System Cost Payback Period & Return On Investment

System Cost Payback Period &
Return-On-Investment (ROI)

 

Trying to use the electricity output from a wind turbine or solar panels for a year to determine the per watt cost of electricity produced by the system will provide you with a meaningless number.  It would be no better than using 4 years and three months or 7.5 years, it would just be an arbitrary period to use for your computations.

Solar panels can last for 25, 30 or 35 years (or longer), but using the projected electricity production from the solar panels for 35 years to determine the per watt cost of electricity produced by the panels really isn’t meaningful either.

What you really want to know is how long is the payback period.  In other words, how long before you recoup your investment in a renewable energy system from the lower monthly utility bills.  Obviously, the more you pay per watt for electricity from your electricity provider and the less you pay for your renewable energy system the shorter the payback period will be. This is where government incentives for the purchase of renewable energy systems and smart financing choices can make a difference.  The more state and local incentives are available, and the lower the interest rate you obtain for financing, the shorter the payback period will be. The purchase of a renewable energy system is probably only reasonable if you monthly electric bill is at least $150 to $200, and you pay more than 10 cents per kWh.

As an illustrative example, say you spend $12,000 on solar panels that produce 5,000 kWh per year.  To further the example, let’s assume your electricity costs $0.12 per kWh so the 5,000 kWh would cost you $600 per year ($50 per month) to buy from the electricity provider.  Let’s also presume your electricity provider buys back your excess electricity production any time you have it – at the same rate that you pay to buy electricity from them.  This may be realistic since 44 states have some type of net metering law, which allows people or companies with renewable energy systems to sell the excess power they generate to their local electric provider – although perhaps not at the same rate.  Finally, let’s assume the cost of the electricity you buy from your electric provider will never increase, which is laughably unrealistic.  If the cost of electricity you buy from your provider increased, your effective payback period would decrease.

You’ve spent $12,000 and, if you can’t get any other incentives besides the federal tax credit of 30% of the purchase price, you would have $8,400 left to recoup.  Dividing the $8,400 by the $50 monthly savings equals a payback period of 168 months or 14 years.  If you paid cash, the approximate return-on-investment after the federal tax credit would be 7% per year ($600 / $8,400). 

If that seems like a fairly lengthy payback period, consider a couple of other things:

1. What is the payback period of a kitchen remodel or for a swimming pool?  The answer is never, because those improvements won’t generate any money from cost savings.  But people still make those improvements for the benefits and enjoyment they get from a kitchen remodel or a swimming pool.  But you can definitely get benefits and enjoyment from generating your own electricity, reducing your monthly electricity bills and becoming more energy independent.

2. A renewable energy system should increase the value of your house just like a kitchen remodel or other improvement.  So if you sell the house before you have recouped all your investment, you’ll hopefully be able to recoup the rest (or possibly more) through a higher sales price.

About the Author

Mark H. Witte is a strong proponent for energy efficiency and renewable energy, and believes individuals should have more control over how the energy for their homes is produced.