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Economic
Payback of
Solar Energy Systems |
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| Introduction |
A customer investing in a solar PV system should understand the
economic payback on his or her investment, even if there
may be strong non-economic (e.g. environmental) factors driving
the purchasing decision.
The initial investment depends on the system size. A convenient
factor that takes this into account is the price per peak Watt
(Wp) of the system. Hence, a 2000 Watt peak (2kWp) solar energy
system costing $16000 in total (i.e. including installation)
will correspond to a price of $8/Wp. In some countries,
you may be able to obtain a grant or rebate towards the cost of
the system, which will obviously improve the economic payback
on the purchase.
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| Financing Options
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You may have different options to finance the purchase, but each
of them has a cost. If you are investing cash then you lose its
future interest; if you borrow the money then you pay a financing
cost. Either way, there is a cost of financing the purchase that
can be represented by a so-called "discount rate". The
normal cost of borrowing may be reduced if local banks offer low
interest loans for the purc hase of solar PV systems. Alternatively,
your bank might allow you to extend your home loan or mortgage;
this may be the cheapest form of standard borrowing.
The economic return on your investment is the value of
the electricity that you generate. This will, as a minimum, displace
electricity that you would have otherwise bought from your utility
or energy service provider during the day. Through certain schemes,
it may be separately metered and rewarded at a defined rate (possibly
related to the domestic tariff or set by a national or state program).
Market incentive programs in certain countries offer some
or all of the range of benefits from grants or rebates and low-interest
loans to preferential electricity purchase rates. Your local Retailer
(also known as "dealer") should be able to advise if
any incentives are available to you.
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| Estimating financial payback
times |
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Armed with the basic information on system price, cost of finance
or discount rate, and the value of the electricity generated,
it is possible to calculate the payback time on your investment
using a discounted cash flow analysis.
The following graphs
give examples of payback times that you might expect under different
circumstances. They come with a series of "health warnings"
though. Firstly, the price you pay for your system will
vary depending on local market conditions. If the local
market is buoyant, sales volumes will be high and prices may
be lower, where product supplies and retailers are competing.
If your local utility is running a particular type of program
you might benefit from bulk purchase discounts. Secondly, the
energy generated by your system depends on sunlight conditions
at your location. Sunlight levels are normally based on averages
from meteorological data for your region. They take into account
the summer highs and winter lows, but your local weather conditions
may vary for a variety of reasons. Thirdly, the inclination
of your solar module array (e.g. on your roof) may be less
than optimal, or it may be partially shaded, so it might not
capture the maximum level of light available.
Overall, we offer the following data only as a guide to the
best you could expect under the quoted conditions. In practice,
the payback times will vary and are more likely to be longer
than shorter than the graphs indicate. In sunny locations such
as California, Spain or Australia annual average sunlight levels
might reach 5 sun-hours per day.
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| Graphical Representation:
Cost of the Solar System |
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The following graph shows the impact of the solar system price
on the payback time of the purchase as a function of
the value of the electricity generated, using a discount rate
of 5%. As you would expect: the cheaper the Solar System, the
faster the economic payback. The higher your regular electricity
rate (shown on the bottom axis), the faster the payback on your
Solar Energy System.
For example, if your average
electricity rate is 20 US cents per kilowatt hour and
your installed cost was $4 per Watt (this is achievable
where government or utility programs are available), your payback
time will be just over 15 years. If you are exposed to
peak pricing on electricity rates, take account of tax incentives
(available for Corporate purchasers), payback closer to 10 years
is reasonable.
Source: Solarbuzz LLC
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| Graphical Representation:
Cost of Finance is a big issue |
For a fixed Solar Energy System price of $8/W in a similar location,
the graph below shows that the cost of finance available to the
purchaser has a big impact. The discount rate is equivalent to
the interest rate. While the higher discount rates are consistent
with what the consumer will pay, the lower rates are more appropriate
for governments and for companies that take in to account the
value of tax relief on purchases of equipment.
Source: Solarbuzz LLC
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| Graphical Representation:
Weather Conditions affect the economics! |
In less sunny locations such as Germany, UK or Japan the average
sunlight level might be closer to 2.5 sun-hours per day. At
the same system price of $8/W, the graph below shows that
payback times are considerably longer. This reinforces the
need for significant market incentives in such countries in
order to speed up the deployment of solar PV.
Source: Solarbuzz LLC
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| Economic Payback: the
good news |
Over the last 20 years the cost of Solar Energy Systems has come
down seven fold. Many Governments in Europe and also Japan have
recognized the wider economic benefits of being first to stimulate
a local solar energy market and industry. A main reason that costs
will continue their decline is not technology (although that can
help), but manufacturing volume. As the market continues to increase,
so costs will come down further and so will economic payback.
In the meantime, ask your local Retailer about presently available
Solar Energy incentive programs.
Incentives by some Utilities are currently bringing the cost of
solar energy down to 10-12 cents per kilowatt hour - which can
imply a payback of 5 to 7 years.
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