[Editor's Note: The following guest post was submitted by Josh Hamilton, a Physician from Texas. It addresses a frequent question people have. While some people will put in a solar system just because they wan to help the environment, most of us won't do it unless it “pencils out.” In this post, Josh gives some insight into the financial ramifications of a solar energy system. Josh and I have no financial relationship.]
In recent years the price of photovoltaic solar systems has fallen dramatically, leading to more and more Americans choosing to add a residential solar electric system to their homes. Depending upon individual circumstances, installing a solar system can be very financially advantageous. Obviously, it would not be wise to spend money on residential solar before paying off debt or investing in tax-advantaged savings accounts, but for anyone who has already funded these priorities, who might be pondering whether to invest more in a taxable account or buy into a real estate crowdfunding deal this year, I would advocate at least considering if residential solar power could be a smart use of money.
I recently completed the installation of a 10.9kW solar system on my rooftop, and in the process of deciding to do so, I spent a lot of time educating myself on the topic. While there are strong arguments for renewable energy from the standpoint of public health, the environment, and even global sociopolitical stability, the following is strictly a discussion of the personal financial benefits of adopting solar power for your home. This discussion also assumes the full upfront purchase of a residential solar system.
Solar Lease Alternative to Upfront Purchase
A popular alternative to buying a system is to enter into a solar lease or power purchase agreement with an installer or utility company, wherein the homeowner allows a solar system to be installed on her roof and then must purchase electricity, often at a below-market rate, from the company that owns the panels.
While this does broaden the market for solar energy installations, which helps expand renewable energy capacity and the non-financial benefits thereof, the homeowner is excluded from all of the personal financial benefits available to those who purchase a system. It also may complicate the sale of your home.
The Financial Benefits of Purchasing a Residential Solar System
Federal Tax Rebates
Offsetting the cost of purchasing a residential photovoltaic (PV) system has, in the recent past, been an above-the-line, uncapped federal income tax credit equivalent to 30% of the cost of the system in the year in which it was constructed.
As part of a tax bill passed in 2015 this credit was weakened such that it is to be reduced in 2020 and again the following year before being eliminated completely in 2022. However restoring the credit could be included in future budget or appropriations bills, or in separate legislation in support of renewable energy proliferation. An example is a recently introduced congressional bill HR 2096, the Energy Storage Tax Incentive And Deployment Act, which would renew the residential solar tax credit and also add tax rebates for the purchase of home battery systems.
So be aware of the very latest status of the federal tax credit prior to assessing the finances of a solar installation project. The absence of this credit would be very likely to make purchasing a solar system financially prohibitive.
State Specific Incentive Programs
A number of states and local utility companies have their own incentive programs, including tax exemptions, rebates, and discounts. It is also important to mention that, in my area, solar installations are supposed to be excluded from your property tax assessment, but as a precaution, I was able to file a specific exemption with my county tax office.
The majority of residential PV systems installed will be tied to the local electricity grid. Net metering by one’s utility company is incredibly important to the financial benefit of installing residential solar. It reimburses you for the electricity your system generates in excess of what you are using at any given time. This means that your personal balance of energy production versus energy use is more meaningfully understood averaged over a period of time rather than at any given moment.
For example, while you may need to buy excess power during the summer, in milder weather you might receive a billing credit for generating more than you use. When averaged over the course of a year it may be the case that a relatively small PV system is able to bring your net annual electricity bill close to zero.
As with tax rebates, net metering is a major incentive to the adoption of residential solar and is frequently under attack by state governments and utility companies. It's important to know what the situation is in your area. Should net metering not be available, the financial benefit of adding a home battery system would increase.
Residential Solar Batteries
For anyone able to install a system under a net metering agreement with their utility, the financial benefit of spending an additional $5,000-10,000 on a home battery system is not good. If you’re being paid for all of your excess electricity, why would you spend more money in order to save it?
The main benefit of adding a battery system is to provide emergency back-up power. Many that I’ve talked to are surprised to find out that, without a residential battery system, solar panels will not power your home if the electricity is out in your area. This is a safety requirement to ensure that power is not being delivered to the grid so that downed lines may be safely serviced.
Perhaps the math on this will change in the future as battery prices fall and technology improves, or if the concept of decentralized microgrids ever takes off, but for the present time I consider a home battery to be more of a luxury than a necessity.
Calculations of Financial Benefit
There are several different ways to analyze the financial benefits of purchasing a residential solar system, each taking a different perspective on the cost/benefit analysis.
Installers will be able to estimate sunlight availability from satellite photos of your roof and surrounding landscape, combined with the average hours of sunshine provided by local weather data. Aside from those assumed constants, the biggest variables are then the cost of the project, your current electricity rate, and your recent history of electricity usage. The average installation cost in the U.S. right now, in cost per kilowatt-hour, is around $3/watt (my own cost wound up being closer to $2.70/watt).
Residential Solar Payback Period
Payback period is the simplest and easiest to understand. How long will it take for you to save enough money that the after-rebate cost of the system is fully reimbursed? My project was estimated to pay back in 7.3 years. To increase the accuracy of this figure, it is important to remember that residential electricity usage rates increase over time. If you think of yourself as “pre-purchasing” electricity for the duration of your payback period at the time you buy the system, the effect is that the electricity you generate later in the payback period is worth more, thus accelerating time to payback as it approaches $0.
IRR is another popular way to estimate the productivity of an investment and compare it to alternatives by annualizing the effective compounded return on invested capital. My project’s IRR was calculated to be 15.1%. For comparison, the 10-year return on Vanguard’s Total Stock Market (VTSAX) and Total Bond Market (VBTLX) funds are, as of this writing, 16.05% and 3.69%. To be even more accurate, it is important to remember to take into account the effect of taxes when comparing these investments. Dividends and realized gains in a brokerage account will be subject to taxation, however the solar “dividend” a PV project produces never involves the government and therefore is never taxed, making it compare even more favorably.
Reducing Fixed Expenses (Electricity Bill)
Reducing Fixed Expenses is a goal for many who may want to increase their savings rate, reduce their workload, or aim towards early retirement. Eliminating or greatly reducing your electricity bill would obviously free up cash flow immediately, but it would also impact how much money would need to be saved in order to accumulate a sum that would allow for financial independence.
Home Equity Appreciation
is probably the most nebulous financial benefit to estimate. Exactly how much a buyer is willing to value a PV system depends on your local market and the demonstrable cost savings of your system. There are only a few small reports on the subject, but the average conclusion is that installing solar increases property valuation, in some cases approaching the cost of the system. If true, this renders the concept of Payback Period somewhat irrelevant, as there is not really a sunk cost that needs to be overcome on the way to a system’s profitability.
Solar Panel Longevity
A typical manufacturer’s warranties for PV modules guarantees power output to be at least 80% of the original rating at 20 years. In reality, many panels haven’t existed long enough to be evaluated, and the degradation of newer, better designed panels is anticipated to be far more gradual. It is reassuring that many reports of tests from panels deployed 20-30 years ago seem to indicate very minimal loss of power output.
While there are many financial lessons of much higher priority to be learned on a site like WCI, high-income professionals who have accomplished their early goals and are on the right path to financial independence should consider residential solar power installation as part of their personal financial strategy. Depending upon individual circumstances, it may in fact be quite lucrative over a medium-term time frame.
To anyone who might be interested, I would recommend visiting the website, Energy Sage. In addition to hosting many informative articles that will answer most questions you might have, the site also allows you to solicit competitive bids from local solar installers to ensure you get the best possible price. I used it, and to my advantage, I found a very competitive marketplace for solar installation in my area.
Also be aware that the process of bidding, contracting, permitting, installing, and inspecting a system can take several months, which might affect the year in which a tax rebate could be claimed. My own system has not been running for very long, so, unfortunately, I can’t tell you too much about its impact on my own finances, but the projections are very encouraging so it will be interesting to see how this impacts my family and our financial goals over the years.
Do you have residential solar? Do you use net metering? What impact has solar had on your finances? Would you recommend it to others? Comment below!