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
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.
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