Should We Go Solar?
Over the past several years, I’ve noticed the installation of more and more solar panels in the area we live.
I’ve long been intrigued by the idea of solar energy, but as someone who tries to base most of his financial decisions on facts and numbers, rather than emotions or peer pressure, it never made sense to me.
A local solar provider recently offered an incentive program through my employer. While the incentive was modest, it was enough to get me to seriously run the numbers, and do some further research about the pros and cons of solar energy for our family.
Honestly, I’d say it’s mixed.
The friendly solar company sales rep’s pitch was focused on the potential environmental benefits of clean energy, as well as the fact the company would finance a system for us around the level of our average monthly electric bill.
These ideas were interesting, but not incredibly compelling to me.
I’d prefer to be friendly to the environment, but I am not a zealot.
I don’t like some of the byproducts of the processes used to manufacture solar panels, and there is the inconvenient question of what will happen to the panels a few decades from now when they are no longer useful.
That said, the thought of generating enough energy to power our home by the sun’s rays, rather than by burning a finite resource, was intriguing to me.
I prefer to purchase things in cash whenever possible. The solar company offered a 10 year financing option at 2%, a 12 year financing option at 3%, and a 15 year financing option at 4%. While these rates were not bad, I loathe debt.
Fortunately, we were blessed with enough cash in our bank accounts to purchase a system for our home in cash, if we decided to proceed. The fact that the solar company was offering a cash discount of 8% made the cash option much more compelling to us. The multiple financing options could certainly make the numbers work for many potential buyers, but they were not critical to our decision-making.
As I mentioned earlier, it’s primarily about the numbers with me. So I focused on calculating how long it would take for a solar energy system to pay for itself.
To start, I went through our financial records, and figured out how much we had spent on electricity in each of the past three years, and how many kilowatt-hours we had used.
Taking the annual average of our power usage and expenditure for the past three years gave me a good baseline for what our electric bill might look like this year. I then assumed future price inflation would be 2% a year.
This provided me with a rough estimate of what we might be spending on electricity for each of the next 30 years.
I then went about comparing those numbers with the cost of the system the solar company proposed, and its expected production.
The top line quote from the solar company on the “value” of our system represented a payback period of 14.5 years under my assumptions.
From my perspective, this was far too long.
After the incentives from my employer, the payback period fell to about 13.5 years.
Still a no go, but making progress.
After the cash discount, the payback dropped another year to 12.5 years.
Better, but for us to seriously consider making the move, I was hoping the system would pay for itself in less than a decade.
Fortunately, that is when our generous Uncle Sam stepped in, to try to close the deal.
According to the Solar Energies Industry Association (SEIA), the solar investment tax credit (ITC) is a 30% federal tax credit that can be claimed against the tax liabilities of residential investors in solar energy property. The residential ITC allows the homeowner to apply the credit to his/her personal income taxes. The credit is used when homeowners purchase solar systems outright and have them installed on their homes.
The SEIA goes on to explain that tax credits are a dollar for dollar reduction in the income taxes the person claiming the credit would otherwise pay the federal government. The ITC is based on the amount of investment in solar property. The residential ITC is equal to 30% of the basis that is invested in eligible property. The residential ITC is currently scheduled to step down to 26% in 2020, and 22% in 2021, before dropping to zero after 2023.
Given our expectation of federal tax liabilities for the 2017 tax year, I believe we would be able to take advantage of the 30% residential ITC if we installed a home solar energy system.
You should check with your tax advisor to make sure you qualify for this incentive before making any decisions about installing a solar energy system. You should also note that some states offer additional incentives that could reduce the cost of solar energy further.
While we’d have to pay for the entire system up front, after our federal tax bill was reduced next April, the payback period on our net investment in solar, based on my assumptions, would be around nine years.
In reality, my payback estimate is still a little optimistic. Even with the installation of solar, our electric bill would not actually go to zero. We’d still have a modest monthly charge to remain connected to the power grid, along with a few other small fees that would make our actual payback period a bit longer than my back of the envelope calculations.
That said, at around nine years for payback, things are starting to get interesting.
Based on my research, a nine-year payback period is still on the longer end for the United States, and significantly longer than is typical in several European countries. We live in a relatively expensive area of the country, and the climate is not optimal for solar energy, so I was not anticipating a payback period that would scream to me solar was a brilliant financial decision.
In our area, a nine-year payback seems a little better than average. I’d like it to be lower, for obvious reasons, but it was still short enough to convince me to do some additional research before making a decision.
According to a 2015 article in the New York Times, a Department of Energy study found that home buyers were willing to pay a premium of $15,000 for a home with an average size photovoltaic system of 3.6 kilowatts. Our system would be larger than that, so it’s not unreasonable to think an investment in solar could increase the value of our home by at least $15,000, while also paying for itself in about nine years. To be fair, there are probably some potential buyers who would be turned off by solar, so I don’t think its unreasonable to also assume it might take longer on average to sell a house with a solar energy system.
Our local solar company actually provided us with two quotes, using solar panels from two different manufacturers. The quote we’ve been discussing included higher-end panels manufactured by SunPower Corporation. The payback period for a system with panels from the other manufacturer was around eight years, but our friendly solar sales rep did a good job convincing me of the long-term value of SunPower panels.
The SunPower panels we considered offered a higher efficiency rating than the other panels, a longer and more comprehensive warranty than other manufacturers, and a guarantee the panels would still be operating at 87% of their original performance level in 25 years. While there are obviously no guarantees that SunPower will have the financial might to honor those warranties in a few decades, I do believe their panels are high quality and should perform well in the coming years.
So where are we now?
We’re looking at a payback period of around nine years, for a high quality system, that could increase the value of our home materially.
But we were still uncertain, until I thought about our quest for financial independence in the context of the 4% rule.
The 4% rule tells us that saving 25x our annual utility expense might be able to support paying that bill for the rest of our lives.
So I multiplied my projected electric bill for this year times 25, to determine how much we’d need to put away right now to – theoretically – finance that bill for as long as we expect to own our home.
Even the initial quote from the solar company was much lower than this figure. Our net cost after all incentives, discounts, and the ITC would be less than 40% of the amount we’d need to put away in cash today to finance our electric bill for the long-term.
Granted, there are no guarantees energy policies won’t change in the future.
A decade from now, it’s conceivable a proliferation of residential solar installations and changes in regulations might mean solar users can only offset a portion of their electric bills. By then, a system will likely have paid for itself, but assuming the financial benefits of solar will be the same in the future as they are today is, in my mind, naïve.
Given the uncertain long-term benefits, it’s hard for me to view going solar as an obviously astute financial decision.
That said, when thinking about our pursuit of early retirement, the ability to eliminate one of our larger monthly expenditures – certainly for the foreseeable future, and possibly forever – while also potentially increasing the value of our home, and perhaps helping the Earth, was very attractive.
Which is why we made the decision: We’re Going Solar!
More to come in future posts on our upcoming installation!
Have any readers considered solar power? What factors drove your decision-making?