The economics of solar

I bought a home about two years ago. It has a south-facing roof, so I decided to look into solar. Solar sounds really really good: put these panels on your roof and get free electricity. Run your air conditioner with impunity. Run the meter backwards during the day, still have electricity at night. People brag about annual power bills in the single digits. Plus your home value increases, and when you do sell, the house will sell faster.

The one thing that mostly gets forgotten is the up-front cost. Let's look at my example. I have an 1100 square foot house, reasonably well insulated. I have an electric stove (we cook a lot), electric washer and dryer, and central air conditioning. I run the AC probably 10 hours a day for two months, and intermittently for another two or three months. We own a frighteningly large number of electronics, which are on all the time. My annual power bill is just over $900, using, on average, 19 kWh a day at 13 cents a kWh. Usage is higher in the summer and lower in the winter. I would need a 4 or 5 kW system to break even each year. Such a system could cost almost $30 thousand, and even after a 30% federal tax credit and utility rebates would be $20 thousand. Payback time, assuming current power prices, would be 22 years. It's hard to know how long a solar system will last, but 25 or 30 years seems to be the numbers most commonly quoted. In other words, the system will take more than 2/3 of its life before I start getting free power. The argument most often used it that electric prices are going to go up, making the system even more valuable as time goes on. It is probable that prices will go up in the long term, but by how much? Remember that other things are predicted to go up as well, including (hopefully) your income. Solar installers are betting that the price of electricity is going to go up faster than inflation, and base their estimates on this. (This is based on historic price trends, what will happen in the future is anyone's guess.)

If electricity prices go up rapidly, solar will end up being a very solid bet, if they only go up slowly, the decision is less clear. Purchasing solar is probably not a bad investment, especially in places like California, with crazy environmental laws and where solar panels generally do not increase property taxes. What it may not be is a great investment, especially compared to other efficiency investments. A few things to consider are listed here:

• Insulation, especially in older homes. Insulation can drastically reduce heat loss in the winter and reduce cooling load in the summer. Homes more than 30 years old are often very poorly insulated. Depending on the specifics of the situation, this may be less expensive and have a quicker return on investment, plus increasing the comfort level in every season.
• Energy efficient appliances. Old appliances, especially old refrigerators and freezers, can use a significant amount of energy, replacement can be much cheaper than solar, and payback time can be much shorter. New high efficiency washers can also save a large amount of water, in addition to helping get clothes cleaner. Even the most efficient washers are a tiny fraction of the cost of a solar system.
• Upgrades to heating or cooling systems. Older air conditioners, in particular, are not very efficient. Further compounding the problem is the fact that many air ducts leak a significant amount of air, often 20% or more. Repairing air ducts and replacing an old air conditioner can save significantly on heating and cooling costs, often at less than the cost of a solar system.
• Replacement windows or doors. Single paned windows are not energy efficient. New double paned windows, some with special coatings can keep your home much cooler in the summer and warmer in the winter, saving on energy costs. Many doors are not well insulated and/or drafty. Replacing these doors can also help save energy. Sliding glass doors are particularly poor in terms of efficiency. Replacing a door can be less than a thousand dollars, and show almost immediate savings in energy and comfort.
• High efficiency lighting. Incandescent and halogen lights use a large amount of electricity. Replacing bulbs with compact florescent or LED bulbs can significantly reduce energy use. New bulbs have a warmer, more inviting color than previous bulbs, so even if you have tried them in the past and didn't like them, take another look. Even specialty fixtures such as can lights can easily be replaced with LED fixtures—cooler, more energy efficient, and never need bulb replacement. Bulbs that are on a lot, such as porch lights or living areas, should be changed first. Even Christmas lights can be replaced with LED lights that use only about 15% of the power of incandescent, plus the bulbs are almost impossible to break—meaning the string lasts longer, an even better investment. LED Christmas lights are perhaps only 20-50% more expensive, and are available in a wide range of colors and styles.
• Investment in low water landscaping. In much of the western US, water is a significant component of monthly utility costs. Saving water can save money, and saves energy too, energy used to pump and purify water. As an added advantage, much low water landscaping can require less maintenance. Most homeowners can do a lot of the work themselves, leading to further savings. New low water landscapes are much more attractive, and use more native plants and drip irrigation, not the bare expanse of rock that have been installed in the past. Most homes could replace a third of the lawn with no loss of functionality. Ask yourself, “when was the last time I used my front lawn?” Approaches like removing lawn in the front, but leaving it in the back can reduce water use significantly, and save big on fuel for mowing and fertilizer as well. Growing a few vegetables in your yard helps save on food bills, saves energy that would have been used to transport the food to the store, and can be healthier as well.
• Paying down debt, especially consumer debt. Americans carry far to much debt, and a lot of it is high interest credit card debt. Credit card interest rates are typically between 20% and 30%, so paying down credit card debt will translate to big monthly savings. Money invested in paying down a credit card will pay for itself in 3 to 5 years (dependent on interest rate). The added advantage is that there is no specific amount required, any amount can be applied. Even lower interest rate loans such as car loans or mortgages are prime for pay-down. The improved financial situation will free you up to make other improvements later, if they become less expensive, and the peace of mind it affords is priceless.

Another new development in solar is “Zero-down” programs. These make even less economic sense. They come in two main varieties, and I'll discuss each separately.

The first is a fixed monthly payment. This goes by several names, usually solar lease or something similar. In this system, you make a fixed monthly payment for a set period, often 25 years, and then get all the electricity the solar system provides. This is essentially a mortgage type loan, only for the panels instead of a home. Savings may be realized, but will likely be very small, less then outright purchase. The lease company makes a profit, cutting into your savings. This complicates home sales. If you enter into one of these types of arrangements, either the home buyer has to agree to assume the remaining amount of the lease or you have to buy the lease out, probably by increasing the price of your home or decreasing your profit from the sale. When the real estate market is not strong, prospective buyers may not be willing to deal with the added complexity, or even qualify to assume the lease (remember they are also taking out a large home loan at the same time). A lease will only make economic sense if you think you are likely to stay in your home for the entire lease period and the saving will be significant, at which point direct purchase would likely be an even better option. (Refinancing an existing home loan to buy solar is similar to this arrangement, but less complex when selling the home, the economics are largely the same.)

The second method is a PPA, or power purchase agreement. These have gotten some favorable press recently, mostly in large commercial installations. In this arrangement, a company installs solar panels, which they own, on your home and agrees to sell you the power generated at a specified rate for a long period of time, typically 25 years. The rate is lower than what you currently pay for electricity. After the time period is up, you often have an option to purchase the panels, or the company will remove them. The short term savings of this plan are likely to be modest, large savings are generally not realized until or unless power prices go up significantly, because the contracted rate is generally fixed. Similar with a lease, the company providing this service is going to turn a profit, cutting into your savings. This makes great sense for large organizations—schools in particular have been taking advantage of this—because even small changes in power prices translate to big savings, an economy of scale. Further large organizations tend to have the space for large, efficient, optimally oriented panels, further enhancing savings. A home typically has none of these advantages, space tends to be limited, and orientation often not optimal. A single home is the exact opposite of economy of scale, small savings will be small. Furthermore, at the end of the 25 years, you don't own the solar panels.

In conclusion, solar may not be the best choice, economically, for your home. I don't want to imply that I am anti-solar, I am not, and some people have the combination of high power prices, good orientation, and sunny weather to make it worthwhile. Solar is a great addition to energy independence and sustainability, it just isn't the total solution. But the cost savings are often not as great as advertized, and many other efficiency changes can save a significant amount of power with a much smaller investment of money. The economics may change, and it never hurts to pull out a few power bills and check the numbers for yourself, but do the math before getting all giddy. Definitely avoid any "zero-down" programs, as they will only decrease possible savings.