Payback Period

A common and simple way to evaluate the economic merit of an investment is to calculate its payback period, or break-even time. The payback period is the number of years of energy-cost savings it takes to recover an investment’s initial cost. To determine the payback, the investor first estimates the wind turbine’s total initial cost, annual energy-cost savings, and annual operating costs. Dividing total initial cost by the difference between annual energy-cost savings and annual operating costs gives the payback period:

Total Initial Cost/(Annual Energy Cost Savings – Annual Operating Costs) = Payback time, in years

The initial cost is inclusive of all expenses to evaluate, buy, install and start-up a wind system. For illustrative purposes, consider the total initial cost of a 5 kW residential system and a 50 kW commercial system:

Residential 5 kW system = $15,000
Commercial 50 kW system = $100,000

Annual electric savings is the retail value of electricity from the wind system that you would have otherwise bought from the utility company. It is determined by multiplying the retail cost of electricity given on your electric bill by the number of kilowatt-hours the wind turbine is supposed to produce in a typical year. A manufacturer or dealer can provide an estimate of the wind system’s annual output as a function of your location’s average wind speed. Assume the cost of electricity to be 6 cents per kWh and the annual output from the residential and commercial systems at a 14 mph site to be 10,000 kWh and 100,000 kWh, respectively. The annual energy-cost savings from both systems would be:

Residential $0.06/kWh x 10,000 kWh = $600
Commercial $0.06/kWh x 100,000 kWh = $6,000

Annual operating costs are estimated by multiplying the wind system’s energy output by a typical operations and maintenance cost, such as 1 cent per kWh. For the two wind system examples, the annual operating costs are:

Residential $0.01/kWh x 10,000 kWh = $100
Commercial $0.01/kWh x 100,000 kWh = $1,000

Now that all components of the payback equation are defined, the payback period can be calculated.

Residential payback period:

$15,000/($600 – $100) = $15,000/$500 = 30 years

Commercial payback period:

$100,000/($6,000 – $1,000) = $100,000/$5,000 – 20 years