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:
|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.