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.

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  • http://JunLoayza.com Jun Loayza

    Hey, so how is everything going? So lets talk money sometime over coffee. You ever in socal?

    - Jun

    Reply

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  • fnguyen

    I didn't see the energy cost savings that you don't have to pay to the utility in the above analysis. Suppose you are currently paying $200 per month average, then per year, that's $2,400 of cost savings!

    For 10 years, that's $24,000.

    Please use the above and add to your analysis.

    Thanks!

    Reply

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    Thanks for sharing~

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  • http://build-home-solar-panel.com/solar-panel-systems-stylish-passing-day Solar Panel Systems

    As
    economy crisis of the world is increasing the people have no choice but to find
    solution to that crisis and finding alternative energy source is one thing to
    be consider, solar panel is one energy source that good alternative. It’s a
    practical alternative energy source.

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  • sol-less

    Thank goodness I’m not the only one to notice – solar is an inefficent and impractical power source.

    Remove the subsidy, what is you return on investment?  80 years!  Solar cells degrade 0.05% per year, leaving you 67% of the total power by year 80.  Inverters last only 15 years, and cost $4,000 to replace.  I submit to you that solar will NEVER pay back the cost.

    Reply

    Anonymous Reply:

    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. 

    Reply

    sol-less? Reply:

    It won’t be so impractical in 40 years when the worlds oil supply has run dry.

    Reply

    Anonymous Reply:

    Note, however, that there are different types of solar panel. I’ve been producing my roughly 50% of own electricity for about ten years now, and haven’t seen a drop in solar production yet (although the drop should be relatively low) and my inverter is still doing fine. Also, I’ve broken even a few months ago.

    Reply

    Electric Liberty Reply:

    You must compare this to the cost of the alternative.  When doing so consider what you currently pay for electricity, and what you are likely to pay in the future.  The price of fossil fuels is likely to go up by 10% every year.

    Reply

    Hr6943 Reply:

    Not paying back the cost? I’m currently producing more power than I need, and the portion I’m selling back to the grid has easily paid for the panels within ten years.

    Reply

  • Glen

    Each square foot of solar panel produces 20 kWh every year? This number seems very low.
    http://en.wikipedia.org/wiki/File:Us_pv_annual_may2004.jpg
    Even in Alaska you would get 99kWh per year! I think for most of the US it is more like 175 kWh per year.

    Reply

    Glen Reply:

     oops, wrong calculation, sorry

    Reply

    Anonymous Reply:

    Oh ok, the number of 20 kWh that I used is hypothetical anyway. That number is not intended to be indicative of the actual average number of kWh that are produced every year. Actual production may vary. Just insert a different number if you want to play around with the equation to calculate the breakeven point. No purchase necessary. Batteries not included. Sorry, getting just a little carried away with the disclaimer.

    Reply

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    The information you shared in the post about the solar panel and the investment one can make in it to have benefits is really nice for all those who want to look forward to it.

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  • Samlili

    WHY DON’T WE USE attic insulation R-15 and one exhaust fan, thermostat and louvers? Cloudy or sunny you pay no electricity for A/C.
    Sam, Orange County

    c

    Reply

  • Guest

    $40,000! Fuck No. I could pay off my house wit dat shit.

    Reply