Renewable energy projects need to be carefully researched and analyzed in order to interest any potential investors. Investors need to know how much energy the renewable source has the potential to generate and how the calculations were derived. Solar energy is infinite, so the risk of running out of this resource is essentially nil. The maintenance of a solar energy system is less than that of other renewables, and considerably less than that of fossil fuel energy. The lifespan of solar panels are on average 30-40 years, and most warranties of solar panels cover an average of 25 years. Investing in solar energy is also very beneficial to the environment. The investment in solar will expand any investor’s portfolio to show environmental awareness, and reduction in their carbon footprint. The solar energy system will also qualify for Solar Renewable Energy Credits (SREC), which earn income through their sale to electrical suppliers in the grid. A federal tax credit of 30% for the system is another important deduction in capital cost. Solar’s extensive lifetime of producing energy make it an attractive investment option for any investor, considering demand for energy and government energy policy.
The potential for financial success is present for investing in solar energy. The federal tax credit reduces the upfront investment by 30% and the IRS allows for accelerated depreciation over a 6 year span. Of course, the most important financial concern to an investor is return on investment (ROI). The US T-Bill has a yield of 2.98% for a 30 year investment. The S&P 500 has an average return of approximately 10%. There are many risks involved with any investment, but the risk analysis for energy demand has a low beta. The internal rate of return (IRR) is a good metric to determine the rate of growth a project is expected to generate. The weighted average cost of capital (WACC) is another analysis to show how capital structure is used, which will help make the decision to invest. The net present value (NPV) is possibly the best financial analysis to determine the value and profitability of an investment. NPV gives results based on cash flows discounted at WACC and proves whether a project is financially worthwhile.
According to the National Renewable Energy Laboratory (NREL), the long-term decline in installed PV system prices is clearly the result of reductions in both module and non-module costs, and module costs have declined at a faster pace, especially over the past several years. In addition, the NREL states that analysts project that PV price trends will remain in their downward trajectory in the near term (NREL, 2012). Technology is reducing the cost of capital for solar investment and the government has incentives in place to reduce upfront costs. The investment in a solar renewable energy system is a good, sound investment decision.
National Renewable Energy Laboratory (NREL). (2012). Photovoltaic (PV) Pricing Trends: Historical, Recent, and Near-Term Projections. Retrieved October 13, 2014,
from http://nrel.gov/docs/fyosti/56776.pdf.