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The Economics of Renewable Energy Whenever any purchase is made to lower operating costs, the question that will arise is the one about payback: how long will the savings created by a solar system add up to equal its cost? The classic method for calculating simple payback is to divide the annual savings into the initial price to calculate the number of years to payback the original expense of the system. So if a system costs $10,000 and is saving $2,000 per year, the simple payback is five years ($10,000 divided by $2,000.) But using payback as a benchmark for making the decision to go solar begs the question: what is an acceptable payback? Five years say some, ten years say others. A great many people feel that the solar option is justified if it simply pays for itself within its lifetime. Solar electricity generated on site is clean and it recycles dollars in the local economy instead of buying and burning irreplaceable fossil fuel. It also helps our utilities by providing energy when it's most needed, during the summer. The economics of the decision to go solar should really be viewed in the same light as you would view any other investment: its annual return or yield. When a CD, stock or bond is purchased, the annual return that this instrument provides is stated in terms of a percentage. If $1,000 is placed in an account that yields $50 a year, the yield or return is 5.00% (.05 x 1000 = 50). If the yield is taxable, the actual or net return will be less, sometimes considerably. An annual return of 5% that is taxed can actually be less than 3%. The safety or security of an investment can also affect the yield. Usually, the deposits in a large bank in a certificate of deposit produce the lowest return because they are so safe and secure. Risky instruments, like junk bonds or penny stocks, can produce spectacular results, but your entire investment is at risk. You could lose everything. When a solar system generates savings for a homeowner its yield is not taxable. Typically a solar electric system will provide a ten to fifteen percent return per annum. If you want to find a ten percent annual after tax yield on as safe and secure an investment as solar, you would fail in today's economy. A ten percent yield from solar equals at least fifteen percent before taxes; today there is no better an investment opportunity. In fact, it is now possible to borrow at five to six percent to make an investment in solar that yields more than ten. As part of a home improvement loan the interest is deductible so the real cost is even less.
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