Payback Analysis for PV in California

The past couple weeks, I’ve looked at various options for financing the purchase of a PV system. This week, we’re gonna dig a little bit deeper into the numbers. (Bear with me. I’ll try to make this as clear and as un-boring as possible…).

Bottom line: before buying a system, you’ll want to know what kind of return on investment (ROI) to expect. For all the excitement around solar power, PV systems are still pretty darn expensive. And in some parts of the country, where sunlight is sub-optimal and/or incentive programs are non-existent, they may never produce a positive ROI. Our interest this week is the payback period–that is, the time between when your system is installed to when it has effectively paid for itself via energy savings. The purpose here is to sketch out the variables involved. Like most forms of analysis, the one presented here is as only good as its assumptions. It doesn’t pretend to be perfect. It does, however, introduce the concepts behind determining an investment’s payback period.

In line with the past two weeks, I’ll look at the case of a 3.6-kW PV system installed in San Francisco for a customer of PG&E. I’m making all of the following available in an Excel spreadsheet. Here’s a look at initial project costs:

Kyocera 180-watt solar panels: 20 units x $835 = $16,700
Mount Rail Kit: 4 units x $360 = $1,440
5000-watt inverter: 1 unit x $4,000 = $4,000
250-amp DC disconnect: 1 unit x $330 = $330
AC kilowatt-hour electric meter: 1 unit x $100 = $100
Copper wire and junction box: 1 unit x $350 = $350
Grounding wire: 1 unit x $150 = $150
Labor: 50 hours x $110 = $5,500
Subtotal: $28,570
Less U.S. Federal Tax Credit =$2,000
Less CA Rebate (PG&E offers $1.90/watt = $1.90 * 3600 watts) = $6,840
System Cost after Basic Credits = $19,730

OK, so upfront costs are about $20,000–a considerable chunk of change. Note that the credits available in California vary by utility, so some of you out there could receive a rebate of $2.50 or $3.00 per watt instead of the $1.90 in this case. Regardless, despite the large upfront costs, the PV system in this case reflects a payback period of about 11 years. Check it out:

ANNUAL ELECTRICITY PRODUCTION

Number of Panels: 20
STC Rating in Watts Per Panel: 180 watts
Total kilowatts per hour (assuming optimal conditions): 20 x 180 = 3.6 kW
Expected performance (in real-world conditions): 80%
Adjusted kilowatts per hour (in real-world conditions): 80% x 3.6 = 2.9 kW
Average hours of sunlight (in San Francisco): 8.2
Estimated kilowatt-hours per day output: 8.2 hours x 2.9 kW = 29.5 kWh

Estimated kilowatt-hours per year: 365 days x 29.5 kWh = 10,775 kWh
Avg. California electric rate (PG&E, per kWh, 2008): $0.14
Estimated Income (Year 1): 10,775 kWh x $0.14 = $1,508
Average Electrical Rate Annual Inflation (assumed): 4

From here, essentially what you do is estimate the energy savings (taking account of 4% price inflation) over the next 20 years or so. Because of space constraints, I’m not able to show the full analysis (for more details, see the spreadsheet). Here’s an idea of what it looks like:

Year 0 (2008): -$19,730
Year 1: -$19,730 + electricity sales ($1,508) = -$18,222
Year 2: -$18,222 + electricity sales ($1,569) = -$16,653
Year 3: -$16,653 + electricity sales ($1,632) = -$15,021
Year 4: -$15,021 + electricity sales ($1,697) = -$13,324
Year 5: -$13,324 + electricity sales ($1,765) = -$11,560
…
…
…
Year 10: -$3,766 + electricity sales ($2,147) = -$1,619
Year 11: -$1,619 + electricity sales ($2,233) = $614
Year 12: $614 + electricity sales ($2,322) = $2,936

As you can see, our 3.6-kW system “pays for itself” in about eleven years. A few points are necessary. First, though this is a pretty rough analysis based on averages, it drive home the main point that solar PV systems can and do represent a favorable investment. Second, in the interest of simplicity, I omitted the fact that at some point in the first 10 years or so, you’ll likely have to replace the inverter. This tacks on another $4,000 in today’s dollars to the analysis, and pushes back the payback period by a couple of years. Third, I assume that retail prices for electricity will rise about 4 percent a year. It’s not implausible, however, that price inflation in electricity markets will be higher. In this is the case, the value of your PV system will naturally be higher and the payback period shorter. Solar power reflects an effective way for residents (and businesses) to hedge against price uncertainty.

That’s about it for this week. If you’ve got any questions, don’t hesitate to ask. Next week I’ll expand the analysis here a bit further, looking at net present value (NPV) and alternative scenarios that reflect different assumptions on price and system performance.