Paybacks on solar systems vary depending on several different circumstances. We look at a solar system as an income producing asset, and as such you have the cost and the income to consider. So if we look at the considerations that affect the cost and the considerations that affect the income, we will have a good idea why some solar systems pay back sooner than others. The formula is simply (Net cost after tax incentives) divided by (Income from solar system per year) = Payback in years. So, why do some solar systems pay off faster than others?
First let’s consider the costs. Some components cost more than others that do approximately the same job. Imported components cost less in most circumstances. A large system will cost less per DC Watt (a measure of capacity of a system) than a small system for all the obvious reasons. Some contractors charge more than others, and some geographic areas cost more than others for reasons we are all aware of that are beyond the scope of this article. Another factor in costs is where the system is installed. The lowest cost may be a large ground mounted system, but not if the cost of the land is taken into account. The roof mounted system would be next lowest and a system on a carport would be the most expensive. There are variations in each of these that also affect costs, but to a lesser degree. We can go over these cost differences with you.
The second consideration would be the income. PG&E has the highest rates in this region, and therefore by generating electricity that offsets these high rates, you have a high income. SMUD has low rates which therefore decreases the income from a given generating capacity. There are also several components of rates. One is the usage portion, measured in kiloWatt hours, or kWh (look on your bill and you will see this). Another portion is the demand rate, which is measured in kiloWatts, or kW. A third is the monthly meter charge. With the existing regulations controlling grid connected solar systems, which this article is talking about, a solar system’s output can only offset the usage charges. The monthly meter charges and demand charges are not offset no matter how large the solar system is. (A solar system can reduce a building’s demand amount in some situations which therefore reduces the demand charge on a bill, but any remaining will need to be paid every month.)
A third consideration would be items included with a solar system. If a new roof is installed at the same time as the solar system, and included in the financing, you might think this cost should be included in the calculation, so this would extend the payback. You might think adding energy saving upgrades would also be an additional cost that may extend the payback, but in many cases the payback on these energy saving products such as LED lighting is as little as a year, so this would actually decrease the payback, which is always our goal. That is why we always install LED lighting with every solar system.
Solar systems benefit from a 30% federal income tax credit (ITC). This is set to sunset at the end of 2019. This will have a large effect on the payback because the net cost will be increased by the amount the ITC is reduced each year until it is completely gone.
That is why a roof mounted system in PG&E territory with an LED upgrade can pay off in as little as two years, while a system that has a lot of carports in SMUD territory can take as long as 4 years to pay off. In either case, it is either a 40% return on investment (ROI) or a 25% ROI, and either one is good considering there is literally no maintenance required and the warranties are as long as 25 years.