North Carolina Solar Payback
North Carolina Solar Payback…Does it pay?
Does It Pay?
Figuring the financial value of a solar or wind energy system.
By Andy Black
Published: Get Started 2010 issue
How long will it take for a new solar or wind electric system to pay for itself? That depends on your local climate, utility rates and incentives. In sunny or windy states or places with expensive electricity, the payback is faster than in calm or cloudy states or where power is relatively cheap.
The most important factors for making solar an attractive investment include high electric rates, financial incentives, net-metering policies and good sunlight (almost all of the continental United States is within plus-or-minus 20 percent of Miami’s sunlight level).
Where net-metering laws exist (42 states), solar energy offsets the retail cost of the electricity generated. In some regions, solar systems are allowed to operate on a time-of-use rate schedule that enables users to sell electricity back to the utility at peak rates, which can be even more valuable. Time-of-use rates vary electricity price by time of day. The set-up allows generators to receive higher rates from the utility during times of power shortage (for instance, when air-conditioning loads are high). These higher electric rate periods often occur in the heat of the day, when solar systems are most productive.
Direct incentives can include tax benefits such as credits or depreciation. The most celebrated recent incentive is the federal tax credit for solar systems that was expanded on Jan. 1, 2009. The credit covers 30 percent of the system cost and can be coupled with state, local and utility incentives. The Database of State Incentives for Renewables and Efficiency (dsireusa.org) lists state and federal incentives around the country for all types of renewable energy and energy-efficiency projects.
Some states have rebates of up to $4.50 per watt (up to 50 percent of system cost), cutting the upfront expense. Others have performance-based incentives (PBIs) that pay from 10 to 40 cents per kilowatt-hour for power produced over three to 10 years. Some states also use solar renewable energy credits (SRECs, also called green tags), which are similar to PBIs in that they produce value based on system performance.
SRECs represent the bundle of legal rights to the green part of each kilowatt-hour produced by a solar system. SRECs are valuable to utilities in certain states, such as New Jersey, Maryland, Pennsylvania and 11 others, because those utilities must comply with renewable portfolio standards that require a certain percentage of the electricity they sell to come from solar sources. New Jersey SRECs are currently the most valuable and have recently traded in their auction market for as high as 65 cents per kilowatt-hour, thus earning five times the price of the electricity savings they are also producing. In most other states, SREC values are much more modest.
A feed-in tariff (FIT) is yet another type of performance-related incentive, but one that foregoes the net-metering benefit. The customer continues to pay the regular electric bill but gets paid for all electricity fed back to the grid. Gainesville, Fla., has an FIT of 32 cents per kilowatt-hour for 20 years, but the program is so popular, it’s currently sold out.
Ontario, Canada, may soon restore its FIT program, with payments between 44 and 80 cents (Canadian) per kilowatt-hour for 20 years, depending on system size and mounting type.
Please consult a certified tax advisor to check the applicability and taxability of incentives for a particular situation.
Rising Electric Rates Increase Savings
Another factor in renewable energy economics is escalation in electric rates. Solar and wind are escalation-protected investments because they offset electricity costs at the current prevailing rate. As rates rise, the owner saves even more.
Several useful ways to measure the economic value of a generating system are compound annual rate of return, increase in property resale value and cash flow, if the purchase is financed. In strong economic cases, the annual returns are more than 10 percent, the cash flow positive and the increase in resale value greater than system cost.
Compound annual rate of return, or CARR, is another term for interest-rate yield — a metric for comparing one investment to another. For example, a savings account might pay 1 percent interest, and the long-term stock market has paid about 8 percent (including dividend reinvestment). In several states, the results for solar can be substantially better than the long-term stock market.
A theoretical increase in property resale value occurs in homes with generating systems because of the reduced utility operating costs. According to a 1998 Appraisal Journal article by Rick Nevin and Gregory Watson, a home’s value should increase $20,000 for every $1,000 reduction in annual operating costs from energy efficiency. The rationale is that the money from the reduction in utility bills can be spent on a larger mortgage with no net change in the monthly cost of ownership. Nevin and Watson calculate that historic mortgage costs have an average after-tax effective rate of about 5 percent. If $1,000 of reduced operating costs is put toward debt service at 5 percent, the homeowner can support an additional $20,000 of debt. The borrower (homeowner) pays the bank the amount he or she saved on the utility bill, so the total monthly cost of home ownership is identical.
Solar systems appreciate over time, rather than depreciate as they age. This is because of the increasing annual savings solar systems afford as electric rates rise. All the calculations in this article assume that electric rate escalation will be 5 percent. If so, the generating system will save 5 percent more value each successive year, and thus gain from the 20:1 multiplier effect. The property resale value will then increase 5 percent per year compounded.
This appreciation cannot continue forever, as the increase in resale value runs into the second limit, which relates to the system’s remaining life. PV modules are warranted at 25 years to work at 80 percent of their new capability. Calculations of long-term resale value should take this into account.
Various Financing Mechanisms Are Available
Financing the system is important to many buyers. For many homeowners who finance their solar systems using home equity loans, the cash flow will be positive, either immediately or within a few years. The cash-flow calculation compares the estimated savings on the electric bill to the cost of the loan. Monthly loan cost is the principal plus interest payment required to pay off the loan, less any tax savings.
Home equity loans are often excellent sources of funds because the payment terms can be long, the interest rates on real estate-secured loans are relatively low and the interest is usually tax deductible, so the net monthly payments are often quite low. As stated, in many cases, the net loan payment will be less than the savings the solar system will generate.
Over time, electric rates usually rise, so the savings increase. But the loan cost generally stays relatively constant, so the situation gets better and better for the system owner, even as the savings from the system are paying off the loan. Once the loan is paid off, all the savings go to the owner.
Those who don’t have equity available can explore other options, such as community financing, whereby a city can arrange a loan for a solar system and allow it to be collateralized and paid back on the property tax bill. The program was pioneered in Berkeley, Calif., and is now available in several cities and may soon appear in other states. See dsireusa.org for more information on community loans.
Two other options for homeowners are commercial financial products applied to residential situations, such as power purchase agreements (PPAs) and leases. PPAs are agreements for one party to sell power to another at agreed-upon terms. The sale is for kilowatt-hours of energy only. Solar leases are rentals, where a customer leases a solar system from another party. In both cases, the parties owning the systems are underwritten by investors who can use the tax credits and depreciation benefits.
It is important to compare renewable energy investments to other investments on an even basis. For a fair assessment, critical analysis should look at compound annual rate of return, cash flow and resale value. For much more detail on the variables that affect the results, the methods of financial analysis and example results for many states, please see the article at ongrid.net/papers/PaybackOnSolarSERG.pdf.
Solar makes economic sense for many, but only a hard look at the numbers will tell if it makes sense for your property. Check it out. Run the numbers, get evaluations and proposals from at least three solar providers and take the estimates to a CPA to check them out. That way, the smile on your wallet can be as big as the smile on your face!