“Install a solar system; it has many financial benefits,” you might have heard a friend or a relative telling you. The promise of reduced energy bills and a more sustainable future has led many individuals and businesses in Pakistan to consider installing solar systems on their rooftops.
However, before investing in solar energy, it’d be helpful to understand the key factors that determine the financial benefits of a solar installation. One such factor is the solar payback period, which plays a significant role in evaluating the return on investment (ROI) and making informed decisions about going solar.
In this article, we will explore the concept of the solar payback period in Pakistan, considering the increasing energy prices.
We will discuss the following:
- What is the solar payback period—and how does it affect the return on investment of solar?
- Average solar payback period in Pakistan
- How to calculate solar payback period?
- Factors affecting the solar payback period in Pakistan
- Solar payback period of some popular systems in Pakistan
Let’s begin!
Understanding Solar Payback Period and Return on Investment (ROI)
The solar payback period is a crucial metric that determines the financial viability of a solar energy system. Essentially, it represents the time required to recover the initial investment through savings on electricity bills.
For example, if you install an on-grid system that costs PKR 800,000, and you save PKR 120,000 each year, then the payback period would be 6.6 years. It means that you will have recovered the initial investment after around 6 years. Since solar panels last for up to 25 years, you can enjoy free electricity for another 18-19 years.
The solar payback period is closely interconnected with the concept of Return on Investment (ROI). ROI is a measure of the profitability of an investment and is calculated by dividing the net profit generated by the investment by the initial cost of the investment.
In the context of solar energy, the ROI is determined by comparing the cumulative savings on electricity bills over time to the initial investment in the solar system. The shorter the solar payback period, the higher the ROI, indicating a faster return on the initial investment.
A shorter solar payback period means that the solar system begins generating positive financial returns sooner, allowing individuals and businesses to benefit from reduced electricity costs and potentially even earn surplus income through incentives such as net metering or feed-in tariffs. On the other hand, a longer payback period may require a more patient approach, but it can still offer substantial savings and long-term financial stability, particularly as electricity prices continue to rise.
Average Solar Payback Period in Pakistan
On average, solar installations in Pakistan typically have a payback period ranging from 3 to 7 years. This means that, within this timeframe, the energy savings generated by the solar system offset the initial investment cost. The specific payback period can vary based on factors such as system size, location, electricity consumption, electricity rates, and the cost of solar equipment and installation.
With an average payback period of 3 to 7 years, solar energy systems in Pakistan offer a relatively quick return on investment. As the cost of solar equipment continues to decline and economies of scale come into play, the average payback period in the country is expected to decrease further, making solar energy an even more financially attractive option.
Also, with electricity tariff rates on the rise in Pakistan, the average payback period for solar systems decreases. Higher electricity rates increase the potential savings from solar energy, making it more financially advantageous for individuals and businesses to invest in solar installations. There is also a net metering policy in Pakistan, which further shortens the payback period in Pakistan.
In 2024, the payback period has become the shortest for solar systems in Pakistan.
What’s the reason? Well, you may be aware of the electricity prices – they are at an all-time high. But the prices of solar panels are at their lowest since 2021. So, while you invest less, you save more. Ultimately, that means a shorter payback period.
How to Calculate Solar Payback Period?
Calculating the solar payback period is simple. Unlike sizing a solar system, which is complex, calculating the solar payback period is straightforward.
Here’s a step-by-step guide on how to calculate the solar payback period:
1. Determine the Initial Investment Cost
Start by identifying the total cost of installing the solar system. This includes expenses such as the purchase of solar panels, inverters, mounting equipment, installation labor, and any additional costs associated with net metering licensing, etc. If you are not sure about the initial cost, let us know, and we will let you know.
To help you, you can read more in our guide to the price of solar systems in Pakistan and the price of inverters. The first article also analyzes the prices of solar panels in the past three years.
2. Estimate Annual Energy Savings
Calculate the anticipated energy savings from the solar system over a year. This can be done by analyzing the historical electricity consumption of your property or using estimated values based on the system’s capacity and the average solar radiation in your area. For example, if you consume 500 units a month, a 5kW solar system can offset your electricity bill completely, especially when you do net metering with the grid. That would be your savings!
3. Consider Maintenance and Operational costs
Take into account any ongoing maintenance and operational costs associated with the solar system, such as routine inspections, cleaning, or potential equipment replacements over time. These costs should be subtracted from the annual energy savings. Often, they are negligible.
4. Determine Net Annual Savings
Subtract the maintenance and operational costs from the estimated annual energy savings to obtain the net annual savings from the solar system. For instance, if the yearly savings are Rs. 200,000 and you spend 10,000 on maintenance, the net annual savings would become Rs. 190,000.
5. Divide the Initial Investment Cost by the Net Annual Savings
Divide the initial investment cost by the net annual savings to calculate the number of years required to recover the investment. This result represents the solar payback period.
An Example Would Help
Let’s consider an initial investment cost of 1,000,000 PKR for a solar system. After analyzing the electricity consumption patterns and solar radiation in the area, it is estimated that the system will generate annual energy savings of 200,000 PKR. However, there are also maintenance and operational costs of approximately 20,000 PKR per year.
To calculate the solar payback period, we need to determine the net annual savings. Subtracting the maintenance and operational costs (20,000 PKR) from the estimated annual energy savings (200,000 PKR) gives us a net annual savings of 180,000 PKR.
Dividing the initial investment cost (1,000,000 PKR) by the net annual savings (180,000 PKR) yields a payback period of approximately 5.5 years.
A solar system for everyone.
We’re customer-centric; we will find you a solution within your budget. Whatever your project size, you can always save with Ecospark Solar.
Factors Affecting the Solar Payback Period in Pakistan
The solar payback period can be influenced by various factors in Pakistan. Some of them are internal factors, such as the system’s size and efficiency, while some are external factors, such as government incentives and taxes, etc.
Here are some key factors that affect the solar payback period in Pakistan:
1. Solar Irradiation and Climate Conditions
The solar irradiation levels and climate conditions in different regions of Pakistan play a significant role in determining the energy generation potential of solar systems. Areas with higher solar irradiation and favorable weather conditions can yield greater energy production, resulting in shorter payback periods. Go through our detailed discussion to learn about solar irradiation levels in Pakistan.
2. Cost of Solar Equipment and Installation
The cost of solar equipment, including solar panels, inverters, mounting structures, and balance of system components, directly impacts the overall investment. Higher equipment costs can increase the payback period while falling prices can lead to shorter payback periods.
3. Electricity Tariff Rates
The current electricity tariff rates in Pakistan affect the financial benefits of solar energy. Higher electricity rates can enhance the potential savings from solar installations, resulting in a shorter payback period. As electricity prices continue to rise, solar payback periods may reduce further, making solar energy more financially attractive.
4. System Size and Efficiency
The size and efficiency of the solar system directly influence the energy generation capacity. Larger systems can generate more electricity, potentially reducing the payback period. Moreover, advancements in solar technology and higher system efficiencies contribute to increased energy generation, impacting the payback period as well.
Read our guide on how to accurately calculate your solar system size.
5. Net Metering
If you are electricity company offers net metering, the payback period of your system can be even lower. It is because net metering allows you to export your excess energy to the grid, thus offsetting your electricity bills. The more your system generates, the lower would be your monthly. Hence more savings and a shorter payback period.
6. Maintenance Costs
The ongoing maintenance and operational costs associated with solar systems can impact the payback period. Regular inspections, cleaning, and potential equipment replacements incur additional expenses that need to be accounted for. If your system doesn’t feature batteries, the maintenance costs would be negligible—thus a shorter payback period.
7. Type of Solar System
Solar systems can be installed in three ways with regard to the grid: on-grid, hybrid, and off-grid solar systems. On-grid systems are the most affordable—consequently, they have shorter payback periods.
Hybrid solar systems feature batteries and are relatively expensive—their payback period is longer than on-grid systems but shorter than off-grid systems. Lastly, off-grid systems cost more in the beginning, as you will have to install a large battery bank. The higher the initial cost, the longer the payback period.
Solar Payback Period of Some Popular Systems in Pakistan
To provide a more comprehensive understanding, let’s delve into the payback periods for specific solar system sizes commonly adopted in Pakistan.
Before that, a disclaimer: The payback periods mentioned below are based on a bigger range our customers have given us. Some systems could have a payback period even as low as 3-4 years. But some systems, especially when the system is smaller and energy consumption higher, could have longer payback periods of up to 6-7 years.
Solar Payback Period of a 3kW Solar System
A 3kW solar system in Pakistan typically has a payback period ranging from 3 to 5 years, considering the average energy consumption patterns and solar resource availability. The precise payback period may vary based on factors specific to the installation. Recently, the payback period would be on the lower side.
Solar Payback Period of a 5kW Solar System
A 5kW solar system, being slightly larger in size, typically exhibits a payback period between 4 to 6 years. The increased energy generation capacity contributes to a faster return on investment. Again, as the prices of panels stand at the moment, the payback period is currently shorter.
Solar Payback Period of a 10kW Solar System
With a 10kW solar system, the payback period in Pakistan generally ranges from 5 to 6 years. The higher system capacity allows for more electricity generation, resulting in shorter payback periods.
Solar Payback Period of a 15kW Solar System
For those considering a 15kW solar system, the payback period is typically around 5 to 7 years. The larger system size ensures significant energy production, enabling faster returns on investment.
Solar Payback Period in Pakistan: Concluding Thoughts
Assessing the solar payback period is important for individuals and businesses considering solar investments in Pakistan. In brief, it refers to the time taken by a solar system to pay back the initial cost to the owner. The exact payback period depends on many factors, some of which we discussed above.
If you want to go solar, make sure you go solar the right way. That is where we come into play—we are experts in what we do, and we are customer-oriented. At Ecospark Solar, it is all about giving you more benefits!
