# Calculating Solar Benefits

## 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 minimizing the Purchase Price (educating yourself) and maximizing the incentives (deciding to Go Solar ASAP since incentive usually decrease over time).

**Carrying Cost:** The “carrying cost” is the estimated total cost to maintain the system over what you determine is the usable life of the system. Although Solar Systems are highly reliable, it may require repair or cleaning depending on the area you live in, or natural or environmental conditions or events (e.g. dirt, soot from fire, debris, etc.). Ideally, the Carrying Cost should be zero. Comprehensive Warranties and Guarantees are the key to ensuring low or zero Carrying Cost.

**Average Annual kWh Consumption:** This is your historical average annual electricity consumption that you can determine from your electric bills.

**Annual kWh Production:** For a given purchase price, you are looking for a system the produces the most kWh that is as close as possible to your Average Annual kWh Consumption. The best way to get this value is to see if the installer guarantees the system’s production; if so, this is the conservative value to use.

**Production Value:** This is the amount of money that each kWh of electricity that your system generates is worth and this is determined by your utility company and the rate plan. If you are on a tiered rate plan, the value of production increases the higher the highest tier you usually fall in. If you are on the Time-of-Use 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, but also 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 more skewed toward the higher rate. You should also consider that over time, electric rates will most likely increase (meaning that the production value will also increase over time).

## Simple Payback Period

The first calculation you can make is the **Simple Payback Period**. This tells 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 are not considering 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) =**5.8 years**

So, in this example, you will break even in 5.8 years. If the utility rates increase or your carrying cost decrease, then your simple Payback Period will be less; and, the value associated with any production after 5.8 years (in this example) can be considered profit.

Ideally, the Annual kWh Produced should be less than or equal to the Average Annual kWh Consumed. This is to be conservative since 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, depending on the net-metering rules.

After doing this calculation, you need to determine if the number of Payback Years is acceptable to you. Ideally, you are trying to minimize this and, at a minimum, wanting to make sure that your payback period is less than the warranty period. The shorter the Payback Period, the less your risk exposure to any future changes that my adversely impact you since you have already made your investment back.

As you can see, it is very important to make sure that when you **compare proposals**, that ALL aspects of the system, including the warranties and guarantees are the same. For example, if a vendor offers a weak or short warranty, then your risk and Carrying cost will rise, causing your Payback Period to increase. Remember, ALL the following items of a Solar System should be the same to do a valid price comparison: panels, inverters, mounting, production guarantee, installation, services, warranties, guarantees, support, vendor stability, etc.).

The Simple Payback Years 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 can also be calculated, as well as a myriad of other values – it depends on your situation and goals. Additionally, you can consider many other factors, such as panel degradation, panel tolerance, or the additional benefit of not paying tax on energy you did not consume from the grid; but, at a high level, these factors will have a relatively small impact. Which one to use depends on your goals and situation. For most people, though, the lower the Simple Payback Years, the better any of the other comparison factors will most likely be.

## Cash Flow

**Cash Flow** is the amount of money flowing from you (negative cash flow; you are losing money) or toward you (positive cash flow; 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 being saved each year, this amount is the positive cash flow each year. But, to get this, $12950 needed to be invested the first year; so, in the first year, there was also a $12,950 negative cash flow. Each year after the first year, we are also estimating 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 |

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 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” since this is the amount you would have had to pay but are not paying anymore.

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: 1) your annual positive cash flow would increase; 2) your cumulative annual cash flow would turn positive sooner – i.e. your simple payback period would be less than 5.8 years; and, 3) after you break even (sooner) 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 and 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** is the total cost of the solar system over its useful lifespan (including its net cost plus its 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 and if the average utility rate you will pay over the same system 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); and, if LCOE is greater, than it is definitely not worth considering.

In our above example, 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 (12 * 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, say, 10 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.