Calculating Return on Investment in Home Solar Systems

Interested in comparing an investment in a residential solar system with other investments? You can do so by evaluating cash flows and their resulting internal rate of return (IRR).

To illustrate, if you were to invest $23,000 in a residential solar system, you might expect to see electricity savings of about $1,200 in year 1. Your savings would increase in following years, up to $5,000 in savings in year 25 (due to the historical annual increase in utility rates).

These recurring and increasing annual savings represent real cash flows from your $23,000 investment. Just like other investments, your initial outlay (in this case $23,000) is rewarded by income ($1,200 to $5,000).

A good investment will, over time, have cash flows that exceed the upfront expense. As you can see below, the cash flows from electricity savings with solar do add up over the years, and will grow your equity (your bank balance).

To know if solar is the best investment for you, it is good to look at what’s called the internal rate of return (IRR). The IRR of these cash flows is the pre-tax rate of return that represents the compound growth in your equity from your initial investment to the end of the investment.

This measure allows accurate comparison against other investment options on a pre-tax basis. Homeowners can compare an investment in solar (typically with an IRR greater than 10%) against other long-term investments, like the stock market (typically less than 10%), or a bank savings account (typically 2-5%).

For those of you looking at payback analysis, we believe that this doesn't best measure long-term investments like solar. Payback periods underestimate the full economic value of a solar system. A Sungevity solar system is warranted for 25 years and will continue to create savings long after the investment is “paid back.”

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