May 25, 2013
In 2013 I ran the numbers on installing solar on my roof in California and came to the conclusion that it may be one of the best financial investments I could make. If you've wondered how all of the numbers work for rooftop residential solar, read below and I'll walk you through using my roof as an example.
First of all, the devil is very likely in the details. If you have cheap electricity rates already, a shady roof, or live somewhere without much sun, this may not be as great of a deal. I'd been wanting to install solar for a long time, but as an apartment dweller it hadn't been an option.
I recently bought a house in the San Francisco Bay Area. I waited a year to install solar so that I'd first have a good idea of my power usage. The photo on the right is my array (which I think looks geeky awesome!). Below, I'll tell you about all of the financial details which is why I think this'll be a great investment for me. It's probably a bit boring with a bunch of math and numbers. I wouldn't consider you lazy if you felt it wasn't worth reading.
The array above is 10x SunPower E20 327W panels. In addition to the panels, you also need an inverter, which is a device that converts the variable DC output from solar panels into AC power with the right voltage and frequency characteristics to connect up to the electrical grid. There is also some amount of electrical and construction work that is required to mount the panels on tracks on the roof, run conduit to carry the current, etc. In total, including install and all other costs, my system grossed $19,820.
However, right off the bat were several rebates from this number. There is a very significant 30% federal tax credit which I'll see next year at tax time. There is a California rebate program that just ran dry which rebated back a little bit based on how much is generated. This was worth another ~2% discount. I also had a rebate from SunPower (the equipment manufacturer) for 35c/W installed.
In total, after all of the various rebates, my net cost was $12,346. Definitely an investment.
Most panels will come with some form of manufacturer warranty, often guaranteeing a certain amount of production given a certain amount of light. It does seem like there is some financial risk in collecting on these warranties - the solar manufacturer must not go bankrupt and collecting may be a hassle even if free. SunPower warranties their panels for 25 years. The warranty covers the cost of panels and the work to replace them. They expect some degradation over time, but they guarantee 95% of their rated performance for 5 years and then that drops by 0.4% every year for the next 20. At the end of the 25 years the warranty guarantees output will be at least 87% of the original rated output.
The inverter has a separate warranty for only 10 years. Most inverters tend to have a more limited lifespan than panels and it is expected that I'll need to replace my inverter once during the life of the panels, probably around 15 years out. I asked for an estimate of what it would cost to replace a dead inverter and was quoted $400/kW or about $1,200 in my case. For my estimation, I'll conservatively add in $1,200 cost, however it is certainly possible that inverters will be cheaper by that point - they are just electronics after all and electronics tend to get cheaper over time.
The US Dept of Energy runs a web tool called PVWatts that allows a person to calculate with reasonable accuracy how much power a set of panels will generate, given a number of inputs: location, angle of roof, direction of roof, size of array. It's no guarantee but the model should be fairly accurate over long periods of time. In my case, plugging in my numbers produced a generation estimate of 4,830 kWh per year. A solar installer will likely run the PVWatts numbers for you as part of their design process.
As a Californian, I buy my power from the utility PG&E. In Caliornia, PG&E uses tiered rates. Tiering works kinda like income tax brackets. The first X kWh you use in a month cost some low price. After that is used up, the next X kWh you use in a month cost a good deal higher prices. This continues through several tiers. The highest tiers have a very high cost per kWh. So, while your average cost per kWh may be somewhere in the middle of these costs, saving a little power is all savings at the highest, most expensive, tier. The higher tiers can be as much as 5x more expensive than the lower tiers. Tiering works in favor of solar generation as you will get save money in the highest tier first. To see what tiers you are paying from, you can simply look at your bill.
In addition to tiering, I can also take advantage of Time of Use rates. Let me explain. The biggest load from residential electric usage is air conditioning. Heating is frequently powered by natural gas, but A/C can't be. Worse, in a particular area, A/C usage is highly correlated - almost everyone runs their max A/C at the same time - middle of the afternoon, when it's hottest. This is a problem for utilities: peak load on the grid is on hot summer afternoons, which sometimes causes brownouts. Unlike water or gas, you can't cheaply store electricity. You must produce it at the moment it's needed. This means that you have to have production capacity on your grid equal to the peak usage on a record hot summer afternoon, but 98% of the year you won't need this capacity you've paid for. This high demand and low supply means that the power company is generally losing money during this peak time - you are paying them less for that electricity than they are paying to generate it. They make it up the rest of the year. Instead of fixed rates, PG&E also offers Time of Use rates if you choose to use it. Rates during summer afternoons (1pm-7pm in the summer) are 3x higher than at other times of the day, such as at night. Those high-price rate periods are exactly when solar is generally performing the best. This means I can generate grid power in the afternoon and get paid peak rates but then when I use power at night, I pay 3x cheaper off-peak prices. PG&E actually has a tool on their website that will tell you, for the last year, how much you would have paid with your current rate plan and a time-of-use rate plan. Even without solar, many folks will save money with Time of Use rates. This will especially be true for folks with electric cars that charge overnight. Plug-in cars and solar have a synergy of price savings due to time of use rates.
Time of use also prefers roofs that face south-southwest. A due south roof would be optimal for kWh generation, but a slightly SW roof shifts power generation a little more towards the afternoon where the time of use rate is higher. Unfortunately my roof is south-southeast.
Tiering and Time of Use conspire to significantly improve the economics of solar. Generally you can design a solar system that covers X% of your power needs and way more than X% of your cost. In my case, I was already efficiently using power, so I'm getting a significantly lower multiplier out of this equation than most people would.
In my case, as a rough estimate based on previous years, I will be generating about 75% of the power I'm using, but saving about 85% of my bill. If I increase my power usage down the line, the savings bonus will grow even larger.
Based on the above, I expect around $1,032/yr savings in electricity starting out. My production will drop over time however the price of energy will very likely rise faster.
The risk for a solar install is much lower than stock market. Assuming one has a balanced portfolio of stocks and bonds, it is therefore fairer to compare solar returns to the bond section of a portfolio than to stock or other risky investments. The returns from solar are very predictable and nearly guaranteed. There are some risks - the panel manufacturer could go out of business just before your panels all fail. Electricity rates could suddenly drop due to new amazing technology. However, both of these are low probability events compared to swings in the stock market. As a result, I'm going to compare a solar investment to a long term bond investment. Current 30 yr investment grade bond rates have a yield of around 2-2.5%. I'm going to give bonds the benefit of the doubt and use the higher 2.5%. Even with much higher returns (stock level returns), the math still comes out in favor of solar, just less so.
Solar "returns" are actually just savings rather than income. As a result, the returns for solar are effectively tax-free! Bonds have returns with tax consequences. I'm going to assume a 20% marginal tax bracket for you.
Solar output may decline, but we can bound it at 0.4% per year as per our warranty. Electricity prices tend to rise over time. Solar companies like to make estimates using a 5% electricity price growth which has certainly happened in the past, but this may be a little optimistic. Still, it seems fairly safe to assume that electricity prices will at least keep up with inflation and will very likely beat inflation. Solar is actually an inflation-protected investment. I'm going to be reasonably conservative and assume a 3% / year increase in electricity prices.
To model, I'd like to compare returns from my solar install to taking the same money and investing in the above bond fund. On the solar side of the equation, every year I save money from my panels, I'll take that savings and put it into a bond investment to grow alongside solar.
Here's my final spreadsheet: Solar Return Comparison.
With the conservative assumptions above, the solar system returns it's initial investment around year 10. It still lags traditional investments, however, until around year 20. By year 25 though, returns via solar are more than double that of traditional investment.
If I assume that the panels completely die exactly 1 day out of warranty and provide no additional value, I'd need to be able to achieve 8.9% bond returns to make solar unattractive. Try it by changing the alternative yield to 8.9%.
You can make a copy and change any of the values on the right to see how it affects things. Small changes don't have big effects fortunately. You can increase the alternative investment returns to much higher numbers or significantly reduce electricity price growth, and solar still beats out investments within the 25 year warranty period.
The cost of your install and the expected generation might make a big difference though. Especially if your panels must face north or will be shaded for parts of the year.
There are lots of ways to be more optimistic and see dramatically better returns in the model:
Solar is documented to be one of those investments that raises the value of a home significantly. One model to consider is that a new homeowner has a monthly bill in mind. That bill includes mortgage, utilities, etc. In theory, a homeowner would be willing to pay $X more in mortgage if they saved $X more in utilities - it's the same net result. If the new homeowner will save $1,000/yr on utility bills, it would make sense that they'd be willing to take on a mortgage with a $1,000/yr higher payment. 30 year mortgage rates are around 4% which means that they could take on a ~$17,000 larger mortgage. Even after real estate agent commissions, this is an immediate return on the solar install.
You can even flip this on it's head to show that if you have some spare cash and are choosing between solar and paying down the mortgage, the solar install may be a better deal.
I've heard this question from a few people. Folks have heard that the price of panels has been dropping quickly. Some estimates put the panel prices (cost per watt) dropping at around 7% per year. The drop in prices was the cause for the failure of Solyndra in the Bay Area and certainly didn't help out Suntech either. The assumption is that the longer one waits, the better the returns will be.
I'll admit that I don't really know how to analyze this possibility. I can throw a little cold water on this idea though. Solar installations have costs outside the panels. There are the roof racks, wiring, conduit, inverter, and most importantly the labor. I didn't get a specific breakdown for my install of how much was panels vs. everything else, but from what I've read, it's about 50/50 at this point. The non-panel costs aren't dropping very fast. This means that even if panels become half as cheap next year, you'll only save maybe ~25% on the entire install.
Another concern is that incentives may disappear. CA's solar incentive is now gone as of a few months ago. The federal incentive of 30% of the total cost expires at the end of 2016. It is unclear what, if anything, it will be replaced with, but it's unlikely to be higher than what it is today.
Lastly, if you are looking for a company in the Bay Area to do an install, I would recommend getting a quote from ProVoltz, who did my install. It's not the type of work I see done multiple times so I can't make comparisons, but from what I could tell they did a great job.
This post was originally made right after installing my panels. Since then I have collected a good deal more data. The punchline is that the results are even better than these calculations thus far, but if you are interested in seeing more information, check out this later post: One Year of Solar
Also, Google released a solar calculator that you can use on your own home that strikes a really good balance between accuracy and ease-of-use called Project SunRoof (solar calculator). PVWatts mentioned above is definitely more accurate, but it requires a lot more data input from the user including fields which most people aren't going to know offhand like the angle of their roof, their electrical pricing scheme, or the number of panels they should install. SunRoof calculates this for you based on your address and while it makes some assumptions is pretty accurate. The SunRoof calculations for my home were pretty much spot on with my analysis above.