Misinformation is at home when looking at the financial calculations in almost any offer you will get, to such an extent that you shouldn’t trust any seller with it! One of the solar companies has a special section describing some of the tricks that can be played with numbers, but there are more. So I chose to do my own calculations, as described in a previous post.
Now I will compare the calculations for my 3kW system and then for a 10 kW system, the maximum allowable under the microFIT rules. I suspect that ROI is better for larger installations, because there are certain parts of the system which are only loosely correlated with the size: design, installation (to a certain degree), permits and even the inverter in some cases.
I will first consider the simple return calculation, corrected for a system cost of $7.8/W. You can download the simple return spreadsheet and check how it’s done. Remember, the simplified return doesn’t consider any of the operational costs (meter fee, insurance, etc) and neither the taxes. It’s an theoretical maximum return.
For the detailed return, I used the Switch Kingston spreadsheet with modified assumptions described in another post. Here are the results :
| Case | Investmentvalue [$] | After taxprofit [$] | ROI [%] | Profit/Investment ratio |
| 3kW, simple | 26442 | 31302 | 5.92 | 1.18 |
| 3 kW, detailed | 26842 | 15968 | 2.97 | 0.59 |
| 10 kW simple | 88140 | 104340 | 5.92 | 1.18 |
| 10 kW detailed |
88540 |
56663 | 3.20 | 0.64 |
The first thing to notice is the obvious limitation of the simplified model. Both the 3kW and 10kW systems have the same ROI, 5.92%! However, when using the more realistic detailed model, the ROI is 8% better for the larger one. That is what we expected and it makes a lot of sense.
But what’s really important in the above table is how large is the gap between the results of the two models in the case of a small system. My 3kW panels will return only 2.95%, basically only 1% more than inflation. Even the 10kW system will be only at 3.2%. This compares as almost equal or lower than some government bonds or long-term GICs. While I readily admit that the latter are not tax-free, they can potentially become so if they’re held in a TFSA tax-free account. Solar panels can not.
SearchingForGreen
Update: proving once more that you shouldn’t trust anyone with your own financial calculations, I have to confess that I somehow managed to mess the numbers on the 10kW detailed calculation in the above table. The after tax profit is $56663 (not $75359 as previously stated), so the ROI is 3.20% instead of 4.26%. The table is now updated.
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I’m not a math wiz, Vasile.
However, you need to add some sort of value for the system at the end of 20 years in your calculation. For example, the solar panels, are waranteed to produce for 20 years so they need to be worth something (net discounted cash flow of the potential earnings during years 21 thru 25, inclusive).
Same for the inverter(s)?
This would provide an increased total investment at the end of 20 years and therefore the ROI. How much more, not sure. The SWITCH worksheet uses some formula but I can’t yet quite figure it out. However, the result for my quotes is that the residual value of the solar system at the end of year 20 is around 1/3 the original system cost.
I hope this helps.
Dan
Hi, Dan!
Great minds think the same
You are certainly right! Tomorrow’s post is exactly about what happens in years 20+. I think you’ll be surprised about how little is the profit. I certainly was! For my small system, the income is almost completely eaten by the meter fee, insurance and the occasional inverter replacement. The bigger the system, the better the return. If you have a big enough system, you may even become self-sufficient.
The SWITCH spreadsheet uses IRR-Internal Rate of Return, which is a standard financial indicator. It’s different than what almost all offers include, which is some form of arithmetic ROI (profit/investment/20 years). I can understand a simple ROI, but IRR is beyond my grasp. That’s why I use a simpler indicator: cash :-).
Regards,
Vasile
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But you do have to compare the IRR of such a project with for example the yield of a bond, else you underestimate the return of the solar project. If you have a bond for 20 years you get your initial investment back at the end. With a solar project you get part of your investment back starting with year one (even better, starting with month one) and that makes a big difference, the present value of that income is simply higher than that of income you get much later. In my opinion the only comparison that makes sense is the one of the Switch Kingston spreadsheet, where the yield of a bond is compared to a IRR of the project.
Another reader, Lou, who seems to be a lot more knowledgeable than me about finances, pointed to me the same thing: $1 today is more than $1 in 15 years. There is even a simple way of modeling this, named Discounted Cash Flow. I will add it into the spreadsheet and probably do an update post. Probably IRR takes that into consideration. However, I’m not sure it makes sense to compare the simple after-tax bond yield with IRR. I certainly cannot tell if it’s right or wrong
He also pointed to me that some leverage can improve the return in certain conditions, and IRR is an indicator of this.