Payback on Solar Electric Systems

Internal Rate of Return (IRR):
A system analysis over 25 years, including all costs, electric bill savings, incentives, maintenance expenses, inverter replacement costs, and real system performance (including wire loss, dust & dirt, module mismatch, temperature effects, inverter efficiency, shading, orientatoin, location, etc), inflation, taxes, etc will result in a time line with an up front cost, and 25 years of savings or expense. Applying the internal rate of return (IRR) analysis will give an interest rate based yield on the investment suitable for comparison to other investments such as stocks, bonds, CDs, savings accounts, etc.

The typical home in California uses about $70 per month in electricity. Such a home, with, with no shade, can usually see an IRR of 9%. Homes that use more electricity will usually see higher than 9% rates of return because of the Tiered Rate Pricing in effect.

Cash Flow:
If the system will be paid for with a loan, in many cases, the loan cost (after taxes) is less than the savings on the utility bill. A loan at 6.5% for 20 years to pay for the system will cost about the same as the savings. In the illustrated case, the loan costs slightly more for the first 4 years, because this is a $77/mo customer. If this were a larger customer, the cash flow would be positive immediately

Notice in the graphic that electric rates rise faster than the “Loan plus New Bill”. This shows that the positive cash flow will increase over time, and jump up when the loan is paid off.

Appraisal Resale Value:
Solar electric systems increase property value by decreasing utility operating costs. According to the Appraisal Journal (Nevin, Rick et al, “Evidence of Rational Market Valuations for Home Energy Efficiency,” Oct 1998, www.ongrid.net/AppraisalJournalPVValue10.98.pdf), a home’s value is increased by $20,000 for every $1,000 reduction in annual operating costs from energy efficiency. The study was updated in October 1999: www.ongrid.net/AppraisalJournalPVValue10.99.pdf

The rationale is that the money from the reduction in operating costs can be spent on a larger mortgage with no net change in monthly cost of ownership. Nevin states that historic mortgage costs have an after-tax average interest rate of about 5%. If $1,000 of reduced operating costs is put towards debt service at 5%, it can support an additional $20,000 of debt. To the borrower, total monthly cost of ownership is identical.

A typical California home with a $70/month electric bill (the state average) can see an increase in their resale value equal to or greater than the system cost. If their electric bill is larger, their resale value goes up even faster than system cost

Total Lifecycle Payback:
Lifecycle payback is the comparison between the total savings over 25 years to the systems costs. Most systems will give back 2.2 to 3.5 times as much money as they cost - a 220% to 350% return on investment (over 25 years). This is an optimistic metric that overstates the value a PV system generates because the savings are spread out over a long period of time.

Simple Payback:
The least accurate way to determine a solar systems value, because it doesn't properly value the after tax value of the savings from a solar system. It also doesn't properly take into account inflation, which doubles electric costs every 12 to 15 years.

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