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How we calculate the net present value of solar investments
We’re not economics professors, and we’re guessing you’re not either, so here’s an easy definition:
“Net Present Value is how much more (or less), in today’s dollars, one investment is worth than the best alternative.”
That means you look at all the numbers: how much the investment costs to make, how much you’re going to get back, and when. In order to calculate NPV, you need to know what your next best investment is. The measuring stick everybody uses is the stock market, because it’s been pretty reliable over the past hundred-plus years.
If you look at the last 25 years of data from the returns of the S&P 500, you get an average annual gain of about 7%. Using that number in an NPV calculation works like this: If I invest $100 (this is the “present value”) today and I expect a 7% return, it’ll be worth $107 next year. If I can get a return of more than $7, it’s like having more that $100 to invest in the 7% investment.
The key to great NPV for solar
Purchasing a home solar system in the United States entitles you to a federal income tax credit of 30% of the price you paid for the system. That’s a huge discount after 1 year, and if you look at it like a return on your investment, it looks even better. But how can that be improved? If you put off paying for the investment until later.
NPV of Home Solar Loans
Taking a loan to pay for solar panels is like starting a business that’s sure to succeed. That’s because your solar panels start saving you money at the same time you’re paying for them. In some (but not most) states, the electricity savings are even bigger than the loan payments. So you pay a little, you save a little, and then BAM! At the end of the year, you get 30% of the system price as a tax credit, without having to invest $20,000… or anything, really.
Here’s what it looks like when you go solar with a loan and the 30% tax credit as the only incentive:
And here’s what it looks like when the state offers other incentives (in this case, SRECs):
So you can see, that tax credit supercharges your savings with solar power, and solar loans are all over these days.
NPV of other kinds of solar investments
Above, we showed you an image with the NPV of a solar purchase and a solar loan, but what about the other way to get solar for your home—the Power Purchase Agreement?
Well, good news! I mean, maybe it’s obvious, but as long as you’re signing up for a PPA at a lower-than-retail rate per kilowatt-hour, the NPV of a PPA is positive.
There is no money needed to “invest” in a PPA—only a roof and a decent credit score. You agree to purchase the solar electricity for a little cheaper than retail, and your electricity bill is reduced by the number of kilowatt-hours you buy. A PPA makes really good sense for the solar company, but it can also make really good sense as a homeowner.
You can do well there with a solar loan, but unless owning the asset is your bag, a PPA is actually better for you. Let someone else do all the hard work, and just save some money.
Last modified: October 23, 2018