Saturday, August 18, 2012

Guest Post by Peter Gorr

Part 3:  The Economics of My Solar System
Glow of the Sun or the Glitter of Gold?

When I discuss my personal experience with renewable energy technology the first question I am always asked is:  “What does it cost?”.   I don’t like to answer this without first asking some questions myself.  For instance: “Why are you interested?”

The value someone places on a renewable energy system can generally be determined by how they answer 4 key questions.  First, how important is it to you to protect the environment?  Second, how important is spending less on energy?  Third, how important is it to support domestic economic growth? And fourth, do you prefer to lead or follow your neighbors in changes to your lifestyle?

How a person answers each of these questions will reflect what they place value on and what they are willing to invest.  So for a seller of systems, it is critical to understand a potential buyer’s motivation.  For me, the environment, the economy, and becoming a leading example of responsible behavior were the prime motivations.  I didn’t think wealth creation was even a consideration but, as I will show, it is also a strong reason.

Now let me review the economics because this is the area that surprised me the most, pleasantly I might add, and is misunderstood.  First you need to have adequate capital to undertake this kind of project, just as you would for any other home improvement.  I have a home equity line of credit at 2.5% so it made sense for me to tap that.  The total cost I faced was $47,428.  Your first reaction I’m sure is OUCH!  Hold on.  Before I get into the details let me say I wish I could find more investment choices like this.   

The economics are a little challenging to detail because it is not just a matter of computing a breakeven point by dividing total cost by annual energy savings.  A renewable energy system has value as a hard asset, generates RECs (Renewable Energy Credits explained in Part 2) that can be sold for revenue, and may qualify for tax credits and rebates in addition to the energy savings. 

Here is a summary of the costs and rebates/credits:
Installed System Cost:                        $46,200

Permitting & Interconnection:            $  1,228

Total Costs:                                         $47,428

30% Federal Tax Credit:                     ($14,228)

30% State Rebate:                              ($14,028)

Total Owner Out-of-Pocket Cost:      $19,172

How often do opportunities to spend $19,000 for over $47,000 worth of goods happen?  While I still have to come up with $19,000, my net worth has been increased by over $25,000.  This is what makes my analysis different from so many others.  I focused on my net worth change while most everyone else I encounter seems to just focus on the cash outlay.  Actually I have very little cash.  Cash is not a good place for your money if you are seeking growth.  I like to put my money to work.  Consider:  Are stocks cash, are bonds cash, is a house cash?  No, they have cash value and we tend to describe them in these terms.  We typically convert much of our cash into value bearing instruments and this is how I view this investment.  I received $47,000 worth of value for $19,000!  I wish I had a larger roof!

This is not the end of the analysis.  The system’s value will depreciate over time and since it carries a 25 year warranty I used this length of time.  Offsetting this depreciation are the energy savings and the revenue generation in the form of the sale of RECs.  Here the payback is cash which further enhances my net worth.  The following are the estimates I used in starting the project:

Annual Electricity Savings:      $    950

Annual REC Sales:                   $ 1,600

Annual System Depreciation:   ($ 1,848)

Total Annual Gain:                    $     702
Taking all the added home value, cost, rebates, tax credits, revenue, and savings results in an estimated net worth growth in year one of $26,772.  Over succeeding years, assuming a certain level of electricity price inflation, continued REC sales, etc.  my net worth inches up even more than the system depreciation takes away, keeping me attractively positive throughout the life of the system.  I estimate the contribution to my net worth in year 10 will be $36,050 and the system would still have 15 years of warranty remaining.  Also to be as thorough as possible I take into account the potential growth (estimated at 5%) of my initial $19,000 if I invested it somewhere else. 

Now some may say, but solar systems are so attractive only because of these rebates and tax credits.  Partially that’s right so what are you waiting for?  I didn’t write these rules but I’m certainly not going to ignore an opportunity when I see it.  Even with these rebates and credits renewable energy still finds it hard to compete because fossil fuels also receive cost advantages and subsidies some of which were discussed in Part 1.  I consider these rebates and tax credits as leveling the playing field a little but it is still far from level for renewable energy.  What was not discussed in Part 1 on this subject is that fossil fuels receive 2.5 times the level of federal subsidies as renewable energy (with most of the renewable energy subsidies going to corn ethanol).  Remove corn ethanol from the equation and fossil fuels receive 6 times the benefits as renewable energy sources.  Also I agree that this is not a desirable means of managing this energy market.  Eliminate all the tax advantages, subsidies, and rebates while making sure all production costs are accounted for in pricing and let’s see how things play out.  My prediction is that fossil fuels will become just that…fossils.  Pollution is a type of waste. Waste is a sign of inefficiency in a business and a real cost. If these costs associated with pollution (and the Supreme Court ruled that carbon emissions are a form of pollution) were reflected in the price of fossil fuels (as I argued they should be in Part 1 of this series) I believe you would see a competitive landscape that would start to favor renewable energy.  Furthermore as innovations drive costs down, they will get us to a world that I hope to see:  one of clean and cheap energy.

Is solar right for everyone?  Of course not and it need not be.  I believe the best market for solar right now would be the top 10% of US households.  Why?  They have an average net worth of over $1 million not counting their homes so they certainly have the resources, are always looking for good investment opportunities, and are probably the worse energy consumers and carbon emitters because of their lifestyle.  So we could take a nice bite out of carbon emissions by transitioning these households to renewable energy and guess what, they become wealthier in the process.  The rich get richer.  Well this time we all stand to benefit.

- Peter Gorr

No comments:

Post a Comment