Buying a Home Solar System Can Be a Good Investment

I’ve recently began to get some quotes on a solar system for my primary residence.  Thanks to local and federal incentives, the price of a PV (photovoltaic) solar system is certainly within reach and can make financial sense.

I’m actually going to make a decision between 4 different quotes next week, the fifth option would be to not get the system.

Here’s a look at a proposal I received:

The grey shaded area is my actual energy usage over the last 12-months.  There’s no surprise that the summer months were much higher due to using my AC system more.  The good news is that your solar system gets more direct sunlight in the summer so it actually produces more also.  The top graph with blue bars is the actual dollar amount of savings I should be receiving from the system.  There’s actually a couple of months that I will produce more than I use. If you are looking to make your home as efficient as possible whilst raising the house price, it may be an idea to check this article on Deep Cycle Versus Shallow Cycle Solar Batteries that way you will know the most efficient way for you to save energy.

There is something interesting though that I didn’t know going into this process.  Each solar watt produced is actually credited at a higher dollar amount than I’d pay for a watt of energy normally.  For instance I might be paying 14cents/watt but get credited for something like 15cents/watt of power. According to the projections, I will have little to no bill at all for February through May.  

Here’s the financial breakdown of this system:

Even though the system cost was $30k, I’m only going to be out of pock $10.5k.  The break-even is about 7 years.

Preliminary Preparations

In order to receive my local rebate, I will have to go through with an energy audit.  This can be both good and bad though.  I will have to have my AC system sealed to where the air leakage is below 10%, it’s currently above 20% per the energy audit I received when I bought my house last year. I will have to have all doors sealed to where there’s no visible light coming through any cracks.  I’ll also have to have my windows checked to see if I need a screen or tint due to getting a lot of sun hitting them.

I’ve actually decided to have this work done already.  Even if I didn’t want to go with a solar system, I feel that the return on this work is a no-brainer.  I just had the work done and I’m awaiting my utility company to come and verify the work so I receive the rebate.  The total cost of this work was about $1k but I’m getting a rebate for this work in the amount of $600 from my local utility company once they verify.  So I’m only spending $400 to receive a better insulated house and more efficient AC system.  I can tell you that I already feel the difference, the AC system is blowing harder with colder air coming out.  This keeps the AC system from coming on as often which saves me money each month.

Positives

Federal incentive:

First, there is a federal incentive to getting a solar system.  You can receive a credit of 30% of the cost of your solar system when you file taxes, including the cost of installation.  This credit is good until 2016.

Local Incentive:

This incentive is obviously different depending on where you live.  I’m fortunate to live in a city that promotes renewable energy and as such they offer very generous rebates.  The City of Austin program will give me a rebate of $1.50 per Watt of power generation.  I’m currently looking at a 10KW (10,000 W) system, so I’d get a rebate of $15,000.  This incentive has decreased though almost every 6 months due to more people installing solar systems.  It could also change at any time.

Non-taxable return:

If I install this solar system, I will immediately start receiving a non-taxable return on my investment.
Rough estimates are looking like I’m going to have to put up $12k after all incentives and received a credit of about $100/mo.  This is a ROI of 10%.  This is $1200 a year in savings that won’t undergo taxation.

Negatives

Industry consolidation:

The solar industry is going through a huge consolidation.  There have been numerous companies going out of business due to heavy competition especially from China.  This creates a problem of not having a company to honor your warranty if something goes wrong.  I’m actually comfortable with the panel installation company, it’s the manufacturers that concern me.

Possible additional preparations:

My utility company will again have to come and verify this solar system meets all of their standards in order to release the rebate.  The good news is that the installer guarantees the rebate so you never pay that out of pocket.  The only cost not covered by the installation company would be for any tree trimming.  I have a large tree in the back that causes some shade on my roof and there is a possibility that I will have to get that trimmed.  My chimney also causes some shading and there is a chance that my utility company would want to change the layout of the panels. 

Overwhelming number of components:

This process is more difficult than buying a house or a car.  There’s multiple brands and types of inverters as well as panels.  There’s no consumer ratings on these panels, only manufacturer’s warranties.  I need to make sure the company will be around to honor their warranty.

Investment Comparisons

Solar VS Dividends:

Let’s compare this to buying dividend paying stocks.  I need to receive $1200/year in after tax income.  Well my dividends are currently taxed at 15%.  This means I only get to keep 85% of my dividend income so I’d actually need $1200/.85 = $1411.76 in total dividend income.  Even at a 4% yield , I would need $35,294 worth of stock.  This doesn’t count any capital gains but I also don’t plan on selling any DG stocks I purchase.

Solar VS Real Estate:

Now I will attempt to compare this investment with an investment in real estate.  This can be a little tricky with all of the write-offs and taxes.  These apply to me but could be very different for someone else.  I will need to acheive an after-tax ROI of 10%.

Assumptions:

Buying a house valued at $160k.
25% in maintenance/repairs/realtor fees for the year.
Down payment of 20%.
Closing costs of 2.5%
Interest rate of 5% (interest rates are higher for investment properties).
Income taxed in a 35% bracket.
Rent of $1500 (this is based on Zillow estimates in my area for houses this size)
.6% yearly insurance
Taxes of 2.75% (this is typical where I’m at)

Results:

Down payment of $32k + $4000 in closing costs = $36,000 out of pocket.
This leaves a loan value of $128k @ 5% interest.  (This is a P&I of $687.13)
Yearly interest payments total $6,357.11 for the first year which we can write off.
Maintenance costs of 25% x $1400 = $350/mo.
$80/month in insurance costs (.6% x $160k /12)
Taxes of $367
Cash Flows = $1500(rent) – $687.13 (P&I) – $367 (taxes) – $350(maintenance) – $80(insurance) = $95.87/month.
We also have $1888.45/year going to principal the first year.

Yearly profits of $1150.44 + $1888.45 taxed at 35%.  This gives you a total of $1975.28, of which only $86.83 goes into your pocket.  The rest is equity in your house.

This is only a 5.5% ROI from your initial investment the first year and you had to put down $36k!

Conclusions

I’m likely to move forward on a solar in the next week or two assuming I can get comfortable with one of the panel manufacturers.