In this seventh video in a ten-part training series of key concepts for people looking to buy a solar system, Kerim Baran of SolarAcademy walks through how to calculate the economics and payback of a typical residential solar system investment. The entire series can be viewed here.

Below is the transcript of the video:

Kerim Baran of SolarAcademy: We’re talking about economics and payback calculation for a solar system. In the previous section we talked about the cost of a solar system, and we said it’s generally around $2.25 to $3.00 per watt in the US. By the way, we didn’t talk about the fact that this cost is under a dollar closer to 70 to 80 cents per watt, as opposed to $2.25, in markets like Australia. In China it’s even under 50 cents but China is a different economic reality. But in markets like Australia, if they can do this for 80 cents, why are we paying $2-3.00 is a good question. The answer has to do with a lot of the soft costs that are involved, but that is not a topic for this video. We’ll cover that in a separate video in the future.

So now getting back to the economic payback calculation. So let’s just say we have an eight-kilowatt solar system actually let’s just simplify it we have a single one-watt solar panel, a solar system which is not going to happen but let’s just talk on a per watt basis. So if the per watt investment is $3.00 Let’s call it then that $3.00 is going to be your cost for the system and that $3.00, we’ve covered this in a previous section, the solar production factor segment, is going to generate 1500 watt-hours of electricity. So that 1500 is 1.5-kilowatt hours of electricity. So the $3.00 investment is going to generate 1.5 kilowatt-hours of electricity.

Electricity costs are generally around 15 cents across the US on average. But in markets like in California, most of the homes going solar are paying closer to 30 cents because California electricity is expensive. They’re markets like Hawaii where it’s even more expensive but then there are markets that where, like Florida or other places, where it’s less expensive, like in Texas. So let’s just say the cost of per kilowatt-hour electricity is 20 cents for argument’s sake, and our one-watt system is going to generate one and a half kilowatt-hours at 20 cents. That means it’s going to generate 30 cents of electricity on a $3.00 of investment, so that means 10% of the investment value is going to be generated in electricity. So that’s a 10% yield in investment.

Basic calculation, let’s say that’s a 10-year payback period. Of course if you are paying a higher rate like 30 cents that would be more like a six-and-a-half-year payback period because the 30 cents of value generated would go up to more like 45 cents applying the same math to a higher production factor or a higher dollar value per kilowatt-hour generated. Now the other number that we did not take into account in this payback calculation is the federal ITC, the Investment Tax Credit, which also gives you some free cash equal to close to a quarter of the value of the investment. So that would also bring down the 10-year payback period in the first example down to seven and a half years because we get 26% of our investment back as tax credit. So those are the basics of the payback calculation for a solar investment.