The Growing Popularity of Solar Energy
Solar energy has been gaining popularity over the past 20 years. Govt is promoting solar to reduce its dependency on fossil fuels & import. While businesses and individuals are choosing solar power to reduce their electricity expenses. Its a win win for almost everyone.
Despite knowing these fundamental advantages, I have seen so many homeowners and businesses still hesitating to install solar panels. Most common reason is lack of clarity on the financial sense of solar system & its long term returns.
Is Solar a True Investment or Just a Utility?
The main question many people have is whether solar should be considered an investment or just a utility expense that saves money. Investments typically generate returns over time, while utilities are simply costs. So where does solar fit in?
I’ve been working closely with Solarium Green Energy, India’s leading EPC companies. This company, run by a friend, has installed solar systems for over 20,000 customers across India. Through their experience, I’ve realized many people don’t view solar as an investment. Instead, they see it as a good thing to do but are uncertain about the returns and financial benefits.
In this blog, I’ll break down simple calculations to evaluate solar as an investment. We’ll use standard financial metrics used for investments like mutual funds, bonds, and fixed deposits (FDs) to see how solar compares with them.
Understanding the Payback Period
One key factor in determining whether an investment is worthwhile is the payback period. Based on government solar calculator website here, a typical 3 kW residential solar setup—the most economical and efficient choice—has a payback period of around 5.32 years. Here’s how the payback changes with different system sizes:
- 2 kW system: Payback period of 5.47 years
- 3 kW system: Payback period of 5.32 years
- 4 kW system: Payback period of 5.63 years
For our calculations, let’s assume an average payback period of 5.5 years.
Calculating Returns on Solar Investment
Let’s start with a simple assumption:
If the payback period is 5.5 years, the annual savings as a percentage of the initial investment would be around 18%.
This means if you invest ₹100, you save ₹18 per year.
The lifespan of a solar system is typically 25 years. Based on this, the internal rate of return (IRR) would be over 18%, which is a substantial return on investment.
Now, let’s make this calculation more conservative:
- If the payback period extends to 8 years, the return comes down to 13.3%.
- If the lifespan of the system is only 15 years instead of 25, the returns would still be around 9.8%.
Even if we assume a worst-case scenario where the payback period is 10 years and the lifespan is 20 years, the net XIRR (extended internal rate of return) is still 7.75%, which is comparable to FDs.
Additional Factors That Improve Solar Investment Returns
Increasing Power Consumption:
- India’s per capita power consumption grows 2-3% annually.
- As people buy more appliances, electric scooters, and electric cars, their electricity use will rise.
- This means the returns on solar investment will increase over time.
Rising Electricity Tariffs:
- Power tariffs increase by 1-3% annually, depending on the state.
- Factoring this into calculations, solar becomes even more attractive as an investment.
Maintenance & Recurring Costs
- Annual maintenance & renewing inverter after 10-15 years are expenses that will pull down the XIRR a bit
Key Takeaway: Plan for the Long Term
Taking into considerations that solar is such a good investment, it is better to plan for long term when investing and make the best of it. Since, it highly likely that our power consumption will increase (along with the tariffs), if your current energy consumption suggests a 2 kW system, it may be wiser to invest in a 3 kW system. As power consumption and electricity costs rise, a larger system will provide better returns in the long run. If you install a system that is too small, your returns will be limited, and you may need to expand later at a higher cost.
Final Thoughts
This calculation isn’t 100% accurate as it varies based on individual circumstances, but it provides a solid framework for evaluating solar investment. Even if we include a 25% margin of error, returns can still be expected to be around 12%, which is higher than FDs and comparable to bonds.
If you’re considering setting up a solar system for your home or commercial property, I’d be happy to discuss your specific requirements. Feel free to reach out with any questions!
Stay healthy, invest well!