The Economics of Renewable Energy or ‘Why Go Solar?’
Whenever a purchase is made to lower operating costs, the question about payback will always arise. As consumers, those investing in solar systems to offset their electricity costs want to know: how long will the savings created by a solar system add up to equal its cost?
The classic method for calculating simple payback is to divide the annual savings into the initial price to calculate the number of years to payback the original expense of the solar system. If a solar system costs $10,000 and is saving $2,000 per year, the payback period is five years ($10,000 divided by $2,000). Meaning it will take five years for the solar system to pay for itself.
When a CD, stock or bond is purchased, the annual return that this instrument provides is stated in terms of a percentage. For instance, if $1,000 is placed in an account that yields $50 a year, the yield or annual return is five percent (.05 x 1000 = 50). If the yield is taxable, then the actual return (or net return) will be even less. For example, an annual return of 5% that is taxed can produce an actual return of less than 3%
The safety or security of an investment can also affect the yield. Usually, the deposits in a large bank in a certificate of deposit produce the lowest return because they are so safe and secure. Risky instruments, like junk bonds or penny stocks, can produce spectacular results. However, since you could lose everything your entire investment is at risk.
When a solar system generates savings for a homeowner its yield is not taxable. Typically, a solar system will provide a ten to fifteen percent return per year. More specifically, a ten percent yield from solar equals at least fifteen percent before taxes. You would be hard-pressed to find a ten percent annual after tax yield on an investment in today’s economy that is as safe and secure as solar.
In fact, it is now possible to borrow at five to six percent to make an investment in solar that yields more than ten percent annual return. If you were to choose a home improvement loan to fund your solar installation, then the interest is deductible and the real cost of the system is even less. Today’s interest rates are low enough that the savings created by solar payments are actually more than the payments of a solar loan — meaning you save even more money.
However, there is a big difference between placing the same money into a stock, bond or CD and going solar to avoid a high utility expense. While the traditional avenues of investment are available to us as options, we really have no choice about our utility bills. Unless we choose to live in cold, dark homes, we must keep paying that monthly energy charge and we will never receive any payback on our payments. Therefore, the choice to go solar is more about how you are going to spend your money rather than whether or not the payback is less than five years. It is similar to the rationale behind making a home purchase rather than renting one. Home ownership is all about developing equity and retaining value while renting is just a permanent never-ending expense.
When you own a solar energy system, you are no longer renting energy from the utility; you are generating energy yourself and developing equity by putting your savings to use elsewhere. Compare how well your money is working for you, and then compare it to an investment in solar energy. You will then understand how great an investment solar energy can be for you.
Solar electricity generated on site is clean and it recycles dollars in the local economy instead of buying and burning irreplaceable fossil fuel. It also helps our utilities by providing energy when it’s most needed, during the summer. The economics of the decision to go solar should really be viewed in the same light as you would view any other investment, by its annual return on yield.
For more information, please visit http://solarexpert.com/solar-rebates/
- Patrick Redgate C.E.O. Ameco Solar