"How soon will it pay for itself?" is the question behind most solar sales. The honest answer depends on the customer's tariff, their subsidy, how much of the solar they can use, and assumptions about the future. A good installer shows the calculation, explains the assumptions and the risks, and lets the numbers persuade. A bad one says "free electricity for 25 years, guaranteed". This lesson teaches the first approach.
The three measures
- Simple payback: the number of years until cumulative savings equal the net investment. Easy to understand, but it ignores everything after payback and the time value of money.
- NPV (net present value): all future savings, each discounted back to today at a chosen rate, minus the investment. Positive NPV means the system beats that rate. It is in rupees.
- IRR (internal rate of return): the discount rate at which NPV is exactly zero. It is a percentage, so customers can compare it with other uses of money, carefully.
Building the model
Each year's cash flow is:
Saving = generation × value per unit − O&M − replacements
With these inputs:
| Input | Value used | Why |
|---|---|---|
| System | 3.3 kWp DCR, Jaipur | Example from lesson 1 |
| Price | ₹2,02,272 incl. GST | Lesson 1 cost sheet |
| CFA | ₹78,000 | PM Surya Ghar (check current) |
| Net investment | ₹1,24,272 | |
| Yield | 1,546 kWh/kWp/yr | Jaipur city benchmark, rooftop-derated |
| Degradation | 2% in year 1, then 0.55%/yr | Mono PERC warranty curve (lesson 1's modules); TOPCon would be 1% and 0.4% |
| Value per unit | ₹8.40 | Blended value of the units solar removes: mostly the ₹7.00 slab plus ₹1.00 regulatory surcharge, ₹0.40 duty and ₹0.15 cess, less a little for units in lower slabs (Rajasthan; verify) |
| Tariff escalation | 3%/yr | Conservative vs history; editable |
| O&M | Free for 5 years (CMC), then ₹800/kW/yr rising 5%/yr | Benchmarks |
| Inverter replacement | Year 12, ₹5,500/kW | Benchmarks |
| Discount rate for NPV | 8% | Just above the 10-year G-sec yield |
The customer uses about 450 units a month and the solar offsets about 420 of them under net metering. Most of those units sit in the ₹7.00 slab, but about 120 fall in the cheaper ₹6.00 and ₹4.75 slabs, which is why the blended value (₹8.40) is a little below the top-slab marginal rate of ₹8.55 (module m03, lesson 1). Work it out from the customer's own bill.
Results
- Year-1 generation: 3.3 × 1,546 × 0.98 ≈ 5,000 kWh
- Year-1 saving: 5,000 × 8.40 ≈ ₹42,000
- Simple payback: about 2.9 years
- IRR: about 35%
- NPV at 8%: about ₹3.88 lakh
- Cumulative 25-year net savings (undiscounted, after O&M and inverter): about ₹11.63 lakh
These are excellent numbers, and they are real for this customer: a high-slab Rajasthan household with full subsidy. They are not typical for everyone.
Sensitivity: the same system for different customers
| Case | Net cost | Value per unit | Payback | IRR | NPV at 8% |
|---|---|---|---|---|---|
| A. Subsidy, high slab (above) | ₹1,24,272 | ₹8.40 | 2.9 yr | 35% | ₹3.88 lakh |
| A with no tariff escalation | ₹1,24,272 | ₹8.40 flat | 3.0 yr | 32% | ₹2.64 lakh |
| B. Subsidy, low slab or free-unit scheme | ₹1,24,272 | ₹5.00 | 4.8 yr | 21% | ₹1.65 lakh |
| C. No subsidy, ₹5.00 per unit | ₹2,02,272 | ₹5.00 | 7.8 yr | 12% | ₹0.87 lakh |
The kink at year 12 is the inverter replacement. Notice that even case C pays back well within the modules' life, but its IRR is a third of case A's. Always model the customer's own bill, slab and subsidy.
Comparing with an FD, fairly
Customers often compare solar IRR with a fixed deposit. As of October 2026, our benchmarks show: SBI 5–10 year FD about 6.05%, PPF 7.1%, 10-year G-sec about 7.36% (check current rates). A 12–35% IRR looks far better. Explain the differences honestly:
- An FD return is contractual; solar savings are not. They depend on generation, tariffs and rules, all of which can change.
- Solar savings are not taxed as income for a household (they are a lower bill), whereas FD interest is taxable. This favours solar.
- Solar is illiquid. You cannot withdraw it in an emergency, and its resale value is uncertain if the customer moves house.
- Risks to the savings: net-metering or ToD rule changes, a lower export rate, the customer moving into a free-unit scheme, roof repairs that need the system removed and refitted (budget ₹5,000–10,000), longer outages of the inverter than expected.
- Upside not counted: tariffs may rise faster than 3%, and comfort benefits (a cooler top-floor ceiling under an elevated structure) are real but hard to price.
Saying it right
Do say: - "Based on your last 12 bills and today's tariff, we estimate savings of about ₹42,000 in the first year." - "Our model assumes 3% annual tariff growth. If tariffs do not rise at all, payback is still about 3 years." - "Generation varies year to year with weather, typically by a few percent."
Do not say: - "Guaranteed returns", "assured 30% return", or "your bill will be zero for 25 years". - "Free electricity" without explaining fixed charges, which remain. - Payback figures copied from another state or another customer.
Key points
- Simple payback is easy to explain; NPV and IRR account for all 25 years and the time value of money.
- A full model includes degradation, tariff escalation, O&M after the CMC, and an inverter replacement.
- Results vary hugely with the customer's marginal tariff and subsidy: show the customer their own case.
- Compare with FDs honestly: solar savings are tax-free but not guaranteed and are illiquid.
- Never promise guaranteed returns or zero bills; state assumptions in writing.
Check yourself
- A system costs ₹1,50,000 net and saves ₹30,000 in year 1, rising slowly. What is the approximate simple payback?
- What does a positive NPV at 8% tell the customer?
- Give two reasons a solar IRR is not directly comparable with an FD rate.
Answers
- About 5 years (a little less because savings rise each year).
- That the system's discounted savings exceed its cost; it beats an alternative that earns 8% a year, under the assumptions used.
- Any two of: FD returns are contractual while solar savings depend on generation and tariffs; solar savings are not taxable income while FD interest is; solar is illiquid and tied to the house; policy changes can alter solar savings.