# Money Matters: Page 3 of 3

Does an RE System Make Economic Sense?
Beginner

## Method 2: Estimate of Return on Investment

Another fairly simple method that can be used to analyze the relative value of a PV or wind system is known as simple return on investment (ROI)—the savings generated by installing a renewable energy system expressed as a percentage of the cost.

Simple ROI is calculated by dividing the RE system’s cost into the value of one year’s worth of utility energy that the system offset.

For instance, a PV system that produces 5,000 kWh of electricity per year at the utility’s rate of 9.5 cents per kWh generates \$475 worth of electricity each year. If the system net cost is \$10,710, the simple ROI is 4.4% (\$475 / \$10,710 = 0.044). If the utility charges 15 cents per kWh, the 5,000 kWh of electricity would be worth \$750 and the simple ROI would be 7.0% (\$750 / \$10,710 = 0.070). Compare this to the March 2009 yields for 30-year treasury bonds at about 3.5%. Even in good economic times, these are respectable ROIs.

### Variables

Simple ROI does not take into account interest payments on loans required to purchase the system or lost income opportunity if the system is paid for in cash. It also fails to consider the costs of maintenance, insurance, or property taxes. All of these factors decrease ROI.

This method also does not account for the gains on the other side of the ledger—the rising cost of electricity, for example. It also doesn’t consider that money saved on the utility bill represents tax-free income, it does not factor in possible income tax benefits for businesses, such as accelerated depreciation, and it does not factor in increased home values. All these factors increase the value of the investment.

Despite these shortcomings, simple ROI is a convenient tool for evaluating the economic performance of an RE system.

## Method 3: Comparing Discounted Costs

Discounting is a more sophisticated method that considers numerous economic factors, such as maintenance costs, the rising cost of grid power, and the time value of money. This last measure takes into account that a dollar today has more spending power than a dollar tomorrow or any time in the future. Economists calculate this loss of value by applying a discount factor, which represents inflation and opportunity cost: the cost of lost economic opportunities by pursuing one investment path over another. An example is investing your money in a PV system instead of investing your money in the stock market.

This economic analysis can be performed by a spreadsheet like the one that was used to create the “Discount” table. You can download an active spreadsheet to do your own calculations from the Web Extras section at www.homepower.com. For simplicity, choose as your discount factor the highest interest rate on any debt you have, including your mortgage. If you have no debt, choose the highest investment interest rate you can get with a low-risk profile (which reflects the investment “risk” in an RE system). A 10-year government bond is a good choice; it currently yields almost 3%.

The first column under “Utility Electricity” projects the cost of utility electricity at an annual increase of 4.4%. Its adjacent column is the discounted cost of electricity from the utility—which takes into account inflation’s effects on the rising cost of electricity. It reflects the value of the money you’d spend over a 30-year period in present-day dollars. As you can see, although you will have shelled out \$28,492 to the utility company, the present value of that money is only \$16,942.

The first column under “PV System” shows what system costs were incurred over the years—\$27,200 minus incentives, or \$10,710 to start. At 20 years, we added a \$3,200 expense to replace the inverter—a commonly predicted cost. If you have additional costs, like a maintenance contract, you would add that cost into that column for each year. In this case, over a 30-year period, you will have invested \$13,910 in your system (in present dollars). The last column shows the PV system’s discounted cost, the present value of your expenditure, factoring in the discount factor of 3%.

The final step is to compare the discounted cost of the system (\$12,482) to the discounted cost of electricity from the utility (\$16,942). In this example, the present cost of the PV system is \$4,460 less than the present cost of utility electricity.

If an RE system is cheaper than buying electricity, it makes economic sense. If it costs more, it doesn’t. The greater the difference in the cost of the two systems, the more compelling the economic argument to install.

## Do the Math, Make Your Decision

Comparisons based on the costs of energy, ROI, or net present value are vital to making a rational decision about an RE system. Beyond the measure of money, there are a multitude of other logical reasons to invest in a system, such as energy security, a cleaner environment, the satisfaction of producing your energy locally, and adding green energy to the grid. The bottom line is that the decision is yours, no matter what metric you use.

## Access

Dan Chiras is the founder and director of The Evergreen Institute, which offers workshops in residential solar electricity, wind, passive solar design, home energy efficiency, and green building at the Center for Renewable Energy and Green Building in east-central Missouri (www.evergreeninstitute.org).

John Richter is the cofounder of the Institute for Sustainable Energy Education and former president of the Great Lakes RE Association (www.glrea.org). He was featured on the PBS special, Michigan at Risk: Michigan’s Green Energy Economy.