Solar, a smart investment

Two questions that are on the forefront of most potential solar customers minds are "How long with my home solar energy system take to pay for itself?" and "How many solar panels do I need to power my home?".

 

The answer is "it depends", and I am not trying to be difficult but the fact is there are a multitude of factors that need to be clarified before one can give an accurate answer to those questions. Starting with the second question first, the best way to provide more insight is to run through an example.

 

Let's take a house in San Francisco with a $200/month electricity bill. For this house we will size the system at 4 kW-ac which will take care of 69% of the electricity use. Because PG&E has tiered electricity rates, sizing the system this way will knock out the expensive tiers and leave the homeowner with a small average monthly electricity bill of $34. If in the future the low tier electricity rates increase significantly, you can always add some panels to your system to boost the solar energy generation.

 

 

Now that we have covered the system sizing briefly, we can look at the financials.

This system will cost the homeowner $19,030 after a state rebate of $4,400, a $1,000 San Francisco PV incentive rebate, and a Federal rebate of $7,980...not bad. Now we can get down to assessing solar as an investment and there are three factors that are important to understand.

1. Payback period - Simply the number of years of electricity savings required for the solar system to pay for itself. 

In our example this system would take a little over nine and half years to pay for itself which may seem like a long time but this is definitely not the only financial metric you should be considering..read on.

2. Internal Rate of Return (IRR) - The IRR is just a fancy way of comparing the returns from an investment in solar to other investment returns like savings account interest, treasury bills & other bonds, certificates of deposit, etc.

The IRR for our hypothetical San Francisco home is 18%. So if you are paying 7% interest on the money borrowed to finance the system you are achieving a net return of 11%. That is the number you should be comparing to all the other investments out there and I think you will agree that 11% is a pretty good return and unless the sun stops shining it is pretty much risk free. 

3. Cash Flow - Does the solar customer have more money in their hand at the end of the month after paying for the solar loan and electricity bill. If the answer is yes, then we have positive cash flow and that is a good thing.

In our example, the monthly electric bill will be reduced to $34. The other expense to consider is the monthly payment on the solar loan and for this system the total amount financed will be $19,030, which at 7% interest and a 30 year term comes out to $126/month. That makes the new monthly expense $160, which represents a saving of $40/month. But wait there is more good news. If you were to finance the solar system with a home equity line of credit, the $126 payment would be tax deductible since it is 100% interest paid toward a qualifying home improvement.

So if you can achieve positive cash flow by installing a solar system on your home, you should be less concerned with the actual payback period or IRR because each month you are saving real money and at the same time taking a big step towards energy independence.