The stage I’ll be at soon (Source: National Renewable Energy Laboratory)
In most cases, investing in a domestic solar PV system or in energy savings measures has become a positive financial investment. The question is: how good is the investment?
Many articles describe the financial benefits of a solar PV system by using the term “payback”.
Payback in this context is just a shortcut for payback time or payback period. It describes how many years it will take until the initial outlay has been paid back or in technical terms how long it takes until the break-even point of the investment has been reached.
Some solar installers, consultants and website articles even call the payback time ‘return on investment’ or in short, ROI. This is wrong. In financial textbooks it can be found that ROI used in finance calculations produces results in terms of %, not years. (https://en.wikipedia.org/wiki/Return_on_investment )
While ‘payback time’ appears to be a simple description of the financial situation, it comes with a number of disadvantages.
Uncomparable
The main problem is that using payback time as an investment guideline results in a disadvantage to the growth of renewable energy. It makes investments in renewable energy or energy savings measures impossible to compare to other financial investments.
This is because payback time is not a term used with other investments. Do we discuss investments by saying, “Telstra shares have a payback time of 7 years.” or “The investment bonds I bought will pay back in 4 years.”?
Misleading
Another problem is that while it appears obvious what payback time means, it is actually not that simple, and the interpretation of payback time is prone to mistakes and misconceptions. For instance, one could think, that a payback time of say 10 years is a bad thing. But is that really so? We will get to that a bit later.
Demotivating
While it sounds nice that putting say $5000 in a 5kW solar system and average electricity cost savings of 15 cent/kWh result in a payback time of 5.3 years, it does not say anything about the additional 20 years where the solar system is producing electricity for free with only some repair and maintenance costs (e.g. replacement of inverter) to be paid. Payback time does say nothing about the $22,000 earned over this time period.
Incorrect
Payback time does not take into account the time value of money. $100 today is not the same as getting $100 in 5 years. This not only about inflation but also about the interest the money can generate if we have it today.
Use comparison rate instead
Would it not be better if we could compare solar PV with any other investment?
This can be done by using what is defined as the ‘comparison rate’. The comparison rate is a term defined for home loans by the Australian Government and must be provided with all domestic home loan products.
However, the calculation works both ways. In case of solar PV the owner is the ‘bank’ and will receive his ‘payments’ either from savings on grid demand or from an existing feed-in tariff or from a combination of both.
The comparison rate is calculated in the same way as the ‘Internal Rate of Return’ (IRR), which is used in financial mathematics. IRR is a function that is very difficult to calculate manually. However, it is easy to use on a computer because it is available as a financial function with most spreadsheet programs.
The Internal rate of Return (IRR) can also be explained in simple terms: The comparison rate is the interest rate of a bank account which creates the same income over the life time of the project as the solar PV system.
Will I also get my money back?
The short answer is yes. If the IRR is positive, the paying back of the initial outlay is included. So if the IRR is 10% you will get the equivalent of 10% interest rate AND you will get your money back – not in a lump sum at the end but in a higher annual return than the 10%.
Relationship of Payback time and comparison rate
However, investment in solar technology can be seen like any other financial investment. The payback time can be converted into a comparison rate. The simple table below shows the conversion of the payback time into the comparison rate for a project with a life time of 10, 20 and 25 years.
It must be said that the table only assumes an initial outlay and a constant annual income, and it does not take into regard extra expenses like replacing a defective inverter. This will make the real world data for the IRR a little bit lower. For a precise calculation it is necessary to set up a detailed spreadsheet or to use a special calculator program.
In the initial example a payback time of 10 years was mentioned. This may sound pretty poor. However the comparison rate (or IRR) over the life time of a solar PV system is still 8.78%.
This means the solar investment with an IRR of 8.8% for a project of 25 years life time is as good as $5000 invested in a savings account over 25 years with an interest rate of 8.8% (and the money back). That’s pretty good! The best savings accounts available today are providing far less than half of this interest rate.
Using the comparison rate for investments in solar PV and generally in any kind of energy savings will make these investments fully comparable to any other investment and reveal the full financial potential of these measures.
Calculators and more details can be found at http://www.sun2steam.com.au/index.php/calculators/
Jo Muller is ecretary of the Central Coast Community Energy Association Inc.
This post was published on June 28, 2017 9:51 am
Switching water heaters to charge during the day can soak up solar and make sure…
Australia has notched up a new renewable energy milestone, with the number of households around…
A client recently presented us with a challenge: More than 2,000 properties that could have…
A $15m large-scale solar and battery storage rollout across six regional Western Australia towns has…
Australians aren’t signing up to VPPs at the rate the government needs to meet its…
Clean Energy Finance Corporation signs agreement with ING Australia to deliver another low-rate green loan…
View Comments
What is being said is that solar plus storage is economically viable but may take 10 to 20 years to recoup costs. A payback period of 5 to 7 years is justified for the following reasons: Electronic equipment tends to fail a lot quicker than the quoted life spans. Unforeseen circumstances such as hail events, electrical storms, power spikes can cause premature failure. Many home owners move , buying and selling their homes. New buyers are not going to pay top dollar for secondhand pieces of electrical equipment. Storage is still in its infancy and costs could half in a few years so an expensive storage system with a payback of 10 years would have lost 1000 cycles of life in three years and have a residual cost exceeding that of a brand new shiny battery with a full cycle life ahead of it. The old system would have a stranded asset aspect to it.
A better way of looking at battery storage value is to account for expected new battery prices In 3 to 5 years
Sorry, I don't understand your first sentences. Does '... is being said .. ' relate to the article? And what means '...payback period of 5 to 7 years is justified...' ? Do you mean 'necessary'?
By the way, the article is not about batteries about about the value of solar PV.
Hail events, electrical storms, power spikes are indeed a risk that has to be considered with solar PV. As it is a statistical risk it cannot be calculated in explicit terms. However most of these risk can be mitigated by including the PV system in the home insurance.
Hello Jo, to your point that it's about solar, not battery, I'd like to use your article to explain how batteries, and battery production plants, as well as solar, charging stations, battery electric vehicles, etc., can be compared financially to other investments. I was fuzzy previously about the use of IRR (I'm in the USA) and tended to do the convoluted explanation of 'after you pay off the financing, the energy is free, so it pays for itself again every x months or years'. Makes internal sense, but as you say, not readily or customarily comparable. The purpose is for educating potential investors, distribution channel members, and end users.
Regarding solar, and battery, costs, what installation cost average and / or range are you using? I'm seeing volume prices of US$160/kWh for batteries within 2 years, falling steadily to $US100/kWh in 2020. It would be great to see your results at those prices; it might motivate a lot more people to plan to invest, or go into business, in renewable energy, storage, and smart micro-grids, as well as converting ICE vehicles to full battery electric, or making new ones.
Hi Mark, while my calculator is useful for assessing solar PV and investment in energy saving (that's the second calculator on my website form the link at the bottom of my article) the calculation of the value of batteries is beyond the scope of my calculator.
For that purpose I recommend Sunulator https://www.ata.org.au/ata-research/sunulator for Australia and possibly something like https://sam.nrel.gov for the US and worldwide.
The sunulator allows to enter a specific energy use pattern and even half hourly interval data and puts against that the solar radiation data of the same year and in the same region. It is of course a bit harder. And while it can provide IRR as an output it does not make it very obvious to the average user what the advantage of IRR to the payback time is.
I cannot comment on the nrel calculator as I have not used it.
I regard of what prices I am using I must say that I provided a calculator model where people can enter whatever price they like. So I am providing the tool, not the content. And I think it is important to keep that apart.
OK, thank you.
I find IRR, NPV and breakeven point calcs leave out the benefits that matter. No CO2 emitted, no water used, no damage to health. These things are worth far more than the cost of electricity avoided. How much would electricity cost if the fossil fuel industry had to undo the damage done over 50 years?
I'm trying to say that the decision to install renewables is so obvious now the mathematics is almost irrelevant.
The point is to show that solar PV beyond its environmental benefits is also an excellent financial investment, better than any other low risk investment.
Especially at a time of rising electricity prices it is important to show a viable financial alternative. And payback time just does not cut it.
IRR is one of the financial KPIs that is produced by PVsell: http://www.pvsell.com.au
Don't buy solar panels before seeing THIS, The '20k solar panel system' is coming to an end. http://rurl.us/bg65rf
You make a very good point Jo. I remember explaining to a customer years ago that the focus of solar should not be on payback.. "as you need to pay the electricity bill whether you like it or not".
Yes the solar system will pay itself off at some point.. but it's about protecting the business long term and over 20-years you will save $XXXX for a cost you would otherwise have to pay.
Thankfully as electricity prices increase I think businesses have now come to realise this.
Great article Jo! Even I can understand what you are writing!! :-)