Do avid anglers ever calculate the payback on their new bass boats? ($25,000 plus the cost of fuel and transportation to and from favorite fishing spots, divided by the total number of pounds of edible bass meat at $5 per pound over the lifetime of the boat.) Have you calculated the payback on your new kitchen cabinets, swimming pool, or other consumer items?

Although payback and ROI are related, ROI is a much more familiar concept. We receive interest on savings accounts and are paid a percentage on mutual funds and bonds both of which are a return on our investment. An RE system also yields a return on our investment by avoiding paying the utility, so it can make sense to use ROI to assess its economic performance.

Source; Used with permission. © Home Power, Inc.

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