World over, it is increasingly becoming clear that the way to go forward for energy requirements is installing solar. It is clear that financial investments made in solar demonstrate a clear ROI, and the attractiveness of it depends on the local tariffs, and the region one is based in, and the average insolation in that area. In India, peole have started waking to the fact that the investments attract decent rate of return, often beating rates that banks and FI deposits offer. A simple way to calculate return on investment into solar
is based on the electricity bill offset that one gets through generating own electricity.
For someone to calculate the ROI, on financial investments made into solar, one has to follow just 3-4 simple steps. Even if one solicits quotes from multiple EPC vendors, each quote may have a different set of equipment, making it difficult for an apple to apple comparision, but the bottomline ( most customers rely on) settles at ROI and payback period for your solar PV plant. The package with better equipment like a Panasonic may be priced higher but will provide you better yields. The package with a cheaper Chinese set of equipment may provide you with the lower cost advantage but issues of service and quality have to be evaluated carefully. The solar PV plant life is 25 years and more and hence the decision making needs to incorporate many factors, and a longer term perspective. It is more involving than buying an expensive item, or a car, or a piece of furniture, since a solar asset is a return generating asset in general, and over the next 25 years or so, the return may appreciate keeping in view that the energy prices will not remain static and may increase over a 5-15 year period. The past trends suggest so, and more information on the electricity price trend over the past 5-10 years are available on the link above.
What is the average payback period on your solar PV plant ?
For India, most rooftop solar plants have a payback period of 4-4.5 years. This is keeping in view the initial cost of investment for mid sized and value for money on grid power plant and net metering for excess energy injected into the grid. For an off grid power plant, the payback period may vary and can be longer. The average cost of funds is kept at around 10-12% annual. Installing solar panels on your home can even increase your property values over time, and those are intangibles that one does not calculate into the payback calculation.
How do you calculate payback period ?
Say, the cost of installing a small solar PV plant of 10 KW is around INR 4,30,000/- One needs to estimate the energy generation for a solar plant of this size, annual generation can be estimated at 13500 units, for a location in North India, with average insolation. It will matter how clean the panels are kept, for optimal generation. Generally, one can clean panels, once in every 3 days, for optimal outputs. There are systems available that tell you when to clean panels as well and when the output is below standard averages. If there are subsidies available, in your area, one needs to subtract them from the total invested amount, as this amount will be credited into your account in 3-6 months by the state nodal agency / MNRE. There are EPC companies, like Urja Unlimited that shall help you with the entire process end to end.
Calculate the total energy save, by multiplying the tariff in your area by the generation ( 13500 units in this case). Let us say that the solar plant location is in New Delhi. At INR 7.5 per unit, the average electricity save is at INR 13500*7.5= INR 101,250
Now, dividing the total cost of the plant ( INR 430,000) by the average save per year ( INR 101,250), one can arrive at a simple payback period.
Plotting a graph
It is possible for one to calculate the IRR and payback keeping in view the borrowing cost of the capital as well. Most good organisations like Urja Unlimited, or networkGreen will handhold the consumer to help arrive at a payback calculation. We will detail the calculation for the same, as this requires more detailed calculation and steps in our next blog post which can be found here.