Solar Panel Payback Period

This entry was posted by on Friday, 5 March, 2010 at

I see ads all over the place for solar panels. Many people have mentioned that you can install them on your house and significantly reduce or even eliminate your electricity bill. Even better, it’s possible in some areas to get payback from the electricity company and receive money each month instead of losing it. Receiving a payment from the power company does depend on two things, you need an inverter so that you can send the energy you harvest back into the grid, and you have to have a contract with a power company that accepts this setup. Is it cost effective? Of course it will cost a lot of money up front, so it is definitely an investment that will take years to pay off. Worthwhile? Possibly. Homeowners are familiar with purchases that can cost a lot of money upfront, especially if they end up reducing costs in the long run. What the solar panel buyer wants to ask is what is the payback period? Another way to explain a payback period is the amount of time until the breakeven point is reached. After that, the solar panel owner will make a profit each month with each check from the electric company.

So what do we need to know here? We’re going to separate the initial costs out from the overhead, so let’s figure out the bills we need to pay to get the system up and running. It is a lot easier for me to visualize with some sample numbers, although to shorten the calculations I’d use algebra variables like a, b, c, to make the formulas. Besides, the real numbers will depend on many other factors that are specific to each household, so keep in mind these are just placeholders and don’t represent your real costs.

You record the initial costs first:
Solar Equipment $30,000
Installment Costs $2,000
Permits $2,000
Government Rebates ($10,000)

Total: $24,000

Then you record the cost savings:
For example, let’s say your power bill was $100 a month, and you installed the panels so now you
are receiving $250 a month back from the electric company. Calculate this as an average, as your power usage and the amount of solar power you collect will vary with the seasons.

$250 – ($100) = $350 a month revenue

You’ll also add the depreciation and repair costs here. Repair costs, like the power bill, is an average amount you budget each year. Straight line depreciation is the cost of the equipment divided by how many years it usually lasts if well maintained.

Let’s say the panels last 20 years, and cost $24,000, so depreciation is $1200 a year, or $100 a month.

$50 a month for repairs
$100 a month for depreciation
Total: $150 a month expenses

So a simple payback period would be $24,000 / $200, which would give a result of 120 months, or ten years. It can also be added to the house value for buyers or lenders at cost minus depreciation, as the solar panels do add value to the house. This can be estimated by another straight line depreciation that includes your installment and permit costs in the value of the asset: The total cost is $24,000 and the panels last 20 years, so subtract $1,200 from the value each year until the panels are depreciated to zero.

This analysis doesn’t account for other factors that might show up. It is a nominal calculation, not a real one; if inflation occurs it’s possible that energy prices will rise sharply. Oil resources are limited, so you might be expecting this factor to limit supply and raise costs in the future, I know I am. You’ll also have to consider interest charges, for borrowing the setup costs to be able to get the system up in the first place. It can be a complex calculation with other factors, although these are the most important costs and revenues to consider.

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