instead of the RE project. Without these characteristics,
simple payback generally underestimates the payback pe-
riod making RE investments appear to be better deals than
they really are.
Net Present Value
A more flexible – and meaningful – calculation for evalu-
ating RE projects is net present value (NPV). NPV provides
today’s dollar value of a potential investment by taking all
costs and savings for the lifetime of the project and con-
verting them to present value and accounting for the time
value of money. NPV can also accommodate energy price
increases over time and can be used to directly compare
alternative projects.
NPV includes more information than simple payback
and is harder to calculate. For example, use a computer
program (e.g., Excel) or online calculator to account for
energy price calculation. Alternatively, a simplified NPV can
be calculated by assuming no price escalation. In this case,
the future stream of energy savings is called an annuity – a
series of equal cash flows. Then, the present value annuity
factor (PVAF; see table) can be used to calculate the NPV of
any project using only a calculator (see example next page).
Present Value Annuity Discount Factors
Discount Rate
(sidebar 1)
Useful Life (years)
10 15 20 25 30
2% 8.98 12.85 16.35 19.52 22.40
3% 8.53 11.94 14.88 17.41 19.60
4% 8.11 11.12 13.59 15.62 17.29
5% 7.72 10.38 12.46 14.09 15.37
6% 7.36 9.71 11.47 12.78 13.76
7% 7.02 9.11 10.59 11.65 12.41
Ben Rashford is an assistant professor in the Department of Agricultural and Applied Economics in the College of Agriculture
and Natural Resources at the University of Wyoming. He can be contacted at (307) 766-6474 or brashfor@uwyo.edu.
How big should the NPV be? That depends on the
other alternatives available for producing energy or invest-
ing your money. As a general rule, a project makes econom-
ic sense if the NPV is positive and greater than the NPV of
other alternatives. When comparing two alternatives, such
as a wind turbine vs. solar panels, the one with the larger
NPV makes the most economic sense.
Levelized Cost of Energy
For RE projects that directly generate electricity, such
as wind turbines and solar panels, levelized cost of energy
(LCOE) is another useful calculation. LCOE is the implied
price ($/kilowatt hour) of energy generated by the RE
system. Put differently, it is the minimum price needed to
break-even.
LCOE can be directly compared to the price the local
utility charges. If the RE system generates electricity for
less than the utility price, then the project is economically
feasible. LCOE, however, does not account for energy price
escalation. So, even if a RE project cannot beat the current
electricity price, it may be cost competitive if and when util-
ity rates rise.
Take Out the Guesswork
Determining the economic feasibility of RE projects
may not be easy but running the numbers and considering
several calculations will help ensure homeowners make an
educated decision. Of course, economic feasibility is not
all that matters. You may still want to invest in RE even if it
doesn’t pencil out because you value energy independence,
you think energy prices will increase significantly, or you
think the environmental benefits are worth the extra costs.
More Information
Milt Geiger is the University of Wyoming Cooperative
Extension Service energy coordinator. He has a wealth of
information about the economics of renewable energy to
share. He can be reached at (307) 766-3002 or at mgei-
uwyo.edu/renew-energy
8 B A R N Y A R D S & B A C K Y A R D S