But that would be a very short post, so this is a post about how you can do a simple Net Present Value (NPV) calculation to see if any investment is worthwhile. Net Present Value is a method of financial analysis widely used in industry to see whether a project is worth pursuing. The answer is very simple: if the NPV is greater than zero it is viable. If NPV is less than zero it means you are making a loss on your investment compared to what you could get doing something else with your money.
In this post I’m looking only at the Excel NPV function, since it is quick and easy. Many people have Excel available from the home version of MS Office, or their kids may have it on their school laptops. Here I’ll do a NPV calc for the use of solar panels with a battery and generator to go off-grid. I’ll use Excel’s goalseek option to work out how much this costs in cents per kWh.
For some assumptions, I’ll use a 4 kW solar PV set up based on Sydney prices ($6,557, which includes Federal subsidies). I’ll assume the panels produce for 8 hrs a day. The battery is a day of capacity as new, so at 4 kW and 48 V the calculation is:
Ah required = 4 kW x 8 h x 1000 / 48 V = 625 Ah
Without chasing around for deals, I’ll just go find a 48 V and 600 Ah battery, which from this shop is priced at $9,336. Obviously a single day of capacity won’t get you through a week of wet weather, but batteries are expensive, so we’ll add a generator for long periods of no-Sun.
The generator has to be sized for peak amperage, so I’ll go for one which does about 6 kW, which I’ll grab randomly from this generator shop for $4,350. I don’t know exactly how much diesel it will consume, but I’ll use 1 L/h as an estimate. We’ll assume that solar can do the job for 275 days a year, so the diesel generator will be running 8 hrs a day at 50% capacity the other 90 days a year, with the battery doing the load levelling. So that is 90 x 8 = 720 L of diesel per year.
I don’t know what the installation cost for this whole system is, so I’ll just use $2,000 as a rough number. It would probably be much more, but this will do for a rough calc.
So we have for the capital cost the panels ($6,557), the battery ($9,336), the generator ($4,350) and the installation ($2,000). For operating cost I’ll take the diesel at $1.50/L ($1,080/yr), some insurance at $5/week ($260/yr) and some minimal maintenance ($100/yr). I’ll assume the investment is over 10 years for the calculation. Both the solar panels and the battery will lose capacity over time, and after 10 years the battery would probably be completely dead, but a simple 10 years will do for a rough calc. With these assumptions the spreadsheet looks like this:
The power produced in this case is all the power you have consumed: 4 kW x 8 hrs = 32 kWh per day, which is 275 days of solar power and 90 days of wet weather generator power.
To work out how much the off-grid power cost you, you use the Goal Seek tool as shown. It can be found in the What-If Analysis item in Excel 2010. By hitting OK with these settings the NPV is set to zero by adjusting how much you “get” for the power. It is necessary to enter an interest rate, ie. cost of capital, into the NPV function so I’ve chosen 7%. As you can see your solar power setup cost you about 40c/kWh with this set of assumptions.
What this means is if you can buy electricity for less than 40 c/kWh from the grid you would be better off, but if the purchased electricity costs more than 40 c/kWh you would be ahead with your investment.
With this spreadsheet you can also see how much you make or lose. So for example if you enter a Power value (cell L3) of 25c/kWh the NPV will come out to -$11,073. You are behind $11,073 compared to using the $22,243 to pay down your mortgage at 7% instead.
These numbers are just quickly pulled together. The aim of this post is to show how you can do a fast and simple financial test of any investment using the NPV function. The warning, as always, is this calculation is only ever as good as your assumptions.