The good news is solar electric systems make good financial sense for lots of California homeowners. The great news is there are now tools to prove it three different ways. For homeowners with a $65 or larger monthly electric bill, it is highly likely they’ll see that a pre-tax equivalent rate of return of 11% or more; an equity loan for the system costing less than the savings on the electric bill; and their home equity increasing more than the system costs.

WHY DOES SOLAR PAY OFF NOW?

High Electricity Rates and California’s tiered rate system (with top rates over 25 cents per kWh) penalizes residential customers for high electric usage.
Net Metering allows a homeowner to get full retail value for each kWh produced. Excess summer and daytime credits that were “sold” to the utility can be used up at night and in the winter. The utility ends up looking like a 100% efficient battery that can store energy for up to a year. The Time of Use (TOU) rate schedule states that electricity cost depends on the time of day and year. The PG&E E7 schedule has peak rates during summer weekday afternoons ($.31/kWh) and off-peak rates ($.09 to $.11/kWh) at other times.
Combining Net Metering with TOU allows a solar customer to 'sell' back power to the utility during peak periods at the high rate, and buy back during off-peak hours. The customer gets credited or charged for the value of the electricity when it is bought or sold. The utility then looks like a 350% efficient battery because most solar electricity is produced during peak hours. The customer gets more value for the same kWh produced, and therefore needs a smaller solar system to offset their electric bill. This works especially well if the customer can mount their solar array facing south, southwest or west, at an angle near 22 degrees up from horizontal (equal to a 5:12 roof).

The CEC Rebate program pays a rebate of $3.00 per AC watt, which cuts final cost 30% to 50%. The State Income Tax Credit is 7.5% for 2004 and 2005.
Even after the rebates are gone, many customers with $130+/month electric bills will receive a greater than 11% return on investment. The rebate is helpful, but doesn’t need to exist to make solar worthwhile for a larger residential customer.

HOW IS THE PAYOFF PROVEN?

Rate of Return is a way of comparing one investment to another (i.e. stocks, savings, etc.). To find the rate of return on a solar system, the cost, savings, maintenance, tax benefits, and other relevant amounts are entered into a 25-year financial timeline. These amounts are adjusted to the pre-tax equivalent values to make the analysis comparable to taxable investments.

Then total cash flow for each year in the analysis is summed. Using the internal rate of return (IRR) tool in a spreadsheet, the effective interest rate for the investment is calculated. Please see Table 1 for several examples showing returns from 11% to 16% for typical residential system installations in Silicon Valley on a simple composition shingle roof.

Solar electric systems increase a property’s value by decreasing the utility operating costs. According to the Appraisal Journal www.natresnet.org/herseems/appraisal.htm, a home’s value increases by $20 for every $1 reduction in annual operating costs from energy efficiency because historic mortgage costs have an after-tax effective interest rate of about 5%. If a dollar of reduced operating costs is put towards debt service at 5%, it can support an additional $20 of debt. To the borrower, total monthly cost of ownership is identical.

Please see the column labeled “Appraisal Equity Increase” in Table 1 for illustrations of the increase in home value for the 3 cases. With as little as a $65/month electric bill, a solar system can increase home value by more than its cost to install. This effectively reduces the payback period to 0 years if the owner chose or needed to sell the property immediately.

Buying on credit, or financing, makes the purchase achievable to more consumers. Table 1 shows several examples of the change in monthly cash flow assuming 100% financing of a solar system’s Final Net Cost using a 7% 30-year loan. This effectively reduces the cost of ownership to less than $0 per month. It actually pays the owner, creating a positive cash flow from day one.

CONCLUSION:

Compare the return on a solar investment to other investments: Do stocks, bonds, or money market accounts give these kinds of annual returns over the long term? As an investment, a home improvement, a hedge against inflation, and a positive cash flow generator, solar electric systems make good economic sense for many residential homeowners. And as investments go these days, having one that is part of the roof over your head may help you sleep better at night than money in a mutual fund.

©2004 Andy Black is a sales engineer for REgrid Power and volunteers for the NorCal Solar Association and American Solar Energy Society. (408) 746 0327 or EcoAndyBlack@earthlink.net