Buying Solar Panels: Year 1 Review

Buying Solar Panels

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.

Background

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.

Energy Generation

Buying Solar Panels

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.

Buying Solar Panels

Power Generation

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.

Buying Solar Panels

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.

Financial Savings

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.

ROI

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).

Behavioral Changes

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).

Buying Solar Panels

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!

Buying Solar Panels

Conclusion

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

 

 

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43 Comments

  1. Fyi your missing part of the room equation imho. These panels depreciate over time. So you need to subtract the net future value of the expected depreciation from your savings to get the true return. So say they have a 20 yr life and cost you 8k. If you hold them their entire useful life then you need to look at deprotonation of 8k/20 approx 400. Then make that a future value which I’ll skip in my example for simplicity and assumption that savings will also move with Inflation. Then 600 savings -400 is 200. 200/8000 is your ROI.

    1. Thanks for sharing that feedback, although I’m not sure I follow exactly. While I work in finance, this sort of field isn’t my specialty so I may be just having trouble wrapping my brain around this, but I’m not sure why I would factor in depreciation when I bought the panels outright. Cash out the door on the front end was the $8K and the cash return was the $600 roughly, so why wouldn’t that be my ROI equation? When the panels no longer have a useful life, I will replace and start the process over again. If I subtract depreciation from my cash return, wouldn’t I be essentially factoring in the “price” of the panels twice?

      And a side note, SunPower guarantees the panels performance at 85% of original power generating capacity through 25 years, so the useful life is well beyond that even.

      Thanks FTF!

      1. Think of it like a bond or dividend. If you buy a bond with a yield of 3% the return includes the interest on the bond plus a factor for any sort of discount or premium as applied equally across the holding period. If you buy a stock with a dividend the return is not the dividend, its the dividend net of any cap gains and losses over the long run. A depreciating asset essentially has a discount equal to the value difference between when you purchased it and when you unload it. The easiest way to view this discount is as a cost flow model using present or future values. So your return on your investment is essentially your return factoring in the costs divided by your total investment as applied in a cash flow model. So in your case 25 years if you held to 0 value. If you held it to some other time period the return would change depending on the cash out value.

        1. Ah, I see your point now. I think the panels have some unique characteristics as an investment. Firstly, they last forever so hard to estimate the depreciation (if any). The first solar panel ever made in the ‘50s or 60s is still generating electricity today (albeit at a lower level of efficiency). Secondly, they could very well appreciate in value as underlying energy costs go up (offsetting any depreciation in energy generation capacity). And Thirdly, given the tax credits I received up front, the true value of the panels is more than the net cost I paid for them (meaning when I sell I should get more value back, although still TBD).

          Good point, FTF. It is hard to put math to some of these considerations and calc a more accurate ROI. My ROI is simple, letting many of these considerations lie silently, but I could run a few scenarios with different assumptions. Let me know if this makes sense?

  2. I read this post with great interest, especially because within the next 2-3 years we’re also planning to install solar panels on our house. The Netherlands is not the most sunny country in the world, so I still need to do some localised research, but it was great to read your positive experience!

  3. Interesting. Jon and I don’t spend a ton on electricity and are willing to keep our home a bit more cool/warm, so I don’t think installing panels makes much sense for us personally, but our church is trying to raise the money to install them and this post will probably help me be more informed for that discussion.(Jon says it makes no financial sense, I suspect it might plus a large group at our church has a heavy ecological stewardship focus.)

    1. It was easy for me to rationalize the purchase given the tax credits so that would be a key question I’d have for your church. Knowing you live in North Carolina like myself though, I think the State credits are gone and the Federal credits diminish after this year.

      One other point to clarify is for low energy users like ourselves, you can but fewer panels. I only have 14 while many folks need to buy 20-30 panels to offset their energy usage in full.

      Let me know if you have any other questions! Thanks for sharing!

  4. Thanks for sharing! It’s interesting to get a real life perspective on the potential savings of solar panels. Your estimated return was pretty close!

    Right now, we have it pretty good, as our energy costs are really low due to low usage and cheap propane. But, we realize propane prices could change at any time and are weighing our options for if they do.

    1. Thanks Amanda! Yeah it’s great that we have these low energy costs right now and good to hear you are keeping an eye on it. Thanks for the comment!

  5. That’s not bad at all. 85% of original power generating capacity through 25 years is quite good. You’ll make your money back way before that. Interesting about the reset, though. I’ll need to do more research to see if we have the same thing here. I don’t think we’d have much problem spending the kW, though.
    Thanks for the great post!

    1. Thanks Joe! You’ll have to take a look at the State tax credits offered in your area too to see what you can take advantage of. In my prior Solar posts I’ve included some links to other resources in case your interested.

      Thanks and let me know if you have any questions!

  6. It definitely seems like you should make your money back over those 25 years. I live in a townhouse community with rigid homeowner rules so I’m not sure I can get it approved just yet. I am curious if Tesla is able to create the solar panel roofing tiles if that will accelerate the acceptance rate in the United States especially if they are able to cost in line with roofing shingle costs.

    I’ll definitely have to re-examine after your analysis. Thanks for sharing!!!

    1. Tesla does the batteries and Solar City, which Elon Musk also founded, does the panels. Oh I see though, you’re referencing panels that also serve as the shingle? That would be great! I just looked that up and see Tesla is wanting to bring those out at a cost of half of a dumb roof. That would be something!

  7. Love the detailed analysis – I’ve thought on and off about getting solar panels over the years, but I’m just not sure it would work at my house. I live in a state where electricity is expensive (CT) so there’s definitely some savings potential, but my house is surrounded by tall trees. The tall trees are nice for aesthetic reasons, but shady roof + solar = ? My middle son keeps talking about getting them too, he wants to “save the world”.

    1. You could always have the local solar installers come out and perform a “shade analysis”, but the tall trees sounds like a deal killer to me. Bummer! And too bad for your middle son too!

  8. Great post JW! Back in undergrad, I used to work for our campus Energy Analysis and Diagnostic Center (EADC). We would go out to local manufacturing facilities, usually within a 1 hour drive of campus, and do a complete analysis of their energy consumption and what changes they could make to save energy. The analysis involved swapping out light bulbs, motors, pumps, HVAC, etc… for more efficient models. The point being, I’m an energy nerd!

    We looked at having solar panels installed on our house a few years ago, but ultimately did not pull the trigger. Even with the Federal tax incentives (no state incentives), I couldn’t get the ROI to work. Plus my wife wasn’t super happy about the look of the panels on the roof because they would have been right up front.

    I’m keeping my eye on installation costs and tax incentives to see if they turn around. If they do tip in our favor, I think that I may go for it.

    1. That’s awesome, Jon!

      Yeah we were lucky that the optimum location for our panels was the backside of the house. But the panels are definitely more aesthetic looking today than they’ve been in the past.

      Hopefully you folks can make it work eventually. I love the direction solar is going and how it can eventually revolutionize the energy industry!

    1. You bet and don’t hesitate to reach out with questions! One thing you’ll have to look into is whether connecting to the utility grid (like what we did) is right for you or whether also getting a battery for energy storage is best. The battery backup is much more expensive but in a doomsday scenario where you can’t rely on the utility grid, it’s the perfect solution!

      Thanks, Laurie!

  9. This is great information! I’ve had an interest in solar and wind power for a while, but I don’t want to put the investment in place yet since I don’t know if we’ll be staying at our current house. In the long run, these are going to pay off tremendously for you!!

    — Jim

    1. Yeah that’s an important consideration we made as well. Hopefully if/when we do end up selling we’ll be able to get our money out of them!

      Thanks, Jim.

  10. I really enjoyed reading about your experience with solar panels. I would love to get some from a conservation standpoint, but I am not sure it would make sense financially. My partner and I have been talking about getting an assessment done to see if it is recommended and how much it’ll cost. I don’t think my state has many tax incentives for it.

    I know you talked about the savings over a year, but did your electric bills go down to almost zero some months?

    1. Yeah doesn’t hurt to have the local solar installer to come out and provide an estimate and tell you where the ideal placement would be, etc to see if it works. Unfortunately some roofs just aren’t ideal fits with size, slope and direction toward sunlight.

      The size of solar array was picked to effectively result in zero payment for all but a few small ones in the winter. And that worked out to be the case. My bill was zero in 9 of the months. Feel free to holler if you have any other questions or shoot me an email from my contact page.

      Thanks for the question, Jax!

  11. Thanks for calculating this! Solar panels are not in the cards for us until we actually move to a single-family house again, but we will definitely come back and compare notes once that opportunity comes up again. I hope we still have the generous subsidies then.
    6.3% sounds like a decent return, as you said, considering that this is a relatively risk-free return. And future savings will also increase with rates tied to inflation, which is a very nice feature. This is the kind of portfolio diversification I like. 2.4% for a 10-year Treasury bond? Not so much.
    Cheers!

    1. Yes and if the subsidies aren’t there still then hopefully the panels keep coming down in price because I needed the subsidies to make it work!

      Thinking of it as an investment makes sense and I agree there are some nice and unique features. Unfortunately the investment is relatively small in the grand scheme of things!

      Thanks for the comment, ERN!

  12. That’s good to see the numbers and reality of solar costs and savings. We have looked into it, but with our plans having kept us in our last house and current house for 5 yrs or maybe up to 8 yrs, it didn’t seem like it would pay out. Even with subisidies it’s still a big investment if you’re not somewhere long enough to pay out. Most people around here seem to be more against solar because of the “negative aesthetics” as opposed to savings, so another reason to not make that leap in our current home.

    It’s definitely something that’s on the table for our forever home though.

    1. I don’t disagree, I think you’d want to be sure about living in the home longer term before making the investment. I’m sure they’ll only be more affordable by the time you do end up getting them.

      Thanks for the comment, Mr SSC!

  13. Interesting! We got solar panels installed in March of this year and are waiting to see what a full year profile will look like. Our electric bill has been effectively zero except for th connection fee since we are still hooked up to the grid. I think our utility company resets April 30 which was handy for this year but not so great in the future.

    In WA state, the incentives are quite generous. We calculated the system would be paid off fully in approx. 8 years between federal tax credits and state incentives. It will be interesting to see if our numbers were correct.

    1. That’s awesome! Hopefully my analysis helps give some foresight to how yours will work out. You’ve probably been able to ramp up a bunch of carry forward credits from strong generation in the summer months! That should carry you through the winter with hardly much of a bill too.

      Interesting how both our states have a reset! Must be common. I think I’d prefer an April date than may given the stronger production in the spring.

      You’ll have to stop by after your year anniversary and let me know how everything went!

      Thanks for stopping by and sharing!

  14. Nice job JW, it’s great after your first year you can see it’s provided you a decent return, even if it’s not quite as much as you wanted it to be.

    If I were you, and I had the option to go back in time and install or not, I would definitely. The ‘green’ effect is good on its own and with all the savings eventually you’ll get your money back. Shame you can’t hold onto the credits. In Australia (to answer your question on your original post) you can ‘sell’ your electricity back into the grid but the energy company takes a fairly big slice of the money you get. Still extra money though. There’s a lot of sun in Australia so solar panels are definitely worth it for a long of people here. We rent so it’s not possible for us at the moment.

    Good job guys!

    Tristan

    1. I agree, if I could go back in time I would do the same. I think it’s great that countries like Australia are supporting solar and at least the utility gives you something for the extra energy produced. It entices you to get solar but only so many panels that you can use.

      Thanks, Tristan!

  15. great description of all the details to consider and your experience with solar panels. I have some friends who recently installe dsome and are basically off the grid now and very happy. Hopefully more and more people continue to do this and reduce the need for so much energy production via less clean sources.

    1. Absolutely! That’s great for your friends. Slowly but surely solar is spreading. It’s said that the amount of energy that hits the earth daily from sunlight is enough to power the earth for a year! That’s a lot of energy we can capture with solar panels!

      Thanks for the comment, Freedom 40!

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