I hear it all the time. It’s the first thing people ask at the cocktail party when you say you’re in the solar energy business: “What’s the payback on solar panels?”
Me: “Oh, about 7-15 years depending on many factors.”
Them: “Holy $#|^, that sucks!”
To be clear, we are talking about solar electricity here, not the solar pool heating or solar water heating cousins that could have much shorter payback periods.
The conversation continues, something like this:
Me: “What’s the payback period on a 10-Year CD?”
Them: “Umm, not sure.”
Me: “It’s 10 years… How about a 30 year Treasury Bond?”
Them: “Let me guess — 30 years.”
It’s really strange to me. There is over $13 trillion (that’s $13,000,000,000,000.00) invested in U.S. Treasury securities right now, so apparently up to a 30 year payback is okay for many, yet 7-15 years for a solar energy investment seems to send some into cardiac arrest.
An investment in solar electricity is undoubtedly a long-term investment. It’s not a get rich quick scheme, and there are probably no windfall profits to be had. If someone offers you a super safe, tax-free investment with a 5-year payback and 20% ROI, sell everything you have and take that bet right now. Unfortunately, those opportunities don’t really exist. Investments typically balance risk and return. Most people don’t really understand the concept of payback until you explain it like I do when meeting new people interested in the investment features of solar energy. Fortunately, my degree is in Finance, so it’s pretty easy to put things into perspective.
You have to compare investment alternatives based on term (length), risk, and features. For example, if you don’t want your money tied up for a long time, solar panels may not be your best alternative. If you have a high risk tolerance and are looking for a home run payoff, you probably have better options. If you don’t care about the income during an investment’s term and prefer one with a big balloon payment at maturity, you might want to look elsewhere. Solar energy’s features are decidedly:
- Low risk
- Periodic (monthly) payments
- Tax free (compare to after-tax investment returns)
- Subject to future alternative electricity costs (probably utility rates)
- Possible returns beyond the analysis time-frame
Here are a few things you should know:
The industry looks at solar energy as a 25 year investment. That is not an arbitrary decision. Most solar panel warranties are for 25 years and feature a power output warranty, providing peace of mind that the solar panels will continue to generate energy (income) for many, many years. This is considered a conservative investment analysis term, as solar panels are expected and proven to put out at least some level of power for 40 years and beyond. However, most people preparing an analysis leave out this “free money” beyond 25 years because those investment returns discounted to today’s dollars have a small impact on the ROI, and there will undoubtedly be some costs associated with maintenance after the warranty period to the panels themselves or the roof on which they are mounted. We consider this “gravy” if you are lucky enough to get more out of your system after 25 years.
Because photovoltaic technology is proven, and we have sophisticated weather models to predict solar power output, we can estimate your monthly energy production within a fairly tight range over time. We look at energy production as averages over long periods of time, and don’t focus on the power produced at any given moment. Monitoring systems allow you to verify energy production against estimates and react to and issues that are presented. For that reason, solar energy is considered low risk.
All financial analyses are subject to assumptions, and solar energy financial models are no exception. Factors like power degradation over time, energy rate escalation factors, maintenance costs, and other values are plugged into a financial model to come up with an estimated payback period and return on investment. If any of those factors are off, you can expect your actual payback period to vary. It’s not like a 10-year CD where you know your payback period is exactly 10 years. For example, if utility electricity rates rise at a greater rate than predicted in the model, your payback period could be drastically less. Make sure you consider the assumptions in the model when evaluating the level of risk involved with a solar energy investment.
The primary feature of a solar energy investment is the money you “get back” on a monthly basis. This money comes in the form of a lower electricity bill from your utility company. You will receive these periodic “payments” for 25+ years. At some point you may sell your home, or sell the solar panels themselves (although that is an unlikely scenario). If you sell your home before you have received enough monthly returns to pay back the investment, you can recover the difference via the increased value in your home and effectively transfer the future monthly returns to the new owners. If you do live in your home for over 25 years, you can let your solar panels continue to produce energy and enjoy the free energy that you did not expect when making an investment decision 25 years prior.
Most homeowners pay income tax and pay their electricity bill with money left over after the Federal government gets their cut. Therefore, your investment returns are tax-free, or “after tax.” When comparing a solar energy investment to other investment alternatives, you should consider the after-tax return of those alternatives.
Future Electricity Costs
An analysis that assumes future utility electricity rates will stay the same is overly simplistic and unrealistic. Most people expect rates to increase over the long term either through general inflation or fuel cost increases due to scarcity and demand. Remember that your monthly periodic return is based on what you will have paid for a traditional source of electricity if you don’t have solar panels. For that reason, the payback period is sensitive to future rates. You are essentially prepaying for electricity without knowing with certainty how much it will cost in the future. If inflation picks up, you will look like a genius by having hedged against rising electricity rates with solar panels purchased today.