# “Solar energy is free, right?”

**“Solar energy is free, right?”**

Update 12-31-14

Yes and no. Sunlight is free, unless your neighbor builds a 40 ft building next to your solar system, but that’s another story (see history of solar article). Yes, sunlight is free, but the equipment to capture and distribute it is not. That means solar is basically a capital investment for a “power plant”, with low operating costs. In many cases, a solar system will produce 2000 times the energy needed to run the pumps and controls.

Consider the typical water heater. It costs a few hundred dollars to buy and install, but a big chunk of change every month to run it. Solar costs thousands of dollars to buy, but small change to run it. Owning your own “power station” can be very rewarding and cost effective.

The real measure of the value of a solar system is the value of the energy it produces vs the cost. This is the return on investment (ROI) of the system. Another way to state the value of a solar system is the payback period.

For example, the return on investment (ROI) changes every year. Assume the energy output is constant every year. In the first year, the owner buys the system with a cash outlay, for the total cost of the system. However, there may be tax credits that come directly out of future taxes, or tax incentives, that reduce the income that is taxed, or grants that are a cash refund (and may be taxable)….. Some tax benefits accrue over several years, such as depreciation. For a commercial solar system, the financial analysis can be very complicated, requiring a table of costs and returns spanning the lifetime of the system.

So, a lot of people use a very simplified financial analysis. What is the net cost (after all rebates, incentives, credits…), and what is the yearly energy value.

Let’s say a DHW system costs $10,000 to install and produces 18 MBtu/year (M=million, or Mega, not to be confused with the archaic mm = million notation).

If the owner gets the 30% federal tax credit, and the North Carolina 35% tax credit, the net cost is $3500. Let’s ignore the extended lifetime of the water heater elements that run 50% less, the ~1/3 ton reduction in air conditioning cost due to shading the south roof, and the extended lifetime of the shingles under the collectors.

Now let’s look at the value of 18 MBtu/year. Electricity consumption is stated in kWh, gas consumption is stated in Therms ( 0.1 MBtu), propane consumption is stated in gallons (~ 92,000 Btu/gal), so we need conversion factors to get them all in the same language, usually, MBtu, or kWh.

1 MBtu = 293.071 kWh, so 18 MBtu/yr = 5275 kWh/yr.

The value of the solar energy is the money you don’t have to spend buying electricity, gas, or propane. This is called the avoided cost.

Let’s see what 18 MBtu is worth. Of course, it depends on what the conventional energy cost is. In NC, electricity currently costs about $0.11/kWhr. I understand the price may be as high as $0.19/kWhr in other regions, and as low a $0.08.

There is one other factor in the calculation. The efficiency of the conventional water heater must be taken into account. Electric water heaters are usually considered to be about 95% efficient. Gas water heaters can be as low as 60% efficient.

This means to get 5275 kWhr of energy delivered to the home, you must buy 5% more electricity to equal the solar energy provided, or 5275/.95 = 5553 kWhr.

If we use the cost of electricity at $0.11/kWhr, then cost of 5553 kWhr is $610.

Now, we can finally put all the pieces of the data together. An initial investment of $3500 will yield an annual return of $610, giving a first year return on investment of $601/$3500 = 17.4%. The question becomes “where else can I get a 17.4% return on a $3500 investment?”

Now this simple analysis ignores inflation in the cost of the conventional energy, and it also ignores the cost of maintenance of the solar system. In other words, it is a first year, brand new system, simplified calculation.

Most commercial, business, and institutional buyers use the return on investment calculation as a go/no-go decision tool for buying solar. They have internal threshold values the system must meet to be accepted, and usually run the calculation over the lifetime of the system (20 yrs typical). For every year there is a different number for the ROI. At some point in the table, the system has generated enough revenue to pay off the initial cost. This the payback period. After that point, the yearly ROI is very high.

For a simple calculation, first year payback is simply the inverse of the first year return on investment, or $3500/$610/yr = 5.74 years. Most residential owners are not familiar with payback calculations, and can be confused as to what a good value is.

For example, many years ago, a person called me to talk about a solar system for his home. His first question was about the payback. I asked him what he thought a good payback period was. He responded, “two years.”

It was obvious he didn’t understand that a two year payback was a 50% return on his investment. I asked him if he had a savings account, and what interest was he getting on his money. He told me 5% (this was middle ’80s). I asked him how would he like to get a 10% return on his money with a solar system. He was delighted. Note that a 10% return is the same as a 10 year simple payback.

There are factors other than economics that enter into a solar purchase. They are mainly environmental, conservation, pollution control, climate change considerations. The environmental value is added to the economic value for a final decision.

– Dr. Ben