The Economics of Going Solar
It’s well known that solar is clean and helps the environment, however, what’s opened up solar to vastly more people (and lead to it becoming the #1 fastest growing new electricity source in the United States for many quarters throughout 2014-15) is that the economics of solar are very sound; further, the price of solar has dropped around 75% since 2009. Solar photovoltaic equipment is solid-state and extremely reliable. An upfront capital investment is required, but thereafter, it pays dividends for decades for little (if any) maintenance costs.
Cash (or self-finance purchase): Solar as an Investment
People are surprised to learn that in Maine, New Hampshire, or Massachusetts, the economics of solar energy outperform investments in the stock market.
Compare solar to an annuity, for example. An annuity works by offering you a monthly payment for a fixed period of time based on a pre-determined interest rate, around 2% right now. A solar electric system also requires an up-front investment (unless you opt for financing), and offers a monthly “payment,” so to speak, in the form of reduced utility bills for the life of the system.
However, the solar electric investment is pegged to a commodity – electricity – which increases in the order of 2.5-3% each year. So, for example, say you consider a $15,000 investment. With a 2%, 20-year, fixed rate annuity, you could expect a $67 dividend each month. With a solar electric array, you would receive 1) $4,500 back in the first tax year as part of the 30% federal tax credit, plus other state incentives or SREC revenue if applicable 2) a ‘dividend’ of around $67 per month, that will appreciate in value to as much as $86/mo in value by year 10.
The exact IRR of a solar investment will vary based on a number of conditions, including a site’s solar access, local rate for electricity, and available state incentives. However, most solar investors see a 25-year IRR of 8-12%, vastly superior to any other risk-free investment. See our profile of a customer who ‘did the math’ for his Falmouth, ME installation to see this modeling backed up with real data.
For businesses and institutions, the math is a little different, as the incentive structures are a bit different, and larger electricity consumers are usually billed on demand profiles rather than a fixed rate for kilowatt-hour consumption. However, the business case is quite solid and especially with financing solar is an excellent choice for businesses who are keen to reduce their long-term operating expenditures.
Solar for Long Term Price Stability
Choosing to go solar with a loan product makes for a slightly different decision-making process. For those who are choosing to finance, usually it is a way to go solar, earlier in time, than would be possible if an upfront cash purchase was required.
One of the biggest reasons to choose to finance a solar array (beyond simply wanting to have solar on your roof) is to enjoy the peace-of-mind and security of a fixed payment for electricity that will not fluctuate with local electricity prices.
Exact economics vary (and are displayed in great detail in one of our solar system proposals), but with our Own Your Power solar loan product, we can offer a fixed-rate of 2.99% over 12 years. After the system is paid off, the solar owner enjoys 100% of the benefits for the remaining 20+ year life of the system. Compare this to a solar lease, where for the same array, you would continue paying for 8 more years!
Massachusetts homeowners are also able to take advantage of a loan product sponsored by the Mass CEC, the Mass Solar Loan Program.
Solar Increases Property Value
As solar has become mainstream, a number of recent studies have sought to help homeowners, appraisers, and real estate professionals through the process of assessing the appropriate value for a solar energy system on a home in the event of a sale.
- The Berkeley National Laboratory (“Exploring California PV Home Premiums“) found that “each 1-kW increase in size equates to a $5,911 higher Premium“
- The National Bureau of Economic Research (“Understanding the Solar Home Price Premium: Electricity Generation and ‘Green’ Social Status“) found that PV systems “add 3.6% to the sales price of a home … [which] corresponds to a predicted $22,554 increase in price for the average sale with solar panels installed”
- The Colorado Energy Office (“The Impact of Photovoltaic Systems on Market Value and Marketability“) found that “owned PV systems typically increase market value and almost always decrease marketing time.” Leased PV systems caused problems with the sales transaction in a number of cases
We appreciate that market research proves what to us seems obvious: solar is an excellent investment, whether you are staying in the home long-term or need to sell. Solar provides a powerful suite of benefits not seen in any other home improvement:
- Proven ROI in the form of reduced energy costs for the life of the home
- Environmental ROI in the form of reduced carbon emissions
- Long-lived and durable equipment increases in value over time as costs of traditional energy rise
Standing Out in a Crowd
While the actual dollar value of PV improvements is still an area of study, what is more easily observed is how solar helps sell homes more quickly. In addition to findings in the Colorado report (which realtors reporting feedback like “PV was a major marketing factor,” “Sold very fast,” and “Listing agent liked the system so much, he had it installed in his own personal home after this sale”).
A 2008 Ryness study found that “homes with solar systems were outselling others by as much as 2:1 in 13 California communities” (Businessweek).
In the Northeast, there is little data, but anecdotally several of our customers have said that they are very happy in their solar homes, but feel confident that their solar investment will be recouped should they need to sell it.
Chris Rhoda of Belgrade told us that “My wife and I were talking about what might happen in 20 years when we’re empty nesters and want to downsize – but we can’t imagine finding a home that’s more efficient than ours already is. The realtors we have talked to have told us they would love to sell a ‘green home.’ They have very few green homes to sell yet people are asking for them all the time.”
More Data Needed
One of the tricky parts with the current solar valuation of solar is the lack of data for appraisers to use when comparing like homes. To help with this, the Sandia National Laboratories has developed a new tool, PV Value, which uses the income capitalization approach to assign value to PV systems. This approach factors in the anticipated production of the PV system, along with estimated maintenance costs, to determine a fair market value of the energy savings. This approach is discussed in detail in their paper, “Standardizing Appraisals for PV Installations.”
This approach, properly called the “Income Approach using a Discount Cash Flow,” more fairly assesses solar compare to the cost approach (looking at costs to have the equipment replaced) or comparable sales (looking at similar homes that have sold, which are often scarce with solar improvements). Sandia Labs reports that there have been over 2,500 downloads of their tool and early feedback from appraisers is very positive.
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