The Value of Money Over Time
Understanding how the value of money changes over time is an important skill in comparing community solar options.
The Very Basics
Money now is more valuable than money in the future. If we imagine receiving $100 at some point in time, receiving it now is best, soon is better, and the value decreases the further in the future we receive it.
What does this mean for me?
Saving money sooner in a community solar subscription is better than saving money later on, so make sure that you consider the timing of your savings when evaluating your options.
The math can get thorny, so we condense this idea into a scale on the quote summary card:
Near-Term Weighted Savings
If this scale is higher, it means that more of your savings occur earlier in the subscription. If this scale is lower, it means that more of your savings occur later in the subscription.
An Introduction to the Math
If someone offers to give you $100 in 10 years, how much is that promise worth today? It all depends on what you can do with the money today. If you have access to a savings account that earns 3% interest, we can calculate how much money you'd need to put into that account right now to have $100 in 10 years. In this case, you'd have to put $76.64 into that account today in order to have $100 in 10 years.
In the example above, we chose to use the interest on a savings account, 3%. If instead of using the interest rate on your savings account, you had assumed the highest interest rate on a typical credit card, 21%, you could turn $17.99 into $100. The rate we choose to adjust the value of money over time is called the discount rate.
Choosing a discount rate not an exact science -- there's no definitely correct number -- but we can follow some well-established guidelines. Assuming a discount rate near the highest interest rate on either accounts you can put money into or debts you can pay off is probably a good idea.
What does this mean for me?
Think about the other interest rates in your life when considering the value of future savings with your community solar options. The higher the interest rates in your life, the more you should favor savings early in your subscription.
A Closer Look
The previous example showed how to compare money in the future to money in the present, but we can also use discount rates to compare money in the future to a different amount of money at a different future time.
Which is more valuable: $60 in five years, or $75 in eight years? We can apply a discount rate to each of these scenarios and compare their current values. If we use the same 3% discount rate as the previous example, we will find that $60 in five years is worth $53.12 today, and $75 in eight years is worth $60.60 today. Comparing the present value of these two scenarios allows us to meaningfully compare them.
What does this mean for me?
Applying a discount rate to several scenarios allows you to compare subscriptions of different types. Even if you aren't comfortable enough with the math to apply your own disount rates, you can still compare subscriptions if you use SolarMatch's Apply a Discount Rate option in the quote detail.
The Full Economic Explanation
If we apply a discount rate to the cost or savings in each year of a community solar subscription, and add those values up, we get the net present value (NPV). The NPV allows us to compare subscriptions that offer different amounts of total savings at different times.
Consider a pay-as-you-go subscription that offers savings of $100/year alongside a pre-pay subscription that costs $14,000 upfront, but offers savings of $1000/year. The pay-as-you-go option offers total savings of $2,500, while the pre-pay offers savings of $11,000 -- but the pay-as-you-go offers savings early, and the pre-pay offers more savings, but much later on in the subscription. How do you know which option is better?
Calculating the NPV of each subscription allows us to make an apples-to-apples comparison of these two very different subscriptions. If we assume a discount rate of 5%, the NPV of the pay-as-you-go plan is $1,473, and the NPV of the pre-pay plan is $730.
What does this mean for me?
If discount rates and the net present value of an ongoing agreement make sense, you should use them when evaluating your community solar options. SolarMatch allows you to calculate the NPV using the discount rate of your choice; you can find this feature at the bottom of the Savings Detail section of the quote detail.
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