Chapter 11 – Economics and Investment Analysis

This chapter ties together all the technical results into a rigorous financial analysis: capital costs, subsidies, savings, and the key metrics investors use to evaluate long-lived assets.

11.1 Capital Costs

Solar PV (Installed Cost)

Prices have fallen dramatically and stabilized. As of 2024–2025, fully installed residential solar PV in Western Europe:

Includes panels, inverter, mounting system, wiring, isolation switch, and installation labor. Excludes grid connection modification if needed.

Battery Storage (Installed Cost)

Includes battery module, BMS, hybrid inverter integration, and installation.

Hot Water Systems

11.2 Available Subsidies and Incentives

Subsidies vary widely by country and change frequently. The table below gives the framework; verify current values from official sources.

Effect of 30% Tax Credit (US Example)

For a $25,000 solar + battery system: tax credit = $7,500, effective cost = $17,500. For a $15,000 solar-only: tax credit = $4,500, effective cost = $10,500.

11.3 Savings Calculation

Annual savings come from three sources:

1. Avoided grid purchases: kWh self-consumed × grid price
2. Export revenue: kWh exported × export price
3. Reduced standing charges: only if you downgrade your connection subscription

Annual savings = (kWh_self_consumed × grid_price)
               + (kWh_exported × export_price)
               − maintenance_cost

Maintenance is minimal: annual inverter check €0–50, module cleaning €0–100, insurance.

11.4 Simple Payback Period

Simple payback = Net investment cost / Annual savings

This ignores the time value of money — useful for quick comparison but not rigorous.

From Chapter 10: | Scenario | Net cost | Annual savings | Simple payback | |———-|———-|—————-|—————| | 1: No heating | €10,000 | €704 | 14.2 yr | | 2: Heat pump | €15,000 | €880 | 17.0 yr | | 3: All-electric + EV | €22,750 | €1,540 | 14.8 yr | | 4: High SSR | €36,250 | €2,370 | 15.3 yr |

11.5 Net Present Value (NPV)

NPV accounts for the time value of money. A euro saved in 10 years is worth less than a euro saved today.

NPV = −Investment + Σ_{t=1}^{T} [Savings(t) / (1 + r)^t]

Where:

• r = discount rate (typically 3–6% real for households)
• T = system lifetime (20 years for panels, 15 years for LFP battery)
• Savings(t) = savings in year t, growing with electricity price escalation

Sensitivity to Electricity Price Escalation

Electricity prices have historically grown at 2–5% per year in real terms in Europe. The effect on NPV is large:

For Scenario 1 (€10,000 investment, €704 Year-1 savings, 20-year horizon, 4% discount rate):

At 0% escalation, the solar investment barely breaks even. At 3–4% escalation (consistent with historical averages), it comfortably beats savings accounts and low-risk bonds.

11.6 Internal Rate of Return (IRR)

IRR is the discount rate at which NPV = 0. It is the effective annual return on your investment.

From the table above, under 3–4% electricity price escalation, residential solar+storage achieves an IRR of 6–8% — competitive with long-term stock market returns, with the added benefit of being inflation-linked (energy price escalation) and not correlated with equity markets.

11.7 Battery Storage: When Is It Worth It?

Adding storage to a solar system is economically justified when:

1. Grid electricity price > ~€0.20/kWh (higher = better storage economics)
2. Export price < ~50% of retail price (if export pays well, battery adds less value)
3. Self-consumption without battery is already < 60% (large surplus to store)
4. Battery cost < ~€600/kWh usable (market has reached this level for LFP)

Rule of thumb: At European electricity prices (€0.20–0.35/kWh), a 10 kWh battery added to a correctly sized solar system adds an IRR of +1.0–2.5 percentage points to the overall project.

Solar-only vs Solar+Battery NPV (Scenario 1 at 3% escalation)

The 7.5 kWh battery adds €700 to NPV vs solar-only. The 15 kWh battery actually reduces NPV — diminishing returns have set in.

11.8 Practical Investment Decision Framework

1. Always start with efficiency: Each euro spent on insulation, LED lighting, heat pump upgrade, and efficient appliances has a shorter payback than solar+storage. Reduce consumption before generating.

2. Solar first, storage second: A solar-only system typically has better economics than solar+storage. Add storage only if export compensation is poor AND electricity prices are high.

3. Right-size the solar: More is not always better. Size for ~60–70% SSR without storage; add battery to reach ~75–80% SSR. Beyond 80% SSR requires disproportionately large investment.

4. Account for rising electricity prices: At 0% price escalation, residential solar barely makes financial sense. At 3–4% escalation (historically normal), it is a solid investment.

5. Include subsidies in your calculation: A 30% tax credit (US) changes payback from 15 years to 10.5 years — a very different investment proposition.

6. Hot water first: If replacing an old resistance water heater, always upgrade to HPWH first. It is the cheapest kWh saved of any investment in this guide.

11.9 Summary: Key Numbers to Remember

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