|Residential Solar can be a good investment. Good Savings.|
Friday, April 10, 2020
SolarInvest2020: Residential Quick Take on Doing Good
[UPDATE: 30% Investment Tax Credit on renewables in the IRA Act. See our Blog post here. This makes all the financial discussions below much more profitable. Also, higher inflation and higher power inflation.]
Anyone thinking of putting solar on a residential property will obviously be friendly to doing a good deed for the environment, but would also like to understand the financial implications. There are subtleties to the analysis that are critical to appreciate the full benefits of setting up a solar power system to replace your residential utility power. We have become accustomed to renting power as a way of life. There’s a paradigm shift needed to appreciate owning your own power system and saving on a monthly power bill. Hall has a detailed article Residential Solar is Good, but Commercial Solar can be Crazy Profitable! that you will want to read as you think further about the financial analysis for a specific solar project, especially a business project. Here are the key points for a residential solar system.
Profitable. Solar can be profitable for a homeowner to purchase, but there are additional considerations that usually make the decision even better than it might appear at first glance.
Solar Investment Tax Credit (ITC). The ITC reduces income taxes by 26% of the system price, so you only pay 84% of the price of the system. This ITC goes down to zero (0%) by 2022.
Easy Loan Option. A homeowner will usually have several loan options available, including using a home equity line of credit (HELOC) or financing affiliated with the solar company. (Lease options are also available from some installers, and may be a good option for a homeowner with lower credit and low house equity.)
Positive Cash Flows. Household budget should be cash positive compared to power bills. Frequently, loan options include interest-only for a year until the ITC is realized (and applied to the loan). What would have gone to the IRS in taxes is applied to the solar system, and what would have gone to the power company goes to pay off the loan for the power system you own.
Annual Return. The savings each year could easily be 7% return each year on the net investment.
Avoid Utility Power Price Increases. If the power company increased rates by 1% (or 2%) a year, the real savings from the solar system could be 8% (or 9%).
Sunk Operating Costs. This is not a normal financial analysis, so different perspective is helpful. If the residence is being used, then the electricity to operate it is needed. The money is already being committed to rent a little bit of the power plant from the utility power indefinitely. Or, you could buy your own power system. You could pay less in loan payments than what the power bill would have been and then have free power for decades thereafter. Committed, or sunk operating costs, is one aspect of the buy-solar decision that takes a little perspective adjustment to fully appreciate, but savings is another.
After-tax Savings. After-tax savings is a beautiful thing, especially if it is recurring every month. You pay the power bill in after-tax dollars. So every dollar saved on your budget for electricity is better than a dollar increase in your salary. Consider a 30% marginal income tax level. (Marginal tax rate is on the next $1 of income or savings, not the average income which have no taxes at the lowest levels.) At 30% marginal tax rate, you would need $1.30 to have an extra $1 to spend on your power bill if power costs went up next year by $1. There are other deductions, plus your employer has expenses and deductions, so costs to your employer would be $1.50 or more for you to have an extra $1 raise for your power bill, which would leave you with the same discretionary income as the past year. Savings related to power is pure discretionary income, spend it anywhere you want… You just got a raise!
Net Metered. The usual way to go solar on residential is to connect to the utility power with net metering, a measured meter that takes your solar power as you produce it and gives you back the power when you need it. If you over produce at the end of the year, the power company typically rebates you – but usually at a rather paltry rate – for your extra power. Therefore, you would typically size the system to your (anticipated) needs, and not much more.
Batteries. If you want to have your own power when the grid is down, you will want to get batteries. Battery prices and technology, like the Tesla PowerWall, is really starting to hit critical mass. Batteries can also be eligible for the 26% investment tax credit.
Solar System is an Asset. The basic accounting for a solar paid for by a loan might look like this. Buy a $30,000 solar system (an asset) by borrowing $30,000 on your HELOC (a loan). If you didn’t think the system was worth $30,000 (because of the power it produces for decades), you probably wouldn’t have bought it. But, you get an investment tax credit of 26% in 2020 so the actual system cost (after eliminated income taxes of $7,800) is only $22,200. You can go on vacation with the $7,800 or apply it to the loan. However, this is a performing asset that produces power for decades, long after the loan is paid.
What if You Sell the Home? With the home producing its own electricity, the operating costs are reduced by the power savings. The money that would have gone to the power company can now easy be applied to the purchase price of the home (and to a mortgage). The value of the house goes up, typically by the net cost of the solar system or more. Even when the solar loan is paid off, the value to property is the ongoing power savings being produced (maybe 10 to 20 times the annual power savings).
What if You Rent the House? Renting the house is rather simple, simply include the value of the utility power in the rent. The renter should have been budgeting monthly operations (as should you in considering a tenant), so the money for power would be shifted into rent. The portion of rent associated with power might be lower than what the power bill would have been, and electric cost from the solar system might be fixed without matching the price increases that would have occurred from the utility. Win-win.
Environmental Savings. The environmental savings are tied to the utility power you are replacing. Check your energy mix from your favorite (only) power utility. US-wide the 2019 electric mix was NatGas (38.4%), Coal (23.5%), nuclear (19.7%), hydro/thermal (6.6%) and wind 7.3%. Solar was up from 1.8% to 2.6% of electricity power by the end of 2019. Fossil fuels produce huge pollution and greenhouse gases. Probably as important is the massive amounts of water used in operating fossil fuel and nuclear power plants.
Doing Good. Most of the people who have gone solar did so for altruistic reasons, they simply wanted to be kinder to the planet and do their part to make things better. Lucky for us now, the technology has gotten much better and the prices have dropped to the point that solar is simply a good financial decision as well. Now we can do financially well by doing good.