The Economics of a Residential Solar Investment

27 January of 2012 by

racking roof The Economics of a Residential Solar Investment

People are starting to notice that solar is becoming more main stream, and not just in states like California; in fact, North Carolina became a top 10 state for solar installations in 2010. But why? It is definitely good for the environment and fits within SEM’s mission of lowering green house gas emissions, but I believe it is the other “green” — economics and money — that is driving its popularity and adoption for a lot of people. Frankly, the combination of added home value and annual energy savings make it impossible to ignore the solar investment.

Comparing Solar to Other Home Improvements

As a nation, we do a lot of remodeling and renovation to our houses. We do it for a lot of reasons, but the truth about most remodeling projects (kitchens, baths, adding a deck, or updating the exterior) is that you rarely recoup all of your cost. In fact, according to the Cost vs. Value report published annually by Remodeling Magazine, only $0.60-$0.85 on the dollar was recouped on most projects when the house was sold. We remodel not so much as an investment, but for pride, convenience, and the enjoyment the projects offer us.

If you crunch the numbers, a solar investment can have a better payback than savings accounts or CDs.

Solar, on the other hand, is an environmentally empowering home improvement — and one that actually manages to recoup its cost. The Berkeley Lawrence National Laboratory recently tested the premise that solar adds significant value to a home’s selling price, and the good news is that solar homes indeed sold for a premium.

The researchers pored over 72,000 California transactions where homes sold from 2000 to mid-2009, including 2,000 with solar photovoltaic systems. The analysis showed that in California, homeowners recouped an average $17,000 premium for a house with a relatively new 3.1 kW system. That average premium tracked closely with the average price of $5 per watt that California homeowners spent to install solar from 2001 to 2009 (total selling price less state, utility, and federal incentives), the report said. The full report is definitely worth reading, and you can find it here.

Obviously, California is different than the Carolinas, so it is hard to say for sure that customers here will get back their entire investment, but the trends certainly indicate that it’s close at the very least.

Comparing Solar to Other Investments

So it got me thinking about the solar investment, and what it might compare to in the personal investment world.  I’ll try to keep it simple, because I know this type of discussion can get complicated quickly.

Today, a typical 3kW PV system will produce about 4400 kWh in its first year, and could create a savings or income stream equal to about $600-$700 its first year. At current prices, depending upon installation complexity, that total system might cost $20,000-$25,000, so for this example let’s split the difference and say $22,500. Federal and state tax credits and other incentives pick up the tab for more than 55% of a solar installation right now, so the net out-of-pocket investment for our example would end up being about $10,000 (depending on the tax bracket).

Keep in mind that study about recouping the premium: what investment do you know of that you can invest $10,000 in that will return $600-$700/year? That’s an average of 6-7% return. Nowadays, you’re lucky to find a savings account that returns 1% annual percentage yield or a CD that reaches 3%. And to be fair to the solar investment, if it is a savings account, a CD, a bond, or anything that resembles an investment vehicle, you would need a 10+% return to have room to pay the taxes and keep 6.5%. Take a look at the chart below, because I know we’re throwing around a lot of numbers.

Savings Account 1.0% APY 1 year income: $100.45 After Tax income: $75.34
5 year CD 2.34% 1 Year Income: $236.52 After Tax income: $177.39
Corporate Bonds 10 Yr AA 3.20% 1 Year Income: $324.73 After Tax income: $324.73
Solar PV System 6.5% 1 Year Savings: $650.00 After Tax Savings: $650.00

Now if you live in the house for 25 years and use the warranted life of the product, the numbers look great, but even if you moved after 10 years and recouped just $7,000, you would be way up compared to virtually any other low risk investment.

Crunching financial numbers can make people’s heads swim, but for savvy investors, it’s time the solar investment gets a closer look. It’s certainly performing well enough to deserve it, even if you disregard the environmental benefits. I would go so far as to say that if you are between a major remodeling project or installing solar, your best bet would be to do both: invest in the solar and let it pay for the home improvement.

Tom Fitzpatrick is the Residential Sales Director at Southern Energy Management. Read more about him here.

Original Article on Southern Energy Management

 
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