Solar Payback and Financials

Looking at the direct savings of a PV system is a good first step in assessing the advantages of going solar. A sample 5.8kW system will save you $1,397 in electricity costs over the first year. This works out to be $38,592 over the warranted life of the system, once you subtract the cost for a new inverter after 15 years.

Factoring inflation (2.5%) into the equation means the cumulative savings will actually be
$57,923. However, when you adjust this value taking historical LIPA increases into account, the cumulative savings is $89,173 for your $6,992 investment!

A common way to analyze a potential investment is to look at the payback period. The system payback is the amount of time it will take to recover your cash outlay. This can also be referred to as the break-even point. Adjusting for inflation only, a standard system will have a break-even point of 5-7 years.

Once you take utility price increases into account, the break-even point is only 4-6 years. The PV system will pay for itself well before the warranted life of the panels is surpassed, allowing you to generate free electricity for the remaining 25 or so years!

Financing is a feasible option for obtaining a PV system for homeowners or small businesses. In many cases the savings in utilities will offset the monthly loan payments. The sample 5.8kW PV system will save $116 per month.

If you finance the purchase (4% over 15 years), the monthly payment would be $45 therefore giving you a net cash flow of $71 per month. However, once you get your tax credits back and apply them to your loan the monthly savings are even greater. The monthly payment would be $23 giving you a net cash flow of $93. Since interest on the loan is tax deductible, the net cash flow will actually be closer to $99 per month!

The monthly savings will grow each year as utility rates increase, while the loan is a fixed cost. The tax benefit of the interest on the loan will be reduced and eventually eliminated, but this loss will be overshadowed by the compound growth of the savings.

If financing is not required for a PV system, the Compound Annual Growth Rate (CAGR) is a valuable analysis tool to compare a PV system to other common investment vehicles. Historically, cash (short term treasuries) yields 4.1%, bonds yield 4.8%, and stocks have the highest return with 10.1%. The comparable CAGR of the average PV system (5.8kW) will actually be around 27.6% once you factor in inflation.

This return increases to 30.1% once you consider historical increases in utility rates. Therefore, even compared to the high growth rates of stocks (which is difficult to achieve in recent times), a PV system provides a much better return on your investment (ROI)!

An often overlooked benefit is the increased value of a home or business which has a PV system installed. A PV system reduces the operating costs, consequently increasing the value of the property.

A comprehensive research article published by the Appraisal Journal determined that for each 1$ decrease in annual utility bills, the selling price of the home increased by $20.73. The average 5.8kW system will have annual savings of $1,323 which would increase the resale value of the property by $28,856. This is an immediate 400-500% return on your investment!

It should also be noted that in NY State, any increase in assessed value due to the installation of solar panels is EXEMPT from property taxes for 15 years!