Is going solar an investment?
If there was a prize for most asked question, this one takes all the medals home.
Well, one thing that’s clear is going solar is an investment to give our future generations a shot at making it out of this climate collapse, but since we are all here to do some number crunching so let’s go 🏃♂️
Two things to keep in mind before we dive in;
This is absolutely not investment advice, just us reporting on numbers we have come across and our perspective about it.
This is more about solar in general, and kind of applies in the same way to all the flavors out there, be it rooftop solar or community solar.
The core purpose for many to switch to solar is to offset power bills. And with that as a frame of reference, the obvious next step to calculate what is the payback period based on what we avoid paying to the local utility. While we pencil in the cost of solar against the savings from energy generated, a rather interesting question pops up;
“Is it worth it?” Say if we had put that money in the bank or another investment instrument, would I be generating value that would otherwise pay off the cost of energy?
So how do we frame the financial incentives of going solar?
There are two attributes of solar we need to address first;
Solar is a reliable, long-term product:
Photovoltaic (PV) solar systems have very few moving parts, and the silicon plates themselves degrade less than 1% annually, which means they last multiple decades.
While power generation from the panels is dependent on the amount of sunlight that strikes its surface, which can be intermittent and erratic in Indian monsoons, from an annual or longer time scale (accounting for all seasonal cycles), we can forecast the power generation with a high degree of confidence. In a nutshell; as long as we are sure the sun rises every morning, solar power is quite reliable.
It’s agnostic to financial stress:
Most financial products are linked or dependent in some form on how markets operate, and during times of financial stress, the health of these products can degrade. Solar is pretty much separated from these uncertainties. Once again, as a product that benefits as a function of solar radiation, it generates value (in the form of direct energy offsets or indirect energy credits) as long as the sun shines.
These two factors mean solar inherently has lower volatility. So one way to address the question ‘Is it worth it’, is to compare it with other kinds of savings and a particularly well-understood and low volatile form of savings is bank fixed deposits.
Here you can see that even at conservative projections, savings on energy costs from solar surpasses savings and interest earned from a bank fixed deposit for the same amount of capital.
(The considerations here are for a 15-year time horizon and tariff rate/ kWh at ₹5 and an interest rate of 7%)
However, simply looking at total savings at the end of a solar panel's lifespan doesn't paint the full picture.
Why? Because the beauty of solar energy is that the savings start rolling in from day one. Every sunrise brings with it a reduction in your monthly bills, rather than waiting for some distant maturity period.
And an essential principle to remember here;
“Today's cash is worth more than tomorrow's”.
So, how do we factor in the value of time when calculating solar savings?
One way is to consider the net present value (NPV) and internal rate of returns (IRR). However, these concepts can be complex and challenging to compare with non-similar items.
But here's an easier way to look at it. Since energy is a daily necessity, think of the savings on energy as extra cash staying snug in your wallet.
Using this framing, consider the 'solar savings' as additional free cash that can be used for monthly recurring deposits (RD) for the next 15 years.
And here's the real kicker: Once we factor this in, the recurring savings from solar energy can yield a value over 30% higher than that from a similar fixed deposit.
Now, that’s pretty sunny huh? ☀️
(Do note that while FD rates can vary over time, the RD rates also often increase/decrease in correlation, which nullifies the shifts)
While this framing works quite well for typical rooftop solar systems, both the graphs above have taken Digital Solar parameters into consideration. You can read more about how Digital Solar works here →
We are still actively mapping out different ways to account for the time factor in a more simplified structure, so if you have other ideas, please let us know in the comments below!