Using today's dollars: if we very conservatively assume your system will be worth $0 after 20 years (which it likely won't but certainly won't be worth $12k) then your $12k investment would net you $66k over that time period or an annualized rate of return (ARR) of ([$66k - $12k] / $12k / 20) = 22.5% ARR. That's very good, in my area where electricity is very inexpensive and tax incentives are generous the ARR is typically ~10%.
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Years to breakeven..? PA Solar worth it?
- Thread starter SabrToothSqrl
- Start date
Using today's dollars: if we very conservatively assume your system will be worth $0 after 20 years (which it likely won't but certainly won't be worth $12k) then your $12k investment would net you $66k over that time period or an annualized rate of return (ARR) of ([$66k - $12k] / $12k / 20) = 22.5% ARR. That's very good, in my area where electricity is very inexpensive and tax incentives are generous the ARR is typically ~10%.
The ironic thing is as PG&E raises their rates, the ROI only gets better and better. How sad is that?
Actually, that is my conceptual beef. If you calculate "break even" and then say, even if its worth $0 in 3.7 years, 5.4 years or 7 years or whatever its provided exactly no return at all.
The system is not going to be worth zero at any point, so that's why I think the 20 year warranty period is realistic. Depreciation is not really applicable, because remember, a typcial depreciable asset, like say, a building, not only is calculated based on replacement cost, but actually has to be replaced. Anyone can always decide to simply go back to the grid, and leave all the panels to gather dust.
So I am just saying its easier to calculate 20 year cost of system v. 20 year cost by paying the utility then it is to calculate some number of years "as if" you were still paying the utility followed by some additional number of years at zero cost. During the "payback" period the system is providing no return (under that assumption) and then during the years after its "paid off" (it may not really be, in fact, paid off, depending on how it was paid for) its providing free electricity.
Its the difference between trying to figure out whether to buy a deferred annuity or whether to buy a bond. Both values can be calculated but the bond is more straightforward. Plus, payments to the utility are regular, and required.
I understand it conceptually ---- its really saying that for the next whatever number of years I am no worse off than doing nothing and then after that I am really kicking ass.
Why not? It seems like they serve the same purpose.
I can finance a project with a loan from a 3rd party; then the external interest rate is the cost of funds. Or my investment self could lend the money to my project self by liquidating some investments (or using cash on hand that is due to be allocated). If my investment self charges my project self an interest rate that matches the marginal investment return on the funds so allocated (the opportunity cost of capital), then my investment self is indifferent (possibly after adjusting for risk). So when internally financed, the cost of funds is the opportunity cost of capital.
Cheers, Wayne
If you want to separate your personas you still have to consider both opportunity cost of capital and cost of funds for both personas.
Your "investment self" has no cost of funds because it is not borrowing. The opportunity cost is potentially what they would have made staying in current investments.
Your "project self" has cost of funds at whatever rate your "investment self" charges AND has opportunity cost because those borrowed funds could have been invested elsewhere.
In the end thinking about it like this is silly because whatever your "investment self" charges your "project self" will wash out, which is why your cost of funds is actually 0 and your opportunity cost of capital is the only thing to look at.
Similarly, in your first example you still need to consider opportunity cost. It will cost you some rate to borrow (cost of funds) AND you miss out on investing those funds somewhere else (opportunity cost of capital).
I disagree a bit on the first part - it's very possible that a PV system will be "worth" $0 and potentially a liability if it needs to be removed or they break. It's like saying a car doesn't really depreciate because it doesn't really ever have to be replaced since you can simply walk everywhere. Similarly a car that has little to no value that cannot move on its own is now a liability since you'd have to pay someone to remove and dispose of it. Happens all the time.
Certainly agree it's easier to set a timeframe and run out the payback math that way.
Just to show why both ways are valid. My system was $43,000 net after incentives. It will produce my annual usage of 27,000 kwh per year, which, if I pay the utility, will cost me 25 cents per kwh all in after taxes and city fees, for about $6750 per year.
I can say the system will "pay for itself" in 6.37 years, which is the $43k divided by what I would pay per year not counting any increases.
Or, I can say instead of spending an average of $562 per month minimum for the next twenty years, I can pay $355 per month. And, have back up, and have a hedge against future increases. And have the intangibles.
In either case I don't project beyond the warranty period but obviously if you spread the cost over 25 years or 30 years the economic benefit is more.
Just like the economic benefit is more if the utility raises rates in the meantime.
I guess I just like the idea of saving money in month one as opposed to year six, month five.
Just to show why both ways are valid. My system was $43,000 net after incentives. It will produce my annual usage of 27,000 kwh per year, which, if I pay the utility, will cost me 25 cents per kwh all in after taxes and city fees, for about $6750 per year.
I can say the system will "pay for itself" in 6.37 years, which is the $43k divided by what I would pay per year not counting any increases.
Or, I can say instead of spending an average of $562 per month minimum for the next twenty years, I can pay $355 per month. And, have back up, and have a hedge against future increases. And have the intangibles.
In either case I don't project beyond the warranty period but obviously if you spread the cost over 25 years or 30 years the economic benefit is more.
Just like the economic benefit is more if the utility raises rates in the meantime.
I guess I just like the idea of saving money in month one as opposed to year six, month five.
For sure, a pay-for-itself is a very valid way of looking at it, too. It's a pretty good approximation given how simple the approach is, in fact it's how I did the comparative math for the different bids I received from different local installers. I just was hoping to explain that there are other tangible factors that are omitted with this analysis. Clearly your system won't be worth $0 after 6.37 years but on the other hand it's ignoring the risk free rate of return on your initial outlay of $43k minus incentives. The former works in your favor, the latter against you.
Just like you mentioned the intangibles, locking in rates now and maybe things like being "carbon neutral", are important but tough (sometimes impossible) to quantify.
Personally I like the wholistic picture, which means trying to predict depreciation and what the opportunity cost is.
One probably should include the cost to replace the inverter(s) at least once if you're calculating out 20+ years (and enphase microinverters have only been around for a little over 12 years so lets see how long they last)... And of course there are other reasons for getting solar besides making money (and I'd say the tax breaks and SRECs really aren't designed to make you money per se): it's environmentally friendly (certainly if the panels last 30 years and you can recycle the panels) and it provides some power independence when coupled with batteries.
For me the real question is will my energy consumption be higher or lower 20 years from now?
For me the real question is will my energy consumption be higher or lower 20 years from now?
OK, you make a good point that it's worth paying attention to the difference between the two. I was assuming a simplified model where the two are basically equal, but that's probably rarely the case.
In any event, in evaluating whether to pursue a project, one needs to compare it to the the alternative, and if when funding the project with cash, the alternative for the cash shouldn't be "stick it under the mattress."
Cheers, Wayne
Great point.
Absolutely - there's a risk aspect to any investment a good place to start is the risk free rate of return, which for T-bills these days is pretty much the same as stuffing it in a mattress
If you would only count the risk free rate of return there's a 50 basis point spread so you are still making a half point on a large number. However, the DOW has returned nearly 10% when adjusted for corporate actions (splits, mergers, dividends) since inception. Now over any short time period it can be a huge loser or a huge winner but over a large sample it will be mean revert and get back near it's 10%.Great point.
Absolutely - there's a risk aspect to any investment a good place to start is the risk free rate of return, which for T-bills these days is pretty much the same as stuffing it in a mattress
However, back to original comment if the 10 year on the run treasury is 149 bps and the loan is 99 bps you are tossing 50 bps on 30-50,000 bucks.
FWIW, and for purposes of accuracy, the system could have a negative value in 20 years (or earlier) if you need to re-roof. It doesn’t change the fact that it is a good investment, but it is $200/panel for removal and disposal in my area.
Correct - lots of potential scenarios where a PV system is actually a liability, I mentioned something similar in post #25.
yes, in my case my original PV PTO was late 2015 and i ended up on EV until june 2021, so i got a few more months beyond the 5 years. i just couldn't remember the july 31 2017 date off the top of my head so i was a little vague.
in my case the powerwalls are saving me from a much longer payback horizon on the solar plant, at a (huge) additional cost that i probably will never earn back. i suppose the actual numbers really depend on how big your PV system is and how much energy you actually use.
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