Saving with Solar
Part 2: Solar Cents
Hello again! Thanks for checking back in with The Green Swan. This is the second installation in a three part series on Saving with Solar. I went green to save some green, and in this post, Solar Cents, I’ll show you how much green! The first part of the series, Solar is Sexy, introduced you to solar, busted some common myths, and provided some basic information on solar panels. Next week’s installation, Solar Power, will detail everything after the fact, such as the process for installation and the results to date (have I saved as much as anticipated?).
As I mentioned in the last post, the total solar panel system cost $18,816 gross (before tax incentives). My system consists of 14 panels total which measure about 5 feet x 3 feet each. It measures as a 4.48 DC Kw system, if that means anything to you. This is a relatively small system overall as my family doesn’t use a whole bunch of electricity.
We have a 3,000 s.f. home, not small necessarily, but we have always been conscious about where we set the thermostat, turning off lights when leaving rooms, relying on natural daylight, etc. I wouldn’t say we go overboard with this, we are just more conscious than the typical family and therefore use relatively less energy. I say this just to give you some background and sense of where you may fall in the spectrum. The more common system size would be about 20 panels. Some families with a large house and no care in the world on how much electricity they burn could require a system closer to 25 panels or more to fully offset their electricity usage. Ultimately, you’ll need to check with your local solar panel installer for a detailed estimate of system size to fit your needs.
So how much does it save me? Electricity is relatively cheap in North Carolina compared to other states, coming in at about 10.5 cents per kwh. In the 12 months leading up to installation, I had spent ~$705.60 on electricity. However, my system won’t eliminate that in its entirety. I expect to have 2 or 3 small bills in the winter months. There is also an incremental cost that I want to be sure to highlight. I increased my home insurance a bit to ensure full coverage for my solar panels. This amounted to an incremental annual cost of about $40 for insurance, not too bad. So net of the insurance cost and the estimated bills in the winter months, I expect my system to save me ~$640 per year.
The next logical question would be how to analyze the cost and benefits, or Solar Cents? Now even though I do work in a finance related field, this isn’t the type of finance I do at work. As part of my analysis, I ran over eight scenarios accounting for all sorts of different variables, and in each scenario calculating nine different financial metrics. Looking back on it, that was a bit over the top. So below you will find a simple overview of just a few primary financial metrics.
One thing I wanted to highlight quick is there are alternatives to how you finance and purchase solar panels. What I ultimately chose may not be the best option for you. I’d recommend talking about your options in detail with the solar panel representative. Such options could include leasing the panels, getting a home equity loan, or paying with cash.
With leasing, you would not own the panels and therefore wouldn’t need to worry about the tax incentives. But ultimately, the idea is the lease payment is still less than the overall electricity payment. There would be no upfront cost to purchase the panels. The savings you would generate are a bit easier to determine, simply your previous electrical bills versus a lease payment.
A home equity loan would likely be a good way to go assuming you can take advantage of today’s low interest rate environment. I thought about getting one myself, but I have only lived in my home four years and have not built up enough equity yet. In this scenario, you would be buying and owning the panels yourself and taking advantage of the tax incentives when you file your tax return. The idea is once you get your tax rebates, use this money to pay down your loan and continue to repay it as you reap savings from lower utility bills.
What I ultimately did was take advantage of a nice deal offered through my local solar panel installer. Through them and a finance company they are affiliated with, I financed my solar panels for 0% for the first year. Come September 2016, I plan to pay this off in full to avoid paying any back-interest. What this financing allowed me to do though, was complete my tax return for 2015 and receive my refunds, which I will hold and accrue a bit of interest until I use those proceeds to repay a portion of the loan in September. The remaining portion of the loan will be paid off with cash that I’ve been saving up for the last year. And the 0% loan has also basically allowed me to generate one year of savings from my solar panels before having to pay for them. That helps the return analysis! There may be similar financing options in your area.
Return on Investment (ROI)
The year-one ROI is calculated by taking the benefit, or return, divided by the cost of the investment. For this analysis, the year-one estimate cost savings is $640. While the gross purchase price was $18,816, my total tax refunds amount to $10,386, resulting in a net amount of $8,430 that I will have to pay for. $640 / $8,430 = 7.6%, not a shabby return for the first year, especially considering it is a guaranteed return (as in SunPower guarantees the performance of the solar panels). Hard to beat that! Additionally, the annual ROI is expected to increase every year as electrical utility rates increase. As I mentioned above, my utility rate is 10.5 cents per Kwh. But as with all things in life, this typically increases each year, usually in the range of 4-6%. This means that each year rates increase, my solar panels are in essence saving me more money, even if the amount of electricity I generate and use remains constant. And therefore, the ROI improves each year.
Simple Payback Period
The simple payback period is calculated by counting the number of years it takes to recover the initial upfront cost. As outlined in the chart to the right, I estimate my payback period to be just shy of nine years. What this tells me is that I will at least make my money back in nine years. This does not really tell me a whole lot else that is useful, but nine years is a decent benchmark. Of course, even after nine years there will still be value in the panels. They are guaranteed for 25 years and, if I sell the house, I will likely get some value for them since they are generating electricity still.
The chart below shows the upfront cost of $8,430 as the flat line over time and the cumulative energy savings exceeding that amount by nine years. Note that I start the chart at t=-1 to show that I basically get the first year of savings before having to pay for the panels (as detailed above).
Total Value Analysis
I’m not sure if there is a more formal name for this, but this is my take on measuring the total value of the solar panel system and comparing it to an alternative investment (the opportunity cost) consisting of an all stock portfolio which provides a hypothetical estimated 8% annual return (similar to what you would expect over the long-term from the S&P 500). I think this is the most applicable analysis for determining if solar panels is a good investment since it captures the value of the panels themselves and the ongoing cost savings, and compares it to the opportunity cost.
This chart to the left shows the total solar panel system investment as being a better investment than putting my money in the S&P 500 from the get-go. This assumes the panels are worth $20 for every dollar saved in electricity (the 20x multiple described in the Solar is Sexy post), or $12,800 in year one based on energy savings of $640, as well as the cumulative energy savings over time. The reason why this investment decision is so favorable is because of the value of the tax incentives that I am reaping. I’ve basically bought $18,816 in solar panels (valued at $12,800 in year one per the 20x multiple), but only paid $8,430 for them. The opportunity cost of investing that $8,430 in the S&P 500 can’t compete.
You could even argue the above analysis is conservative since the energy savings ($640 in year one) are counted at face value. In reality, I would take those savings each year and invest those in the S&P 500 and generate additional returns. The analysis doesn’t otherwise account for this.
Yes, this analysis demonstrates that value of the solar panel system is largely in the value they retain when you sell the house. I personally think this is fair given how long solar panels have proven to last and the 25 year guarantee provided by SunPower. But, say you think this scenario is too rosy, and the 20x multiple to determine the value of the panels is too high. The chart to the right shows the exact same analysis with the exception of using a 10x multiple rather than 20x. Even in this more conservative scenario, the investment profile of the solar panels exceeds the S&P 500 by year two and keeps climbing each year!
Does my Solar Cents analysis make sense to you? Do you think I missed something? Is there a better way to analyze it? Let me know in the comments below.
As I mentioned in my Saving with Solar Part 1: Solar is Sexy post last week, I bought my panels through SunPower. They are the best in the biz. If you are interested in looking into solar panels more, be sure to check them out. And remember, they offer a pretty generous referral program, so reach out to me through the contacts page for more info.
Thanks for taking a look.
The Green Swan
Disclaimer: As with all decision likes this, I would recommend you discuss this with a trusted adviser and your tax accountant to make sure you are making the best decision given your personal situation. The analysis above is shown for informational purposes only and should not be relied on for your own financial considerations and analysis.