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Nice infographic. What’s it mean?
Hi there, folks! We’ve been working hard on the 2017 version of our state solar power rankings report, and we’re ready to dish some data! We thought the information about the investment returns of solar power deserved to escape our sealed envelope before the rest of the report was ready for publishing.
What you see in the graphic up there are bars representing the potential returns on a solar investment for all 50 states and the District of Columbia. The bars reach closer to the center of the sun as the investment return percentage goes up. Every state is graded A-F on their investment return, and bars that signify A and B grades are burnin’ hot!
We tried to make this infographic an easy way to see that and investment in solar beats the stock market in most states. The current 25-year performance of the S&P 500 is about 7% (not adjusted for inflation), which pales in comparison to the returns with solar in places like Massachusetts (28.5%), New York (25.1%), and New Jersey (22.5%).
But solar even meets the 7% threshold in places you wouldn’t expect, like Wisconsin and Minnesota. That’s the big, shocking news we hope the infographic conveys in a compelling way.
How we calculate Investment return for solar
There are a ton of variables that go into calculating the numbers you see above. Basically, it boils down to costs and income (energy savings and incentive payments). We plot those numbers on a graph for 25 years (the length of major panel manufacturer’s warranties), and do the math to find the payback time, Internal Rate of Return, and Net Present Value.
For 2017, we added a new variable called panel degradation. Solar panels don’t last forever, but that warranty means the manufacturers guarantee their panels will continue to function at better that 80% of their rated production after 25 years. That’s a loss of about 0.7% of output per year. Some manufacturers now report better-than-expected degradation rates of less than 0.5%, but until the lengths of those warranties increase, we’re sticking with 0.7%.
Here’s how the calculation works:
- Year 1 (cost): Cost of solar panels, minus rebates, electricity bill savings, and tax credits (including the federal 30% tax credit)
- Year 2-25 (income): Electricity bill savings and SREC payments; additional tax credits (if applicable)
Paying for electricity from the utility company gets more expensive each year by an average of 3.5%. That means electricity bill savings get larger every year, even as the panels produce slightly less electricity. SREC payments vary widely by state, but generally last a few years after installation. State solar tax credits often have per-year caps that mean you only get a certain amount until your full credit has been claimed.
Here’s how that looks in a chart of the cumulative returns over 25 years:
Once we put all of that together, we find the “Internal Rate of Return,” or IRR, a tool used by businesses to determine the best ways of investing their money. The IRR is the interest rate you would have to get to equal the return this investment provides.
According to our calculations, the average IRR of a solar investment in the US as of 2017 is 9.24%. Better than the stock market! For reference, the IRR in the Connecticut chart above is 17.7%, which is like “whoa, crazy” good.
But this is just the beginning. We do these kinds of calculations for all 50 states, so head over to our home page and click your state for more info!
Last modified: October 23, 2018