Solar As Investment

Financial Analysis of an Investment in Solar Panels

Simple payback asks, How long does it take for the investment to pay for itself?

NOTE: This page displays out-of-date PG&E rates. Two reasons for this. First, the graphic below is no longer available on the PG&E website. But it’s such a useful graphic, I like to show it. Second: PG&E rates bounce all over the place. Not just up. Some tiers will go up; some will go down. Then four months later, the opposite will happen. Strangest thing I’ve ever seen, and it’s not worth continuously updating this page…

Let’s assume that your power bill averages $185 a month, and you’re in PG&E territory, where electricity is priced in tiers, with the first “bucket” of kilowatt-hours cheaper than additional “buckets.”

Here’s what that looks like, using PG&E’s own website calculator:

Let’s assume that your bank account is not bottomless. One solution is to eliminate just the expensive tiers. In the example above, the expensive tiers (3, 4 and 5) total $47+$76+$23, or $146 per month. Assuming that this is an average bill, these expensive tiers, over the course of a year, would total $1,752 (146 x 12).

A web calculator sponsored by the state of California (csi-epbb.com) shows that offsetting this electricity can be accomplished with sixteen 235 watt panels. (Learn how this calculation was made by visiting www.HowManyPanels.com.) We estimated that this straight-forward 16-panel installation might be bid at $19,000.

That’s $19,000 is before rebates. After the 30% tax credit, the cost would be $13,300, and — while the state rebate fund has run dry — there may be local rebates. In the screen grabs below, I include an $814 state rebate that’s now gone. But I’ve also used panel prices from last year, and panels are cheaper now than they were, so let’s stick with my $12,486 net cost.

With the annual savings equaling $1,752, it’s easy to determine the payback period:

Year Annual electricity Savings Expense (Savings – Expense) Running Total
0 0 -12,486 -12,486 -12,486
1 1,752 0 1,752 -10,734
2 1,752 0 1,752 - 8,982
3 etc. etc. etc. etc.

The rows in this spreadsheet accomplish one thing: they show how many years of $1752/year savings are needed in order to offset the $13,300 purchase. That’s a pretty simple calculation, so this spreadsheet isn’t really necessary:

12,486 / $1752 = 7.1

This investment pays for itself in 7.1 years. Then free electricity for decades more!

But we started this analysis as a spreadsheet, so that we can add factors to make the calculation more realistic. Some of these factors will hurt the argument for solar, and some will help it. Let’s see if solar survives this more sophisticated analysis.

First: electricity rates tend to go up. So the $1,782 in savings in year 1 will definitely be more than that in year 10. A whole website can be written about what’s expected for future PG&E rates. And the likely future is NOT what many of the solar salespeople are telling you. PG&E rates will NOT go up 6.9% a year for the next 30 years. The highest tiers have actually dropped in the past five years, and there is a 2009 California Public Utilities Commission mandate (http://docs.cpuc.ca.gov/WORD_PDF/FINAL_DECISION/111508.PDF) that suggests that the higher tiers will not skyrocket again. What this means is that if your analysis requires PG&E rates to climb at 6.9% for solar to make sense for you, then don’t get solar!

I will use 5% utility rate inflation, but I’ll insert it as a variable, so that I can test what happens if electricity rates go up slower or faster. (Note: even at 5%, your rate will have doubled in 14 years.)

Meanwhile, panels degrade. If your panels produced 5,000 kilowatt-hours of electricity in year 1, they will produce less than that the following year. And a bit less than that the year after. Solar panels lose perhaps 0.3 – 0.5 % of their production each year. But since panel warranties often limit their protection to declines greater than of 0.7% per year, this spreadsheet will be conservative, and use that same 0.7%

When solar panels are installed, an inverter is also installed, to change the DC electricity to AC electricity. The inverter is expensive: thousands of dollars. Most solar panel financial analyses will show the inverter replacement in year 15. But for this analysis, I will again be conservative, and assume that the inverter will fail the day the warranty expires. Since the most common inverter warranties are for ten years, this spreadsheet shows a charge for a new inverter ($0.70/watt) every ten years. (Honestly, I should have used a lower number, like $0.50/watt…)

Note: I’ve displayed intermediate calculations, so that the logic is easier to follow. For example, to convert panel-degradation into a financial cost, there’s a new column – leftover bill — where there is listed, as a dollar amount, the fraction of power that would no longer be covered by the panels.

Column H adds-up my three cash flows: the savings from a power bill that I’m not getting, the periodic equipment purchases, and the slow return of a (much smaller) electrical bill as the panels degrade.

Column I is a running total of my cash flow, and indicates a breakeven between year 6 and year 7. At a gut-level does that make sense? Yes, I’m increasing the value of my production by 5%, but decreasing the amount of production by 0.7% . (As a logic-check, I can go into the spreadsheet and make the inflation and panel degradation the same percentage. I did, and the sheet seems to be operating correctly. It gets a bit tricky, in that I’ve designed this sheet so that the expense of the solar installation is in year zero, yet the first benefit is in year 1. The logic to this: the expense is on day 1, and the first year’s savings are not until day 365.)

But this spreadsheet still doesn’t address the Time-Value of Money. Time-Value of Money means that a dollar now is worth more to us than a dollar tomorrow, or next year.

Net Present Value is what we call the number that describes the present value of a future stream of payments. Net Present Value is determined by applying a discount rate to each future payment. And the discount rate compounds, meaning that a dollar two years from now will be worth less than a dollar one year from now.

We need to choose our discount rate.

Since banks are currently paying 1% to borrow our money, that means that the market has accepted 1% as a short-term discount rate. But for a long-term calculation, it makes more sense to use a government bond rate, or perhaps the current 30-year fixed mortgage rate.

In this spreadsheet, I’ll start with 5% as the discount rate.

There’s an Excel formula that calculates the Net Present Value of money, but I’ll test it first on a mini-spreadsheet to make sure that passes the gut-feel test.

In the mini-spreadsheet below, I’ve spent 10,000 in year 0, and will earn $1000 back, for each of the next 15 years. I will use a discount rate of 5%.

The NPV formula in the top green cell tells me that, with a 5% discount rate, the present value of the $15,000 in total payments is only $380 more than the $10,000 investment. Wow… NPV analysis can really make investments with long-term payoffs seem unattractive.

So let’s see how this solar investment survives our NPV test:

Here’s what’s going on:

I’m showing 40 years of data, since panels last and last.

I’ve reduced the height of some of the intermediate rows, to keep this print screen smaller, while still showing what matters.

The big impact of discounting the future benefits of this solar installation is that my cumulative cash flow has dropped from $162,991 (bottom middle) to only $45,852 (bottom right).

Yet, surprisingly, my break-even date really doesn’t change. On the left side of the sheet, cumulative cash flow shifted to black in year 7. On the right side of the sheet, discounted cumulative cash flow shifted to black in year 8. It seems like an error, but what we’re seeing is the importance of benefits early in the calculation. If I use a 10% discount, I’m still breaking even by year 12. (And if I correct my panel and inverter degradation to more realistic numbers, that breakeven shifts to year 10.)

We’ve learned that, even with a 5% discount rate, a $12,486 solar panel investment this year has a present value of $45,852. THAT’S a good deal!

Conclusion: If you’ve got a sunny roof, with a south, southeast or southwest orientation, phone someone – anyone – and get a solar bid.

= = =

Learn more. Email me (at bf@u-write.com) and I’ll send you two other reports: PG&E and Solar, and Is My Roof Right for Solar.

PG&E and Solar explains how PG&E pricing actually encourages you to purchase solar.

Is My Roof Right for Solar provides an overview of the relative importance of orientation, tilt, weather and shade.

By reading and understanding these two papers, you will be a smarter shopper when shopping for solar for your home.

Bill Fridl
Solar Advocate
415.999.9108


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