Financial Concepts
For further information see our Solar Return on Investment PagePayback
Payback is the most commonly used and easily understood term to assess the financial performance of a solar power system.
Payback is how many years it takes to pay off the initial investment with the subsequent revenue.
The PV industry most often considers simple payback, the initial cost divided by a constant revenue from electricity sales. Future Sustainability calculate pay back based on a 'point in time' usually the date of quote. It is worth noting that true payback is expected to be sooner as electricity is expected to rise in price.
True payback is a more accurate but complex calculation method accounts for the likely rise in electricity prices.
This calculation requires a spreadsheet and looks at when cumulative cash flow first becomes positive. It results in a shorter payback than the simple 'point in time' payback method described above.
If electricity price rises are factored in, so should panel degradation.
The amount of power produced in the second third and fourth years is likely to be less than when the panels are new, in line with the 80% performance warranty over 20-25 years.
Degradation lengthens payback slightly, but degradation is typically assumed to be less than electricity price rises, so a shorter payback than the simple payback still results.
One factor that is commonly overlooked in PV systems is the cost of operations and maintenance (O&M).
Thankfully O&M is negligible for customers other than government.
Inverter replacement cost is hidden when paybacks are shorter than likely inverter lifetime. However, paybacks exceeding 10-15 years may need to factor in a new inverter.
Although a short payback is desirable, profits accrue only after the system has paid for itself.
If the system dies as soon as it has paid for itself, it wasn't a good investment, no matter how short the payback. This is an important factor to note when considering what quality of product to utilise within your solar installation. Fundamentally if you deal with quality products, for example Hyundai Solar Panels and Power One Aurora Inverters, quality is what underpins the longevity of return from your investment.
If the cost of inverter replacement is factored into customers' decision making, larger systems can have better financial merit because small inverters can cost two years revenue to replace.
These concepts are shown in the graphs to the right, and explained in the following text. The top graph shows cashflow for a 1.5 kW graph, the bottom graph shows cashflow for a 10 kW system.
Shown above left is the cumulative cashflow (red, left axis) and annual cashflow (blue, right axis) for a 1.5 kW system located in NSW and installed in 2010, assuming inverter replacement every 10 years. Shown above right is the same graph but for a 10 kW system. Electricity prices are as per Country Energy regulated tariffs and assumed to increase as per IPART recommendations until 2012, with subsequent 3% annual increases.
Note in the first years, the assumed 1% annual degradation results in progressively lower revenue.
After the end of the NSW FiT the revenue decreases significantly, but the peak electricity price is 40c/kWh by 2017 under these assumptions. In subsequent years electricity price increase outweighs panel degradation and steadily increasing revenue results.
Note that although the 1.5 kW system pays for itself sooner (4.3 years after installation, compared with 5.3 years for the 10 kW system), the 1.5 kW inverter replacements have a huge effect on the customer’s financial position, taking 3 years of non-FiT revenue to pay back, whereas a replacement 10 kW inverter quickly pays for itself.
Also for consideration is the quality of componentary utilised in a solar install. For example a Power One - Aurora Inverter has an average mean failure rate of 25 years. Commercial 3 phase inverters also are available with a 25 year extended warranty. Hyundai Solar panels are a premium panel utilising superior manufacturing techniques and grade of silicone. Furthermore dealing with brand name manufacturers like Hyundai guarantee the security of your panel performance warranty for the full 25 years.
Internal Rate of Return / Net Present Value
Simple payback doesn’t indicate the amount of profit reaped until the end of system lifetime.
The profitability of a system can better be expressed in terms of Internal Rate of Return (IRR).
In simple terms the IRR is the effective interest rate earned on investment. If the IRR is less than the interest rate offered on a term deposit by a bank, then it would be more financially sensible to put money in the bank.
The IRR on the NSW systems can be 17.4% for a 1.5 kW system and 14.9% for a 10 kW system. The smaller system has a higher IRR because most money is earned in early years.
In states with net FiTs, the larger amount of power export from a larger system will typically result in quicker payback and higher IRR than that of smaller systems.
Commercial Systems Tax Implications
- If a PV system is used for business purposes (i.e. to reduce the business expense of electricity), then the PV system is treated by the Australian Taxation Office (ATO) as a depreciating asset. The ATO specifies the effective life of the PV system to be 20 years.
Businesses registered for GST can claim the 10% GST on a PV system.
Together, these discounts combined with solar credits can mean a commercial customer eventually pays effectively only 50% of the actual system cost
Clients and customers are advised to obtain independant expert advice from their financial/tax advisor.
Energy Payback & Lifecycle Analysis
Energy Payback is covered in Part 1.
Energy Payback is the amount of time required to generate as much energy as went into the construction of the PV system.
A lifecycle perspective expands this to calculate the energy used in extraction and transport of raw materials, and ultimately through to recycling.
Some portion of the energy used to make the infrastructure that manufactured, shipped, and recycled the product might also be included in this analysis.
Lifecycle analysis looks not only at energy but also carbon dioxide and other pollutants.
Obviously this is a complicated process, and one that can be country-specific and even site specific.
It is important to consider that more efficient panels like Hyundai 15%+ Positive tolerance module efficiency compared to typical panels in the market; 13 - 14.5% efficiency have lower energy payback/life cycle analysis as the panel requires less materials, less freight due to the use of higher quality silicone in the process.
