By Andy Sendy
One of the issues faced by consumers when considering going solar is that things are changing so frequently that it is hard for consumers to evaluate solar as an investment. Solar prices have fallen significantly over the past few years, but government and utility rebates and incentives have been in a perpetual state of change. These constant changes have meant that it is almost impossible to publish anything related to solar pricing that remains accurate over time. This has led to most consumers using overly simplistic methods to evaluate solar power as an investment. These simplistic methods fail to give solar electricity the full credit it deserves.
The first thing that is easy to find out about a home solar system is how much power it will produce. This page on SolarReviews allows you to see how many kwh’s (kilowatt hours) per day of electricity you will get from each kw of peak capacity solar you install in your state. For instance, a 5kw system in Southern California will produce 4.5 kwh x 5kw (size of system) multiplied by 365 (days of the year), or around 8,200 kwh per year. A consumer in California who is paying 15 cents per kwh for power would most likely think that their return would by .15 x 8,200 kwh per year, or $1230 per year. If this person was looking at a 5kw system that cost $15,000, after rebates and the federal tax credit, then they would conclude that their return would be 8.2 %.
That is not a bad return, but it is a fair evaluation of the investment in a solar power system? It may be an accurate reflection of the return on investment in the first year, but not over the life of the project. The reason this is the case is that energy prices from utilities using finite energy sources will continue to increase over time. Each time this happens, the same 8,200 kwh per year produced by the solar power system becomes worth more to the owner.
To work this out, you need to use a financial method known as internal rate of return (IRR). Investors use this type of calculation to evaluate the average return they receive over the life an investment, when the returns from their investment change each year. Based on the above figures, and based on the assumption that electricity prices will increase 3.5% per year over the 25 year life of the system (some estimate that electricity prices will increase at an even higher rate), the IRR for this system would be 12%.
This is a very good return on a consumer’s investment, and all the more reason a home solar power system can be for your pocketbook.