Economic Payback

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When Does Solar Energy Make Economic Sense?

Solar energy can cost three to five times as much as standard electricity pricing. When a user is already connected to the grid, other factors, such as environmental concerns, are most likely to drive an investment decision. When not connected to the grid, solar can be an economical solution.

Even if non-economic factors influence the purchasing decision, the economic payback of a system can be understood by comparing the initial investment on a price per peak watt basis to the cost of other primary energy sources. By further breaking the costs into price per kilowatt hour, the investment in the system can be compared to standard electricity rates. This can also provide a calculation of the time it will take to pay off the initial investment.

In general, the smaller the initial investment, the higher the regular electricity rate. Also, the sunnier the climate, the faster the system will pay itself back.

How Can the Economic Equation be Enhanced?

Cost of the Solar Energy System

The cost for a 1 kilowatt peak system can range from US$8,000 to US$12,000 or €8,800 to €13,200 before sales tax and any government program assistance. Installation costs add another US$1,000-2,000 or €1,100-2,200. Assuming a 20 year life for the system, and including the cost of finance, this investment can equal a price in kilowatt hours of 30-40c/kwhr in sunny climates and 60-80c/kwhr in cloudy climates.

Rebates and Incentives

Local utilities or government energy agencies may offer promotions to drive investment in solar energy systems. These local programs may subsidize the cost of the solar system by 10% to 60% of the total cost, thereby significantly lowering the system’s cost per kilowatt hour. Financing programs can reduce rates by 15-20c/kwhr in sunny climates and 30-40c/kwhr in cloudy climates.

Finance Options

Banks may offer low interest loans specifically for the purchase of solar PV systems. Some lenders may also allow an extension to a home loan or mortgage for the installation of solar PV systems.

Value of Generated Electricity

The economic return on investment for a solar energy system is equal to the value of the electricity the system generates. At a minimum, the electricity generated from the solar energy system will displace electricity that would otherwise be provided by a utility or energy service provider.

A utility may also take excess power generated from the solar energy system, so that the electricity meter from the electricity grid essentially moves backwards.

Estimating Financial Payback Times

With basic information on the system price, the cost of finance, 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 graph below demonstrates the impact of the solar system and electricity rate prices on the payback time of the purchase as a function of the value of the electricity generated (cents per kWh). As you would expect, the less expensive the solar system and the higher the regular electricity rate, the faster the payback on the system.


For example, if your average electricity rate is US$0.20 per kilowatt hour and your installed cost was US$4.00 per watt, your payback time would be just over 15 years. If you are exposed to peak pricing on electricity rates, by taking account of tax incentives (available for corporate purchasers), payback may be closer to 10 years.

Payback time can also be affected by weather conditions and the cost of finance. In less sunny locations, such as Germany, the United Kingdom, or Japan, the average sunlight level may be closer to 2.5 sun-hours per day. In this scenario, a system priced at $8/W will take significantly longer for payback, perhaps 10-20 years.

Over the last 20 years the cost of solar energy systems has come down seven fold. As the demand for systems rises and manufacturing volume increases, costs will decrease and the economic payback time will also decrease.


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