Economics Of Solar, Homeowners, FYI…It’s All About Cash Flow & Return On Investment

Residential solar is said to have a sad closure rate of only 1 in 10 qualified homeowners. In some ways it is hard to understand why. Most people would consider securing 5% interest on a CD an excellent if not unheard of rate of return. Yet if someone were to tell you that they can put $100 plus in your bank each month account AFTER the cost of financing solar, break even after 7 – 10 years with a 12% ROI with a investment more secure than a 401K wouldn’t you think they would jump on it?

In many cases, solar installed on a home can do that! The solar industry in general, and this Sacramento California solar company in particular, needs to do a much better job of educating consumers about the financial benefits of going solar. Lets start here –

Getting Consumers to Rethink Cost of Solar: It’s the Electricity. By Michael Balchunas Sun Pluggers

A well-dressed gentleman strode out of a utility-sponsored solar information class for homeowners and waved dismissively at the lineup of solar installers waiting to hand out their business cards and brochures.

“If you guys can’t give me a payback in less than seven years, I don’t want to hear it,” he said.

As he moved beyond hearing range, one installer said quietly, “Ask him what the payback period is for his boat.” The remark reflected the frustration many installers harbor about trying to inform prospective customers that solar photovoltaic systems represent a long-term investment in electricity an investment whose energy payback may outlast some purchasers’ lifetimes.

In demanding a financial “payback” of less than seven years, the prospective buyer may not have recognized that he was not just asking for an opportunity to buy cleanly generated electricity at a long-term price that would save money. He was instead insisting that he receive two decades or more of electricity for nothing at all.

In a number of places this year, combinations of attractive solar incentives and reduced solar installation prices have indeed made it possible for some consumers to lock in long-term electricity supplies at exceptionally low rates, sometimes a fraction of a utility’s current price, potentially guaranteeing savings of thousands or tens of thousands of dollars over the 25 years or more that solar systems are expected to produce power.

When screaming bargains have appeared, they have often prompted immediate sellouts or reductions in solar incentives, followed in some cases by slackening demand even when the reduced rebate amounts still may offer a competitive price compared with conventional energy.

Many consumers accustomed to simply paying a monthly bill are just now learning about how electricity is priced and sold. As digital “smart” meters are installed at more homes and businesses, pricing approaches are destined to evolve.

Increasingly, customers are being offered time-of-use rates that vary throughout the day, with prices much higher at peak afternoon or early evening times than they are in the dead of night.

Most California residents already are used to paying tiered rates that rise sharply as their electricity consumption increases beyond low “baseline” levels.

For example, in the Southern California Edison Co. service area, where the recent homeowner solar class was held, typical average residential retail prices range from about 13 cents per kilowatt-hour in tier 1 to about 31 cents in tier 5, according to a July 2010 bill.

Many homeowners and small-business owners are unsure how to price solar electricity in comparison with what they pay a utility for conventionally generated electricity. Many, like the well-dressed gentleman, have decided that financial “payback” time the number of years it takes to fully pay off the solar system is the only appropriate measure.

But that measure does not compare the cost of solar with the cost of conventionally generated electricity. Consumers often neglect to consider that the end product they are purchasing is electricity, and that the equipment is not the end product but the means of generating it.

At least two of the Southern California installers waiting outside the information session said they could offer residential solar photovoltaic systems at gross prices as low as about $6.50 per watt, before considering any incentives.

At that price, a typical residential system rated at 5 kilowatts of production capacity would have a gross cost of $32,500. An incentive available from the California Solar Initiative of $1.55 per watt would reduce the cost to $24,750. A 30 percent federal tax credit, available to those with federal tax liabilities, could reduce the net price to $17,325.

Although solar panel modules typically have power production warranties lasting 20 to 30 years, inverters, which convert a system’s output from direct current to alternating current, have shorter warranties, usually five to 15 years. A new one would almost certainly be needed during a system’s working lifetime. The cost today for a 5-kw inverter is approximately $3,500.

The potential total 25-year cost for a 5-kw system therefore comes to about $20,825, excluding insurance or maintenance. Homeowners’ insurance for a typical solar PV system, which many states stipulate is not required, can vary in cost from nothing to a relatively modest premium. A consumer who is quoted a steep price to insure a qualified home solar PV system may wish to seek additional quotes.

Over 25 years, an ideally located, south-facing, shade-free 5-kw residential solar PV system in the heart of the Southern California Edison service area in the San Gabriel Valley might be expected to generate about 157,000 kilowatt-hours, according to figures obtained from the solar calculator called In My Backyard, available from the National Renewable Energy Laboratory. (The calculator’s default cost figure of $8.15 per watt was higher than the prices mentioned by installers at the recent meeting. Even NREL encourages consumers to value solar electricity by payback years rather than the cost per kwh.)

Dividing the possible 25-year cash price of $20,285 by the estimated 25-year production of 157,000 kwh yields a potential long-term price per kilowatt-hour of 12.9 cents. That price is about the same as the utility’s current lowest tier price of about 13 cents per kwh. The solar price would be locked in, while the utility’s price may rise over the next 25 years.
However, many prospective solar buyers cannot write a check for $20,000 or more to buy at least 25 years of electricity up front because of unresolved fears about loosing their shirt.

If a prospective solar purchaser were to borrow $17,325 at 7 percent interest and repay the sum over 20 years, and in about 10 years borrow $3,500 for a new inverter and pay that cost back over 10 years, the net payments over 25 years might total about $37,076. For this homeowner, the net electricity cost might be about 23.6 cents per kwh. (Prices of inverters, or the newer micro-inverters, are expected to drop in the future and capabilities may increase.)

At 23.6 cents per kwh, the cost of solar electricity purchased with borrowed money compares with current average residential utility rates in the SCE service area of 24 cents per kwh for tier 3, 27 cents per kwh for tier 4, and 31 cents per kwh for tier 5. A homeowner with bills consistently in tier 5, with ample sunshine access, could reap substantial long-term savings with solar.

Companies that provide residential leases or power purchase agreements may be able to guarantee savings from the start with no money down for solar electricity.

Installers say that explaining the nuances of solar electric economics to prospective customers one by one is time-consuming and raises the overall cost of installations. The well-dressed gentleman at the recent homeowner solar session was not the only one to barrel past the row of installers handing out brochures.

One of the installers trailed the man out to the parking lot, returning several minutes later.

“He has a large house and a huge electricity bill, and would need a 12-kilowatt system to offset all of his annual use,” the installer said. “I told him he’s a perfect candidate for a power purchase agreement, and he listened. He understood it when I explained how it would work and that his electricity price over 20 years would be certain to be lower. He was definitely interested.

“I hope I get the solar installation call.”