Payback Time & Return On Investment for Renewables

By Cindy Rohaly 

No matter your reason for installing solar panels or a microgrid (environmental, financial, or energy independence) it is a long-term financial decision at the end of the day. Determining how “smart” a solar purchase would be can be calculated in a few different ways.

The simplest equation you can use to calculate the payback period is the following:

Cost ÷ Annual Savings = Payback period in years

 This is commonly used for residential installs, where clients are more interested in when the cost savings begin. You will need the total cost (or estimated cost) of the solar project. The other value for simple payback is the annual savings which is the amount that you would have spent on electricity without solar panels.  In most cases, this simple equation does not consider all the major components that truly affect payback and the return on a renewable energy investment.

Some other items that should be considered to get a more accurate idea if the investment is a wise one for a business, farm or home should include:

    • Energy inflation
    • Energy Rate Structure
    • Demand Charges
    • Time of Use Billing
    • Upcoming changes in your usage patterns
    • Financing
    • Incentive and Grant opportunities

Energy inflation is an estimate of how quickly energy rates are going up or down. Places like Purdue University and the U.S. government will conduct studies to see what utility inflation looks like historically and use that as a predictor of future energy costs. Currently, expected energy inflation sits at 4.0%, coming down since January of 2023 from 4.9%.

https://tradingeconomics.com/united-states/energy-inflation

Your energy rate structure can be found on your utility bill. Rates for businesses and farms can often include hidden costs if the property is a high energy consumer.  Among those hidden costs are demand charges. If you have demand charges showing up on your bill the utility is constantly monitoring your usage and creating interval data.  They then use your highest consumption point in the billing cycle and use that number to determine demand charges for the month.  This is often at a rate of 2 to 10 times your normal rate and rapidly increases your utility bills. The utilization of a solar-plus-storage microgrid can help lower these costs quite effectively!

Time of use charges are similar in that at certain hours of the day, electricity comes with a higher price tag. If you are using battery storage and solar together, you can program the renewable system to provide your power rather than the utility during those hours.  Again, this lowers electricity costs dramatically and needs to be considered when viewing the financial wisdom of a system.

Financing, of course, can add years onto a payback calculation. Grants and incentives can do just the opposite and help a project pencil.  Check out our previous blog on incentives to get more details that could help with projects you might be considering.

Even if you are convinced that the best reason to buy solar panels or invest in a microgrid is to help save the planet, it’s still important to understand the financial investment being made. Renewable systems are designed to the needs of each individual or company, leaving the opportunity to balance your budget. Reputable installers and designers should be able to help you determine your payback period when you provide utility information.