Profitability calculation: When does a solar energy system pay off?
There are several reasons and incentives to invest in a solar energy system. While real estate companies are strategically expanding their service portfolio and large landowners are modernizing building infrastructure, private homeowners are simply dreaming about having their own solar and clean energy system. Nevertheless, the same question keeps on being raised:
When is it worth investing in a solar energy system?
This post will explain to you how the profitability of an energy solar system can be calculated.
Three basic parameters for measuring profitability
Are you planning a solar system for a specific building? Maybe you want to find out which roofs from your property portfolio are best suited for a solar energy system? Get the answer by calculating the following three parameters:
Net Present Value (NPV): How much is the investment worth today?
Payback Period: When will I earn as much as I previously invested?
Internal Rate of Return (IRR): What is the compound annual rate of return that will be earned? (Also known as the economic rate of return, making NPV equals to zero – editor’s note).
Calculate the yield of a solar energy system – how it works
Regardless of the building you wish to install a solar energy system, one rule prevails. From a cost perspective, always pay attention to the three investment measures, operating and capital costs. Lastly, compare the final result with the yields your solar systems will generate. This will already give you a good grasp on its profitability.
It does sound like a no-brainer, doesn’t it? Nevertheless, the key parameters look utterly different if the energy system is deployed at a private scale (single family home for instance) or geared towards industrial use (large infrastructure and property).Here’s what you have to consider when calculating the costs and yields for your solar system:
Planning and construction costs of the system: Several assumptions need to be taken into account while evaluating this aspect. It is therefore crucial to collect serious offers in regard to the construction site and the operating system. To some extent, additional measures need to be deployed such as roof renovation, or additional wiring connecting the roof with the basement for instance.
Meter system and other infrastructure: Clarify right from the beginning how the electricity consumption is measured in the given building. Is the current system capable of measuring the newly installed solar production? Or new measures should be implemented?
ZEV Setup ( Zusammenschluss zum Eigenverbrauch – Self-Consumption Community): How would you like to design your own self-consumption? Would you rather stick to produce your own electricity with solar panels and resell it later to other residential parties? What about integrating new additional components? Maybe you have the possibility of installing a charging station in the garage or even storage capacity within the ZEV. Even merging with other buildings in your neighbourhood and selling your electricity to even more parties is possible.
One-off payment (EIV): The “one-off payment” (EIV) is a Swiss Confederation initiative focusing on the promotion of renewable energy. You may be eligible to obtain this one-off payment with the Confederation’s support (allowances up to 20-30% of a reference solar plant). The company in charge is Pronovo AG .
All recurring costs should be considered when it comes to operating costs. In a ZEV setup, this includes for instance, the maintenance and necessary repairments and spare parts, monitoring and inspection, system cleaning, and the administrative part. Other costs to take a close look at include the roof rental, VAT, insurance or monthly costs for the Internet connection.
Cost of capital
The next step will be to calculate your cost of capital. It’s easy and straightforward with this formula:
Cost of capital = reference interest + 0.5%
Once the solar system is installed, you will generate the following multiple income streams:
Return delivery tariff to the network operator: Note – Differences in tariffs apply between service providers. Here is an overview of the different tariffs.
Guarantees of Origin Tariff (Herkunftsnachweise- HKN): The grid operator reimburses you a certain amount for the Guarantee of Origin (HKN) for each kilowatt/hour (KWh) of solar power provided. The network operator defines the tariff. This Guarantee of Origin provides transparency to the end-consumers. It acts as a certificate for the origin of your electricity.
Own consumption tariff: In order to define your own consumption tariff, production costs should be calculated first. Since the tariff must be less expensive than the main electricity costs (medium product of the network operator) you, as a ZEV operator, can set a price between your own production costs and the network tariff. When setting the tariff you must consider the «Profit Share» scheme between you as ZEV operator and your tenants.
Self-consumption quota: The self-consumption quota refers to the energy consumed on site as a percentage of the total energy generation. It measures how much electricity is self-produced and consumed by your ZEV. The higher the quota, the more profitable your investment will be. For the returned energy to the network you usually get rewarded with single-digit amounts per kilowatt only.
One-off payment (EIV): With the one-off payment, you can count approximately between 20-30% of the investment costs of a reference solar plant. The federal government awards this remuneration to promote photovoltaics in Switzerland. It will be paid out to you by Pronovo AG.
In a nutshell, in order to implement a solar energy system, several steps need to be identified and potential additional measures scrutinized. When it comes down to yield, the Self-Consumption Quota and the Guarantee of Origin Tariff are important profitability drivers for you and your system to consider. When it comes to costs, additional construction costs can be decisive in determining whether the solar system is profitable.
Now you have just learned how to calculate the costs of a simple photovoltaic system and how to estimate the earnings. If you wish to be more precise and assess how profitable your solar energy system could be, the best way to start is to contact an expert in this field, a solar energy technician and get an offer.
You will find here further information helping you in your researches and planning. Would you like to be advised on assessing the parameters? Ormera will be happy to help you in this process. Contact us!