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Calculating Payback
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CALCULATING PAYBACK FOR A PHOTOVOLTAIC SYSTEM

It would be nice to say that calculating your payback on an
investment in a solar photovoltaic system were really easy.
Unfortunately that is not always the case. There are several
reasons for this. First, each state in the U.S. has different tax
incentives and rebates for solar energy. The incentives are great
and can make a huge different in the initial cost and therefore the
payback time for a system, but each state approaches the
incentives slightly differently so you have to take your state's
specific incentives into consideration.
Second, if you have gone with a grid-tied PV system, and most people these days do, then you
have to consider how net-metering works. All states are required under federal law to provide
net metering but each state is allowed to implement it differently. In some states you always
get paid a flat retail rate regardless of when the electricity is generated. For example, if the
utility rate was $.18 per kilowatt hour then you would pay them 18 cents per kilowatt-hour
when you took energy off of the grid and they would pay you 18 cents per kilowatt-hour when
you generated excess energy back to the grid. Other states use a payback scheme called a
time-of-use approach that is based on the time of day when the energy is generated. Under a
time-of-use approach rates are higher for electricity during the day when demand is greatest
and lowest in the evening when demand is the lowest. The time-of-use approach to
compensation is particularly advantageous to the PV owner and can significantly shorten the
payback period. This is because the utility company pays you for the excess energy you
generate during the day at a high rate (and solar systems only generate energy during the day),
and then you pay them for the energy you use from them in the evening at a lower rate.
A final consideration in any long-term payback analysis is an assumption (or more likely a guess)
as to what energy costs will be in the future since PV systems will continue to provide power
for 25 to 30 years at minimum once they are installed. As many of us have found out in recent
years, predicting future prices for gas and electricity is not a simple matter. Everyone knows
prices will continue to go up as we enter the era of post-peak oil, but how much they will go up
is a hard call.

Calculating the Potential Monthly Savings from a PV System

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Before we start figuring out the payback period over the life of the system, lets start
with something simple like figuring out what the immediate impact will be on our
electric bill once the solar system is installed. The calculations are contained in the
attached spreadsheet. Here is the process that was used:
Step 1: Find out your average monthly electric bill. - For most of us this is a fairly easy
process. Look at your electric bill and find out what your average monthly electric bill is
and your total annual bill. If your statement doesn't show you the annual average monthly
electric bill then call the electric company and have them provide you that information.
They are required to give it to you.
Step 2: Determine how many kilowatt hours you use per month. - Electric usage is
measured in kilowatt hours. Most monthly electric bills will show you both the number of
kilowatt-hours you used that month plus your average monthly usage for the year. If you
keep copies of your bills you can add them up for the last year and take the average. If
you don't have them and its not on your bill call the utility company and have them give
this to you. Most homeowners use somewhere between 600 and 1200 kilowatt-hours per
month.
Step3: Find out the monthly output of the proposed system. - This number should be
provided to you by the contractor who gave you the bid. If you have not yet received a
bid it is still pretty easy to estimate. For the purpose of this analysis we will assume that
you are planning on putting in a 4 kilowatt (4000 watts) PV system into a home near Albany,
New York. By the way, this example, is covered in detail in our section called Typical PV
System Costs. To determine the monthly output of the proposed system in kilowatt hours
you must first multiply the 4 kilowatts times the numbers of hours of sun per day you
receive in your location. If you don't know what that is for your area you can look it up in
the solar maps section of our Website. According to the U.S. solar map Albany, New York
receives on average 4.3 hours of sun per day if we assume that the panels are mounted at
latitude on a fixed mount on a roof. If you multiply the 4 kilowatts per hour output from
the panels times the 4.3hours of sunlight per day you get a daily output of 17.2 kilowatt
hours per day. Now multiply this by 30 days per month on average and you get 516 kilowatt
hours per month. (4kw x 4.3 sun hours x 30days = 516 kw hours per month)
Step 4: Adjust estimate for real solar conditions - Solar panels are rated under ideal
conditions in a laboratory setting. However, those conditions do not accurately reflect
real world conditions. In reality there will be occasional cloudy days, rain, and other
conditions that keep performance from being optimal. Therefore we should adjust the
earlier estimate of kilowatt hours to account for this. For most locations in the U.S. and
adjustment down of 20% should be sufficient. So multiply the 515 kw hours per month
times .8 and we get 412 kilowatt hours per month.

NEW CONTENT
We have been
getting a lot of
questions lately as
to the costs for a
solar PV system and how soon
PV systems pay for themselves.
It is not always easy to tell
given the host of federal and
state regulations. To provide
some clarity on these cost
issues we have updated our
section on Typical Costs to
reflect the latest prices and
have added a new article on
Calculating the Payback for a
solar PV System. Take a look!
SOLAR FACTBOOK
PV Demand Growing Global photovoltaic demand
continues to soar in 2010 and is
currently projected to double
over the rate of installations
year last year, according to
Solarbuzz, a solar energy
market research company.
Solarbuzz has raised its 2010
market size to 15.2 GW, which
compares with a revised 7.5 GW
in 2009.

Step 5: Divide adjusted output hours by the actual average monthly use - To determine
what percentage of your electric bill the PV system will cover just divide the adjusted
output hours (412 kw hours) by your average monthly kilowatt hours of use which you got
from you electric bill. So for example, if the average monthly use was 600 kilowatt hours
per month the calculation is 412/600 which equals .69. This means that the proposed 4
kilowatt system would cover 69% of the electric needs of the household.
Step 6: Multiply your average electric bill by the percentage - Since we now know that
the proposed system will address 69% of our electric needs we can multiply that times our
monthly bill to find out the savings. If we were paying $.22 per kilowatt hour our monthly
bill would be about $132 per month excluding any special charges. If we multiply this by
69% we can see that the system will save us about $91 per month ($132 x 69% = $91 or $1092
per year.

Calculating the Lifetime Payback for Your PV System

Now that we have calculated the monthly and annual savings we can take a look at the
savings over the lifetime of the system. One of the great things about PV systems is
that they last a very long time. Most solar panels are warranted for 25 years and will
probably perform even longer if properly cared for. Therefore, a payback calculation
needs to look at the savings from the solar system across a 25 year period. This can be
calculated by hand but is a whole lot easier with a spreadsheet. Click on the icon to see the
analysis we have done and then see the explanation below as to how we calculated the values:
Step 1: Determine initial annual savings from PV system - We have just done an example
of this in the section above so let's use that example. By calculating the output of the
proposed system in kilowatt hours we determined that the PV system will pay for 69% of
our electric needs and therefore save us $1092 per year.
Step 2: Set assumptions regarding future increase in electric costs - It seems highly likely
that electricity rates will continue to increase given that fuels which are most often used
to create electricity such as natural gas and coal are non-renewable. The question is by
what amount do we presume they will increase. In this example we have used a fairly
conservative estimate of a 4% increase per year for the next 25 years.
Step 3: Multiply the annual savings by energy inflation rate - This step is a lot easier to
do if you use the attached spreadsheet. Create a row of columns for years 1-25. Take the
amount you will save after year 1 and then multiply that savings by 1.04 for each year for
the next 25 years (keeping in mind that the solar panels are warranted for 25 years)
Step 4: Accumulate the savings by year - Use a spreadsheet to calculate the accumulated
savings by year. This is done by adding the prior year's savings (adjusted for inflation) to
the current year savings for each year.
Step 5: Subtract the initial cost from the accumulated savings - To see how you are
paying off your initial investment you then create a row which subtracts the accumulated
savings from the initial cost. Initially this will be positive because the initial system cost is
more than the savings. However, after a certain number of years the accumulated savings
will exceed the initial costs. The point at which this occurs is known as the payback
period. Using the data from the prior example all initial costs are paid back by year 14.
The next 16 through 25 years are all positive until by the end of 25 years the system has
earned us $17,782.
This example is a fairly simple one. For example, if you had to take out a homeowners loan of
some type to pay for the system, the cost of the interest on that loan would have to be
accounted for in the payback scheme. We have also not done a comparative analysis on the
comparative cost of this investment to other investments you might have made over the same
time period. This type of comparative Return on Investment (ROI) analysis will be covered in
more detail in an upcoming article.
The Effect of a PV Investment on Your Home's Resale Value
Finally, the biggest factor we have not yet discussed is the impact of this investment on the
value of your home. Unfortunately there is very little good scientific data on the impact of PV
systems on home values. While the general consensus is that an investment in a PV system, like
most home upgrades, increases its value, there doesn't seem to be a lot of good current data
out there as to how much. Most recent studies we have seen were made several years ago when
the housing market was booming. It would probably be unwise to presume those apply to the
current slumping housing market.
Nonetheless, there is some data that suggests that even in the current market PV can be a very
good payback. At a recent Solar Conference in San Diego a group of new home builders
reported that their new housing units with PV systems far outsold the units without PV even
though they were more expensive. Also, the addition of PV systems seems to have a good fit
with the growing movement around green remodeling. The McGraw-Hill Construction
SmartMarket Report on Attitudes and Preferences for Remodeling and Buying Green Homes
found that 73 percent of people surveyed listed potential higher resale value as one of the top
four reasons to buy a green home.
When all is said and done home values are very often a local phenomenon, particularly in a
down housing market as we have now. If resale value is a major consideration for you we
suggest that you talk to some local real estate agents and get their opinions as to the impact a
PV system will have in your local housing market.
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