Calculating Payback on a Solar Installation

Calculating investment payback on a solar energy system is important as it gives you a way to guage its financial effectiveness, and particularly against alternatives. However, the calculation of investment payback is not an exact science and can be calculated in many ways.

Calculating investment payback does not (and should not) include any of the other benefits from installing a solar energy system, such as your contribution to a reduction in carbon emissions. That factor and other non-direct financial factors are best kept out of the calculation, because they do not have a direct financial impact and will only muddle the results of this type of calculation. We think that solar energy will increasingly stand on its own as being an economically viable solution and it's important that there are calculations to demonstrate this. The more compelling these calculations, the more quickly solar energy solutions will be adopted!

We'll start off with a sample home installation, which we will use throughout our different calculations. These are the characteristics of this sample:

Sample Home Installation

• Total cost of solar energy system: $15,000
• State renewable energy rebate: $2,000
• Energy cost average savings per month (year): $100 ($1,200)
• Interest rate if we were to deposit our money in the bank: 5%
• Annual interest earned on $15,000 @ 5%:

Payback Calculation on a Solar Energy System

Calculating payback on a solar photovoltaic or solar thermal system is important as gives you a guage on how long it will take before you recoup your investment. You can use the most simple calculation, which is great for comparitive purposes--comparing one type of solar panel system to another--but you can use increasingly more complicated formulas that will give you an increasingly accurate economic assessment of the system your are considering.

Payback calculation: Simple Payback

The calculation of simple payback for a solar energy system, is as its' title says--simple. It's simple to calculate and its great for doing quick comparisons with other solar systems, but when using it by itself, it does not produce truly actual results.

The Simple Payback Calculation

To calculate simple payback, you take the net costs of the system installation (total costs minus any type of rebates or discounts) and divide it by the amount of utility energy cost savings you'll achieve in twelve months. This will give you simple payback in terms of years.

For example, in our sample home:

Net costs ($15,000 - $2,000)  divided by savings ($1,200) = 10.8 years

This calculation is great for comparative purposes when you are evaluating different solar energy systems. One system may use more panels, which will produce more energy, which due to time-of-day metering, could result is a shorter payback than a similar, but smaller, system.

Benefits of Simple Payback

• Simple to calculate and understand
• Good when comparing different systems against each other

Deficiencies of Simple Payback

• Calculation does not take into account the opportunity cost of money
• Does not consider that solar is anti-inflation (solar provides protection against rising electricity rates)
• Does not consider maintenance or replacement expenses

The negatives of using simple payback are that it does not take into account 1) the opportunity cost of money, 2) maintenance or replacement expenses, and the inflation-protected aspect of rising electricity rates.

But the fact that it does not take into account the opportunity cost of money, does not diminish its importance, because it still is as useful as any other guage when comparing against alternative solutions. Each solution can have its simple payback calculated and compared against each other and you quickly see which will give you a greater return. Once you've determined the best using simple payback, you can proceed to use the following calculations to asses its merit on its own.

In Part II, we'll talk about more advance calculations. Stay tuned.