The initial investment in Solar was “sizable” for us but there are motivators to spending the money.
Financial installation incentives
For instance, in the US, there is a federal “RESIDENTIAL RENEWABLE ENERGY TAX CREDIT” and in some locals the state or public utility company may offer additional incentives. The US federal tax credit is 1/3rd of the total investment in solar, which includes all costs (e.g., the cost of the system, installation costs, and even repair costs incurred to make installation possible.) Since we began the installation in December, we get the credit when doing our 2013 taxes. Unfortunately in our local there are no state or public utility incentives (they’ve been exhausted). If you’re considering installation of solar panels you should certainly investigate with your state and local public utility what programs or incentives they may offer for home improvements. e.g., Pacific Gas & Electric offers home improvement incentives just for doing things like replacing your insulation, adding or replacing windows and doors to improve energy efficiency, etc. They do not offer any incentives for installation of solar panels anymore, but there are public utilities in California that still do.
Financing your installation
Additionally, the installer offered financing and financing incentives. We get 12 month, no interest, no payments financing. This gives us 12 months to pay payments to lower the principal without incurring interest. Payment can come from sources such as the tax refund resulting from the federal tax credits received for installation, as well as the savings we receive from the reduced electricity bill. Lastly, the financing has a one time adjustment to the monthly payment which occurs when the interest begins– so if our current payments are $100 and we pay 1/2 of it then our new payments would be $50. Even if your installer does not offer financing, you could consider various methods of controlling the costs:
- Home improvement loans against home equity, or other bank loan
- Credit card loans (buy, then roll over the purchase to another credit card on lower or zero percent financing for some term.)
Using some of the numbers I offered in my last post, if the cost of tier 4 power is $0.50 per kW (kilowatt) and our daily consumption is 40 kW and a billing cycle is 30 calendar days, you can quickly arrive at $600 monthly electricity costs. (40 kW * 30 days * $0.50/kW) This is not an accurate number, because the energy pricing is actually on a sliding scale, so this is way more than our monthly bill (i.e., the first X kW are at tier 1 pricing, the next at tier 2, and so forth… with each tier increasing in cost. But let’s just use $600 as a budgetary number for this illustration.) If you decide to install a system that costs $40,000 (this is higher than what we paid) that is estimated to produce 1000 kW (this is more than our system produces) per billing cycle, then your balance is going to be 200 kW consumed (-1200 total usage, +1000 produced via solar, -200 consumed from the utility company). Assuming flat pricing that’s only going to be $100 per month bill. Now, 30% of the $40,000 is given back to you through the federal tax credit so if you apply the full refund against you bill you’re only paying on $28,000 principal. If we assume a 10 year loan with 6% interest and a $28,000 principal, you’re only looking at about $310 as your monthly payments. If you were paying against the full $40,000 principal, you’d be paying about $444 per month. If you’re saving $500 on your electricity and putting $444 (or even $310), then you’re saving money by installing solar.
Home improvement value
According to an article in the 1999 edition of The Appraisal Journal [found via this article], for every $1 reduction in annual energy costs you increase the value of your home by $20. Based on the above estimate of reducing consumption by$500 per month (or $6,000 per year), the theoretical home receiving installation of $40,000 worth of solar panels would be increased in value by $120,000. In truth though, this value is highly subjective as “savings” is entirely dependent upon “usage” which is entirely dependent upon the consumer and their situation. A person who works from home and has higher energy consumption during “business hours” is going to have a much higher savings than someone who works remotely, and thus if the buyer works from home they’re going to see a lot greater value in the addition of solar panels than would someone who works out of the house. In my municipality the increase in value is not counted towards the house for the purposes of property tax, since it does not increase the “usable space” (like a pool, or a shed, or an addition to the home might.) So the only cost for us to install is the cost of the financing. When I was estimating the home improvement value on my house, I used a rough three times (3x) the cost of installation. Using that calculation, I still came in under the value proposed by the Appraisal Journal (my number was about 10% less than the estimated value from The Appraisal Journal.) In my illustration above, the numbers come out to be exactly the same regardless of which method you use. My reasons for using a 3x value was because the loan on the installation of solar was a 10 year loan, the typical home was a 30 year loan.
When it doesn’t make sense to install Solar
When your usage is in the tier 1 and sometimes tier 2, or when you want to install a solar system that can produce more energy than you will consume. If your usage is low, then the savings is minimal. Reducing tier 1 or tier 2 energy costs is not as substantial a savings as reducing tier 3 and 4 down to tier 1 or 2. Taking the above illustration, if we said you had an allotment of 300 kWh (kilowatt hour) in tier 1, 90 kWh in tier 2, 90 kWh in tier 3 and everything beyond tier 3 was at tier 4 pricing, then 1200 kWh usage per month would equate to 300 kWh in tier 1, 90 kWh in tier 2, 90 kWh in tier 3 and 720 in tier 4. If the prices are $0.16, $0.30, $0.40 and $0.50 for each tier, respectively, then your costs would be $48 for tier 1 usage, $27 for tier 2, $36 for tier 3 and $360 for tier 4 usage. This would equate to a $471 monthly bill. If we recalculate the above illustration, reducing consumption from 1200 down to 200… then our monthly usage is 200 kWh times $0.16 or a $32 monthly electricity bill. Therefore our Solar installation needs to cost us less than $439 per month in order to make fiscal sense. While a straight $40,000 solar system installation would not make sense (because it would cost us $444 per month over 10 years with a 6% interest rate), once you deduct the tax rebate (assuming you put that money towards the principal on the solar installation), then our monthly finance payment drops to $310, which then makes solar a lot of sense. If you get the 1 year no interest, no payments financing… and you put the first years savings towards paying down the loan… then you adjust the monthly payments at the end of that first 12 months so that you’ll pay down the loan 10 years later… We apply the $439 monthly savings ($5268 annual savings) against the loan balance ($40,000 minus 30% for the federal credit is $28,000 minus $5268) which leaves $22,732 principal. At a 10 year term with 6% interest that results in a roughly $252 monthly finance payment. $252 finance payment plus + $32 electricity bill is $284 monthly combined expense, but is still far below the projected $439 monthly expense. But, if your usage was low to start with, it doesn’t make sense. Along the same lines, it doesn’t make sense to over produce energy. If your electricity bill is 800 kWh per month (roughly estimated at $271 per month) and you build a system that will produce 1000 kWh per month, then you have a surplus of 200 kWh per month. At the end of the year, if you consistently over produce, you’ll end up with 2400 kWh credits (and no reason to roll over those credits into next year). PG&E will only pay around $0.01-$0.02 cents. If we assume a high value ($0.02) that makes your 2400 kWh surplus worth only $48 per year ($4 per month). $252 finance payment minus $4 is a monthly expense of $248. However, if you got a smaller system, you could probably cut your month expenses even further. If your electricity bill is already less than $50 per month, you are unlikely to be able to find a system worth installing that will cost you less. In short, it doesn’t make much sense to over produce because the return on investment for over production isn’t there. Producing 80%-90% of your energy needs per annum is where you want to shoot for. And it’s only worth doing that if your usage is high enough (or is projected to go high enough) for the savings to exceed the cost.
Leasing vs Buying
I considered leasing, but decided against that. Firstly because photo voltaic (PV) cells degrade in efficiency over time. A system should experience a sharp reduction in efficiency (a few percentage points) the first year and then no more than 1-2% every year thereafter. The theoretical lifespan of the panels is 30 years (with current technology.) The only real attraction to the lease option over buy has been that the lease option usually includes some kind of maintenance plan (up to and including replacement of panels if they fail prematurely) as well as a monitoring plan to make sure that the leasing company is aware of failure. The downside of most buy options is that without some kind of warranty and a way to monitor the energy production of each panel individually, you have no way of knowing whether or not you bought a lemon. Most leases that I’ve seen are 25 year leases, where at the end of the lease terms they offer you the option of “buying” the solar panels “at fair market value.” The problem with “fair market value” is that after 25 years those panels are producing at about 75%-80% of their original production capability (and they will continue to degrade.) After about 25 years, it might actually be cheaper to install a new system and take advantage of the technology advancements (from what I was told, in the last 10 years the micro-inverter advancements have been substantial, so anyone who bought panels 25 years ago would definitely want to take advantage of the increased efficiency from newer micro-inverters. In another 25 years, there is likely to be another advancement that would make it worth while to “upgrade” your installation.)
Our installer offered an attractive warranty on both installation and materials (the panels, micro-inverters, etc.) They also offered a monitoring package (not lifetime, but for the first X years it’s pre-paid) which let’s us monitor the efficiency of our solar panels as well as allowing us to be aware of equipment failure. Combine the home improvement value (no plans to sell the home, but it’s still nice to improve the home), the federal tax credit (which expires in 2016, unless it is extended), the reduction in our electricity bill, the attractive financing plan, and the ability to roll that financing over to another loan before the no interest, no payments feature expires (as I said above, rolling it over to a zero interest credit card offer, or maybe a home equity loan– thus extending how long we avoid interest.) There were so many reasons for us to go solar (although it is not the right decision for everyone). For us, as long as our final payments on the financing was less than the savings gained from having the panels, it made sense for us to take the plunge.
If anyone is interested in talking to my installer, I understand they offer referral incentives (both to the referrer and the referred). Let me know and I’d be happy to put you in touch.