How to Calculate the Rate of Return on Solar Heating

Calculate a Solar Heating ROI,

Solar Heating is a great way to support energy efficiency and a green planet. Since the sun provides its energy free of charge, hoping solar heating benefits your financial bottom line isn't unreasonable. With knowledge of your up front costs to install a system, possible tax credits, ongoing maintenance costs, and the future savings on your energy bill, you can calculate an expected return on investment in a solar heating system.

Instructions

1. Calculate the cost of the system. Include the purchase price, the installation price, and costs associated with removing an old system. This is the cost of your investment.

2. Account for any tax credits as a future savings. In the United States, the Energy Policy Act may make you eligible for a tax credit of 30 percent of the cost, up to $1,500, if you install a solar water heating system.

3. Calculate energy savings by predicting how much energy your solar heating system will offset that which you would otherwise pay a utility company to provide you, such as through electricity or natural gas.

4. Estimate the expected maintenance costs and the lifetime of the system. You may need to consult with your manufacturer to get long-term information.

5. Determine the present value of your future savings and costs over the lifetime of the system by first making an assumption on future annual interest rates, such as 3 percent. For example, if you save $1200 a year in utilities, the present value of the first year of savings is $1200 / (1 + 0.03) = $1165.05. The present value of the second year of savings is $1200 / (1 + 0.03)^2 = $1131.12. The present value of the Nth year of savings is $1200 / (1 + 0.03)^N.

6. Add up the present value of all future savings and costs. The result is the gain on your investment.

7. Calculate the return on investment, ROI. ROI = (gain on investment -- cost of investment)/cost of investment. Convert to a percentage value. For example, if your system creates a gain on investment of $10,000 over its lifetime and costs $5,000, your ROI = ($10,000 -- $5,000)/$5,000 = 1, or 100%

References

• U.S. Department of Energy: Solar Energy Technologies Program
• U.S. Department of Energy: Consumer Energy Tax Incentives
• Investopedia: Return on Investment