Payback Period

Simple payback

The basic calculation: divide the net upfront cost (after rebates and incentives) by the annual savings.

Example - 6.6 kW solar system:

• System cost after STCs: $8,500
• Annual savings (bill reduction + export earnings): $1,900
• Simple payback: 8,500 ÷ 1,900 = 4.5 years

For most residential solar installations in Australia, simple payback currently sits between 3–7 years, depending heavily on:

• Self-consumption rate - households using 40–60% of their solar generation save more than households exporting most of it at 5–8¢/kWh feed-in tariff
• Electricity tariff - each kWh self-consumed saves the retail rate (28–42¢); every kWh exported earns only 5–10¢
• System quality and installation - cheaper systems may cost less upfront but generate less over 25 years

Battery systems typically have longer paybacks - 8–14 years is common for residential batteries added to existing solar, though this varies with usage, tariff structure, and whether VPP participation is factored in.

What simple payback misses

Electricity price escalation. If your current tariff is 30¢/kWh and rates increase 3% annually (roughly the historical average), year 10 savings will be higher than year 1 savings. Simple payback assumes constant savings, which understates long-term returns.

Degradation. Solar panels lose ~0.5% of output per year. A 6.6 kW system producing 9,500 kWh in year 1 produces about 8,800 kWh in year 15. Simple payback ignores this gradual output reduction.

Time value of money. $1,000 of savings in year 8 is worth less than $1,000 in year 1 because of inflation and the opportunity cost of capital. Discounted payback (or net present value analysis) corrects for this by discounting future savings at an assumed rate (typically 5–7%).

Practical use

Simple payback is useful for quick comparisons and sanity checks - a system with a 3-year payback is clearly better than one with a 12-year payback, before any further analysis. For decisions involving significant capital, it’s worth doing the fuller NPV calculation or using a solar savings calculator that models year-by-year cash flows.

The solar industry has historically oversold payback claims. A quote promising “payback in 2.5 years” on a $9,000 system implies $3,600/year of savings - which would require either very high self-consumption, very high tariffs, or both. Model the assumptions yourself before accepting a vendor’s payback figure.