Solar: The No-Risk Path to Wealth Creation
Petroleum and Natural Gas Watch
by Michael Vickerman, RENEW Wisconsin
February 27, 2007, Vol. 6, Number 4
Awhile back, I wrote a column which was highly critical of using payback analysis to figure out whether installing a solar hot water system on one’s house makes economic sense. In almost every example you can imagine, the payback period for today’s solar installations ranges between long and forever. For my system, which started operating in January 2006, payback will be achieved in a mere 19 years using today’s energy prices, though by the time 2025 rolls around, half of Florida might be under water and the rest of the country out of natural gas.
What message does payback analysis convey to the average household contemplating a solar installation? It can be boiled down to this harsh assessment: the chances that you will be living in the same house when the system is fully paid off are remote, so you’re better off leaving solar off the table.
Indeed, payback analysis reinforces the popular perception that solar energy is unaffordable, and that homeowners should wait for technological improvements or cost reductions before pursuing this energy option. But from the standpoint of energy security and climate protection, every day of inaction leaves us in a deeper hole. We no longer have the luxury of waiting for external triggers — be they painful market signals or nasty resource wars — to spur us into doing the right thing.
But there’s no reason to let payback length rule one’s ability to invest in sustainable energy for the home or business, especially if there are other approaches to valuing important economic decisions. One way to sidestep the gloomy verdicts of payback analysis is to do what most companies do when contemplating a long-term investment like solar energy — calculate the internal rate of return (IRR) on the invested capital. The definition of IRR is the annualized effective compounded return rate which can be earned on the invested capital, i.e. the yield on the investment.
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This is fascinating. As someone who just replaced an air conditioner and furnace with a heat pump, I can add that if you have to replace a system anyway, then the rate of return is even more, because if you have to buy something anyway, all you have to recover is the difference in cost which is much less than the whole cost. So, when your water heater breaks, and it will, get a solar one. Or at least the most efficient one you can.
free_electron
April 21, 2007