By Scott Gordon, Director of Sales, HelioPower
If there were a most commonly asked question contest in the solar business, this question would win hands down: “How long will it take for my solar system to pay for itself?” (Incidentally the second most asked question is: “I have an XXX square foot house, how many solar panels do I need?”).
As you can imagine neither question is particularly easy to answer and both depend on the individual circumstances. If we start with the second question first, the answer is: “The number of panels you require, Mr. Customer, depends upon your 12 month electrical usage history, how your roof is configured, and the type of panels you choose to install.” In other words, without knowing the particulars of a customer’s situation, it’s impossible to answer what on the surface seems like a simple question.
Answering the first question (concerning solar payback) is more complicated because we need to establish a definition of ‘payback’ before we can adequately get to the nuts and bolts answer the customer is seeking.
Then we need to apply customer specific financials to make a final determination. In my experience as both a solar customer and salesman, I believe that there are three ways to think about a solar power system’s payback:
1. ROI – (Return on Investment) - This is what most customers think about. ROI determines how many years of energy savings are required for the solar power system to pay for itself.
2. IRR – (Internal Rate of Return) – Least considered payback methodology, IRR compares a solar ‘investment’ return to other conservative investment returns like interest paid by savings accounts, treasury bills & other bonds, certificates of deposit, etc.
3. Cash Flow – Can financing be obtained that generates positive cash flow for the customer? In other words, will the finance payment be less than the current electric bill? This is truly the Holy Grail.
Using my own solar power system as an example, I’ll address all three of these payback methodologies.
1. ROI – My system (installed in February 2007) has an eight year ROI. It will take eight years of energy savings (compounded at 6.7% annually) before my system pays for itself.
2. IRR – That same system provides me with an IRR of 12%. I’m currently paying 4.2% on the money I borrowed to finance the system, so my ‘net return’ is 7.8% (way better than my savings, CDs, or bonds are paying me and certainly better than the 24 month return on my stock portfolio!).
3. Cash Flow – Most importantly, I’ve been cash flow positive from the FIRST MONTH. How? I swapped a $150-200/month electric bill for a $150/month Home Equity payment. Unlike my electric bill, the $150 HELOC payment was entirely tax deductable since it is 100% interest paid toward a qualifying home improvement.
Over the last two years, I’ve paid off a significant portion of the principle (which lowers the monthly payment) and had some luck on the interest rate front. Today, I am $110/month cash flow positive, yet my solar panel system won’t “pay for itself” for another six years!! Funny, because it’s paid me every single month since I installed it in 2007. As you can see, solar payback is truly a matter of perspective.
With the recent removal of the cap on the residential tax credit (Federal), IRR in some utilities is approaching 20%. Warren Buffet became a billionaire by averaging a 20% return over the course of his investing career. Bernie Madoff defrauded investors of billions by promising a 12% return.
A solar power system will provide you with a guaranteed conservative Buffett-like return, without making off with your money in Madoffesque fashion. Your exact return will ultimately be determined by your utility’s rebate level; your appetite for tax credits; and net system price.
If you can achieve positive cash flow with solar, your return from either/and ROI or IRR standpoint become less important. Cash is king, and the more of it you keep every month, the better off you’ll be in the long run. However you decide to calculate the payback on your solar panel system, remember, like any attractive investment, there is a cost to wait. Rebates are ticking down and utility rates keep going up. Every month you delay could cost you hundreds of dollars. Now that’s food for thought.