These days, the words “safe investment” mean treasury bonds or CDs paying a meager few percent. On the other hand, with government incentives and income from Renewable Energy Credits, your investment in a renewable energy system can give you double-digit annual returns!
So how do you evaluate an investment in a solar PV system? How do you know when “the economics make sense”?
The Classic Economics Approach
The classic economics approach to evaluating investments is Net Present Value or net cash flow over the life of system. We’re glad to discuss your investment in these terms, but most people talk in terms of “payback” or return on investment. [ Interested in a commercial application? Click here: “We Speak CFO”. ] [ link ]
Keep in mind that economists see “payback” as more complex than taking cost savings and calculating how many years it takes for cost savings to equal outlay, but we’ll keep it simple here.
Another classic approach to assessing an investment is internal rate of return, or IRR. This variation on net present value basically assesses the return on and return of your capital over the course of your investment.
Paybacks as Fast as 4 Years and ROIs Over 20%
When you receive a proposal from Switch, we will clearly lay out these numbers for your specific situation, just as we do her. Here’s how incentives work for customers who bought a system that will generate [ insert chart here ]
The economics even make sense if you take out a home equity loan to fund your system. We can run the numbers for you.
Our calculations include a conservative percentage increase in annual electrical rates for your specific location. (For example, we use 7% for the District, which is less than the average increase over the last 15 years.)
Our calculations do not include:
- Increases in savings you can expect after the payback period as electrical rates continue to climb (Experts predict increases of 5% to 10% annually for the next decade.)
- Potential increases in the value of your system (As the price of electricity goes up, the value of a system that generates electricity will go up.)
- Potential increases in the value of your home [ See Why Solar is a Great Home Improvement. ] [ link ]
- Assumptions about the value of RECs at the end of the 5-year contract (We believe cap and trade, increasing energy demand in China and India, and a recovering economy will increase the value of RECs. Others believe that as renewable energy becomes more common, the value of RECs will decrease.)
In the District and in Maryland, local incentives [ link to Incentives page ], RECs [ link to REC page ], and higher electrical rates combine to make solar an excellent investment. In Virginia, where incentives, RECs, and electrical rates are lower, solar is a safe investment, but with a longer payback period.