Are you interested in reducing your utility bills while doing something good for the environment? A lot of people are saying “yes” to that question. The popularity of solar energy continues to grow, despite the challenges outlined in this article. One reseason homeowners are going green is solar companies have found less expensive ways to produce and install the panels and some financial engineering has made it possible to “go solar” with little to no money out of pocket.
No money down appeals to lots of customers:
Several years ago, solar panels required a $25,000 to $50,000 up-front investment to produce savings that trickled in over time. New companies came to market, such as SolarCity, which is now the largest player in residential solar energy. SolarCity developed a lease option that enabled homeowners to install solar energy with no money down and start saving money on their electric bills immediately. This sounded like a no-brainer for many people, and the “no money down” leases now account for around three quarters of all solar installations.
Recently, one of my clients was considering solar and asked me to help him analyze the numbers. Here were our findings:
- Lease – This option did not require any money out of pocket. The solar panels would produce a portion of the client’s electricity, which he would buy from the solar company for less than the current rate he pays his utility company. The cost of the electricity purchased from the solar company will increase at 2.9% per year. Therefore, the total cost savings over the 20-year lease depends on the magnitude of price increases from his public utility compared to the 2.9% price increase on solar power. The total savings for the 20-year period would be only around $1,020 if the public utility never raises its prices. The cost savings would be $8,184 over the twenty-year period if electricity prices from the utility increased by 4% per year. Actual electricity price inflation nationwide since 2001 has averaged around 3.75%.
- Buy the system outright – The cost of installation was around $11,600, but I consider the real cost to be the net cost after tax credits, which was $7,422. Note: you do not receive the tax credits if you lease. The initial savings is estimated to be approximately $880 per year. If you assume that electricity price increases from the utility company average 2.5% per year over the next 20 years, then the Internal Rate of Return on the investment is over 12%. However, the projected savings of both options ignores the costs that may be charged by the utility for Net Metering, which is the biggest wildcard in solar right now.
Net Metering is the biggest wildcard in solar:
Solar customers need to connect to the utility company’s electrical grid to store excess energy when more is produced than needed and to buy electricity from the grid when less is produced than needed. Originally, utility companies were subsidizing solar installations for residential customers in order to meet federal mandates for renewable energy. Demand exceeded expectations, so the subsidies have been largely eliminated. To make matters worse, utility companies now want to charge solar customers for net metering. They claim that solar customers are not paying their fair share to maintain the electric grid, and those costs are being unfairly shifted to their non-solar customers. Many utilities are now charging solar customers fees to connect to the grid (Demand charges) and are trying to increase those.
In the most extreme (and public) case nationwide, SolarCity decided to leave the state of Nevada after the public utility changed the Net Metering Rules, charging solar customers a $40 monthly fee, and thereby, making the economics of solar far less attractive. Nevada even made the change retroactive to existing solar customers.
Other Considerations before opting for Solar Energy:
- Aesthetics – Individual homeowners have to decide how they feel about the look of solar panels on their roofs.
- Resale Value – I asked a couple of realtors whether solar panels helped or hurt the resale value. They did not have strong opinions, but they did say that if you have a lease (as opposed to owning the system outright), then the panels either have to be moved or the lease taken over by the buyer.
- Stability and reliability of the company – Most solar installations come with a long warranty. Therefore, it is important for your solar company to stay in business. Most solar companies are losing money, which is not totally unusual for high growth companies. SolarCity, which is publicly traded (SCTY), lost $58 million on $399 million in revenues last year.
So what do you think? Do you have solar energy panels? Do you want them? Do you think they will they be a good investment? Send us an email…and may the sun continue to shine on you and your family (solar panels or not).