Payback of Solar Energy Systems

A customer investing in a solar PV system should understand the economic payback on his or her investment, even if there may be strong non-economic (e.g. environmental) factors driving the purchasing decision.

The initial investment depends on the system size. A convenient factor that takes this into account is the price per peak Watt (Wp) of the system. Hence, a 2000 Watt peak (2kWp) solar energy system costing $16000 in total (i.e. including installation) will correspond to a price of $8/Wp. In some countries, you may be able to obtain a grant or rebate towards the cost of the system, which will obviously improve the economic payback on the purchase.

You may have different options to finance the purchase, but each of them has a cost. If you are investing cash then you lose its future interest; if you borrow the money then you pay a financing cost. Either way, there is a cost of financing the purchase that can be represented by a so-called "discount rate". The normal cost of borrowing may be reduced if local banks offer low interest loans for the purchase of solar PV systems. Alternatively, your bank might allow you to extend your home loan or mortgage; this may be the cheapest form of standard borrowing.

The economic return on your investment is the value of the electricity that you generate. This will, as a minimum, displace electricity that you would have otherwise bought from your utility or energy service provider during the day. Through certain schemes, it may be separately metered and rewarded at a defined rate (possibly related to the domestic tariff or set by a national or state program). Market incentive programs in certain countries offer some or all of the range of benefits from grants or rebates and low-interest loans to preferential electricity purchase rates. Your local Retailer (also known as "dealer") should be able to advise if any incentives are available to you.

The following graph shows the impact of the solar system price on the payback time of the purchase as a function of the value of the electricity generated, using a discount rate of 5%. As you would expect: the cheaper the Solar System, the faster the economic payback. The higher your regular electricity rate (shown on the bottom axis), the faster the payback on your Solar Energy System.

For example, if your average electricity rate is 20 US cents per kilowatt hour and your installed cost was $4 per Watt (this is achievable where government or utility programs are available), your payback time will be just over 15 years. If you are exposed to peak pricing on electricity rates, take account of tax incentives (available for Corporate purchasers), payback closer to 10 years is reasonable.

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