Solar is tough to determine if it makes sense for you to install. The best way to determine that is solely based off an analysis of cash flow, savings or lease payments based off the install rate. Our solar ROI calculator will help you make the right decision on whether you should install solar or not.
Solar Return on Investment Calculator: An Easy Way to Determine Your Payback
There are a ton of ways to make money with solar today. Thanks to a variety of structures you can participate in solar energy without having it on your roof.
Solar energy will always be location dependent. The return on investment that you make in California is likely a lot different than the return on investment in Wyoming.
Power prices are different geographically. Weather conditions vary geographically.
What has benefited consumers the most is that solar energy remains competitive with any asset class out there.
Types of Solar Financing Methods
There are a few different ways to install solar at your home or business. These are all different in financing structures and payback methods.
Solar Power Purchase Agreement (PPA)
This is where you pay nothing upfront for the system. This is completely financed by a third-party developer, lender or outside party.
You simply sign an agreement that suggests you will buy the output from the system at a predetermined price and term.
It’s a great option for power consumers as you have $0 upfront cost and you realize savings off your price of power.
The PPA usually includes a discounted rate of power lower than the rate you are currently paying. A PPA might be one of those solar buzzwords you’ve never heard of before.
A typical rate of savings is 10-20% off of your current energy bill.
Solar Lease Agreement
A solar lease agreement is somewhat similar to a Power Purchase Agreement (PPA). In addition, you will be able to start saving money on power with $0 of upfront costs. The difference is really that will generally have a shorter contract than a PPA (this varies of course).
You won’t own the system. You will essentially make payments as a lease instead of your current power prices.
Like a PPA, you will not get the benefit of tax depreciation, the investment tax credit or any applicable energy rebates.
Cash Purchase / Loan
A cash purchase is where you really need to do your math upfront. A cash purchase has benefits like using the investment tax credit and depreciation benefits of solar, but not everyone has the ability to buy solar panels with cash upfront or use a lender.
If you are grid-tied or participate in net metering, the power generated at your facility is placed as a credit to your energy bill. This enables you to dispatch power while you are not home and will help you save money right away.
If you have an off-grid system, you will likely need to consider purchasing a battery energy storage system to complement your solar panels.
Why? Solar only generates power while the sun shines. You generally don’t use a lot of energy when the sun is shining. You might not even be home. You will need to save that power to dispatch it at night.
If you go this route, consider these solar panel batteries for your system.
Download the Free Solar ROI Calculator for Excel
You can download our free solar ROI calculator to use in Microsoft Excel or Google Sheets. This will help you tweak your own assumptions to tailor to the above financing methods for solar.
It only takes 5 seconds to download.
How to Use the Free Solar Return on Investment Calculator in Excel
The calculator is very easy to use and is fully comprehensive enough to adjust your assumptions to find the most optimal solution.
Here are a few steps to use the solar ROI and payback calculator in Excel. First off, input your system size in the project details section of the inputs tab.
Input the revenue on that is assumed on the inputs tab of the project finance model for solar. You will want to input the PPA rate of power.
There are two core components of revenue: power prices and production.
There are sometimes additional incentives like solar renewable energy credits, but let’s disregard those for now.
- If you are using this to find your return on investment for a straight cash purchase of a solar panel and are eliminating your power consumption, you will want to input your current rate of power.
- If this is for net metering purposes, you will likely get a net metering contract that will have the rate and amount of production.
- If this a commercial install and you are the developer/installer, you will want to input the price of power that you will sell to your customer, which could be a commercial business or a utility.
For production, you will want to do some research for your area. Your capacity factor will determine how much production you will ultimately get.
The life of the project is generally viewed as 25-35 years.
For operating expenses, that’s the beauty of solar. You will likely have a lower capacity factor, which means the facility rarely is producing power.
At the same time, solar projects have very high availability meaning that they will not be out of power or offline. There is usually something severely wrong in this instance.
To run solar projects, you don’t need much. You just need to be on standby for any required fixes. This is where operations and maintenance expenses come in.
Think of a contractor that will come out and fix your project whenever it needs maintenance.
There are a few other key expenses that you should be aware of:
- Property Taxes / Leases: If you are using someone else land. If you own the rooftop of your own house, you likely don’t need won’t be paying a lease to yourself or pay property tax for your roof.
- Insurance: You should definitely have some form of insurance on the project and the corresponding value. This should help cover both your house, property and the project itself as well as any corresponding liability associated with it.
- Taxes: This is where solar projects get tricky. They offer some lucrative tax benefits. One is from the investment tax credit. The other is in the form of depreciation and the accelerated nature of the depreciating project value. You likely won’t have to pay taxes on the project for a while. When you do, ensure you have your proper tax rates input into the model.
There are a few other operating expenses that you will see in the model. If you have any question, please feel free to contact me. I will do my best to answer any questions relating to the model.
Project Installation Costs
Okay, the first two items were revenue and operating expenses, which are all income statement and cash flow related. In order to determine your return on investment and payback, you need to know what you are paying up front to install a project.
There are a handful of costs that you can use to in the buildup of your assumptions.
In order to maximize your return on investment, you need to build for the lowest cost and receive the maximum output.
Use the goal seek or solver function to solve to a pre-determined payback period of your liking relative to the project installation costs. This will help you get to a practical assumption.
Typical Solar Returns & Payback Periods
Generally speaking, the internal rate of returns for solar projects are anywhere from 6-10% with a payback period of 7-10 years. This is in the absence of renewable energy credits (RECs) or other statewide assumptions.
Also, this is a pretty wide range as power prices, regulatory regimes and energy markets vary significantly state by state.
Conclusion on Solar Payback Calculator
Our solar payback and ROI calculator will help you make conscious decisions about your switch to a more environmentally friendly way to consume power.
Finally, on the inputs tab, you will see both a pre-tax and after-tax calculation of the internal rate of return (IRR) on the investment of putting in solar.
This is a good summary that will help you understand the sensitivity as you change the various revenue, operating expenses and project installation costs.
Ready to get started? Download the model by clicking the button below.
Are you ready to start your solar power journey? Let us know in the comments below. We’d love to hear from you.