Solar Payback and Financials

The financial benefits of going solar

There are many benefits to going solar, such as minimizing the impact to the environment and achieving energy independence. Beyond these reasons however, there are real financial advantages in investing in a solar system.

For many homeowners and small businesses, not going solar is the more expensive option as described below. The following financial analysis assumes the typical system of 5.0kW, a $100 per month electric bill, a system life of 30 years (though it will last longer then that), and an inverter replacement after 15 years.

  • Direct Savings
  • System Payback
  • Positive Cash Flow
  • Annual Rate of Return
  • Home Value Increase

Looking at the direct savings of a PV system is a good first step in assessing the advantages of going solar. A sample 5.0kW system will save you $1,200 in electricity costs over the first year. This works out to be $32,256 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 $48, 921. However, when you adjust this value taking historical utility increases into account, the cumulative savings is $75,861 for your $14,216 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 5.0kW PV system will save $100 per month.

If you finance the purchase (7% over 30 years), the monthly payment would be $95 therefore giving you a net cash flow of $5 per month. Since interest is tax deductible, the net cash flow will actually be closer to $28.

The monthly savings will grow each year as utility rates increase, while the loan is a fixed cost. The tax benefit 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 (5.0kW) will actually be around 14.9% once you factor in utility rates and inflation.

This return increases to 18.6% 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!

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 5.0kW system will have annual savings of $1,200 which would increase the resale value of the property by $24,876. This is an immediate 200-300% return on your investment!

It should also be noted that in NY State, this increase in value is exempt from property taxes for 15 years!

 

Related Topics

Benefits of Solar Power | Solar Power Costs | How to Get Solar