Solar ROI & Payback

What is Return on Investment (ROI)

Simple ROI is the incremental gains of an action divided by the cost of the action. This metric will predict the percentage or ratio of gains to cost. You will hear ROI given as a number, usually a percentage. For example, if someone tells you that your R100,000 investment has an ROI of 25%, you can expect your incremental gains to be 25% more than the investment.

What is “Payback Period”?

Payback period is the length of time that it takes for the cumulative gains from an investment to equal the cumulative cost. In other words, how much time it takes for an investment to pay for itself. Investments with shorter payback periods are considered to have lower risk than those with longer payback periods.

What is the ROI of a Solar system?

While traditional electricity suppliers continue to consistently increase the cost of supply, solar system costs have come down significantly in recent years. This is due to an increasingly competitive environment, a popular move towards greener energy and homes and businesses looking to take control their electricity costs in tough economic climates

This has reduced the average payback period and increased the ROI (return on investment), making the investment in Solar far more attractive for the consumers. The average payback period for a commercial solar system is between 3 and 6 years and is dependent on the following factors:

  • Geographical Location – different areas have higher solar yields due to local weather conditions for example inland and coastal areas;
  • Electricity tariffs – the higher your kWh (Kilowatt Hour) tariff from Eskom or City Power the quicker the Payback period and the higher ROI;
  • The size of your Solar system. The larger the system the lower the price per watt produced;
  • The angle of the Solar panels and orientation of the panels towards the north.

It is important to calculate the 15 or 20-year Internal rate of return (IRR is a metric used in capital budgeting measuring the profitability of potential investments) providing a view of projected savings over a 20-year period. The IRR also takes into consideration, maintenance and replacement parts of your solar system