Calculating Solar Benefits
The first motivation for most people who want to go solar are the financial benefits, and that makes complete sense. However, many people wonder whether solar panels are worth the investment. There are many factors and ways to calculate the benefits. Here are some basic yet powerful calculations that will allow you to determine if going solar with LA Solar Group is right for you.
Common ways to calculate solar benefits include:
- Simple Payback Period
- Cash Flow
- Return on Investment (ROI)
- Levelized Cost of Energy (LCOE)
Definitions
First, a few definitions:
Net Cost: Your net cost = (System Purchase Price [the total amount paid to have the system installed]) – (All Incentives [e.g., rebates, tax credits, etc.]) Naturally, you are trying to minimize your net cost by reducing the system purchase price. By educating yourself, you can maximize the incentives. It is recommended to go solar as soon as possible because incentives decrease over time.
Carrying Cost: The carrying cost is the estimated total cost to maintain the system over what you determine is its usable lifespan. Although solar systems are highly reliable, it may require repair or cleaning. The need for cleaning will depend on the area you live in, or environmental conditions and events (e.g., dirt, soot from fires, debris, etc.). Ideally, the carrying cost should be zero. Comprehensive warranties and guarantees are the key to ensuring low or zero carrying costs.
Average Annual kWh Consumption: This is your average, annual electricity consumption. You can determine this from your electric bills.
Annual kWh Production: You are looking for a system that produces kWh that is as close as possible to your average yearly kWh consumption. The best way to get this value is to see if the installer guarantees the system’s production.
Production Value: This is the amount of money that each kWh of electricity generated by your system is worth. This amount is determined by your utility company and the rate plan. If you are on a tiered rate plan, the value of production increases with the frequency in which you operate in the highest tier. If you are on a time-of-use (TOU) plan, the value of production increases when you produce during the “peak” periods. The rates usually differ during different times of the year. To be conservative, use the minimum value you will receive per kWh. Be realistic based on your usage patterns. For example, if you are on the tiered plan and you consistently fall into the highest usage tier (highest rates), then the production value you use should be skewed toward the higher rate. It would be best if you also considered that over time, electric rates would most likely increase. Therefore, the production value will also increase over time.
Simple Payback Period
The first calculation you can make is the Simple Payback Period. This calculation will tell you how many years it will take for the savings in your electric bills to add up to the amount you invested in your solar system. It is termed “simple” because we do not consider the cost of money over time or any other factors.
The simple payback period formula is:
Simple Payback Years = ((Net Cost) + (Carrying Cost)) / ((Annual kWh Produced) x (Production Value))
For example, let’s assume the following (amounts chosen are for ease of calculation):
- System Price: $20,000
- Utility Rebate: $1,500
- Post-Rebate Cost: $18,500
- 30% Federal Tax Credit: $18,500 * 30% = $5,550
- Post-Federal Tax Credit (Net Cost): $18,500 – $5,500 = $12,950
- Assumed Annual Average Carrying Cost: $50
- Assumed Productive Life of System: 20 Years
- Total Carrying Cost: 20 * $50 = $1,000
- Assumed Annual Average kWh Produced: 12,000
- Assumed Production Value: $0.20/kWh
- Simple Payback Years= (($12,950 +$1,000))/(12,000kWh)*($0.20/kWh) = 8 years
In this example, you will break even in 5.8 years. If the utility rates increase or your carrying cost decreases, your simple payback period will decrease. The value associated with any production after 5.8 years can be considered profit.
Ideally, the annual kWh produced should be less than or equal to the average annual kWh consumed. This is a conservative figure. If you produce more than you use, you may not get the same production value for the excess that you give back to the utility company. The value will depend on the net-metering rules.
After doing this calculation, you need to determine if the number of payback years is acceptable. You are trying to minimize this for your benefit. At a minimum, you want to make sure that your payback period is less than the warranty period. The shorter the payback period, the less you risk exposure to future changes that may adversely impact you.
Ensure that all aspects of the system, including the warranties and guarantees, are the same when you compare proposals. For example, if a vendor offers a weak or short warranty, then your risk and carrying cost will rise. As a result, your payback period may increase. Remember, ALL the following items of a solar system should be the same to make a valid price comparison: panels, inverters, mounting, installation, services, warranties, guarantees, support, vendor stability, etc.
The simple payback year calculation is not the only way to compare systems and determine if going solar is right for you. The system’s cash flow or return-on-investment (ROI) can also be calculated. Everything depends on your situation and goals. Additionally, you can consider panel degradation, panel tolerance, or the additional benefit of not paying tax on energy you did not consume from the grid. At a high level, these factors will have a relatively small impact. The right one to use depends on your goals and situation.
Cash Flow
Cash flow is the amount of money flowing from you or toward you. Negative cash flow means you are losing money. Positive cash flow means you are gaining money.
Let’s use the same example as before. Again, amounts chosen are for ease of calculation:
- Acquisition method: Purchase
- System Price: $20,000
- Utility Rebate: $1,500
- Post-Rebate Cost: $18,500
- 30% Federal Tax Credit: $18,500 * 30% = $5,550
- Post-Federal Tax Credit (Net Cost): $18,500 – $5,550 = $12,950
- Assumed Annual Average Carrying Cost: $50
- Assumed Productive Life of System: 20 Years
- Total Carrying Cost: 20 * $50 = $1,000
- Assumed Annual Average kWh Produced: 12,000
- Assumed Production Value: $0.20/kWh
The first value we can calculate is the annual savings. Since an average of 12,000 kWh are generated per year, and the value of each kWh generated is $0.20, the annual savings is $2,400 (12,000 * $0.20). Since this amount is saved each year, there is a positive cash flow each year. To get this, you must invest $12,950 in the first year. In the first year, there is also a $12,950 negative cash flow. Each year after the first year, we estimate a carrying cost of $50, which is a negative cash flow. For clarity, the tabular form for 20 years would be:
Year | Annual Cash Flow | Cumulative Cash Flow |
1 | -$12950 + $2,400 – $50 = -$10,600 | -$10,600 |
2 | +$2,400 – $50 = +$2,350 | -$8,250 |
3 | +$2,400 – $50 = +$2,350 | -$5,900 |
4 | +$2,400 – $50 = +$2,350 | -$3,550 |
5 | +$2,400 – $50 = +$2,350 | -$1,200 |
6 | +$2,400 – $50 = +$2,350 | $1,150 |
7 | +$2,400 – $50 = +$2,350 | $3,500 |
8 | +$2,400 – $50 = +$2,350 | $5,850 |
9 | +$2,400 – $50 = +$2,350 | $8,200 |
10 | +$2,400 – $50 = +$2,350 | $10,550 |
11 | +$2,400 – $50 = +$2,350 | $12,900 |
12 | +$2,400 – $50 = +$2,350 | $15,250 |
13 | +$2,400 – $50 = +$2,350 | $17,600 |
14 | +$2,400 – $50 = +$2,350 | $19,950 |
15 | +$2,400 – $50 = +$2,350 | $22,300 |
16 | +$2,400 – $50 = +$2,350 | $24,650 |
17 | +$2,400 – $50 = +$2,350 | $27,000 |
18 | +$2,400 – $50 = +$2,350 | $29,350 |
19 | +$2,400 – $50 = +$2,350 | $31,700 |
20 | +$2,400 – $50 = +$2,350 | $34,050 |
The first thing to note is that the cumulative negative cash flow turns into a cumulative positive cash flow between years 5 and 6 – as noted in the simple payback period calculation in the above section. This matches with 5.8 years.
Next, you can view the positive cumulative cash flow amounts from years 6 through 20 as profit. It is a profit because this is the amount you would have been required to pay but are no longer paying.
Finally, if the value of production rises over the years to over $0.20/kWh, or the annual carrying cost drops below $50/year, then:
- Your annual positive cash flow would increase.
- Your cumulative annual cash flow would turn positive sooner – i.e., your simple payback period would be less than 5.8 years
- After you break even, your positive cash flow (i.e. your profit) would be greater each year.
Return On Investment (ROI)
Return on investment (ROI) is defined as: (Gain or Loss from Investment – Cost of Investment / Cost of Investment) * 100. It is usually expressed as a percentage.
Using the cash flow example above, the ROIs for each year are:
Year | Net Savings (Profit) | ROI |
1 | -$10,600 | -82% |
2 | -$8,250 | -63% |
3 | $5,900 | -44% |
4 | -$3,550 | -26% |
5 | -$1,200 | -7% |
6 | $1,1150 | 11% |
7 | $3,500 | 30% |
8 | $5,850 | 48% |
9 | $8,200 | 67% |
10 | $10,550 | 85% |
11 | $12,900 | 104% |
12 | $15,250 | 122% |
13 | $17,600 | 141% |
14 | $19,950 | 159% |
15 | $22,300 | 178% |
16 | $24,650 | 197% |
17 | $27,000 | 215% |
18 | $29,350 | 234% |
19 | $31,700 | 252% |
20 | $34,050 | 271% |
Levelized Cost of Energy (LCOE)
The simple Levelized Cost of Energy (LCOE) is the total cost of the solar system over its useful lifespan (including its net cost plus carrying cost) divided by the total amount of energy that the system will produce over its useful lifespan. It is termed “simple” because this calculation will not incorporate the net present value of money or other details. LCOE provides the average $/kWh for the system. If the average utility rate you will pay over the same system’s useful lifespan period is greater than the system LCOE, then the system is worth considering. If the two values are the same, then you will break even (most likely not worth considering). If LCOE is greater, then it is not worth considering. In the example above, the assumed net total cost of the system is ($12,950 + $1,000 = $13,950), the assumed lifespan is 20 years, and the total energy generated over the 20 years is (20 * 12,000 = 240,000 kWh). The LCOE for this system is then: $13,950 / 240,000 kWh = $0.058/kWh, or 5.8 cents per kWh. Considering that the average rate is more than 15 cents/kWh, this system makes sense. But, even if we want to be conservative and assume that the useful life of the system is ten years, then the LCOE over ten years is: $13,950 / 120,000 kWh = $0.116/kWh, or 11.6 cents per kWh, which is still less than 15 cents/kWh.
Solar panels are worth the investment in the areas of high solar power eligibility and high energy rates. The benefits of solar panels in homes are enormous, and the installation of solar systems has a significant impact on the planet. Solar panels will help you reduce your monthly bills over the period, and the tax benefits of solar panels are a huge incentive. With the fast-growing and improving solar industry, solar panel prices are dropping down. You can estimate the solar panel system cost by the solar panel cost calculator. The solar panel calculator estimates the cost of your solar system depending on your address and location details, roofing type, the percentage of shading, and monthly electric bills. The solar panel calculator is a useful tool in understanding if solar is right for you.