Cost Benefit Analysis |
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Calculate Net Energy Cost Savings
Like any purchase, it's always best to weigh your options and find the right panels or wind turbine for the right price before actually buying. But unlike most purchases, a wind or solar energy investment is exactly that - an investment, which could yield energy cost savings compared to your local utility company's rates. Understanding how to compare the potential cost of your system with the utility company's rates is important for determining what you can reasonably expect for a net return in savings.
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Of course, the first thing you need to know is the total capacity and cost of your system (materials/components, labour, applicable taxes, etc). Let's say, for example, that you were quoted $12,000 by a local contractor after sourcing components based on the best price per watt, to install a 4 kW grid tied solar energy system that will produce ~20 kWh per day based on an avg 5 hours of peak sunlight hours each day (20 kWh per day multiplied by 365 days = 7300 kWh potential per year). That works out to around $3/watt. Bare in mind that this is just a hypothetical example, and what you would actually pay for a grid tied system will depend on local contractor installation prices and the cost of their supplier's equipment.
The next thing you need to know is how many kWh your system will potentially generate over its lifetime, which means you need to know what the life expectancy of your system will be. The contractor or manufacturer/supplier should be able to provide you with a reasonably accurate figure that's specific to their brand, but generally you can expect your system to last at least 20 years. Using the example above, 20 years x 7300 kWh per year = 146,000 kWh potential over its lifetime.
The next thing you need to know is how many kWh your system will potentially generate over its lifetime, which means you need to know what the life expectancy of your system will be. The contractor or manufacturer/supplier should be able to provide you with a reasonably accurate figure that's specific to their brand, but generally you can expect your system to last at least 20 years. Using the example above, 20 years x 7300 kWh per year = 146,000 kWh potential over its lifetime.
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Now that the total lifetime production has been estimated, we can calculate the cost per kilowatt hour. Shopping around for components based on the best price per watt is necessary for sourcing the most affordable equipment, but the price per watt hour or kilowatt hour is what matters when it comes to cost comparability with the local utility's rates, which are based on cost per kWh. What's the difference between watt and watt hour? Watt or kilowatt is a unit of power, while watt hour or kilowatt hour is a unit of energy. Power is the rate that work is being done, while energy is the amount of work that has or will been done.
So if the total system cost is $12,000, and it will produce 146,000 kWh over its potential lifetime, then the cost for that energy per kilowatt hour would be: $12,000 / 146,000 = $0.082 per kWh, or 8.2¢/kWh Now let's compare that with the local utility company's rate, let's say it's 12¢/kWh. If you were to buy that 146,000 kWh of energy from the utility, it would cost you: 146,000 x 0.12 = $17,520 So your gross savings in grid electricity costs would be $17,520. Now the price of the system needs to be deducted from this figure to determine the net return, ie: your profit. $17,520 - 12,000 = $5,520 That means that your system will pay for itself and generate $5,520 in net savings before it expires. |
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Calculate Payback Period and Return On Investment (ROI)
So we've determined that the savings are worth the investment, now the question is exactly how soon will the system pay for itself? If grid electricity costs 12¢/kWh, and the system will generate 7300 kWh per year, then the total savings per year will be:
$0.12 x 7300 = $876 per year
Total investment was $12,000, so:
$12,000 / $876 = 13.7 years
Not too bad. Let's get a bit more technical. Investors like to measure performance efficiency, called 'return on investment' (ROI). It measures how much of the initial investment has been returned in net profit, and is expressed as a percentage of the investment. In our case, this is calculated by dividing the net return in savings by the total investment cost, then multiplying the result by 100:
($5,520 / $12,000) x 100
= 0.46 x 100
= 46%
$0.12 x 7300 = $876 per year
Total investment was $12,000, so:
$12,000 / $876 = 13.7 years
Not too bad. Let's get a bit more technical. Investors like to measure performance efficiency, called 'return on investment' (ROI). It measures how much of the initial investment has been returned in net profit, and is expressed as a percentage of the investment. In our case, this is calculated by dividing the net return in savings by the total investment cost, then multiplying the result by 100:
($5,520 / $12,000) x 100
= 0.46 x 100
= 46%
That's a total ROI of 46%, which would be considered good by most investors. But they like to further refine the efficiency by determining the net return per year, to get the biggest bang for their buck in the shortest amount of time. So we need to divide the total ROI by how long it will take to generate the total net savings of $5,520, which is 20 years (remember, the system has to pay for itself before a profit is generated):
46% / 20 = 2.3% annual return
A real estate investment will usually generate a 10-12% annual return, a business investment will generate 5-7%, and bonds will generate 2-4%. So while this particular investment may not be the most efficient in terms of generating the net return faster, it's still a sensible long term investment for a home or business owner. Bare in mind that these calculations don't account for inflating grid prices over the years either, which are inevitable and will be compounded by increasing extreme weather events that cause damage to the grid infrastructure. Calls for rate hikes here in the Maritimes are long underway for such reasons. Considering this, the true potential return is likely to be much higher by the end of the system's life, than what's calculated here. Bare in mind that the calculations here were based on examples, and that what you will pay for a solar investment compared to power from the grid will depend on a lot of factors, mainly your location and product availability. What someone in BC Canada pays for grid electricity isn't necessarily what everyone in the developed world pays. Utility rates will vary by location and company, and component prices will vary by manufacturer and availability - the further your gear has to be shipped, the more it's going to cost you. This article was not intended to give you a ballpark price on your solar energy system, it's simply a means to provide you with the tools to estimate your own cost savings for your circumstances.
46% / 20 = 2.3% annual return
A real estate investment will usually generate a 10-12% annual return, a business investment will generate 5-7%, and bonds will generate 2-4%. So while this particular investment may not be the most efficient in terms of generating the net return faster, it's still a sensible long term investment for a home or business owner. Bare in mind that these calculations don't account for inflating grid prices over the years either, which are inevitable and will be compounded by increasing extreme weather events that cause damage to the grid infrastructure. Calls for rate hikes here in the Maritimes are long underway for such reasons. Considering this, the true potential return is likely to be much higher by the end of the system's life, than what's calculated here. Bare in mind that the calculations here were based on examples, and that what you will pay for a solar investment compared to power from the grid will depend on a lot of factors, mainly your location and product availability. What someone in BC Canada pays for grid electricity isn't necessarily what everyone in the developed world pays. Utility rates will vary by location and company, and component prices will vary by manufacturer and availability - the further your gear has to be shipped, the more it's going to cost you. This article was not intended to give you a ballpark price on your solar energy system, it's simply a means to provide you with the tools to estimate your own cost savings for your circumstances.