## Breakeven: Investment in solar panels

A few months ago, I wrote a post about solar innovations that may save you money – Solar innovations saving you money: Konarka, Alan Heager, Nanosolar

You or someone you know might be wondering whether to invest in solar panels. It’s fun to watch the electric meter run backwards and sell unused electricity back to the power company; however, it’s also important to determine how long it will take for your energy savings to offset the initial installation cost.

Here are some important factors to consider. Of course, there are many other criteria to consider, but we’ll focus on the main points for this simple example.

>> What is the average cost for energy/electricity in your area?

>> Is there a government subsidy on your solar panel investment?

>> How much power will each square foot of panel produce each year?

>> What is the installation cost, per square foot, of these solar panels?

>> How many square feet of roof space do you have available? Will this generate sufficient power?

>> What is your estimated interest rate? This may take into consideration things such as inflation, market rates, etc.

Here is a relatively simple (and hypothetical) example to consider …

The average cost for energy in your area is $0.15/kWh. The government subsidizes 60% of your initial investment. Each square foot of solar panel produces 20 kWh every year. The cost of installation per square foot of solar panel is $100. The building has 400 square feet of available roof space. Assume that your rate of interest is 7% per year.

Ok, now we’re going to determine the breakeven point.

Let’s calculate what your initial investment would be: 400 square feet of roof space * $100 per square foot = $40,000.

With a 60% government subsidy, you would only pay 40% of the initial investment: 0.4($40,000) = $16,000

To find the breakeven point in years (N), we set the initial investment equal to the annual energy savings as follows …

$16,000 = (400 square feet)(20 kWh/sq ft-yr)($0.15/kWh)(P/A, 7%, N)

40/3 = (P/A, 7%, N)

Note that P/A means to find the present equivalent worth given an annual worth. Since you’re dealing with annual savings, you have to convert it to the present, just as the initial $16,000 investment is in terms of present worth.

The formula for P/A at 7% for N years is as follows: [(1+0.07)^N - 1]/[0.07(1+0.07)^N]

Simply set this formula equal to 40/3 above, and solve for N to find the breakeven point in years (you can solve this with a computer, graphing calculator, etc.). For this example, solving for N yields approximately 40.025 years to break even!

As mentioned before, this is a relatively simple example. There may be many other factors to consider in real life. Nevertheless, this is a good model to play around with. Experiment with varying interest rates, installation costs, square footage, goverment subsidies, power production, average cost of electricity, and more.

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Stay tuned for the next breakeven post dealing with the purchase of a hybrid vehicle. If you haven’t subscribed to this blog already, please do so by clicking here.

Anonymous Reply:

October 13th, 2011 at 10:25 pm

Very true once you remove the subsidy … and take into consideration all the other variables you mentioned, such as degradation, inverter replacement costs, etc. By the way, what type of work do you do at URS? I’m an engineer myself (mechanical engineer). I’m guessing there are a lot of projects in the civil engineering end of things.

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