What is the Payback Period on Solar Plants?
With the rapid decline in solar panel prices, on-grid solar power systems have become commercially attractive.
At the same time, solar plants need high initial investment. Therefore, understanding soundness of investment becomes crucial. Payback period, Return on Investment (RoI) and NPV are the most commonly used metrics to gauge soundness of an investment. In this article, we explain:
1. About the payback period
2. How to calculate the payback period
3. Approximate payback periods of on-grid solar systems from 1kWp-500kWp
What is Payback Period?
Payback period is the amount of time taken to recover the initial cost of an investment. Investments with shorter paybacks are more attractive. In general, Investments with a payback period of less than 4 years are considered good. It is also useful to compare choices and arrive at informed decisions. Choices could be:
1. Payback period of solar investment vs investment in energy saving equipment
2. Payback period with different type of panels
3. Payback period with different designs etc.
How to Calculate Payback Period on Solar Investment?
Payback Period on Solar System= Net Initial Cost (INR)/ Net Annual Benefit (INR)
Net Initial Cost
Net Initial Cost= (Initial Cost- Initial Benefits)
1. Initial Cost of the solar plant. It includes the cost of
o Solar panels
o Solar Inverter
o Balance of System (Cables, boxes, earthing system etc.)
o Engineering, transport, and installation
2. Initial Benefits from the govt.
o Subsidies for residential consumers/Savings from accelerated depreciation for industrial consumers
Net Annual Benefit
Net Annual Benefit = (Annual Benefits – Annual Costs)
1. Annual Benefits
For residential consumers, there are no annual benefits from governments. For businesses (Industries/commercial entities), annual benefits from solar plants come in two parts. They are:
1. Savings in electricity bill
2. Tax savings due to accelerated depreciation
Savings in electricity bill can be calculated by multiplying generation from the solar plant with electricity tariff.
2. Annual Costs
These include Operation & Maintenance costs such as
1. Cleaning of panels
2. Health checks by professionals to avoid failures (preferred for large plants)
3. Spares maintenance (preferred for large plants)
O&M costs are considered as 1% of the initial cost for large systems and 2% for small systems.
Using the net initial cost and net annual benefits, the payback period can be calculated. To calculate the accurate payback period of your project, download our RoI Calculator.
Approximate Payback Periods of On-Grid Solar Systems
The average payback period can vary between 2.5 to 5 years. The variation depends on
1. Size of the solar system
2. Local price of electricity
The size of the solar system depends on the electricity requirement of the customer, sunshine available at a location. Read more to understand this
A rough chart with an approximate payback period of different sizes for household users is given below:
The payback period for industrial and commercial consumers in the table does not take savings from accelerated depreciation into account. If these savings are taken into account, payback periods reduce by about an year.
Want to calculate RoI and payback period specific to your case. You can do that using our RoI calculator.