What is the Payback period and the Financial feasibility of the solar roof in

India?
April 14, 2015 05:00PM

In the previous article,What is the average cost of solar

roof in India ?, we learned that the average cost of the solar roof in India is Rs. 83 /watt to Rs.
91 / watt (without battery back up).
Now let us determine the Payback period and the financial feasibility of the project .
The Payback period is the time required to cover your initial investment made in purchasing and
installing the solar roof at your residence. We will determine the financial feasibility of the
project through Net Present Value method, which is done by summing all the future savings after
discounting them to the present value and subtracting the initial investment.
(Photo credit: https://www.flickr.com/photos/coshipi/8557119423/in/photostream/)

The following is the step-by-step procedure, which tells on how to determine the payback period
and the feasibility of the solar roof:

Determine the average cost of your solar roof: Here we are assuming that you have
installed 1 KW system at your roof top which costs you in between Rs. 83,000 to Rs. 91,000. You
can get the cost for the higher wattage like 2 KW or 3 KW by simply multiplying it by average
cost per watt, which is Rs. 83/watt Rs. 91/watt

Determine the daily average number of sun hours: You can find this data from the official
website of renewable energy of your state. The average number of daily sun hours in Delhi/NCR
is 5.5, therefore I am taking this value in the calculation.
I am listing the average values of solar radiation for few Indian cities in the table below:

Calculate the units generated by your solar roof: Your 1 KW system will generate 1 KW x
5.5 hours = 5.5 KW-Hr or 5.5 units in a day under ideal conditions, that is when we assume that
there will be no energy conversion losses and heating losses. But in actual conditions, there are

certain losses which reduce your output power. Here we assume that our system is 85% efficient,
which means that it will generate 5.5 units x 0.85 = 4.675 units in a day. The 15% of the energy
will be lost as:

The conversion from solar energy to DC electrical energy

DC energy to AC energy

Dissipation of energy as heat when it passes through wires

Understanding the performance of your solar panel: When you purchase the good quality
solar panel, the manufacturer provides you the performance warranty on it. It states that the solar
panel will perform at 90% in first 10 years and then 80% from 11 th to 25th year. (Please read
"Seven points to consider before buying solar panels for your home").
Therefore, from 1 to 10 years of operation, your system will generate 90 % of 4.675 units = 4.21
units
The efficiency of the system will further reduce by another 10% in 11 th till 25th years of operation,
then the system will generate 80% of 4.675 units = 3.74 units

Table:

Find the average rate of electricity per unit in your area: The electricity that you receive
from the grid comes at a cost, which is generally expressed as the rate per unit consumed. The
rate of the units consumption is divided into slabs, for first 200 units consumed, the rate of units
consumed is less and for higher consumption, the slab rate increases accordingly. You can find
this by simply dividing your monthly bill by the number of units consumed in a particular month.
You will get the more accurate average value if you divide the total bill of a year by the number
of units consumed in that particular year. Anyhow, I am taking the average rate of Rs. 4.5 / unit.

Include the maintenance cost of the system: Your system will need maintenance, after
installation, on regular basis. The maintenance process will involve the following activities:

Regular cleaning of the solar panels

Checking and tightening of the loose connections, fuses and switches in the system

Checking and service, if required, the inverter section of the system

Regularly monitoring the output of the system

(Please read "Factors to consider before implementing solar PV system at your home.")
During initial years of operation, the cost of maintenance will be less and afterwards it will start
increasing with the age of the system. We assume that it will cost us around 2% per annum of the

cost of the system or you can take 10 % per annum of your yearly savings as your maintenance
cost. I am taking the latter assumption in this example.

The electricity from grid will not remain at Rs. 4.5 / unit forever: By looking at the past
trend, the rate of the electricity is growing at an average rate of 8% per annum. In order to get the
realistic picture, we need to consider this in our accounting to evaluate the payback period. Here,
we assume that the rate of electricity will grow at the rate of 8% per annum till the life of the
system which is 25 years.

Summarizing all the details in the form of the table to get the Payback period:

The life of the project is 25 years

Formula for the Yearly savings = Units generated x rate of electricity per unit x 365 days

Net yearly savings = Yearly savings Yearly maintenance cost

Now to get the Payback period, you can see in the table in between 10 th and the 11th year, the
cumulative cost exceeds the total cost of the system, which is Rs. 91,000. Therefore, the Payback
period of the system is in between 10 and 11 years, that is your solar roof will recover your initial
investment in approximately 11 years.

Your solar roof will give Rs. 3, 62,564.20 in 25 years. Your net savings will be Rs. 3, 62,564.20
minus your initial investment (Rs. 91,000) = Rs. 2, 71,564 in 25 years.
The main disadvantage of the Payback period method is that it does not take in to consideration
the time value of money. The yearly savings or income that your solar roof will generate in
future, when discounted, say by the rate of inflation, will have less purchase value in present.
Therefore, to get the more realistic value of your solar roof, we need to calculate the Net Present
Value of the future savings or income generated by the solar roof.

Net Present Value = Sum of present value of all the future savings by the solar roof
The initial investment
If,
NPV < 0, then solar roof is not a feasible option and it is rejected
NPV > 0, then the project is feasible and it is accepted
I am taking the discount rate as the rate of Inflation, which is 7%. Now, discounting all the future
net saving by this rate we get:
NPV = Rs. [6223.41/(1.07)1 + 6776.64/(1.07)2 + 7191.54/(1.07)3 + 7744.68/(1.07)4
+ ........................+ 26291.79/(1.07) 24 + 28134.72 / (1.07)25] Rs. 91,000
NPV = Rs. [(6223.41/1.07) + (6776.64/1.16) + (7191.54/1.25)
+ ............................... + (26291.79 / 6.35) + (28124.72 / 6.86)] Rs. 91,000

(7744.68/1.35)

NPV = Rs. [5816 + 5842 + 5753 + 5737 + ................................................. + 4140 + 4101] Rs.
91,000

NPV = Rs. 1, 21,999 Rs. 91,000 (Initial Investment)

NPV = Rs. 30, 999, which is > zero

Hence, the project is feasible and acceptable.
Conclusion: The Indian residential solar roof of 1 KW has a payback period of 10 11 years
and it is a financially feasible project.
As you increase the wattage of the solar roof:

The overall cost of the system will decrease due to economies of scale

The Payback period of the project will reduce because of reduction in the Initial
investment

The Net Present value of the project will increase.