Thirteen years to Payback? You must be Joking!

Often times when home owners look at solar electric systems for their homes, the number of years to “payback” (time to recoup the initial capital investment) emerges as an important criteria in the decision process. Simply put: the longer the time period to payback, the less attractive the investment appears. Or is it?

A simple payback analysis is performed by arriving at the system cost after rebates and incentives have been deducted, which is your “net system cost”. This is the actual cost to the consumer of functioning solar electric panels installed and generating electricity. Next you take the annual savings in utility bills for the first and subsequent years until that number adds up to be equal to your “net system cost”. The number of years of savings it takes to equal the cost of the system is your “Payback”. When adding up the annual savings, it is important to include energy inflation; this captures an important aspect of a renewable energy system, while fossil fuel generated electricity tends to get more expensive every year, a solar electric system produces electricity at a relatively fixed cost over the typical 25 year life time of a system.

Simple enough, but what’s missing here? Several important pieces of the puzzle are missing in a simple payback analysis (we will look at two). First, the answer (number of years) only looks at the number of years and amount of money saved up to break even, not after break even, when the fun and the savings really kick in. A typical residential solar system in California might earn 2 to 3 times it’s initial cost over the lifetime of the system. For this reason a total lifetime analysis is more useful in gaging the financial return of a solar electric system. You may ask: “But what if I move before the full 25 years of the system are used up and I don’t get to reap the benefits of all the back end savings?” That is an excellent question (and the subject of a future post) to which the short answer is: the value of the remaining lifetime of the system should be added to the value of the home.

Another missing piece is the “cash flow” of purchasing a solar electric system using a loan and comparing the monthly cost of the loan to the monthly savings on the utility bill. In a market like California, depending on the interest rate of the loan (roughly 8%) and the length of the loan, homeowners can see a “positive monthly cash flow” right from almost the beginning. This is because the homeowner saves more on the utility bill every month (averaged over the whole year, 12 month cycle) than the monthly cost of the loan. All things being equal, if you can lower your monthly energy outlay, that would be a good thing. This aspect is not captured in a “thirteen year” payback number. Andy Black does some great work in the area of solar financial payback.

So even though a solar panel system may take quite a few years to pay for itself, it is a long term hedge against energy inflation, and depending on financing options, may start lowering your monthly energy spend very early in the system lifetime. If solar technology is to gain widespread adoption in the US and abroad, it must make financial sense. Years to payback is just one type of analysis when researching the viability of solar, and because of the limitations of what data it captures and communicates, it may not be the best.