Buying Solar Panels: Year 1 Review
Hello $wanigans! Thanks for stopping by The Green Swan. I’m here today to provide an update on buying solar panels and my experience in the first year. It has been a full 12 months since installation so I figured the time was right to show how they perform throughout the seasons. It is time to see how they measure up compared to my initial expectations in terms of dollar savings and if they are on track to provide a solid return on investment (ROI). Lastly, I hope this review is helpful for others as they think through the process of buying solar panels and determining if it is right for you.
I recognize this is a personal finance blog and some may wonder why I’m focusing on solar panels, but to me this was very much a personal finance decision. Solar panels have been one of the biggest purchases I’ve ever made and they do provide a return on investment through the energy generated savings on my utility bills. And also, I know reviews such as this would have been very helpful to me back when I was analyzing the decision!
If you have been following my blog since I first began, you’ll recall some of my first posts were on the recent installation of my panels. Don’t judge the writing style of my first posts (not like it has gotten much better!), but for a refresher you can check out the three solar posts from the beginning: Solar is Sexy, Solar Cents, and Solar Power.
The panels were first installed in late November 2015 and I’ll be focusing on their performance beginning December 1, 2015 through November 30, 2016 to account for a full year performance on a monthly basis.
As you can see in the chart above, which shows the daily amount of solar power generated, there is a clear curve showing the higher production in the summer. This is not a surprise given the longer days and the sun more directly overhead which provides stronger rays.
The chart above also shows how the power generation can range significantly from day to day depending on the cloud cover or rain. But it smooths out when you look at total kWh generated on a monthly basis as shown below. As I write this, it is hard not to draw parallels to investing in the stock market. Some years are good and some are bad, but over time it pretty consistently averages. I laid this argument out not long ago in my Invest to Win post.
There is one other important distinction to point out in terms of the solar panels performance throughout the seasons. And that is the efficiency of the panels in terms of its peak power generation. While the energy generated is measured in kWh, how efficiently the panels’ convert sunlight to energy is measured is kW. Peak performance is when the sun is directly overhead and the panels are just soaking in the daylight.
As you can see in the chart above, peak kW varies less from month to month than kWh. While the summer months are strong because the sun is closer and more directly overhead, the fall and the spring are strong because the temperature is more moderate and the panels don’t operate quite as well in strong heat. So the panel’s efficiency drops slightly when the temperature rises and, therefore, the summertime benefit of power efficiency isn’t quite as good as you would otherwise expect.
The important question is how does all this energy production translate into savings? Well energy is relatively cheap in North Carolina which means the kWh my panels generated is relatively less here than it would be in more expensive states (i.e. many states in the northeast). Over the last year, the cost per kWh has averaged approximately 10.5 cents from the utility company. So the math is pretty easy, simply multiply the kWh generated by the average cost to determine the total value of the energy.
While our energy usage on a monthly basis does not match up perfectly to the energy generated on a monthly basis, our local utility company does allow excess energy to be credited to future bills.
So, in the first 12 months, we’ve generated approximately 6,030 kWh. At a cost of 10.5 cents from the utility, this amounts to $633 in value. This wasn’t too far off from my initial estimate of $640.
However, there is one additional wrinkle to factor in which played a larger role than I had anticipated. And that is the utility company doesn’t allow kWh credits to carryover indefinitely. Each May 31 they reset the balance back to 0 kWh. That is a pretty inopportune time for the homeowner because, as you can see in the charts above, March through May is prime months for energy production.
I wasn’t completely caught off-guard by this. I was aware of the reset before buying the panels, but a lot more energy credit carryovers were wiped out than I expected. Perhaps next year we will take advantage of our energy in those months more before they go to waste by cranking the A.C. as soon as it gets warm. I know Lucy would be in favor of that! I would say that part of the problem is the fact we are light energy users in general. We use way less than the comparable size house in our area (I know this since our energy bills come with this analysis each month) and I’m quite proud of that. And that is somewhat comforting to know that if we sell the house, the future owner (likely a higher energy user) would get more value from the panels and have less lost when the reset hits in May.
So the reset on May 31st ended up clearing 943 kWh. That is huge! It represents 15% of all the energy generated. I was bummed when I realized just how much was wiped out. At 10.5 cents, this “cost” us approximately $99 in lost energy credits. Backing that out of the total energy produced in the year, our energy savings amounted to $534 with the solar panels.
The total cost of my solar panels was $18,816. I was fortunate to be able to take advantage of the federal tax incentives as well as the generous state tax incentives (before North Carolina eventually let them expire and go away at the end of 2015). Net of the tax savings, the total cost amounted to $8,430.
A simple ROI calc with savings of $534 / $8,430 cost = 6.3%. Not bad, but not as good as the initial expectation of 7.6%. Although 6.3% still isn’t bad considering it is a fixed return basically (no volatility as you’d expect when investing in the S&P 500). I know my panels will generate a consistent amount of energy year in and year out. SunPower, the manufacturer, actually guarantees performance at 85% efficiency for 25 years.
As I mentioned above, the utility rate is 10.5 cents per kWh. But as with all things in life, this typically increases each year, usually in the 4-6% range. This means each year rates rise the solar panels will provide more savings and a greater return.
Solar Panel Value
Another reason I am not down on the performance and the ultimate decision to buy panels is because the value the solar panels provide will still outpace anything the S&P could over the long-term. Solar panels are commonly valued at $20 for every dollar saved in electricity for second-hand buyers (i.e. if I were to sell my home). With energy savings in year 1 of $633, this would result in panel value of $12,660. So if/when it comes time to sell the home (perhaps in the near-term if we end up moving to London), this is the incremental value we could expect from the panels.
The reason why this investment decision is so favorable is because of the value of the tax incentives I received. In sum, I bought the panels for $18,816 which today are valued at $12,660 per the 20x multiple, but I only paid $8,430 in cash for them (after the tax incentives). If I buy into the market norm of 20x and can ultimately achieve that if/when selling the house, that means the tax incentives for buying the panels juice my returns by an extra $4,230 ($12,660 – $8,430).
Netting the cost out for this added value that I’ll achieve when I sell the home would mean my cost is really closer to $4,200. Calculating the ROI on this adjusted figure would result in 12.7% returns ($534 / $4,200).
Over the last year, Lucy and I have noticed a few behavioral changes now that we have solar panels. For one, we are easier going on energy usage (primary running the AC). It has been easy to rationalize since we know we have the solar energy to use and that any usage on top of what we are able to generate will result in minimal expense on the bills.
Having just wrote the above and recognizing the feeling of more leniency in energy usage, I was curious if this bears out in the numbers. As such, I went back three years to check the kWh used (see chart below). A lot of the variation from one year to the next can be explained by the variation in temperatures (i.e. July was much hotter this year than last). However, is sum, our kWh usage increased 367 compared to the 12 months before solar installation (effectively 2016 vs. 2015) and, interestingly enough, our usage went up an additional 467 kWh compared to the 12 months before that (2015 vs. 2014).
This isn’t huge; it only amounts to an incremental expense of approximately $40 and $50, respectively. But it is telling. What this says to me is that we have been willing to spend a bit more on comfort. I think that is part of it at least. The other part I would say is related to now having a kid and wanting a more comfortable house for him. For one, given he is an infant over these years he can’t regulate his temperature as easily at night by using blankets, etc. So we have resorted to a space heater in his room tied to a specific temperature threshold. Therefore we are using more electricity in the winter. And of course in the summer with running the AC at a more comfortable level.
All About the Green
This post has been focused primarily on saving some green by going green. But there are more than dollars and cents when weighing the decision to go green with buying solar panels. Our solar panels will provide consistent energy for the next 25+ years (yes, they last a really long time!) for which we will drastically reduce our reliance on our utility company which sources its energy primarily from burning coal. My wife and I have substantially lowered our carbon footprint and SunPower makes it really easy to track with its online portal and mobile app! The chart below shows our environmental savings through the first year and they are huge! Just imagine the savings over 25+ years!
All-in-all not a bad year. Energy production was in line with expectations, however, financially we didn’t achieve quite as much savings. And environmental savings are fantastic!
- Energy production was on par with my expectations initially. It is good having this confirmed with actual results vs. the energy production estimates that are spit out from SunPower’s models based on the direction my panels are facing, pitch of the roof, a shade analysis from some of the big trees in the backyard, etc. Additionally, this will provide a good baseline for future year production.
- However, financially speaking, the results were below expectations. I do have some solace in the fact that this was due solely to the reset of energy credits in May and I can somewhat control this to maximize value going forward (having a more comfortable house with AC running earlier in the spring). And also, given that any future homeowner would likely have higher energy usage than we do, they will have less credits building up over the course of the year. I think any other user would easily be able to maximize the panels’ value with little or no loss in the May reset.
- And environmentally, how could I not feel good about reducing my energy reliance on coal burning and saving 5 tons of CO2 emissions (the equivalent of planting 110 trees)!
Thoughts? Would you consider going solar and have you looked into it before? Hopefully the analysis above would help you in your considerations and provide you confidence in the financial returns and environmental savings you could expect to achieve.
Thanks for taking a look!
The Green Swan