microfit: calculating the return on your solar panel investment | Searching for Green

In my admittedly limited experience, the financial calculations for the same roof vary wildly from one offer to the next, even if the price itself is almost the same. It looked fishy to me, so I started looking for a way to do the math myself.

In the beginning, I used a simple method that anyone can understand. Let’s consider the simplest case, when we don’t need no financing and pay everything cash. I know it’s a very unlikely situation for most of us, but bear with me for a while.

We start with the installed power calculated as described in the previous post.  In my case, that’s 3 kW.  Historical solar data for  Southern Ontario (specifically Toronto), combined with the current efficiency of the panels and inverters are all compounded in a single number: we can get around 1160 kWh/year for every 1kW of solar panels. For reasons that will be obvious a little bit later, I chose to use a slightly increased value, 1200 kWh/kW/year. So the yearly value of the electricity my panels will generate is:

3kW x 1200 kWh/kW x $0.802 = $2887.2

For the 20 years contract, this amounts to the pretty amount of:

20 x 2,887.2  = $57,744

To achieve this, we need the panels. Generally, the solar systems are installed for around $8/W+HST. So our 3kW system will cost:

3000W x $8 X 1.13 = $27,120

The resulting net profit is:

$57,744 (the income) – $27,120 (the initial investment) = $30,624

Now we can calculate the return on investment, ROI:

ROI = profit /  investment /20 years = $30,624/$27120/20 = 0.0564 = 5.64%

You can download the simple spreadsheet I’m using and play with the input data to see how it works for your system.

Return on Investment is extremely dear to all the solar contractors, since it potentially tells the “efficiency” of your investment. Some go to lengths and even to deception to assure that their offers will have a higher ROI than any other competitor. The normal ROI you can get with solar installs is around 5% when no financing is involved, maybe a little higher for larger installation. However, I’ve seen offers quoting ROI up to 14%. That’s why I would advise you to disregard it. Yes, you heard me right, TOTALLY DISREGARD IT!

Now, you will agree that this is a simplistic model, good only for a first evaluation. It doesn’t take into account a few factors:

  • as the panels age, their output decreases. Generally it’s just 0.5%/year, but over 20 years it accumulates to real money
  • the are some recurring costs for the system: Hydro connection fee ($5.25/month, or $63/year) and increased insurance premiums ($130/year, in my case)
  • the above recurring costs are potentially affected by inflation, but the income is not indexed in any way
  • the inverter life is around 10-15 years, so it will need replacement during the duration of the microFIT contract
  • you will earn some “solar income”, and CRA wants its pound of flesh:(; there are income taxes to be paid

Obviously, we’ll need a sharper tool to model all these. Fortunately, the kind people from SwitchKingston have done most of the job and provided a free spreadsheet for us to use.  Their comprehensive model will even take depreciation into account!

Now download the file on your computer and let’s do a test! Open the file, go to the Overview sheet and enter the installed power of your system in cell D6 (System cost). Let’s use my case, 3kW. We’ll use the default values provided for the rest of the input data:

Cell Description Default value Notes
D6 System cost The formula in this cell is based on $8/W or $8000/kW of installed power. It is be possible to get better prices, but for simplicity I preferred to keep the default value. If you want, go ahead and modify the formula for your case.
D7 Utility connection fee $1147 This is on the high side; in Toronto it’s probably around $400, if you don’t need a building permit. Again, I kept the default just for simplicity.
D11 Annual performance degradation 0.5% Typical value for most solar panel manufacturers
D16 Energy production 1200 kWh/kW/year this is on the high side, but reasonable; now you can understand that we used 1200 in our simplified calculation just to be able to compare the two models
D20 Utility account fee $5.25/month This will probably be indexed over time, at least by the inflation rate
D21 Insurance 0.4% This depends on the insurer. Some don’t increase their premiums at all, but personally I don’t think it will continue for long.
D23 Inverter replacement $2000 This is on the high side. Electronics are cheaper and cheaper, and in 10 or 15 years the inverter will probably cost $1000. Again, I kept the default for simplicity.
D30 Income tax (marginal) 35% If the solar panels are your only income, the marginal tax rate may be a lot lower lower. But if this is just a side income on top of your job income, 31.15% is probably a good value. See TaxTips.ca for your marginal rate.
D39 Inflation rate 2% arguably, a reasonable long-term value; OPA uses 2.25% in their calculations

Now go on and analyze at the results for a few minutes. The most important thing for me is in cell X36:  the cash position after 20 years is $14,170 $13,024 (while writing this post, I discovered a small error in the spreadsheet; since I’m not sure if/when it will be fixed, I will leave both the wrong and corrected results here). This is the after-tax money you will get from your panels. Quite a difference from the $30,624 profit resulted from the simplified calculations, don’t you think?

Suddenly, my solar project is in jeopardy! I don’t know about you, but investing $27,000+ to get a profit of $13,024 over 20 years doesn’t seem such a good idea to me! And consider that this is the best case, with no financing needed and no shading on my panels to reduce the output.

But wait! This couldn’t be right! If this is true, why do people rush to install solar panels on their roof? And how come nobody pressed the alarm button earlier? Am I missing anything? And, most important, where did $17,600 in profit vanish between the simplified ($30,624) and the more comprehensive ($13,024) evaluations? We’ll see in the next post.



9 Responses to “Is There Money in the Sun?”

  • […] 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. […]

  • Dan:

    Hi Vasile,

    A few thoughts.

    First, I now have two quotes where the cost per kW of installed power is not $8,000 per the spreadsheet but closer to $7,300. So I would adjust that figure lower.

    Second, to make this meaningful to you, I suggest you adjust the factors as they will impact you. For example, what cost per kW do you have from your own quotes received and use those. As well, adjust the Utility Connection fee to that which you will incur. And so on.

    I hope that helps.

  • icabrindus:

    Hi, Dan!

    Thanks for taking a look. This was the first take, and I kept almost everything as it was in the original spreadsheet, to insure everybody who reads the post can quickly and painlessly reproduce the results by themselves. I’m not asking anyone to trust my word, everybody can check the math.

    I did what you’re suggesting in the follow-up posts and I squeezed $3000 more. I also used a lower tax bracket.


  • […] Solar Panels a Gold Mine? « microFIT solar panels: what’s in it for you Is There Money in the Sun? […]

  • john:

    As you’ve probably figured out, when most solar firms talk about your rate of return, they really mean IRR and not ROI. It’s not as deceptive as it sounds, because IRR is the more appropriate measure when discussing capital investments.

    Counter-intuitively, although financing generates a lower NPV, it can make a lot of sense. If you finance the entire system cost, you can have a relatively low-risk (backed by the government) positive cashflow from day one. How many other investment options out there can match that?

    • icabrindus:

      As I’m only an amateur when it comes to finances, I must confess that despite all my reading I still don’t “feel” the meaning of IRR. That’s why I’m using another metric, which is easier to grasp: after tax cash position after 20 years. It’s still not perfect, since it doesn’t take into account the future value of money. I have a modified spreadsheet which calculates that, and obviously the return is a little bit lower. I will post that spreadsheet soon.

      Positive cashflow from day one sounds good as long as you consider all the expenses. In fact, this is where I started my quest. But using a loan adds some other variables (the loan conditions) which increase the uncertainty of the return. Leverage also makes the return look better, so it can be used as a trick.

      • john:

        Net cash position is a perfectly reasonable measure of return. What’s also important is the -yearly- cash position. If you use $27,120 of your own money to purchase the system, that’s money which is unavailable for RRSP contributions, TFSA, mortgage payments, etc. Financing gives you the flexibility to pursue other options concurrently. You could do that regardless of MicroFIT, of course, and simply borrow to invest. However, it’s extremely unlikely that you could find a secure income stream that would exceed your cost of borrowing. The devil is in the details, though, so it’s very important to account for incidental costs and the financing rate (1% difference can be huge!).

  • Dave:

    I would suggest that people who are interested in this as an investment not look at the numbers and compare them to an investment in the bank for 20 years. rather look at the amount like an annuity. you pay a lump sum and then you get monthly payments for 20 years. in 2012, if you paid $150,000 to a bank, they would pay you $800/month (taxable) for 20 years. at the end of which, your initial investment is been reduced to Nil.

    NOW… consider Microfit as an alternative to an annuity. Buy a Solar System for $50,000 for a 10kw system and under microfit 1.0 (80.2 cents / kwh) you will earn $900/month (taxable) for 20 years. at the end of the term, perhaps your initial investment is worth nothing. who cares. you out performed any annuity on the market today that provides a garunteed monthly payment for fraction of the initial investment. you can work out the rate of return you are earning if you wish and argue over wheather RRSP’s are a better investment, but my example shows that it truly is the best investment a home owner can make right now, especially if you want to add to your retirement.

    Even microfit 2.0 provides a better rate of return compared with any annuity on the market today. $50,000 investment pays $600 a month for 20 years. That would cost you more than $100,000 as an annuity to a bank. I saw… NO BRAINER!

    plus, dont forget that this will add to the value of your house if you ever wish to sell. it is fully transferable and the income that it will generate can be used to negotiate a price on your house that may be higher than your initial investment because you have done all the hard work to get this done and someone can live in a house that has a garunteed income “turn Key”.

    • icabrindus:

      Hi Dave,

      My calculations are over 2 years old. The spreadsheet is there for anyone to check for it’s own conditions. Just make sure to include *all* the expenses, and especially the recurring ones.

      You can compare the solar return to anything you can think of, starting with annuities (lowest risk and lowest returns) and ending with stocks or options. The solar risks are obviously higher than for an annuity, so it’s just normal that the return is higher. Does it worth it? I argue the everybody has to judge for himself. My calculations show that for a smallish 2.5 kW installation, the after-tax return was 5.64% at the time. It’s a lot better for a 10 kW system, but I don’t have the roof to install it on. Anyway, prepaying my mortgage got me a slightly better return with only a phone call :-). Yes, the coolness factor isn’t there, but I can live as well without it.

      If you consider the return is good for you, go for it! My only drive to write this blog was the way many solar sellers were taking advantage of people by quoting inflated returns just to make the sale. I’m not here to convince anyone not install panels, I’m merely showing how to calculate the real returns.

      It could be interesting to see how the numbers play for the new microFit rate and today’s lower solar panel prices. But I don’t feel like spending again the time for requesting quotes and digging into the detailed expenses.

      As for your last assumption, I don’t think having solar panels on the house will get you back the invested money if you sell the house. It’s certainly a selling point, but I know that as a buyer I wouldn’t want to pay a premium for that. And this comes from a geek who loves tech! But again, this is just my opinion, which wasn’t tested by life.


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