Solar Economics

The Economics of Turning Sunlight into Electricity

3.68 kW Solar Array

Turning sunlight into electricity is a wonderful idea. Earth receives enough sunlight to power everything mankind does and more if we could only harness that energy. Solar panels are a start, but most people think of using solar panels to generate electricity is more of an investment in green living, rather than a return on investment. This page will give you a general idea of the economics of investing in a solar energy system.

Solar panel arrays are typically rated by the kilowatt – a typical system might be a 4.14 kW (18 panels of 230 watts each). Since power usage is priced in kilowatt-hours (kwh), we need to figure in the hours of sunlight and its intensity to understand how much electricity a 4.14 kW system can really generate.

A 4.14 kW rating for a solar installation assumes that when the sun is directly overhead, and with no shade, the system will generate about 4 kilowatts of electricity an hour. Over 24 hours, that would equate to 96 kWh of power if the sun were shining and directly overhead the entire time. Of course that’s not the case, and the sun is only directly overhead for a fraction of the day. By the way, that 96 kWh is over twice what I use on a daily bases for my three bedroom home.

As a rule of thumb here in Texas, when the number of actual daylight hours are used and after correction of varying intensity as the sun moves across the sky, the power output is about 1400 kWh per installed kilowatt per year. Thus, our 4.14 kilowatt system will produce about 5800 kWh of electricity over the course of a year. Actual results will vary depending on your latitude, cloud cover, and shading. For instance, in Texas, power output is greater than if you live Maine, because we’re closer to the equator – it also assumes your panels aren’t spending the day under an East Texas pine.

Let’s do the MATH…

A 2.4 kW Solar Array

Using our simplified estimate of 1400 kWh of energy per installed kilowatt, we can begin to work out the rough economics of a solar panel system. A 4.14 kW array producing about 5800 kWh of electricity costs about $15,400 to install after the 30% federal tax credit. So, if you’re paying $0.12 per kWh for electricity, the 5800 kWh your panels produce is worth $700 a year.

In this case, the simple annual return is 4.55% ($700/$15,400). In other words, not eye-popping you might be thinking, but let’s compare that to an alternative in today’s market. Because energy is a major component of inflation, and because solar is considered a safe long-term investment (as long as the sun shines for the nest 25 years), let’s contrast 4.55% to the current yield of 1.77% of an Inflation Indexed Treasury. Now how does it look… not too bad!

And of course, so far we haven’t even taken into consideration the pollution prevention aspects. In the first year alone, this small system will prevent over 8000 lbs of CO2 emissions from being released. That’s the equivalent of planting .63 acres of trees, or reducing your driving by 9800 miles.