How to calculate Solar Plant ROI and PayBack Period

Installing a solar energy system is a lifetime investment. In this blog, we will discuss how to calculate the solar plant ROI & payback period, and important factors affecting them.

Solar power consumption is rising as it’s one of the most efficient renewable energy resources.

Along with being a sustainable energy alternative, solar energy is a major cost-effective solution.

Hence, it’s important to understand the solar payback period (time taken to recover your investment) and the ROI (Return On Investment).

Mostly, people prefer a solar return calculator or a solar payback calculator to calculate these numbers, but it’s also essential to understand how this system works.

As a major investment, you should understand the time taken for break-even & the total amount of savings for your solar plant.

The solar panel ROI & payback period help you determine the financial profitability of your solar plant.

Let’s understand the calculation of solar panel ROI and payback period with a detailed approach.

How to Calculate Solar Payback Period?

The Payback Period is the overall period taken by your solar plant to recover the amount spent on it through your electricity bill savings. 

Post that, the energy produced by your solar plant can be considered as free.

Usually, solar energy consumers use a solar payback calculator to calculate this time period.

It’s important to know your payback period, as it will help you see the financial benefits of your investment. 

A shorter payback results in faster savings.

Let’s have a step-by-step look at how to calculate this period:

• Total system cost

It includes the cost of solar panels, installation costs, permits, an inverter and other equipment.

Example: Let’s consider that your total system cost is ₹ 20,000.

• Value of incentives

The government offers tax benefits and subsidies to adopt solar energy. For example, the Indian government offers 30% benefits.

So, 30% of ₹ 20,000 is ₹ 6,000.

This makes your net system cost ₹ 14,000 (₹20000 – ₹6000).

• Cost of Electricity

This is the cost you pay to the utility company or the state per kilowatt-hour (kWh).

Example: ₹ 0.15 per kWh

• Annual Electricity Usage

This is the total amount of electricity produced by your plant or consumed you you yearly.

Example: 10,000 kWh annually

• Payback Formula

Payback Period = ( Total system cost – Value of Incentives ) ÷ ( Cost of Electricity x Annual Electricity Usage)

=      14000 ÷ (0.15 x 10000)    = 14000 ÷ 1500 =  9.33 years

So, in this case, you will fully recover your investment by approximately 9 years & 4 months. 

Calculating ROI for Solar Panels

The total amount of profit made by your solar plant/system in its lifespan (25 to 30 years) is the Return on Investment (ROI) for solar panels.

This can be calculated using the solar return on investment calculator.

ROI shows the long-term value of solar adoption. A high ROI represents more profits in your plant’s entire life.

Let’s have a look at the steps to calculate ROI:

• Lifetime Solar Cost

It includes the overall costs of equipment, installation, permits, maintenance, and part replacements (inverter replaced after 10-15 years)

Let’s assume your total solar cost = ₹ 18,000

• Lifetime Electricity Cost

This is the cost of your electricity without installing solar panels for 25 years.

Example: 10,000 kWh/year for 25 years at ₹ 0.15 per kWh = 10000 x 0.15 x 25 

    = ₹ 37,5000

• ROI Formula

ROI = Lifetime Electricity Cost – Lifetime Solar Cost

= 37500 – 1800 = ₹ 19,500 

So, your total profit for 25 years will be ₹ 19,500, which is almost 108% ROI on your overall investment.

Example Scenarios 

Scenario 1: National average rates with contractor installation

• System size: 5 kW (ideal for a mid-sized home)

• Total system cost: ₹ 4,00,00

• Government subsidy (30% approximately): ₹ 1,20,000

• Net cost after subsidy: ₹ 2,80,000

• Electricity cost (national average): ₹7 per kWh

• Annual electricity usage: 6000 kWh

• Annual savings: 6000 x 7 = ₹ 42,000
• Payback period: 280000 ÷ 42000 = 6.66 years

Scenario 2: DIY Installation

• System size: 3 kW ( for a smaller home)

• Total system cost (DIY setup + electrician): ₹ 2,40,000

• Subsidy (if applicable): ₹ 72,000

• Net cost after subsidy: ₹ 1,68,000

• Electricity cost (national average): ₹8 per kWh

• Annual electricity usage: 4500 kWh

• Annual savings: 4500 x 8 = ₹ 36,000
• Payback period: 168000 ÷ 36000 = 4.66 years

Scenario 3: High Electricity Rates

• System size: 6 kW (suitable for a large-sized home/villa)

• Total system cost: ₹ 5,00,000

• Subsidy (30%) ₹ 1,50,000

• Net cost after subsidy: ₹ 3,50,000

• Electricity cost (national average): ₹12 per kWh (common in metro cities)

• Annual electricity usage: 8000 kWh

• Annual savings: 8000 x 12 = ₹ 96,000
• Payback period: 350000 ÷ 96000 = 3.65 years

Scenario 4: Low electricity rates with high system costs

• System size: 5 kW

• Total system cost (premimum panels + design upgrades): ₹ 4,50,000

• Subsidy (30%) ₹ 1,35,000

• Net cost after subsidy: ₹ 3,15,000

• Electricity cost (national average): ₹5 per kWh (applicable in a few government-discounted or rural areas)

• Annual electricity usage: 6000 kWh

• Annual savings: 6000 x 5 = ₹ 30,000
• Payback period: 315000 ÷ 30000 = 10.5 years

These different scenarios showcase the ROI & Payback period for different solar panel setups. 

Using a solar ROI calculator or a solar payback calculator can help in determining your long-term savings quickly & precisely.

Factors Affecting Solar ROI

Here are a few factors affecting the solar panel ROi in different ways:

• Installation costs

As compared to a DIY setup, professional installations are more expensive, but they offer a warranty & more reliability.

• Tax incentives & rebates

In India, the subsidy amount varies as it’s 40% for a 3 kW capacity system and up to 20% for systems between 3 kW to 10 kW.

• Fees & Permits

In India, the solar permit costs are usually affordable, ranging from ₹2500 to ₹7000 (depending on the location). These fees include the application & inspection fees, net metering charges, and electricity safety certificate fees (if applicable).

• Maintenance & part replacements

Irregular maintenance can affect the performance of your solar panels. Get an automatic solar panel cleaning system or a solar panel cleaning service to maintain your panel’s performance & efficiency.

Usually, solar systems are low maintenance; you might have to replace the inverters in 1 to 15 years.

• Leasing  & Financing options

Loans or leases can affect the plant’s ROI & payback time. Buying your solar setup outright leads to better profits, according to the solar panel ROI calculator.

• Utility billing structures

Net metering (sending excess generated energy to the grid) majorly increases the ROI.

• Sun exposure & shading

Solar panels with better sun exposure and no contact with shade produce more energy and deliver higher profits.

• Panel degradation & electricity costs

The solar panel efficiency decreases by only 0.5% per year. Your panels might produce slightly less energy, but with the growing electricity rates, you will still save money.

Conclusion 

Looking at these high investment numbers, you might wonder whether solar is worth it.

The high investment results in long-term savings, which makes solar energy completely worth it.

You can recover your investments in the initial 5 to 10 years of solar installations, and then you can save tons of money over the 25 to 30-year lifespan of solar panels.

Here are some long-term solar investment benefits:

• Low electricity bills
• Independent energy source
• Sustainable & eco-friendly
• Increases the home’s value
• Protection from rising energy costs.

Investing in solar is always a profitable investment, and understanding the solar panel ROI & payback period calculation makes your solar journey easier.

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