Financial modelling takes into account solar panel degradation over time, future replacement costs for failed panels and inverters, maintenance costs and electricity tariff changes in the future.
Simple payback calculations are often used by solar installation companies in their quotes. This is a method a simple way to represent financial value.
However, it doesn’t account for a variety of factors that could add significant risk to your project.
The simple payback method
Using the simple payback period method considers only the upfront capital cost to implement the project divided by the first year revenue once the project is up and
A simple payback period indicates how long it takes for the project to “break even”.
There are signigicant limitations to this method as it does not take into account:
- Solar panel performance degradation
- The lifespan of panels
- The replacement labour costs in case of early failure
- Maintenance of the system.
LG Solar product warranty includes panel replacement and labour support for commercial projects. Many competitor panels only offer panel replacement and no labour support for their commercial solar product warranty. LG’s comprehensive product warranty can make a big financial difference in the long term.
The Net Present Value (NPV) method
This is the ideal method for valuation of solar projects, as it considers a wide range of factors. Under the net present value method, all cash flows, both projected revenue and costs are considered, for the life of a project.
The value of future cash flows get adjusted to reflect their value in the present day. This adjustment is done via a “discount rate” that takes into account inflation, the risk of the project and the cost of capital.
The present values of all the positive and negative cash flows are then summed up to determine the projects net present value.
The importance of diligence in financial assessments
The Net Present Value (NPV) method can take all future costs into account. This includes potential premature panel failure and associated replacement costs over the project life, inverter replacements at the end of their life and degradation of panel performance over time.