Object of this document is to compare options regarding overall financial impact of investing solar PV system compared to using same funds in conservative investment or early principle payment on mortgage.

PV payback estimate… to measure against. The question being how long it takes to recover initial investment cost, and what you have after that. Note that studies estimate the cost of electricity is anticipated to rise 20% in the next 5 years (4% per year), and about 2%-3% after that.
The other aspect of payback is that since the REC/metering credit are actual cash savings they COULD be deposited in some interest bearing account or other investment to further increase the rate of return; I will use a conservative 5% compounding model starting with year 2 using savings/earnings from previous year. (these numbers may need adjustment which would extend the payback time a little since the typical CD these days has dropped it’s yield, so you would not earn as much in compounding… - 9/2008)

11,000 year one tax credits ($9000 federal, $2000 state)
     988 est annual fixed rate REC earnings 7600kWhr *.13
     684 est net metering savings 7600kWhr * .09
12,672 year 1 total
     988
     711.36 net metering 7600kWhr * .0936
       83.60 earnings on savings/earnings of 988+684 = 1672 at 5%
14,454.96 year 2 total
     988
     739.81 net metering 7600kWhr * .09734
     168.57 earnings on savings/earnings of 1672 +988+711.36 = 3371.36 at 5%
16351.34 year 3 total
     988
     769.38 net metering 7600kWhr * .1012
     254.94 earnings on savings/earnings of 3371.36 +988+739.81 = 5098.81 at 5%
 18363.66 year 4 total
     988
     799.88 net metering 7600kWhr * .10525
     342.81 earnings on savings/earnings of 5098.81 +988+769.38 = 6856.19 at 5%
20494.35 year 5 total
    988
    823.90 net metering 7600kWhr * .1084
    432.20 earnings on savings/earnings of 6856.19 +988+799.88 = 8644.07 at 5%
22738.45 year 6 total
    988
    848.56 net metering 7600kWhr * .1117
    522.80 earnings on savings/earnings of 8644.07 +988+823.90 = 10455.97at 5%

25097.81 year 7 total
    988
    874.39 net metering 7600kWhr * .1151
    614.63 earnings on savings/earnings of 10455.97 +988+848.56 = 12292.53 at 5%
27574.83 year 8 total
    988
    901.00 net metering 7600kWhr * .1186
    707.75 earnings on savings/earnings of 12292.53 +988+874.39 = 14154.92 at 5%
30171.58 year  9 total
    988
    928.40 net metering 7600kWhr * .1222
    802.20 earnings on savings/earnings of 14154.92 +988+901.00 = 16043.92 at 5%
 32890.18 year  10 total
    988
    956.58 net metering 7600kWhr * .1259
    898.02 earnings on savings/earnings of 16043.92 +988+928.40 = 17960.32 at 5%
35732.78 year 11 total
    988
    985.55 net metering 7600kWhr * .1297
    995.25 earnings on savings/earnings of 17960.32 +988+956.58 = 19904.90 at 5%
38701.58 year  12 total
    988
  1015.29 net metering 7600kWhr * .1336
  1093.92 earnings on savings/earnings of 19904.90 +988+985.55 = 21878.45 at 5%
41798.79 year  13 total

…so at the end of 13 years, the total installation cost will have more than earned/saved back PLUS we still have equipment rated to last at LEAST 10 more years earning/saving over $3000 per year and rising with cost of electricity and compounded savings from net metering, still adding to the value of the house. 

Versus mortgage principle paydown… it is somewhat irrelevant in terms of liquid funds on a monthly basis until end of mortgage term because additional funds going to principle do NOT reduce monthly payments in a fixed rate loan. While it would shorten the life of the loan and provide early payoff, the same funds applied at any later date would have the same effect. Additional consideration is that since home mortgage interest is deductable in taxes, with a mortgage interest rate of 6.25%, and tax bracket of 33%, the alternate investment need only produce more than 4.125% for a duration equal to time saved at the end of the loan to be a better use of funds. Working backward from our amortization schedule, applying $40k now would shorten the loan by approximately 12 months, and have NO effect on monthly cash flow until then. Using $40k for 12 months at 5% would only produce $2000… nowhere near what it could produce if invested for 29 years. The net is that it makes no sense to dump money into a fixed rate mortgage as it does not lower monthly payments, cash is better spent earning interest in some investment and using initial cash plus earnings toward the end of the loan to payoff early.

Versus conservative investment… assume 5% (similar to CD, Bond, or conservative stock) growth compounded annually. How does $40k grow over the same 13 years the PV system pays for itself (earning $41798.79 )…

Year 1 : 40,000 + 2000 = 42,000
Year 2 : 42,000 + 2100 = 44,100
Year 3 : 44,100 + 2205 = 46,305
Year 4 : 46,305 + 2315.25 = 48,620.25
Year 5 : 48620.25 + 2431.01 = 51,051.26
Year 6 : 51051.26 + 2552.56 = 53,603.82
Year 7 : 53603.82 + 2680.19 = 56,284.01
Year 8 : 56284.01 + 2814.20 = 59,098.21
Year 9 : 59098.21 + 2954.91 = 62,053.21
Year 10: 62053.21 + 3102.66 = 65155.87
Year 11: 65155.87 + 3257.79 = 68413.66
Year 12: 68413.66 + 3420.68 = 71834.35
Year 13: 71834.35 + 3591.71 = 75426.06

…giving total earnings of $35426.06 over the period that PV earned $41798.79 .

In final analysis there are a couple other tangible considerations such as depreciation of the PV equipment; it probably is not worth the $40k initial investment any more in absolute terms if de-installed and sold… but hard to assign value in terms of marketability of the house or emotional appeal to prospective buyers. Other considerations are the earnings value used… where 5% is conservative, changing the assumptive rate doesn’t change the final picture much if you assume the same rate for investment of the earnings/savings in the PV model. 

There are also the intangible values of making a personal investment in the environmental aspect of clean power generation, environmental education and awareness of our children, AND the opportunity to use our home as a model to generate future business opportunities in consulting or some other offshoot of future business.

Disclaimer – I am not a financial analyst, nor a Banker, but this was the best I could come up with to illustrate the general comparison of payback. - Dan