Payback is the time it takes for the energy savings to cover the initial investment (CAPEX) of a photovoltaic system. It can be calculated in two ways: simple payback, which ignores the time value of money, and discounted payback, which applies a discount rate and better reflects financial reality.
The inputs you need
- The initial investment (equipment, installation, approval).
- The expected monthly generation and the customer's consumption before the system.
- The current tariff and its expected annual increase.
- Module degradation (typically 0.4–0.5% a year), O&M costs, the discount rate and the analysis horizon (usually 25 years).
Without these inputs the projection becomes guesswork — and an optimistic payback is the fastest way to lose a customer's trust later.
The formulas
Annual savings in year t are the energy generated times the tariff, adjusted for degradation and tariff increases, and capped at what the customer consumes (energy that is not used or credited has no value). The cash flow is the savings minus O&M.
Savingst = min(Em·12·(1−d)t−1, Cm·12) × T0·(1+r)t−1
Simple payback is reached when the cumulative cash flow equals or exceeds the investment; discounted payback divides each year's cash flow by (1+k)t first. The LCOE (levelised cost of energy) compares cost per kWh between projects and technologies.
A worked example
Take a system with a CAPEX of R$ 35,000, a tariff of R$ 1.20/kWh rising 6% a year, consumption of 500 kWh/month and generation of 550 kWh/month, degradation of 0.5% a year, O&M of 1% of CAPEX a year, a 10% discount rate and a 25-year horizon. Savings are capped at the 500 kWh consumed, so year 1 saves about R$ 7,200 minus R$ 350 of O&M. Simple payback arrives around the fifth year; discounted payback comes later because it accounts for the time value of money. You can run the same calculation for your case in the solar calculator.
Good practice and common mistakes
- Use the average annual generation, not the sunniest months.
- Use the real tariff increases of the local utility and include losses from cabling and shading.
- Respect the offsetting limits (in Brazil, the minimum availability charge and the Fio B charge).
- Count O&M such as cleaning and a possible inverter replacement, and always apply a discount rate.
The usual mistakes are overestimating generation, ignoring degradation or tariff increases, and leaving out extra costs.
Payback formulas
| Calculation | Formula |
|---|---|
| Annual savings in year t | Savₜ = min(Eₘ·12·(1−d)^(t−1), Cₘ·12) × T₀·(1+r)^(t−1) |
| Cash flow | CFₜ = Savₜ − O&M |
| Simple payback | ∑ CFᵢ ≥ 0 (with CF₀ = −CAPEX) |
| Discounted payback | ∑ CFᵢ / (1+k)ⁱ ≥ 0 |
| LCOE (optional) | ∑ Costₜ/(1+k)ᵗ ÷ ∑ Energyₜ/(1+k)ᵗ |