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

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.
• 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.