Generating your own electricity can save you money. PV panels produce a return on investment. The amount of return in dollars can be calculated pretty accurately. The investment decision challenge is to make sure the return stream is enough to pay back the investment plus a little more.

Deciding whether or not to invest involves a comparison. What do I have to invest compared to what I get back? Or if the money has to be borrowed, is there a positive cash flow left after all the expense of the loan has been covered? A second calculation is always made too, but maybe not articulated. That is, how’s this investment compare to all the others I could make? In other words, “if I have money, should I put it here?”

Some PV systems are being installed for $5/watt or less, half the cost of just a few years ago. The cost of a particular project depends on its size and how challenging the mounting is. Generally bigger is cheaper on a per watt basis.

For the purpose of analysis, suppose the cost is $5/watt. Does the electricity generated pay for the equipment?

As usual, we have to assume. First, let’s assume the equipment lasts 25 years. This is conservative because there are PV panels in use now, still producing at near their original output after 30 years of service. Secondly, let’s assume electricity will be worth $.15/kWh, and net metering, which allows you to get full credit for what you produce, will continue to be available. This assumed price is slightly higher than the price today because the current glut of natural gas is keeping electricity rates low. This is unlikely to last.

To keep with easy numbers as much as possible let’s consider a 10 kW photovoltaic installation. At $5/watt the investment is $50,000. Averaged over the year, PV produces its rated power for four hours a day. This 10 kW (10,000 watts) array will produce 40 kilowatt-hours a day. At $.15/kWh, that’s $6 a day and $2,190 a year. The payback is 23 years. Your call.

If incentives are considered, the picture brightens. The 30% federal credit would bring the installation cost down to $35,000. Then the payback is 16 years, maybe good enough.

Another way to look at the investment is to calculate its rate of return as a percentage annual rate. If the useful life is just 25 years, the return is about 3.8%, way better than the passbook. If the panels last 30 years or longer, the return is over 4.5%.

As discussed in a previous post, money is cheap…really cheap if your measure is what you get paid on your savings account. Three or four percent used to be pretty meager investment return, but maybe not so any more. It definitely makes solar electric on a roof or the top of a WattTree™ worth a look.