Solar economics — look at cash flow, not payback

By Bristol Stickney, technical director,
Cedar Mountain Solar Systems, Santa Fe, N.M.

Whenever a solar heating project is under discussion, someone always brings up the concept of “payback.” This idea is based on the assumption that the extra cost of installing solar equipment must pay for itself in energy savings in some fixed amount of time. If it doesn’t, then it is not worth installing the solar equipment. The payback period is often picked at random, say five, seven or 10 years. This “simple payback” analysis (so often scribbled on a paper napkin during lunch) is easy for everyone to understand because the math is elementary. I guess that’s why it is so popular. But it produces, at best, a factoid for an answer and, at worst, a completely false representation of the economic benefits of a solar heating system.

What if you were building or remodeling a heating system and you found out that, because of the way financing for construction and home improvements are structured these days, you could include solar heating with virtually no additional expense to the project? Suppose that, to top it off, the cost of operating the heating system for the next 20 years or more will be less than half of what a conventional heating system would require. And, even better, that, because of the ever-increasing cost of conventional energy over time, the cash flow benefit increases every year?

Most of the solar heating projects I have designed in recent years fit this description, in part or in whole. Sometimes the owners are partly swayed by the more intangible benefits of being “green,” which doesn’t really fit into any kind of economic analysis. If the initial expense is insignificant, and the cash flow is positive and that benefit increases every year for the life of the system, then the payback is irrelevant.
At the very least, the investigation into solar heating should go beyond payback to include fuel inflation, interest rates on the project financing, national and local incentives for energy efficiency and all the other variables impacting a construction project today. The calculations are not so simple; that is where computers come in handy.

In the past few months I introduced some of the computer software available to model and analyze solar heating installations such as SAM, Retscreen, Tsol and Polysun. All of these programs include an economic analysis section that allows an inspection of the effects of interest rates, incentives, fuel costs and the like. Many of these computer tools also try to put a value on the green benefits as well, by reporting on avoided carbon emissions and other pollutants.

Multiple variables

Here at the SolarLogic Lab, Fred Milder and I have been comparing this kind of economic data on a spreadsheet that Fred created. Following is a brief description of the variables needed for a realistic economic model. We will be using an example project to illustrate a typical residential solar combi heating system in the United States.

• The cost of borrowed money: Most construction projects are financed. Home equity loans offering historically low interest are available today. The amount and terms of the loan for a solar installation must be included in an economic evaluation. For our example, we will borrow $30,000 at 3% interest for 15 years to install a solar hydronic combi heating system in a typical residence.

• Costs recovered from rebates and incentives: The actual amount depends on the owner’s individual tax status and the state and local offerings. Remember that not all heating equipment is automatically eligible for a rebate. If a component is required as part of a conventional heating system, it may not qualify. In our example, we assume that $25,000 worth of equipment qualifies for a rebate. Our tax bracket allows the full rebate to be collected in the first two years after installation, using the New Mexico rebate limits.

• Heating energy required: The domestic hot water and space heating needs for the residence each year must be estimated in order to put a value on that amount of heating fuel. In our example, the building consumes one million Btu per year.

• Cost of fuel over time: The cost of fuel changes all the time, and it is not possible to predict what will happen in the future for all sources. One commonly accepted method of estimating this is to look at the trends over the last ten years and project that forward into the future for economic comparison. A good resource for this information is the U.S. Energy Information Administration (EIA.gov). In our example, we use propane at $3 per gallon, with a price increase of 10% per year.

• Solar energy delivered to the heating load: The solar heat that actually offsets conventional fuel use each year can now be compared to the cost of fuel to determine an economic savings. In our example, we install 320 square feet of flat plate collectors and use an SRCC collector rating that corresponds to a partly cloudy climate. Figure 25-1 shows the results from our example project using the economic data described above. This graph shows the cumulative cost of heating with and without solar and with and without rebates more than 20 years.

Compelling cash flow

The typical “simple payback” analysis is actually a special case, where the solar installation is paid for by the owner in a lump sum up front instead of using borrowed money. The fuel inflation rate and tax incentives may or may not be included (depending on the size of the napkin you are working on).
In our example, seen in Figure 25-1, I have included two payback graphs shown as pink and red lines. Notice that the initial cost is seen as a major expense, which is slowly offset by solar savings. The point of payback occurs when the accumulated solar savings cross the black line that represents the accumulated non-solar fuel costs. The solar rebate (red line) lowers the initial cost and causes payback to occur about two years sooner.

The same data is plotted on Figure 25-1 for this example, when the project is financed for 15 years at 3% as described above. The results are much more compelling because there is no large cost up front and the savings are immediate. In fact, when a rebate is collected in the second year (the green line), the costs “go negative” which indicates cash flow into the owner’s pocket rather than out of it.
Even when no rebate is collected (the blue line), the financed system never costs any more from year to year than the non-solar option (the black line). The savings kick in by the third year and continuously increase for years to come.

In this example, a payback analysis shows a negative benefit for the first eight to 10 years, while the cash flow analysis for prudent financing shows continuous benefits right from the beginning. Of course, every project is different, by region, by climate, by fuel type and by type of construction, and each has its own economic fingerprint. The economic evaluation really must be personal. The powerful tools like those built into Retscreen and other computer models make this as painless as possible.

Beyond economics

There are other advantages that owners experience from their solar heating systems besides economics. Abundant domestic hot water from the typically larger solar hot water tanks can provide a feeling of luxury. Extra heat in summer can be diverted to a hot tub or pool without any added fuel cost. Night Sky Radiant Cooling (NSRC) can often provide extra comfort or savings. Solar heat can deliver extra LEED points for designers who are involved with high efficiency buildings. Solar heat provides a kind of insurance against the future cost and instability of conventional fuel. And, of course, solar heat offsets CO2 and other emissions in a big way, so anyone concerned about their carbon footprint can use solar energy to improve their green impact.

Looking at these graphs, we can see that the annual savings steadily increase over the years as the cost of fuel increases. The biggest benefits occur over the long term. This implies that the solar components must function reliably and consistently over the expected lifetime of the equipment. In other words, the system must be designed, installed and maintained in accordance with the six principles of good solar design. The systems must especially be Reliable and Serviceable if they are going to deliver the economic goods over time.

Final notes

At SolarLogic, we are developing integrated methods of design, installation, control and monitoring for Solar Combi heating systems based on our field experience from recent years. Our goal is not only to assure that a working system is installed but also that its proper performance can be monitored, verified and maintained over the years.

Special thanks to Dr. Fred Milder for the original economic insights included in this article.

Brand names, organizations, suppliers and manufacturers are mentioned in these articles only to provide examples for illustration and discussion and do not constitute any recommendation or endorsement. Calculations and estimates are for example only, and are not intended for any particular design application.

Bristol Stickney, partner and technical director at Cedar Mountain Solar Systems in Santa Fe, N.M., has been designing, manufacturing, engineering, repairing and installing solar hydronic heating systems for more than 30 years. He holds a Bachelor of Science in Mechanical Engineering and is a licensed Mechanical Contractor in New Mexico. He is the Chief Technical Officer for SolarLogic LLC and is involved in training programs for solar heating professionals (visit www.cedarmountainsolar.com or www.solarlogicllc.com for more information.)