Solar energy systems hang their hats on payback. Financial payback is as tangible as money in your bank account, while other types of payback—like environmental externalities—are not usually calculated in dollars. There’s no doubt that photovoltaic (PV) and solar hot water (SHW) systems will pay you back. Maybe not as quickly as you’d like, but all systems will significantly offset their cost over their lifetimes. Here we’ll try to answer: Which system will give the quickest return on investment (ROI)?
Financially, solar pool heaters and off-grid PV systems have the quickest payback of all home-scale solar energy. Solar pool heaters pay back in three to ten years. Off-grid PV systems can have an immediate ROI if they eliminate the need for costly utility-line extensions. However, not everyone uses those kinds of systems. Most U.S. homes have utility-generated electricity and are without swimming pools. The two most common solar energy systems are utility grid-tied PV and domestic SHW. These systems can reduce your utility bills and cut your carbon footprint. Let’s take a closer look at the economics of the two technologies.
No subsidies or incentives have been factored into these payback scenarios—the paybacks are based on simple rates of return and are used to show the relative value of each technology based on its estimated cost and energy production. The scenarios do not include system maintenance, although some maintenance will probably be required over the life of each. The payback periods will vary with location depending upon the climate, the cost of utility-generated electricity, and installation costs.
ROI calculations can be much more complex than the simple methods used here. We left out the future value of the initial investment and the tax-free nature of solar returns and just tried to keep this as simple as possible. Our methodology concentrates on the comparison of grid-connected PV and SHW systems. Information similar to return on investment is an integral part of information given to policy makers to support the need for incentives to offset the initial cost of the solar energy systems. Quicker payback periods that are incentive-driven through local rebates and tax credits have resulted in big increases in market penetration. Without dramatically higher utility rates and/or more attractive incentives, solar energy systems in most of the United States will have a tough time being installed on the basis of economic payback alone.
First, we’ll look at a simple solar heating system payback. The installed cost of a two-collector direct forced-circulation antifreeze system with an 80-gallon tank is typically between $8,000 and $9,000. In Richmond, Virginia, this system will produce an estimated 3,100 KWH per year (equivalent to about 10.6 million Btu), according to the Solar Rating and Certification Corporation (SRCC). Richmond, with an average of 4.8 peak sun-hours per day, has a moderate climate and is near the U.S. average for payback times (see table). The SRCC publishes estimated production data for many other cities on their Web site (see Access).
In Hawaii and the southern part of each state that borders Mexico or the Gulf, the climate is mild enough to allow lower-cost SHW systems. Integral collector storage (ICS), thermosyphon, and direct forced-circulation systems are also used in these climates. The installation cost of these systems can be thousands of dollars less than the example two-collector SHW system, dropping payback length by 10% to 30%.
Now let’s look at a simple PV payback scenario based on a 2 KW, batteryless grid-tied system. The estimated installed cost of this system is between $16,000 and $20,000 ($8 to $10 per watt). Calculating system KWH production is done slightly differently for PV systems than for SHW systems, but both methods arrive at the average expected KWH production. This example system is also located in Richmond, Virginia, again at 4.8 average peak sun-hours per day. Average peak sun-hour values account for cloudy days, so we can simply assume that 4.8 hours per day of full sun is received every day of the year. We also multiply by a 0.70 derating factor to account for inefficiencies due to temperature, inverting, module production tolerance, wiring losses, and module soiling. This system can produce an average of 6.72 KWH per day (2 KW x 4.8 sun-hours x 0.70 derating) and 2,453 KWH per year. Plugging this estimated output into different electricity costs gives us the info for the PV Payback table.
To verify the estimated PV KWH energy production figures, we can use PVWatts, an online PV energy estimation program supplied by NREL (National Renewable Energy Lab, see Access).
This easy-to-use program allows us to select our site (Richmond, VA) and enter the 2 KW system size to calculate energy production data on a monthly and yearly basis. In this case, PVWatts estimates average AC energy production to be 2,532 KWH per year. Our estimation of 2,453 KWH per year is within 3% of the PVWatts estimation. You can use this calculator to find energy production values for other PV system sizes in other cities and states.
Looking at the solar payback tables, we can see that the sample solar hot water system’s payback is about 2 1/2 times faster than our sample grid-tied PV system. Of course our estimations assume no available incentives, so actual payback times will depend heavily on available solar rebates and tax credits (see “Solar Assistance” sidebar). Also check out the incredibly fast payback times of the energy-efficiency upgrade example (in the “Efficiency Pays” sidebar), where we see full financial payback in months, rather than years.
NREL also has payback maps for SHW and PV systems. These maps illustrate how payback times vary for different locations across the United States. Although the NREL payback maps are a little outdated with 2004 data, they are still worth a look. The fine print states that the grid-tied PV systems have an installed cost of $10 per watt—a reasonable figure, but perhaps a little high. The SHW map assumes a cost of $900 per square meter (about 10 square feet) and 40% efficiency. This cost is too low for the pump-driven 80-gallon example system (according to NREL estimates, our $8,000 to $9,000 system would only cost $6,000). The rise in copper prices in the last four years is probably a factor in this discrepancy. Even with this cost difference, the maps are an eye-opener for how the two types of systems pay back their owners. What the maps don’t show is the current trends of lower PV installation costs and higher SHW material prices—which are somewhat narrowing the previously wide gap in the respective payback times.
While these simple payback calculations are important to the pocketbook, the primary motivator for many is not which investments will yield the fastest payback, but rather how can they produce renewable, clean electricity or hot water. The reduction of pollutants such as carbon dioxide (CO2), sulfur dioxide (SO2) and nitrogen oxides (NOx), as a result of replacing “average” U.S. utility energy—which includes hydroelectricity, nuclear, oil- and coal-based generation—with renewables or efficiency measures is shown in the “Pollutant Savings” table. Note that emissions from strictly coal-based electricity, which accounts for about 50% of all electricity generation in the United States, will be higher.
All these examples substantially reduce greenhouse gas emissions and air pollutants while they are paying back the up-front cost—and will continue to produce pollution-free energy (or reduce pollutants, in the case of the energy-efficiency upgrade) after they have achieved financial payback.
While many utilities sell electricity at affordable rates, inflation as well as energy price history and forecasts indicate price increases in our future, which will make RE systems’ payback even quicker. Historical data reported by the Edison Electric Institute shows that from 1929 to 2005, the average annual price increase for electricity has been 2.94% per year. And according to the Energy Information Administration June 2008 Short Term Energy Outlook, utility rates are projected to increase by an average of 3.7% in 2008 and by another 3.6% in 2009.
Note also that we are figuring payback times on utility rates based on conventional energy production, which does not account for “externalities.” If consumers had to pay for the true price of conventional energy (coal, natural gas, fuel oil, and nuclear) without the benefit of hidden subsidies and unaccounted-for environmental and military costs (see “Leveling the Playing Field” sidebar), payback times for solar would decrease dramatically.
Solar Thermal Editor Chuck Marken is a New Mexico-licensed plumber, electrician, and heating and air conditioning contractor. He has been installing and servicing solar thermal systems since 1979. Chuck is a part-time instructor for Solar Energy International and the University of New Mexico.
Justine Sanchez is a NABCEP-certified PV installer, Home Power technical editor, and Solar Energy International instructor. Justine lives, works, and teaches from an on-grid PV-powered home in Paonia, Colorado. And while her PV system will not reach the financial payback milestone for another 44 years (at the local utility rate of $0.09 per KWH), she couldn’t care less—it has negated 8,769 pounds of CO2 in its 24 months of operation.
SRCC • www.solar-rating.org
NREL’s PVWatts • http://rredc.nrel.gov/solar/codes_algs/PVWATTS/