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Determining Payback

There are several ways to measure the economic value of a solar system: compound annual rate of return, cash flow or increase in property resale value. In the best cases — California and New Jersey — common results are a rate of return well over 10 percent, positive cash flow and an increase in property value that more than covers the cost of the PV system.

Compound annual rate of return. This is another term for interest-rate yield, which is a way of comparing one investment to another. For example, a savings account might pay 1 percent interest, and the long-term stock market has paid about 10.5 percent. Solar systems in California, New Jersey and a few other locations can often produce a pretax compound rate of return of 10 percent or more. Several examples are shown in the table, “Sample Scenarios for Residential System Payback.”

Cash flow. The cash flow will be positive, either immediately or within the first few years, for many homeowners who finance their solar systems using home equity loans.

This calculation compares the estimated savings on the electric bill to the cost of the loan. Monthly loan cost is the principal-plus-interest payment required to pay off the loan, less any tax savings. In the case of “deductible” loans, such as home equity-based loans, the interest is usually tax-deductible, and thus the loan effectively costs less. Home equity loans often are excellent sources of funds because interest rates on real estate-secured loans are relatively low and payment terms can be long.

Inflation plays an important part. Inflation affects electric rates and thus effectively increases the savings from a solar system over time. Inflation doesn’t affect loan rates, particularly with fixed-rate loans. Hence, as electric rates rise, the savings grow, but the cost of the loan stays relatively constant (it rises a little over time as the interest portion of the payment falls, which cuts the tax deductibility). See “Power Costs Compared” for an example. Note that this is an ideal case in a state with the best incentives.

The accumulation of net annual savings is free and clear with no initial outlay of cash, because that was covered by the loan. The savings are small though significant in the first years, but really jump when the loan payments stop.

The table “Sample Scenarios for Residential System Payback” includes several examples showing the initial monthly cash flow, assuming 100 percent financing of a solar system’s net cost.

Increased property resale value. Homes with solar-electric systems increase in value because the systems decrease utility operating costs. According to a 1998 article by Rick Nevin and Gregory Watson in The Appraisal Journal, a home’s value increases $20,000 for every $1,000 reduction in annual operating costs from energy efficiency.

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