Working in the energy industry, caring about the environment, and being financially minded have colluded to pique my interest in solar. Unfortunately, in the past, the analysis was pretty short-lived. It simply didn’t make sense financially.
What changed? Why did we decide to make the leap? Let’s take a look…
It’s not in the star(s)
Last time I ran the numbers, as much as I wanted it to, installing solar didn’t make sense financially for a number of reasons. For one, solar panels and their associated costs (such as installation) were still too expensive.
This was partly due to the financial structure. Due to the small or negligible (depending on your situation) actual savings in the first several years, the large upfront cost was too much of a pill to swallow. The return was incredibly low compared to simply investing the money in the stock market.
To make things worse, it complicates your situation. Instead of simply paying your electricity bill each month, you potentially have two bills (one for the electricity and one for your solar panel loan*), plus you now have to deal with any issues with the panels. As much as I may have wanted to experiment with solar and help reduce my environmental footprint, I’m not running a charity over here.
Why solar
In case you’ve been living under a rock, let’s review some basics. Solar refers to photovoltaic (PV) cell panels installed on your roof. These devices magically turn sunlight into electricity, which is pretty freaking cool.
With all the focus on climate change and the massive demand for energy that just keeps growing, where your electricity is sourced is a big part of the equation. In the past, we’ve used a lot of dirty fossil fuels like coal and natural gas to generate electricity because it’s cheap.
Unfortunately, these fuel sources generate a lot of carbon that gets pumped out into the atmosphere. Hence renewable energy. Renewable energy refers to energy sources that don’t deplete on any reasonable timeframe, such as wind, solar, hydro, and geothermal. These energy sources also tend not to dump a bunch of carbon into the atmosphere, which is pretty cool.
Sunlight is one of the most readily available sources of energy and provides a unique opportunity for consumers to participate directly in changing the fuel mix on the grid. It’s not like anyone is installing wind turbines or a hydroelectric dam at their house.
Normally, the only option consumers have, assuming they have one, is to purchase renewable energy from their electric provider (generally wind or solar, although this depends on where you live). This doesn’t actually mean that your provider is purchasing energy from (in most cases) – or that the electrons flowing into and powering your home were generated by (not physically possible/feasible) – a solar or wind farm.
Rather, your provider purchases vanilla power for you in one form or fashion on the market and then also purchases a Renewable Energy Credit (REC) for every MWh (1,000 kWh) of electricity you use. Your provider then retires the RECs (representative of the environmental characteristics/benefits of energy produced by renewable resources) on your behalf.
With solar, you can skip all that mumbo jumbo and go straight to the source, generating your own sunshine-fueled power. In some states, you even earn the rights to your own Solar RECs (SRECs). Depending on where you live, there may be a market you can participate in directly for SRECs, and in some areas of the country, SRECs are worth hundreds of dollars apiece.
Plus, solar is just cool!
Running on Sunshine
Part of what makes solar economically feasible has to do with tax benefits. Currently, there is a federal tax credit of 30% of the entire cost of installing solar, which is pretty huge. If you’re installing a $30,000 system, that means you’ll get $9,000 back**, which you could then apply to your loan, effectively reducing your cost for the system to only $21,000 or 70%.
In addition to this stellar benefit, some states have additional tax benefits. In Texas, solar is not allowed to be taxed, so even though PV panels increase the value of your home or property, they don’t increase your property taxes. Pretty cool.
The larger the system you purchase, the more likely it is that you’ll also receive additional incentives directly from the installer. In our case, we are receiving a solar attic fan, which will further reduce our demand for electricity.
Solar panels themselves also act as a radiant barrier, reflecting sunlight and thus heat that would otherwise be absorbed by your roof and cause your HVAC system to work harder.
However, credits and incentives aren’t the only economically attractive feature of the current solar market. The financial structure of your loan has a huge impact on the picture for consumers.
On the one hand, you can wrap a solar loan into a mortgage or refinance. This is beneficial because you are likely to get a lower rate and it generally spreads your payments over a longer period. While I would usually consider this a tactic that could be used to trick consumers into paying more interest over the long run (still potentially true), it can still be financially beneficial since you end up with a system that reduces what you’re paying for electricity. This is especially true if you invest or save the difference in cash flows.
On the other hand, for those without this option, solar financiers are now offering loans at 0% down, which significantly changes the financial picture. Many providers are also offering loan structures where the first 18-months or so of the loan are interest only. I would normally run far, far away from a loan with this structure (for a car, for instance), as it would only serve to funnel more hard-earned cash from your wallet to the banks.
However, given that your solar system will be actively working to cut your electricity bill during those 18 months, this effectively locks in some more upfront cost savings at the start of your loan. The reason providers are doing this is to help consumers bridge the gap from their full loan amount to the reduced amount after taking the federal tax credit into account.
If you were to start paying on the full loan immediately, your payments would be higher for up to roughly 18-months (depending on when you installed the system and when your tax return is processed). This way, you actually have lower payments at the front of your loan, after which it rises only slightly (assuming you applied your tax credit to your loan). This effectively lowers your total bill for electricity for some time.
When you take the potential for a beneficial loan structure into account in addition to the federal subsidy, the picture changes significantly from the last time I evaluated solar.
Not all sunshine and rainbows
At this point, you’re probably wondering when I’m going to start selling you solar panels! As with anything, installing solar has its drawbacks as well, the first and most obvious being complication.
Instead of having one bill for electricity, you now have a loan payment and a separate electricity bill (although this could be negligible or negative). In most cases, I try to opt for simplicity and the less is more approach, so this does add a small bit of complexity, although two accounts on autopay is still pretty simple.
You clearly do have to go through the process of shopping suppliers, applying for credit, taking out a new loan, and allowing people to install solar on your house (assuming you don’t do it yourself). Depending on what else you have going on in your life, this alone may be too big a detractor, although in truth other people mostly handle all the work.
Installing solar also limits your options if you’re in a deregulated area where you have a choice between electric providers. If you’re in a regulated area, you don’t have a choice and just have to accept whatever deal (if any) your provider offers for buying solar generation back from you. It’s important to research your options prior to making a financial commitment (do I sound like a broken record yet?).
In a deregulated area, not all providers may buy back the solar power you generate. In Texas, this isn’t required, so only a few providers will credit you for your generation, significantly limiting your options compared to the abundance of companies and plan options for someone without solar installed.
Currently, the options available to individuals with solar installed in Texas are favorable for those with most, all, or over 100% of their usage covered by their solar generation. This will naturally vary depending on where you live.
Given that these plans don’t have indefinite or multi-decade terms, you are introducing some risk, as these providers could change the terms of their plans to something less favorable. However, you are trading this risk for the price risk you would normally experience being in the market without solar. The further out in the future you go, the more money you’ll likely be saving with solar.
Installing solar does also increase your risk in regards to equipment damage or failure, although most companies offer 10-25 year warranties on different aspects of your installation. You don’t have to worry about that at all without solar, though, nor do you have to worry about any maintenance such as clearing the panels if they’re obstructed by leaves or snow.
Sun-Dialing It In
So where do we stand? As you would expect from a personal finance blog, the primary consideration boils down to economics. Currently, I am getting a very competitive rate for electricity. Good enough that it’s likely it won’t continue to be quite as good into even the immediate future.
When evaluating a decision that has the potential to impact you for the next 25+ years (assuming we never sell this property), you end up having to consider quite a bit and make several assumptions. In this case, the question of what rate to compare against ends up being the most important one.
While a solid case could be made that electricity rates in my market will go either up or down in the long term, there is a lot of uncertainty involved. I ended up assuming that my costs (sans solar) would stay mostly flat with yearly adjustments for inflation, which seems pretty conservative.
My ultimate benchmark ended up being: can I meet or beat what I’m currently paying for electricity? Even if I’m only able to break even, I consider this worth doing because I enjoy experimenting and it’s just the right thing to do from an environmental perspective. Luckily, I get to do something cool that feels good and could save me money as well.
In most cases, I’m not in favor of taking on debt as it can be a trap. In this case, the beneficial financial structure actually helps make the case even stronger. However, this is a pretty unique situation. In most cases, your options are something along the lines of financing with debt, paying cash, or not purchasing at all. In this case, we’re going to be paying for electricity regardless, which slightly changes the cost/benefit analysis.
If you’ve been following my writing, then you are probably expecting some graphs and numbers. As the design of our system hasn’t been finalized, I’m not including any of these yet. Naturally, I’ll update you with them once things have been finalized and likely again once the system has been up and running for a while.
Overall, with a system that will ultimately offset 100% or more of both our house and our garage apartment’s usage, things are looking positive. We’ll see how the numbers shake out!
What are your thoughts on solar? Do you have a different perspective? Let me know!
Much Love,
(Your) Wallet
*It makes even less sense financially to purchase a system upfront for cash. I wouldn’t advise this unless you have piles of money lying around that you don’t know what to do with. If that’s the case, feel free to contribute to this blog!
**This is a general case. As usual, any specific tax outcome is dependent on the specifics of your situation. I’m not a CPA and you shouldn’t consider this financial or investment advice. Do your research!
