Solar panel payback calculator with opportunity cost?

[FIRE 20/20]

Does anyone know where to find a solar panel calculator that includes opportunity cost?  Most calculators I've seen ignore opportunity cost, which makes the calculations unreasonably optimistic.  The typical calculator typically essentially says that if your actual outlay for the panels is, say $20k and you will reduce your electric bill by $2k / year, then the payback time is 10 years.  But if I purchased solar panels I would take the $20k from investments one way or another, so I would be losing out on the investment returns from that money.  If my return from the market would be 7%, then I'm losing $20k * 7% = $1,400 in investment growth the first year alone for only a $600 savings that first year - less than 1/3 of the $2k promised. 

Someone must have done these calculations somewhere, but I can't seem to find it.  I am competent enough in Excel to take a stab at it, but I hate doing work that someone else has already done and I have to believe someone has created a better calculator than what I'm finding online. 

[ak907]

I made a spreadsheet when I was looking to do just that. It's a bit of a mess but it did the job. I can tell you that you generally need very high power costs and usage, or a well pay SREC program to make it make sense financially in any sort of a reasonable amount of time. Also your estimates for how much power you generate and the value of the SRECs are huge variables that can swing things wildly. That being said, if inflation keeps going, capital assets that earn an inflation adjusted return tend to do very well.

[bryan995]

We took out a 0.99%, 10 year loan to purchase solar.

So the math was a bit more clear cut.

[Greystache]

When I got solar, I looked at it as part of my low risk asset allocation. The money I spent on solar came out of my bond fund, not my stock fund. So I was looking at opportunity costs in the 3% range. With bond funds losing money at the moment, there is no opportunity cost for the short term.   

[JLee]

I had significant state incentives and financed at 3.99%, then rolled it into a car loan at 1.24%.  I was cash flow positive on day 1 - overall they had a 6.5 year payback period, including keeping the original loan at 3.99%.

[Syonyk]

When I got solar, I looked at it as part of my low risk asset allocation. The money I spent on solar came out of my bond fund, not my stock fund. So I was looking at opportunity costs in the 3% range. With bond funds losing money at the moment, there is no opportunity cost for the short term.

That's how I look at solar as well - low risk, almost guaranteed returns in the form of reducing my minimum monthly costs, no matter what the market does.  In that I've got 25 years of grandfathered in net metering (kWh for kWh, no expiration), it's been well worth my time/money, though I did do it myself and I'm around $1.50/W.  Plus I repair stuff myself if it has problems.  And I've got some spare parts.

If one could accurately predict the next 30 years of stock market returns, one would be quite wealthy.  But I view solar as locked in reduction of expenses, and consider things that way.

[FIRE 20/20]

I made a spreadsheet when I was looking to do just that. It's a bit of a mess but it did the job. I can tell you that you generally need very high power costs and usage, or a well pay SREC program to make it make sense financially in any sort of a reasonable amount of time. Also your estimates for how much power you generate and the value of the SRECs are huge variables that can swing things wildly. That being said, if inflation keeps going, capital assets that earn an inflation adjusted return tend to do very well.

Thanks.  Yes, every time I've looked into getting solar it seems that our electricity use and payments are low but installing a system is expensive, to the point that it just doesn't seem to make sense for us.  When I started thinking about opportunity cost from taking money from our investments it makes it even harder to justify.

[Abe]

As others point out, buying solar panels is likely not cost effective when assuming you’d invest all of that into stocks. It is more of a hedge against electricity price inflation. I would not risk my future returns on solar panels, so I base their return compared to bonds. This is all financial alchemy to some extent, so choose your source metal as you wish!

[ChpBstrd]

I put together the attached spreadsheet, which calculated the net present value of my various options against a discount rate so that I could compare a solar panel investment against bound funds or preferred stock. As a rule of thumb, you can find your approximate ROI by raising the discount rate until the NPV is zero. Then the discount rate is roughly your ROI.

This particular spreadsheet is set up to estimate the value of cancelling my natural gas service and moving 3 appliances to electric at the same time (otherwise I would produce more energy than I can sell back). I also made some assumptions about the lifespan of various components.

Put your energy (hehe) into doing a careful calculation of the generating capacity and the value of your annual yield in dollars. As a Sunshine Farmer these details will matter to you. Generally the vendor will provide these data in their proposal.

Also, think about this investment in similar terms to the great pay-off-your-mortgage debate. In early retirement, anything you can do to reduce monthly liabilities makes your portfolio more resilient to drawdowns. That's why the odds of retirement success are higher if you pay off your mortgage, even though that move usually has a very poor ROI. By paying for your electricity in advance with the solar panels, you are reducing your monthly draw from savings for those critical first couple of decades in retirement - the point when sequence of returns risk and inflation risk are most acute.

[TheAnonOne]

I slapped $45,000 worth of the things on my roof back in 2019.

I got......

$15,000 back at tax time.

--------------------
$30,000 out of pocket.

That buys me net metering, $0.12/KWh in general. Plus a power incentive of $0.07/KWh of generation (used or not). Making every KWh worth about 20 cents. Making every MW/h worth $200

The array makes around 18 of those babies every year. $3600. 12% returns.

Even the stock market has trouble generating a -nearly- guaranteed 12% return annually.

--------------------

For me, in my state, with my deal, it's both low risk and high return.

[FIRE 20/20]

I put together the attached spreadsheet, which calculated the net present value of my various options against a discount rate so that I could compare a solar panel investment against bound funds or preferred stock. As a rule of thumb, you can find your approximate ROI by raising the discount rate until the NPV is zero. Then the discount rate is roughly your ROI.

Thanks for the spreadsheet. 

I'm having trouble making the numbers work in my situation (not the spreadsheet's fault).  I use about 20 kWh / day on average, and pay about $80 / month on average for electricity.  So my total electricity cost for the year is about $1k, and the rough calculators seem to indicate I'd need to spend $12k-15k or so for a 5kW system.  I don't want to get a more precise estimate to avoid being hassled by sales people, but I suppose that's the next step.  If the installation cost is a lot lower than I'm estimating then it might be worth it, but spending $10k+ to save $80 a month doesn't seem like a good deal.  Especially since that $10k is earning money for me by doing nothing. 

[uniwelder]

I slapped $45,000 worth of the things on my roof back in 2019.

I got......

$15,000 back at tax time.

--------------------
$30,000 out of pocket.

That buys me net metering, $0.12/KWh in general. Plus a power incentive of $0.07/KWh of generation (used or not). Making every KWh worth about 20 cents. Making every MW/h worth $200

The array makes around 18 of those babies every year. $3600. 12% returns.

Even the stock market has trouble generating a -nearly- guaranteed 12% return annually.

--------------------

For me, in my state, with my deal, it's both low risk and high return.

I think what OP is asking is a bit complex than that.  If your system has an 8 year payback period, the 30k you spent would have become about 42k in that amount of time if it were invested with a 5% return.  However, after 8 years, the solar array would be essentially worthless if considering removal and resale value, so you'd be 12k ahead just investing the money with modest gains. 

After the 8 year payback period, the solar array starts making you money and considering 3% inflation, seems to finally catch up financially compared to a 5% investment return around 20 years from installation.  I just threw together a simple excel calculation, so my numbers might be off a little since I might not be multiplying optimally for inflation.

[ChpBstrd]

I put together the attached spreadsheet, which calculated the net present value of my various options against a discount rate so that I could compare a solar panel investment against bound funds or preferred stock. As a rule of thumb, you can find your approximate ROI by raising the discount rate until the NPV is zero. Then the discount rate is roughly your ROI.

Thanks for the spreadsheet. 

I'm having trouble making the numbers work in my situation (not the spreadsheet's fault).  I use about 20 kWh / day on average, and pay about $80 / month on average for electricity.  So my total electricity cost for the year is about $1k, and the rough calculators seem to indicate I'd need to spend $12k-15k or so for a 5kW system.  I don't want to get a more precise estimate to avoid being hassled by sales people, but I suppose that's the next step.  If the installation cost is a lot lower than I'm estimating then it might be worth it, but spending $10k+ to save $80 a month doesn't seem like a good deal.  Especially since that $10k is earning money for me by doing nothing.

IDK... $80/mo is $960/year. Even if you were only able to offset $800 of the bill it would still be a competitive return on a system with a $10-12k net cost. There's also the matter of mitigating sequence of returns risk in early retirement.

In my experience, the salespeople/estimators seemed too busy to follow up with me and required nudging on my part. My vendor relied on a website to estimate the project and communicate costs more so than sweet talkers. Your experience may vary of course but I was definitely not hassled.

If the spreadsheet taught me anything, it's that the details matter. A thousand dollars on price or a 1% assumption about inflation or panel degradation lead to vastly different estimates of return. The option to eliminate the natural gas bill also made a difference. So getting a few actual estimates will be required if you want an ROI within a couple percent of precision. You may also need to make decisions about system sizing.

[FIRE 20/20]

IDK... $80/mo is $960/year. Even if you were only able to offset $800 of the bill it would still be a competitive return on a system with a $10-12k net cost. There's also the matter of mitigating sequence of returns risk in early retirement.

But my question is based on the idea that I don't think it would be a savings of $960 / year.  Based on my estimates, a $10k system would not only cost me $10k up front but also a rough average of about $700 a year in lost investment returns because the money would be coming out of VTSAX.  So I would only be saving about $260 / year after spending $10k.  A $260 a year return for spending $10k just doesn't make sense to me. 

I'm less concerned with sequence of returns risk.  While I do believe in the 4% rule if you have some flexibility and I planned for about 3.5% to be extra safe, I've actually been closer to a 2% withdrawal rate each of my first 3 FIREd years.  I have found that in retirement I need to spend a lot less than I expected because I'm so damn happy all the time.  :D  Add in good returns the past few years and limited travel due to COVID and I am just not spending anywhere near what I planned.  So at this point while I'm not terribly concerned about SoRR. 

[ChpBstrd]

IDK... $80/mo is $960/year. Even if you were only able to offset $800 of the bill it would still be a competitive return on a system with a $10-12k net cost. There's also the matter of mitigating sequence of returns risk in early retirement.

But my question is based on the idea that I don't think it would be a savings of $960 / year.  Based on my estimates, a $10k system would not only cost me $10k up front but also a rough average of about $700 a year in lost investment returns because the money would be coming out of VTSAX.  So I would only be saving about $260 / year after spending $10k.  A $260 a year return for spending $10k just doesn't make sense to me. 

I'm less concerned with sequence of returns risk.  While I do believe in the 4% rule if you have some flexibility and I planned for about 3.5% to be extra safe, I've actually been closer to a 2% withdrawal rate each of my first 3 FIREd years.  I have found that in retirement I need to spend a lot less than I expected because I'm so damn happy all the time.  :D  Add in good returns the past few years and limited travel due to COVID and I am just not spending anywhere near what I planned.  So at this point while I'm not terribly concerned about SoRR.

That's awesome! You might still become concerned with SORR in the future if the stock market goes through an actual "SORR event" like 2008 or 2000, 1973-74, or 1929 or if your spending changes. In those events, when your portfolio is a red number every year for multiple years and doesn't recover for 5-10 years, you would be glad to be earning returns from a source other than financial markets and glad not to be forced to sell shares or bonds on the cheap to pay for electricity.

Solar panels are a bond of sorts, that generate income in a way that is independent of what financial markets or the economy are doing. They are completely detached from SORR and there are very few alternatives with that financial profile. Side gigs or return-to-work contingency plans require customers who have money to spend, which cannot be assumed in an SORR event. Bonds can default. Long-duration treasuries can lose massive amounts of value if inflation gets out of hand. And your rental properties can be subject to defaults and market pressures to lower rent. Your solar panels would have physical risks, but they do not have market risks unless nuclear fusion is perfected and electricity prices drop to being too cheap to meter.

[Syonyk]

Solar panels are a bond of sorts, that generate income in a way that is independent of what financial markets or the economy are doing. They are completely detached from SORR and there are very few alternatives with that financial profile.
...
Your solar panels would have physical risks, but they do not have market risks unless nuclear fusion is perfected and electricity prices drop to being too cheap to meter.

That's about how I view mine.  They're not so much a return as "paying once for a permanent reduction in ongoing costs."  Probably in the same category as paying off a mortgage... it's reducing monthly expenses.  Yes, I know it's suboptimal if you assume ever rising markets, but I don't tend to do that, so... ways to reduce my monthly expenses to clamp down "minimum monthly spend" are of value.  That our car charges off them too (indirectly, but it can directly charge off them if the grid is down) means I'm reducing my transportation costs even more than I would with grid charging - and I'm independent of grid prices for the large part.

And I've had a bit of physical rework on my system (some junction box issues) that ended up being not a big deal other than having to buy a $450 thermal imager to really figure out what was going on, but I'm not worried about the system long term - if I suffer some catastrophic hailstorm that destroys the panels, I can reasonably assume insurance will cover them (and I can do the work), and otherwise, they should last about indefinitely, even at somewhat lower production numbers than new.  The "25 year life" is usually to 80% production, and that's still an awful lot of useful power.  I may have to swap a string inverter at some point, which takes about 15 minutes physically and about the same to configure them, and I go on my way.  Plus I have a spare just in case.

I'm certain you can "prove" that my panels are a money losing activity based on optimistic assumptions about market performance and some particular assumptions about power prices, and I simply don't care that much.  They're pushing my monthly expenses down, a simple payback isn't that long (even on low cost power), and if things go sideways, as they seem to be doing, I still have a productive asset that is providing an awful lot of useful power.