What's the Payback?
The question everyone asks about solar electricity
How does “payback” work?
How do I get the best payback on efficiency?
How much investment in energy efficiency is necessary to substantially reduce the size of a PV system?
What else is part of my personal payback?
Smart shopping to cut initial costs
A brief word on energy efficiency opportunities
“Solar panels, huh? What's the payback?” Solar energy installers hear this question at home shows and energy fairs all the time. Perhaps you have asked it yourself. But does a “simple payback” calculation really tell you the whole story? What numbers do you need to make the payback calculation for your own home? This White Paper looks at why there's more than one answer to the payback question, and illustrates why you will need to calculate your own personal payback from solar energy.
How does “payback” work?
A payback calculation is a type of cost/benefit analysis that deals exclusively with the savings in operating costs of new equipment, whether those savings are labor, time or energy. “Payback” determines how long it will take for the savings themselves to return up-front equipment investment. The concept is a good measure for comparison among options because it is concerned with the rate at which savings are achieved, not how much the equipment costs or how much actual energy is used.
Payback calculations on solar energy are usually based on the fact that sunshine is free, so the question becomes simply, “how long will it take to pay for the equipment if the power source is free?” But before you can answer that question, you need to know how much solar equipment you really need. Solar energy is expensive, so it makes sense to invest in energy efficiency to reduce the size of the PV system you need.
Payback and Solar Energy
We will create the hypothetical “Maple Street household” electricity customer to demonstrate three different payback scenarios on a solar energy system. The first scenario will maintain the status quo on energy use in the Maple Street household; the second will reduce energy use by 30% through investment in energy efficiency measures; and the third will consider the possibility of inflation in the cost of utility energy. This last example is included only to illustrate the complexity of predicting payback, but it is unlikely that utility rates will go down as time advances. Avoiding the unpredictability of future energy costs is why some people invest in their own renewable energy system (see What else is part of my personal payback? below).
For the Maple Street household, we will use the following assumptions as the baseline for the calculations. These assumptions all fall within average ranges:
- Electricity currently used in Maple Street household: 9,800 kWh per year
- Price currently paid for electricity: $.10 per kWh
- Price for solar panels (installed): $10,000 per kilowatt
- Number of kilowatt hours produced by a 1 kW panel per year: 1300
Let's Be Realistic About Solar Economics Today
Solar electricity still costs more than fossil fuel electricity. Despite the fact that sunshine is free, it is still economically impossible to invest in a photovoltaic (PV) system and beat the per unit price advantage utilities have achieved for power generation through economies of scale and the low cost of traditional fossil fuel technologies. The installed cost per watt for PV technology continues to go down, but it has not yet reached a competitive level. This is why the simple payback calculation will consistently yield a discouraging result when used to analyze the return-on-investment for a residential renewable energy system. However, the payback needn't be quite as discouraging as it might first appear.
Increasing energy efficiency remains the most cost effective way to reduce the impact of fossil fuel use. It's possible to install a large enough array of photovoltaic panels to maintain your present level of electricity use. A PV system does not, in itself, save energy for you. If you think solar electricity is a good idea but are daunted by the price, you can improve your simple payback calculation by adding investments in energy efficiency. Using electricity more efficiently in your home or business will allow you to reduce your PV system size requirements. Most energy efficiency measures are less expensive than adding more PV panels.
While the greatest savings can be realized with building an energy-efficient home from the ground up, existing homes and buildings frequently have plenty of room for improvement, both through changing energy habits and installing efficient building materials and appliances.
Three additional assumptions are used:
- The PV system being calculated is intended to provide all the electricity the Maple Street household will need.
- No equipment depreciation is included in the calculations. It is assumed here that purchase of the high efficiency appliances is done only to reduce household electricity consumption. Therefore, typical, full retail costs are shown for the equipment. If appliances need replacement for other reasons (such as age or condition), the energy savings payback should be calculated using the difference in cost between the standard appliance and the higher-priced energy efficient appliance. For example, a standard refrigerator might cost $200-$400 less than a comparably sized Energy StarÔ refrigerator. That extra investment for the Energy Star refrigerator would pay back in energy savings in about a year, and cost less to operate thereafter.
- To keep this example simple, we included no additional financial factors such as energy efficiency or renewable energy program incentives that would reduce system cost, or utility charges beyond the per kWh rate (fuel adjustment, etc.) that appear on the utility bill. Including these factors (and equipment depreciation) would reduce the payback on both efficiency and the PV system even further.
Table 1: Three payback scenarios using the Maple Street household assumptions
||Size of PV system required
||Total price of PV system
|Status Quo: PV system to supply current level of use in Maple Street household
|Reducing System Size: PV system based on 30% reduction in electricity use through $4,000 investment in efficiency improvements
||$52,769 + $4,000 for efficiency equals $56,769
|Allowing for Inflation: PV system based on 30% electricity use reduction and 3% per year utility rate increase
||$56,769 (including energy efficiency investment)
||34 years($980 x 1.03 compounded annually = $56,576)
Energy Efficiency Opportunities
While inflation in electricity prices may or may not be a factor in years to come, it is obvious from these calculations that reducing energy use by investing in efficiency can greatly reduce the size of solar system that a household would require. By investing $4,000 in the replacement of three major appliances, the solar system price alone went down over $22,000. The 30% reduction in electricity use was accomplished as follows (energy use and appliance costs fall within average ranges):
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