Solar
Economic Return
Internal Rate of Return (IRR) of a Photovoltaic
Solar System
Many people ask about the payback period of a
photovoltaic solar system...
Another way to look at it is to ask the question:
"If, instead of buying a photovoltaic solar system,
I put the same amount of money into an investment,
what return would I have to receive in order to pay
for the electricity the solar electric system would
have provided.......?"
This return rate is called the Internal Rate of
Return or IRR.
When
you invest in a solar system, you receive
nontaxable dividends each year in the form of the
cash that is no longer being paid to the utility
company. The solar panel system has an internal rate
of return higher than the yield achievable through
most other investments (see table 1). In other
words, to perform financially as well on a nonsolar
investment, you must receive a return equal to the
solar IRR (on a taxfree investment or the Taxed
Equivalent Rate on a taxable investment). If you
invest the same amount as the net cost of a solar
energy system, you need to make as much money to pay
your utility bills as the solar electric system
saves, plus enough more to pay any taxes on the
investment returns.
Table 1
Electricity Rate Inflation* 
Solar Internal Rate of Return 
Taxed Equivalent Rate** 
2% 
12.8% 
20.4% 
1% 
14.0% 
22.3% 
0% 
15.1% 
24.1% 
1% 
16.3% 
25.9% 
2% 
17.4% 
27.8% 
5% 
20.9% 
33.3% 
*The historical average rate of inflation for
electricity rates has been 2%. PG&E's "Average
Retail Electricity Prices" have averaged 5.15%
annual increases from 1980 to 2013, rising from 4.79
cents/kwh in 1980 to 21.00 cents/kwh in 2013
(source:
http://www.eia.doe.gov/cneaf/electricity/epm/table5_6_b.html).
**assuming a marginal tax rate of 37.3%
Other assumptions:
1. Each peak kilowatt of solar panels will yield
1548 kwh of solar electricity per year.
2. Electricity produced is zeroing 6600 kWh of use,
at an average savings of $0.223/kwh.
3. 4.275 kWp solar energy system costing $11,103
(after 30% federal tax credit, $2597/kilowatt), 30
year lifetime. Most solar panels are warranted by
their manufacturers for 25 years.
4. Solar system has 0 value at the end of 30 years.
In fact, the solar energy system will keep operating
for many years after, producing free electricity.
5. Since savings on utility charges are not taxable,
the fair comparison is with an investment's
aftertax returns. The rate of a taxed investment
which will provide the necessary returns is listed
as "Tax Equivalent Rate".
Since savings on utility charges are not taxable,
the fair comparison is with an investment's
aftertax returns. The rate of a taxed investment
which will provide the necessary returns is listed
as "Tax Equivalent Rate".
Free Analysis
Such calculations show a solar energy system to be a
good investment. There are some unknowns, such as
the future price of electricity, and some variables,
such as the homeowner's marginal tax rate and the
size and cost of the PV system. The projection for
your house will depend on your consumption patterns
and tax status  contact us for a free personal
analysis by phone at 8313331919 or by email
at
info@appliedsolarenergy.com
Examples
The following examples show some interesting results
for two different scenarios.
A home averaging 550 kilowatthours per month
(6600 kWh / year, as in Table 1) putting in a 2.28
kilowatt solar panel system will get economic
benefits equal to a taxable investment paying 25.8%,
assuming utility electricity rates rise at 1% (1/5
their recent rate and onehalf their longterm
historical rates). (See Table 2)
Table 2: Replacing Tier III and IV electricity
Returns as a function of electricity rate
inflation 
Electricity Rate Inflation 
2% 
1% 
0% 
1% 
2% 
3% 
4% 
5% 
PV IRR 
12.7% 
13.9% 
15.0% 
16.2% 
17.3% 
18.5% 
19.6% 
20.8% 
Taxed equivalent rate 
20.3% 
22.1% 
23.9% 
25.8% 
27.6% 
29.4% 
31.3% 
33.1% 









6600 kWh 
Annual Use 
2.28 kilowatt peak capacity 
System size 
3531 kilowatthours 
Annual solar panel production 
$7194 
PV System Cost (after 30% tax
credit) 
37.3% 
Marginal Tax Rate 
$0.2693 per kwh 
Average savings rate for
replaced power * 









* (all of Tier III and IV, some of Tier II)
If the home averages 1000 kilowatthours per
month, and rates rise at their historical 2%, a 2.28
kilowatt solar system will yield the equivalent of
an investment paying 34.8%. (See Table 3) If
you use a lot of electricity, even if rates DECLINE
at 2% per year, a solar system is as good as a bank
account paying 27.2%!
Table 3: Replacing only Tier IV electricity
Returns as a function of electricity rate
inflation 
Electricity Rate Inflation 
2% 
1% 
0% 
1% 
2% 
3% 
4% 
5% 
PV IRR 
17.1% 
18.3% 
19.5% 
20.7% 
21.9% 
23.1% 
24.2% 
25.4% 
Taxed equivalent rate 
27.2% 
29.1% 
31.0% 
32.9% 
34.8% 
36.8% 
38.7% 
40.6% 









6600 kWh 
Annual Use 
2.28 kilowatt peak capacity 
System size 
3531 kilowatthours 
Solar Energy Annual Production 
$7194 
Solar PV Cost (after 30% tax
credits) 
37.3% 
Marginal Tax Rate 
$0.33322 per kwh 
Average savings rate for
replaced power * 









* (Tier IV)