Ideal Return on Investment (ROI) or Payback Time Interval for Solar

[lemonsocal]

What do you think is the ideal return on investment (ROI) or payback time interval for solar installation?

I realize that this is personal with unique systems / situations (i.e., factors in how long you expect to live at your current home), and also depends on your philosophy for going solar.

To me:
An ROI of <5 years seems very reasonable.
An ROI of >15 years seems too uncertain and prohibitively high (despite warranties of even 25 years).
However this is a big range.

What is your personal "sweet spot"?

For my calculations of ROI, I simply divide the cost of the system (after tax credit) by my annual electricity bill for the past year.
For a $20,000 system (after tax credit) / $2500 current annual bill = 8 year return on investment.
This assumes the same energy usage and stable POCO energy charges (do POCO costs rise much more than inflation?).
How inaccurate is this estimation?

Also things I am considering: expiring federal tax credit and changing net metering rules (in Southern California) this year, and evolving technologies over the next 5-10 years. I would like to jump on the solar band wagon, but it's harder for me to sell an intangible, large investment to the wife, especially when the ROI is >6 years.

Can anyone see the future?

[organic farmer]

Every system is unique. I am on Solar-Power without net-metering. So the PoCo here has no bearing on what I do, other than providing grid power that I can use as an 'Aux Input' to my E-panel.

I am also on a farm. We depreciate our Solar-Power system. Along with federal tax credits and state tax credits, do not forget that you may be able to depreciate the expense as well.

[sensij]

Can anyone see the future?

I can't see the future, but there aren't many systems sold today that are able to recover their costs faster than 6 years. You can include in your analysis that your post-solar electric bill won't actually be zero, there are other ways you could spend your money that would generate a return, and PoCo rates do move around, sometimes up, sometimes down, but roughly following inflation is a reasonable starting point. The end result is probably still the same, something like 5-15 years to recover the costs. Shopping hard for the system helps, as does some degree of certainty about staying in your current residence.

As an SCE customer, you will probably have until July 1, 2017 to install a system under NEM 1.0. I just moved into a new home in SDG&E territory, missed NEM 1.0 at this point but NEM 1.1 isn't really that bad. The next big deadline is 2019, when the federal tax credit is due to start rolling off and the CA CPUC will be revisiting net metering again.

Taking time to save up and pay cash is a big deal, if going solar now means you need to finance then I would suggest you wait.

[FFE]

It depends on your definition of ROI. In my case, I chose to finance 100%. If I ever move I will probably rent out the house and be able to recover some of the cost by increased rent or can get it moved to a new house I purchase. Because of the financing my ROI was instantaneous. I am saving money every month.

If I look at ROI as when the cost of electricity at current rates (I believe they most likely will increase) equals the cost of the system and don't include lost opportunity for the investment and inflation it is a different picture. I have moderate to severe shading issues so my ROI would be 15 years.

If I ever sell the house I am the kind of stubborn person that would wait till I get the proper offer that would include the value of the array. So do I include $1.00/watt as installed value?

So, what is my ROI? If I look at short term and very long term cost/opportunity for me it was a no brainier. I started reaping the benefits as soon as I flipped the switch.

However I advised my dad against getting solar where he lives (Tucson) because the short term and long term savings were almost zero. I didn't think it made sense to risk such a large chunk of change when the future is uncertain there too.

[sensij]

It depends on your definition of ROI. In my case, I chose to finance 100%. If I ever move I will probably rent out the house and be able to recover some of the cost by increased rent or can get it moved to a new house I purchase. Because of the financing my ROI was instantaneous. I am saving money every month.
.

This may be true, but it is worth mentioning that you incur some risk in this scenario. It is fine to say that you will pass costs on to a renter or a potential buyer (who would need to at least pay off whatever loan is left to make you whole), but even though your monthly payment *now* is less than it had been, you are obligated to pay for the system even if you don't end up actually reaping the expected benefits. If you have a 12 year loan but end up moving after 6, the ROI may not be as you might have projected it today.

Some may be more comfortable with that risk than others, but it is very easy to focus on the monthly payment and forget the overall debt obligation.

[FFE]

Excellent point. I guess I am getting tired of everyone obsessed with ROI. I would love for there to be a requirement for anyone posting about the ROI on a solar array also post their ROI on the last three vehicles they purchased. Most people don't think twice about spending more for a car than a power generation system.

[sensij]

I won't dive into comparisons between cars and PV systems, but do agree the focus on ROI can be misleading. Over the useful life of the system, there is too much uncertainty in what the future will bring to make any really confident statements about what a system will be worth financially. I feel much more confident recommending that the risks and potential benefits be weighed, and to err on the side of smaller / less expensive, all else being equal.

[organic farmer]

IRS says to depreciate solar systems over 7 years. The simplest method is straight-line. A $20,000 system you write-off $20,000 on the first year. Then on the second year you start your depreciation write-off at 1/7 of that amount [$2,857.14]. You continue to depreciate at $2,857.41 every year for seven years. After the seventh year of depreciation, there is no further tax benefit from having solar power.

[sensij]

IRS says to depreciate solar systems over 7 years. The simplest method is straight-line. A $20,000 system you write-off $20,000 on the first year. Then on the second year you start your depreciation write-off at 1/7 of that amount [$2,857.14]. You continue to depreciate at $2,857.41 every year for seven years. After the seventh year of depreciation, there is no further tax benefit from having solar power.

Residential systems can not generally be written off as you do. For most, there is no tax benefit beyond the 30% federal ITC.

This isn't really the place to discuss it, but I think your tax advice has some serious flaws. In straight-line depreciation, you don't get to write the whole expense off in year 1 and then also the fractional depreciation each subsequent year. That would result in writing off double the amount you paid.

[cebury]

Beat me to it SensiJ.

[organic farmer]

I may have to check, but I think I said something like: "I am also on a farm. We depreciate our Solar-Power system. Along with federal tax credits and state tax credits, do not forget that you may be able to depreciate the expense as well."

Or something really close to that. That should be close to what I said since I did a cut&paste.

Our residence is a farm, we did write-off the installation and we are depreciating the system as the IRS specifies.

Check with an accountant. We hired an accountant just to make sure we did it the right way. Make sure you run your plans by an accountant.

[huge]

I think your calculations of ROI is a little flawed. You have to calculate how much money you anticipate saving and compare it to the cost of the system. The savings usually are not simply 100% of your current yearly electric bill. It is not a huge difference, but it will probably change it by 1-2 years

[lemonsocal]

I think your calculations of ROI is a little flawed. You have to calculate how much money you anticipate saving and compare it to the cost of the system. The savings usually are not simply 100% of your current yearly electric bill. It is not a huge difference, but it will probably change it by 1-2 years

I am interested in what additional factors account for additional savings--the increases in POCO charges? I think they do seem to increase more than inflation.

Senjsij, organic farmer, ffe: thanks for your comments. I can understand that an obsession with ROI is an oversimplification of a decision to go solar. I just needed a reality check to know if I was in a reasonable range.

[huge]

Good point. Maybe minimum charges from power company. Also, panel degradation.
Maybe it's good to use your calculations but just add a year to account for the minor details just to be safe

[UkiwiS]

I created this to calculate the IRR for my system.
I'm not an accountant and perhaps it's flawed but feel free to copy and play with it or edit it.
My bill was approx $200 per month so the green column is what I used.

https://goo.gl/zGy9dB

[huge]

Impressive