Going Solar – Now or Later?

Solar technology is getting better every year. Investments in research and development are producing modules and electronics that are more efficient and reliable. More installations are bringing down the price of installed systems. So the question is: should you install solar now or wait a few years?

Let’s take a look at this question from only two perspectives. From an environmental standpoint, the sooner we reduce carbon emissions, the better off we all will be in the future. Less carbon in the atmosphere today compounds the benefit as time goes on. After reading the rest of the essay, you might call this the “time value of carbon emission reductions”.

From a purely financial perspective, delaying your installation also costs you money on top of the carbon.

The financial performance of a typical 25 kW photovoltaic (PV) system in Missouri can be summarized with these parameters (given reasonable assumptions for energy cost increase, the value of S-REC’s, and other factors).

7% Internal Rate of Return, IRR
9 yrs Straight-line Payback Period
$ 3,090 Net Present Value

Waiting 3 years in anticipation of a 20% improvement in efficiency will have these impacts.

1. You will pay your current utility bills without the benefit of the PV system production. The future value of these payments over the next 3 years is about $10,000.
2. The cost of installing the system will increase about 3% per year, and the cost of equipment probably also will increase. The result will be a first cost increase of $5,000 to $15,000, depending on what you think will happen to the cost for modules and inverters.
3. Insurance and O&M costs will increase slightly, again by the same 3% consumer price index (CPI) margin.
4. The energy production increase of 20% will result in increased savings at a higher utility rate, which after all, is the main reason to consider waiting.

Here are those same financial parameters, but with waiting three years and the assumptions noted above.

6% Internal Rate of Return, IRR
12 yrs Straight-line Payback Period
$ 1,101 Net Present Value

As with other energy generation technologies (including wind, coal, natural gas, etc), incentives play a part in the financial performance. Over time, the intention of our legislators seems to be to reduce incentives for renewable energy. If you believe some of the incentives will be eroded in the next three years, the most likely target will be the MACRS depreciation, with the schedule going back to the service life of the system, or 30-year straight-line depreciation, for the sake of simplicity.

The financial results of the model with this assumption are as follows.

3% Internal Rate of Return, IRR
19 yrs Straight-line Payback Period
$ (20,272) Negative Net Present Value

There are other ways to slice it, but the bottom line is – bank your carbon savings and your utility savings today.