What is the Payback Period of Rooftop Solar PV Systems?

Talk to any investor on a business opportunity, and one of the first questions that come up is about the solar energy payback period for the investment.

The same is the case of rooftop solar PV investments.

What is Payback Period?

Payback period of a rooftop PV system can simply be defined as the time taken by which the initial investment made for the system will be recovered from the savings it makes.

To illustrate this, assume you invest $10000 in a project that gives you a profit of $1000 every year. In 10 years, the profits together have paid back your original investment, and hence the payback period is 10 years.

Many times, the solar energy payback period metric helps determine whether to go forward with a project or not.

Most PV systems come with a warranty period of 25 years. So while calculating the potential savings, we’ve to consider a span of 25 years.

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Solar Energy Payback Period Illustration

When you consider the above definition of solar energy payback period, upon some reflection it becomes apparent that the payback periods for solar PV systems can differ widely from one region to another. The three basic steps involved in calculating the payback period of any rooftop solar system involves:

  • Calculating System Costs
  • Calculating System Savings
  • Calculating Solar Energy Payback

Calculating System Costs

Let us first consider a country such as India where a rooftop solar panel installation (without batteries) cost about $1.2/W or $1200 per kW (about Rs.80/W in local currency). If this is a residential rooftop solar system, the owner can avail a capital subsidy of 30%* in some cases. Thus, the actual cost of installation is approximately $1/W after subsidies. If it is however a commercial rooftop solar installation, there are no capital subsidies available in India starting Aug 2015, so the cost of installation remains at $1.2/W. Thus, even for a similar rooftop installation, depending on whether it is for the commercial or residential sector, the installation costs, and hence payback period, could differ.

*MNRE has reverted back to 30% capital subsidy from 15%

Calculating System Savings

But the payback does not depend on the cost of the solar system alone. It also depends on the cost of the grid power for the sector, as this is how much the rooftop installation can save by installing a solar PV system.

Let us continue an analysis of the earlier illustration. For India, for many states, the average cost of grid power for residential segment is about 7 cents/kWh (about Rs 4/kWh in local currency) and for industrial and commercial segments, this is almost 12 cents/kWh (about Rs 7/kWh in local currency).

Note: the concept of net metering allows you to sell electricity into the grid; and it’s possible to have $0 utility bills every month. This is especially true if you implement a few simple energy efficiency strategies to reduce your electricity consumption.

Calculating Solar Energy Payback

Taking an annual generation of about 1500 units per kW, the table for the above scenario looks as follows:

A B C D E
Category Per W price, Net ($/kW) # of units generated per year per kW Price of grid electricity (cents/kWh) Total savings per year ($) B*C Payback period (years)

A/D

Residential 1000 1500 7 105 9.5
Industrial 1200 1500 12 180 6.5

 

Thus, for the same country and the same region, the payback period for rooftop solar could vary between 6.5 years – 9.5 years, a variation of almost 50%

Needless to say, payback periods could be differing widely between different countries, and different regions even within one country.

General Estimates for Solar Energy Payback Period

On the whole, one can say that payback periods for rooftop solar PV systems are in the range of 6-10 years in many parts of the world today.

While this might appear like a very long time for pay back, please note that for a product that works for 25 years, recovering your investment in 8-10 is not a bad idea, as for the rest 15+ years, you are essentially getting electricity at no cost, as there are very little operating expenses for a rooftop solar PV system.

Future Estimates for Solar Energy Payback Period

Solar PV costs are decreasing all the time, while the cost of grid power is increasing all the time.

Thus, it is safe to say that the pay back periods for rooftop solar systems will continuously decrease over time.

At Solar Mango, we estimate the overall payback period for rooftop solar power plants could reduce to fall in the range of 5-7 years by 2017.

Note:

Please note that we have kept things simple in the above calculations, and have not considered the concepts of time value of money etc. However, even with such financial concepts included, the solar energy payback periods will again fall in the range of 6-10 years once other related aspects (such as expected escalations in grid power prices) are also factored in.

To know more about payback periods for your rooftop solar system, take a look at Solar Mango’s India Rooftop Solar Advisor

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