The Economics of Solar Panels (in Central PA)

December 2018

Going with a solar installation is no minor investment. If you are considering solar, look at your annual consumption of electricity, in kilowatt hours (kWh). The generic prices for installation is around $3 per kWh.  That will put you in the ball park.  Our annual electric usage is 7,500 kWh.  Making a decision on whether to go solar or not takes in a lot of factors and it is no simple calculation.  And this disregards any important considerations of saving the planet.

First, a word about scalability.  Our system is on the smaller side, at 7,500 kWh/yr.  There is a bit of an economy of scale, so larger systems would be less expensive per kWh.  This is intuitive as the increase in the system will be through the addition of solar panels only.  For an average homeowner, the wiring into the electrical box, permits, inverter all would be the same regardless of the size of the system.  So the installation of 27 panels would not be half again as much as the installation of 18 panels.

Federal Tax Credit

The gross installation price is usually not the actual cost of installation.  Our Federal government provides a 30% tax credit for solar installations.  If you pay Federal taxes, this is a straight deduction against your tax bill, so if your taxes owed is $100, and your installation is $50, you would get a $15 deduction against your taxes, so now you would only owe $85.  Effectively, those $15 goes into your pocket, or if you wish, you can treat this as a 30% discount against the gross installation cost.  This tax credit is available whether you itemize or not.  Using our $3 per kWh figure from above as your gross installation price, the net installation price is reduced to $2.10 per kWh.  The tax credit is found through Residential Energy Credits at Form and Instructions for 5695.

SRECs

There is something called a Solar Renewable Energy Certificate (SREC).  These exist because of a federal regulation that establishes a renewable portfolio standard (RPS), which requires the increased production of renewable energy sources, such as wind, solar, biomass, and geothermal.  Energy providers in different states have different RPSs.  Power companies can build renewable power plants. but they can also buy credits from individuals or companies that generate renewable energy.  They are traded on an open commodity-like market. One credit is created from each 1,000 kWh of electricity produced. Our system should generate 7 credits each year. Because the mandate differs from state to state, the credits are worth more in some states than others.  For states that have a high mandate, the credits are worth a lot and genuinely subsidize the cost of the system.  In other states, such as Pennsylvania, where the RPS is lower, the value of the SRECs on the Pennsylvania market is correspondingly lower, currently in the $10-15 per credit range.  While there was a recent law (Act 40) to ban the sale of credits into Pennsylvania from out-of-state, this is still a squishy area.  For purposes of our calculations, we see only a $80-100 per year additional benefit from SRECs here.

            Solar as Investment

During our lives, we all make some major purchases: a car, a college education, a house, a wedding, a new roof, etc.  How we see these purchases differs, depending on not just the cost but on whether it is treated as an investment or not.  An investments can be thought of as deferred return for the money spent.  Perhaps the ultimate investment might be a retirement plan, where we don’t expect to see a payoff for 30 years.

How then to see a solar installation?  Leaving aside any warm and fuzzies about the planet, how does it make sense financially?  In our case, we plunked down a chunk of cash. What do we have for our purchase, even if subsidized by the Federal government?  For starters, we are talking about electricity generation. Each year, we normally consume around 7,500 kWh of electricity.  We are averaging about $90 a month for our electric bills (for charges above the basic customer charge by PPL), or $1,100 a year.  We anticipate using electricity for the rest of our lives, so this is going to be an annual cost for the rest of our lives. Our return on investment of the installation of a solar panel system would be $1,100 per year.  So the question now becomes how many years of electricity production does it take to amortize the cost of installation, also known as the Solar Panel Payback Period.  If you go on the internet, you will see numbers ranging from 4 to 15 years. This is due to different reasons.  In different parts of the country, the effective hours of sunlight will differ, figured in kWh/m2per day. Some parts of the country generate twice as much electricity per panel per day than others.  Pennsylvania is on the lower end of that spectrum. Secondly, some states offer additional incentives to go solar.  Pennsylvania does not.  In some states, the RPS is more stringent. In Pennsylvania it is not, calling for only 9% renewable energy by 2038, so the SRECs are worth less.  

To summarize, going solar here is like fighting with one arm tied behind your back – less sunny, lower RPS and consequent lower SRECs.  This would push us to the longer end of the Payback Period Spectrum.  Still, we think for us this Payback Period will be 13 years.  What this means is after 13 years, the system is paid for and will be generating electricity for free, electricity we would still be paying for.  The warranty on the system is for 25 years, but there’s an expectation that it should last longer.  Realistically, we think we could be here for another 20 years, so let’s use that for the time frame.  If electric prices do not rise (and they will), this means we will have made around $10,000 during that period. Comparing investments, if we had put the entire payment into a CD paying 3%, after taxes it would have been a wash. Now, 3% is not spectacular, but I have been conservative on all of the estimates so far, assuming current SREC and electric rates that do not increase.

House Resale

Does the installation of a solar system increase the resale value of the house? Definitely.  The rule of thumb is $3 per kWh, meaning the added resale value to the house would be around $22,000.  Clearly, the new owners would have the generating value of the system for their electric needs. How long a solar system could last is unclear. Data shows that the panels do slowly degrade over time, generating less electricity.  The 25 year warranty is generally for 80% of the original capacity, meaning that after 25 years, the panels are warranted to generate at least 80% of the original production.  Well-made panels should last longer, so that the 80% threshold should not be reached for 30+ years. 

Financing

We also chose to finance the system by writing a check, a luxury we had due to a sick leave payout when I retired.  A lot of folks simply don’t have the necessary Simoleans handy, so other means of financing would be considered.  For starters, this project would qualify for a home equity loan.  Currently, if you are itemizing (big if), you can still deduct the interest paid on a home equity loan to install a solar system.  There are other cost-free schemes out there, such as Solar Purchase Power Agreements.  A PPA means your solar company owns the panels on your roof, and you pay for the electricity they produce, at a discount. Anything that would not call for you to pay out of pocket also would not be as remunerative.   Whether you would buy outright, finance, or enter into an agreement, I believe that even here in suburban Pennsyltucky, the economics can work.

Fiscal Bottom Line

If the only consideration we had was fiscal, then installation of solar panels at our home made sense.  Not only does it give a return of 3% over 20 years, but adds to the resale value of the house.  The installation also functions in the same way that a fixed mortgage works. We have a known and fixed cost of electricity for pretty much as long as we live here.

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