Does installing a photovoltaic (PV) solar energy system make financial sense?
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I’ve been asked this question fairly often ever since I had a PV solar array installed on my roof in early 2006. The short answer is yes, but many factors are involved.
The main components of a PV system are the solar panel array, which converts light into DC electricity, and the inverter, which converts the DC electricity into 110 Volt AC electricity that can be used by the house. The system is designed to run the house on solar power first and only switch to the grid when electrical demand exceeds the PV system’s power output. It operates seamlessly, so no manual intervention is ever necessary.
During winter and early spring, my home’s electrical demand is low enough that I use solar power exclusively. In fact, for a few months I generate more electricity than I consume, and sell the excess to my power company, which applies a credit to my bill during those months. During the summer, however, air conditioning (a necessity in Phoenix) requires more power than my array provides.
My solar system is rated at 3 kilowatts (kW) peak power, which is the amount of power produced when the sun is exactly perpendicular to the panels. Obviously, during the course of the day the angle of incident light, and hence power output, will vary for a system that’s mounted in a fixed position such as mine. Clouds also affect the output, but not as much (Germany has invested heavily in solar energy despite not being very sunny). More sophisticated, and hence more expensive, systems are available that track the position of the sun and adjust panel position accordingly.
According to the sales literature, my system is supposed to generate an average of 5100 kWh of electricity per year. Using Salt River Project’s average electricity price of 8.91 cents/kWh, that translates into annual savings of $454. Based on my system’s dedicated electricity meter, the output for the first year was actually 5573 kWh, yielding a savings of $497. The savings will be even greater in locations where electricity costs more.
The installed cost of the system was about $20,000, but before (or perhaps while) you gasp in horror, note that $9,000 of that was covered by a rebate from the power company, since they retain green energy credits for the electricity produced. In addition, there’s a $2,000 federal tax credit and a $1,000 AZ state tax credit (other states and countries may vary) that can be applied for alternative energy improvements when itemizing taxes for the year of installation. Therefore, my out-of-pocket cost for the system was $8,000. I should mention that I used a home equity loan to pay for it; I normally don’t have $8k or $11k floating around in my bank account.
Using my $497 annual savings from above, the simple payback period for an $8k investment would work out to 16 years; using the $454 example, one gets roughly 17 and a half years. However, this calculation assumes that electricity rates never increase over that time period, which is unlikely, as shown below.
Between 2002 and 2005, residential electricity rates in the U.S. rose by about 4% per year. Taking that increase into account, the simple payback period drops to just over 12 years. Note that if the rate increases get even higher in coming years, or if your current cost is more than 8.91 cents per kWh, the simple payback period will be even shorter. For homeowners who are still concerned that they might sell the home before they’ve recouped the cost, an additional factor to consider is that home improvements that reduce utility expenses have been shown to raise the value of the home by between $10 and $25 for each dollar reduction in annual utility bills. Taking the average of those two values, $17.50, my $497 present annual electricity savings equates to a home value increase of $8,698, or about $700 more than what I spent (109% recouped). Five years from now, assuming continued 4% annual rate increases, my annual utility savings will be $604, for a home value increase of $10,570 (132% recouped). How many home improvement projects recoup more than their cost, and increase in value every year?
However, from discussions with other homeowners, it appears that the home-value-increase argument is only of interest to those who intend to sell their homes at some point. Those who intend to stay in their current home for the rest of their lives seem to only be concerned with the simple payback, which as mentioned above can take a while. A PV solar system might therefore be analogous to an extremely long-term certificate of deposit, where the principal is locked in for a lengthy period of time, but gets a guaranteed return of about 6% ($497 or $454 divided by $8k) in simple interest every year - more if electricity rates are higher - for the life of the equipment. The system components have a 20-25 year warranty, and since the panels have no moving parts to wear out, I’d expect them to last quite a bit longer. Obviously, from a purely financial standpoint there are other investments that are likely to return much more than 6%, especially over such a long time period. However, note that this 6% is after-tax, so it’s comparable to 8-9% pre-tax. Furthermore, the return is guaranteed no matter what happens to the stock market. In fact, it’s a guaranteed minimum return because it’s directly related to electricity rates, and as mentioned above it’s therefore more likely to increase than remain constant or decrease. It might therefore be worth considering as a low-risk allocation (even if the appeal of increased equity as mentioned above is ignored).
Another benefit to consider is the environmental impact of reducing the amount of fossil fuel-based electricity one consumes. 5573 kWh of solar energy eliminates 7600 lbs. of carbon dioxide emissions every year. Regardless of where you stand on global climate change, it’s safe to say that less pollution is better than more. The more people who adopt solar (or other clean energies), the less need there is to build additional coal-fired power plants. If solar’s payback period is too long, think of it as a donation to a good cause (that is, cleaner air for everyone) that also pays the above-mentioned interest and also increases one’s equity. How many other charitable donations ever make money for the donor at all?
Depending on which arguments readers see as applicable to their own particular situation, solar energy can have a range of advantages. Do the math using the costs and incentives that apply in your own location. While the financial return obviously can’t compete with, say, Google stock bought during their IPO, it compares very favorably with other home improvement projects. To me, the combination of financial and environmental benefits makes photovoltaic solar energy a good home investment indeed.
For additional information:
* My solar contractor, who I recommend highly
* NBC interview about my system, broadcast Nov. 8, 2007
(text w/ link to 3:02 minute video - can take over a minute to load)
* FOX clip about SRP’s solar A/C (briefly mentions my PV system), broadcast May 28, 2008
(direct link to 2:07 minute video)
* East Valley Tribune article about my system, published June 29, 2008
(first & second pages of print version, which includes better photos 
)
* FOX clip about APS’s new solar loan program, broadcast August 28, 2008
(click main image to start 2:05 minute video)
Revisions:
(1) August 8, 2007 - added pre vs. post tax info on investment return (thanks Grand Pa Solar).
(2) August 13, 2007 - added chart and info on utility rate increases, impact on payback.
(3) August 28, 2007 - edited to emphasize comparison to other home improvement projects.
(4) November 13, 2007 - added NBC interview link at very end above.
(5) May 29, 2008 - added FOX interview link at very end above.
(6) July 7, 2008 - added EV Tribune links at very end above.
(7) August 29, 2008 - added 2nd FOX interview link at very end above.
This is hardcore stuff Suman, you’re officially the most eco-friendly person I know.
Just out of curiousity, how large are the PV cells on your house? That would help out with the calculations
Thanks.
Thanks Tomas! Good question, PV Wonderer. There are 18 panels altogether, arranged in two rows of nine. If I recall correctly, the array takes up 300 square feet, though I don’t know if the individual dimensions are exactly 10 feet high x 30 feet across or something else but similar.
Now that you have solar you can see the biggest savings come from efficiency. I only have a 2.4 kw system and we made more thqan we used from Jan to June. Then I got a bill for $36 in hot July. I also give power back to the utility right during peak hours of the summer. I even buy renewable energy blocks I don’t even use each moth to be 200% green. My system makes no pollution and doesn’t use water like coal and nuclear do.
Passive and efficiency along with solar make it a real winner. Energy star appliances , thermal barrier, solar screens , CFL and LED lights all help reduce energy needs.
I’d love to retrofit and become a zero energy home. It’s happening a little at a time. It would be great to have R20 windows. They are still the weakest link. R5 or 6 are about the best made so far.
Also I’m working to make my Prius a plug-in hybrid to cover transportation. 100+ mpg just goes together with a green home.
I drive buffalo cart to work. But I worrying - is buffalo green enough? He eat very much grass all around my house in Kazhakistan. Maybe I, how you say, retrofit him and paint him green.
Jstack6 raises a good point - a lot of energy is wasted due to inefficiency, causing unnecessary pollution. I’ve found energy-saving lights make a big difference for just a small investment, and his other suggestions could also offer significant bang-for-the-buck.
Forgot to mention, for those who want to drive greener but can’t afford a hybrid (let alone a plug-in conversion), if your driving involves a lot of short trips, consider getting an electric scooter. It won’t replace your regular car but will help you use it less.
Borat’s buffalo will soon find, like Kermit the frog, that it *is* easy being green! Is the paint lead-free…?
To Suman,
On-going tax concerns also figure in to your return on investment. Your additional home loan interest is tax deductable while your savings are “after tax” and you pay nothing on the effective income. This increases your return on investment to over 8% effective. This compairs well to the best low investments that are available.
Good point, Grand Pa Solar - thanks!! I’ve updated the article to reflect that.
Thanks for all the great information, Suman! It’s a lot to think about. Any idea how to compute the energy produced by geographic area? I suspect I won’t do as well here in Seattle and with an 18-year payback, so I’ll have to at least come up with additional solutions if not completely different ones.
Great write-up!
Thanks, Nicholas, and good question. I’m afraid I don’t know a formula for computing energy vs. geography, but here’s a nice animation from the University of Oregon showing how the intensity of solar radiation shifts over the entire world by month. Seattle appears to get more intense solar radiation than Germany, which as mentioned above has gone heavily solar. It really comes down to what incentives are available for a particular location - check with your power company. More power to you for considering going green!
I realized over the weekend that the 16-18 year period mentioned previously assumes that electricity rates never change during that time. I looked up rate data and revised the article accordingly. There’s an added chart that’s a little scary!
You must use discounted cash flows as the “simple” payback period for such long periods (10+ years) gives you a skewed picture.
Look at the effect of discounting the cash flows (i.e. your annual $497 savings):
-> At 4% discount - Payback Period = 27 years
-> At 6% discount - Payback Period = 58 years
This of course doesn’t take into account the annual rate increases but even then I’d expect the payback to be in the region of 20+ years.
You should think of putting a monetary value to the warm fuzzy feeling of saving the world that you get from your PV panels and add that to the math. One way of doing this is to ask yourself, if the Electric Company offered you to cut its CO2 emissions by 7,600 lbs for a price, what would you pay for it?
Well, asked *that* way, hardly anyone would pay much!
Not to belabor the point of my green cred, but a few years ago I started buying blocks of green energy from the power company (either $2 or $3 extra per month - I don’t remember offhand) to support clean energy projects of theirs, so in effect I was paying $24 or $36 per year for them to cut their emissions.
While I’m still doing that, one advantage of my PV system that your DCF analysis ignores is that I’ve immediately increased the value of my home, due to the reduced utility costs, by more than my investment. The payback therefore isn’t 58, 27, 18, or 12 years, but immediate (so I not only get the warm fuzzies for cutting emissions, but I’m also already ahead financially)! As I mention in the revised article above, this home value increase actually gets larger every year that utility rates go up. Even if I never sell the home, increased home value will be of interest should I someday decide to get a reverse mortgage.
You’re right. You should add the asset appreciation value at some fixed point of time in the future, say 10 years out and end the analysis at that. You can’t consider that appreciation today, because you will realise the money only if you sell the house and if you sell the house you will stop reaping the savings.
Did you add the interest cost to the analysis? At 8%, that’s around $600 per year, which will wipe out your entire savings.
Don’t worry about the financial part. It takes irrational early adopters, like yourself, to drive advances in technology to the point where they become mainstream… not to mention to the point of having real financial justification.
I’d mention that the interest on a home equity loan is tax-deductible, but there doesn’t seem to be much point. Not quite sure what I did to rub you the wrong way, but thanks for the endorsement… even if it’s a dubious one!
“The rational man adapts himself to the world. The irrational man tries to adapt the world to suit himself. Therefore all progress depends on the irrational man.” - G B Shaw
I was reading an incoming link to this article and was thinking that “payback” is the wrong way to look at this whole project. A more appropriate way to evaluate and justify this project would be to look at in this simple way:
1. There is no investment. (What I mean by that is: Suman’s not paid anything out of his own wallet.)
2. There are no expenses. (Electricity savings + tax exemptions >= interest on loan)
3. There is no asset depreciaion.
Having spent nothing, with no recurring expenses, and no depreciation, you shouldn’t worry about payback because you aren’t paying anything anyway.
So the answer to your original question on whether it makes financial sense is, “Yes it does because, despite the marginal positive impact, there is no negative financial impact and you get to reduce 7,600 lbs of CO2 emissions annually for nothing.”
Thanks so much for your note. I’m learning a ton on every exchange, believe me!
Here’s how I look at it: the writer notes his cost is $8,000 above. It’s true that there’s no out of pocket cost per se if he uses a home equity loan, but in fact he’s actually paying interest on the $8,000 so the true cost is actually more than $8,000. Now if the system could generate enough power to cover the payment on the home equity loan I’m so sold! However that strikes me as unlikely and I don’t think that’s what he’s saying.
Your note came with interesting timing as I was just struggling with this exact issue last night at MovingLikeWater.com. Specifically how to compute the payback time of a solar panel installation. If you know of any calculators or methodologies for approaching this, that would be very helpful.
The perspective of my site is that to truly begin making a broad impact toward moving people toward renewable energy, the technology must be affordable, easy to use and safe. Once these solutions are seen as a financial win, they’ll take off and that’s the point when you’ll see real impact toward global warming goals. Doing it for warm fuzzies is great but a very small group of concerned people can’t take enough pollution from the atmosphere. We need massive numbers of people to move and that’s why the financial payback concept is so important to me.
A few weeks ago a representative from the power company asked me if I’d be willing to be interviewed about my solar cells. My chance at stardom? Helloooo!! OK, maybe not quite, but of course I was (and am) eager to spread the word about solar power’s green benefits (both environmental and financial).
Last week Dave Cherry, one of the consumer reporters with the local NBC station, came to my house to get some footage of the equipment and me. This morning they broadcast the piece a little after 6 am. The text of the story is here, and there’s a link to the video clip itself near the beginning of the article. Patience is required - the video takes a *long* time to load…
Way cool - we have a bona fide celebrity here. By the way, the video downloaded in real time for me.
Thnks for this note that great to know about the solar sell
Please I am a university student in Ghana and am working on a poject topic “Evaluation of an emergency PV lighting system for domestic electrification” Please help me to go about this project. Thank you
In California if you had a high electric bill, a system that eliminates most of you electric bill would pay itself off in less then 10 years. If you finance it with a decent rate (Around 7%) you can be cash flow positive in the first month. Meaning you are paying less on your financial charges then you would be on your electric bill. You can even save more if you are able to take out a home equity line because of the tax deductions
I am so glad that I read your blog entry. I am currently doing a major research project on Solar Panels and love your honest approach and explanation. I will be putting this in my articles section of my research for sure! PS - good for you for doing a great thing environmentally speaking