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| Residential Solar can be a good investment. Good Savings. |
[UPDATE: 30% Investment Tax Credit on renewables in the IRA Act. See our Blog post here. This makes all the financial discussions below much more profitable. Also, higher inflation and higher power inflation.]
Anyone thinking of putting solar on a residential property will obviously
be friendly to doing a good deed for the environment, but would also like to
understand the financial implications. There are subtleties to the analysis
that are critical to appreciate the full benefits of setting up a solar power
system to replace your residential utility power. We have become accustomed to
renting power as a way of life. There’s a paradigm shift needed to appreciate
owning your own power system and saving on a monthly power bill. Hall has a
detailed article Residential Solar is
Good, but Commercial Solar can be Crazy Profitable! that you will want to
read as you think further about the financial analysis for a specific solar
project, especially a business project. Here are the key points for a
residential solar system.
Profitable. Solar can be profitable for a
homeowner to purchase, but there are additional considerations that usually
make the decision even better than it might appear at first glance.
Solar Investment Tax Credit (ITC). The ITC reduces
income taxes by 26% of the system price, so you only pay 84% of the price of
the system. This ITC goes down to zero (0%) by 2022.
Easy Loan Option. A homeowner will usually have
several loan options available, including using a home equity line of credit
(HELOC) or financing affiliated with the solar company. (Lease options are also
available from some installers, and may be a good option for a homeowner with
lower credit and low house equity.)
Positive Cash Flows. Household budget should be
cash positive compared to power bills. Frequently, loan options include
interest-only for a year until the ITC is realized (and applied to the loan).
What would have gone to the IRS in taxes is applied to the solar system, and
what would have gone to the power company goes to pay off the loan for the
power system you own.
Annual Return. The savings each year could
easily be 7% return each year on the net investment.
Avoid Utility Power Price Increases. If the
power company increased rates by 1% (or 2%) a year, the real savings from the
solar system could be 8% (or 9%).
Sunk Operating Costs. This is not a normal
financial analysis, so different perspective is helpful. If the residence is
being used, then the electricity to operate it is needed. The money is already
being committed to rent a little bit of the power plant from the utility power
indefinitely. Or, you could buy your own power system. You could pay less in
loan payments than what the power bill would have been and then have free power
for decades thereafter. Committed, or sunk operating costs, is one aspect of
the buy-solar decision that takes a little perspective adjustment to fully appreciate,
but savings is another.
After-tax Savings. After-tax savings is a
beautiful thing, especially if it is recurring every month. You pay the power
bill in after-tax dollars. So every dollar saved on your budget for electricity
is better than a dollar increase in your salary. Consider a 30% marginal income
tax level. (Marginal tax rate is on the next $1 of income or savings, not the average
income which have no taxes at the lowest levels.) At 30% marginal tax rate, you
would need $1.30 to have an extra $1 to spend on your power bill if power costs
went up next year by $1. There are other deductions, plus your employer has expenses
and deductions, so costs to your employer would be $1.50 or more for you to
have an extra $1 raise for your power bill, which would leave you with the same
discretionary income as the past year. Savings related to power is pure
discretionary income, spend it anywhere you want… You just got a raise!
Net Metered. The usual way to go solar on
residential is to connect to the utility power with net metering, a measured
meter that takes your solar power as you produce it and gives you back the
power when you need it. If you over produce at the end of the year, the power
company typically rebates you – but usually at a rather paltry rate – for your
extra power. Therefore, you would typically size the system to your
(anticipated) needs, and not much more.
Batteries. If you want to have your own power
when the grid is down, you will want to get batteries. Battery prices and
technology, like the Tesla PowerWall, is really starting to hit critical mass.
Batteries can also be eligible for the 26% investment tax credit.
Solar System is an Asset. The basic accounting
for a solar paid for by a loan might look like this. Buy a $30,000 solar system
(an asset) by borrowing $30,000 on your HELOC (a loan). If you didn’t think the
system was worth $30,000 (because of the power it produces for decades), you
probably wouldn’t have bought it. But, you get an investment tax credit of 26%
in 2020 so the actual system cost (after eliminated income taxes of $7,800) is
only $22,200. You can go on vacation with the $7,800 or apply it to the loan.
However, this is a performing asset that produces power for decades, long after
the loan is paid.
What if You Sell the Home? With the home
producing its own electricity, the operating costs are reduced by the power
savings. The money that would have gone to the power company can now easy be
applied to the purchase price of the home (and to a mortgage). The value of the
house goes up, typically by the net cost of the solar system or more. Even when
the solar loan is paid off, the value to property is the ongoing power savings
being produced (maybe 10 to 20 times the annual power savings).
What if You Rent the House? Renting the house
is rather simple, simply include the value of the utility power in the rent.
The renter should have been budgeting monthly operations (as should you in
considering a tenant), so the money for power would be shifted into rent. The
portion of rent associated with power might be lower than what the power bill
would have been, and electric cost from the solar system might be fixed without
matching the price increases that would have occurred from the utility.
Win-win.
Environmental Savings. The environmental
savings are tied to the utility power you are replacing. Check your energy mix
from your favorite (only) power utility. US-wide the 2019 electric mix was
NatGas (38.4%), Coal (23.5%), nuclear (19.7%), hydro/thermal (6.6%) and wind
7.3%. Solar was up from 1.8% to 2.6% of electricity power by the end of 2019. Fossil
fuels produce huge pollution and greenhouse gases. Probably as important is the
massive amounts of water used in operating fossil fuel and nuclear power plants.
Doing Good. Most of the people who have gone
solar did so for altruistic reasons, they simply wanted to be kinder to the
planet and do their part to make things better. Lucky for us now, the
technology has gotten much better and the prices have dropped to the point that
solar is simply a good financial decision as well. Now we can do financially well
by doing good.
