Compare your own solar investment decisions with these examples and you can get a good idea of how your investment stacks up. In most cases, just substitute in your own numbers. In some cases, you may have to adjust the model to fit your exact situation.
Decisions often come down to the details of your rate structure. You can find it on your power bill. You may be able to change your rate structure with a simple call to the utility. Some allow for choices. In fact, you may be able to save some money simply by changing your rate structure.
To calculate payback, first find the monthly energy savings. Suppose Household X uses an average of 1,000 kWh of electricity per month. At $0.15 per kWh, the monthly cost is $150. An energy audit determines that water heating comprises 18 percent of the total electric bill, at a cost of $27 per month (see the earlier "Figuring out monthly savings" section for details on such calculations). With the solar water heater, that amount drops to zero, so $27 is its monthly savings.
Then determine the net cost of the equipment. A solar water heating system costs $2,000, including parts and installation. A federal government tax credit of 30 percent is available, for a total of $600. The net cost is $1,400. The warranty is for 5 years, so the homeowners won't have to pay maintenance costs for the first 60 months.
To recover the initial investment of $1,400, Household X will need
That's a good investment. A solar water heater may last about 20 years, and Household X is making a profit within the first 5 years.
Here's how some other investments stack up: Put $1,000 in a savings account at 6 percent, and you gain compounded interest. You have $1,000 in interest 12 years after you make your original investment, which is the payback period. At any point in time, you can pull your money back out of the bank, with zero risk.
If you put your money into the stock market and get a return of 12 percent, the payback period is only six years. But the value of your stock could also go down in value, maybe all the way to zero. Because the risk is much higher in the stock market, you insist on a higher potential gain or else you'll just put your money into a bank.
A good general rule is the Rule of 72: To find the number of years required to double your money at a given interest rate, just divide the interest rate into 72. For a 12-percent return:
Accounting for pollution
Suppose you're installing a solar water heater in an area where the climate is northern. There isn't as much sunshine, and the winters are colder. Cost savings are $13.50 per month (or half as much as in the preceding section). For this example, assume constant energy costs, which is probably a simplification. (The point here is to illustrate how you can account for pollution.) When the monthly savings are cut in half, the payback period for a $1,400 water heater is twice as long — about 104 months. This isn't much different from the return (or payback) you can get at a bank, where there's zero risk and you can take your money back out whenever you want. When you invest in solar, you're stuck with what you've got. This is a bad investment.
But how much is it worth to reduce pollution? Ten dollars a month? Twenty? How much would you pay to completely eliminate your carbon footprint altogether? $1,000 a year?
Out of your total carbon footprint (see Chapter 2), figure out how much CO2 the old water heater contributes. The typical carbon footprint is around
40,000 pounds per year. The typical footprint from a water heater is 3,000 pounds per year, or 7.5 percent of the total.
If you're willing to spend $1,000 a year on pollution mitigation, you'd spend 7.5 percent of this on heating water. That's $75 per year, or $6.25 per month. Add this to the savings column, and instead of only $13.50 per month, the real savings is $19.75. This makes the payback 71 months, which is a better proposition:
If you'd spend $2,000 a year eliminating pollution, total cost savings are $27 per month, which is all the way back to the original example with a payback of 52 months (see the preceding section). This is a good investment.
What if energy costs rise 12 percent per year instead of staying flat? That percentage is higher than historical norms, but it's not difficult to imagine how this might come to be, with all the pressure coming to bear on the energy markets. When energy costs rise, each year the savings grow. Perhaps your $1,400 solar water heater saves you $27 per month the first year. But the next year the savings grow to $30.24 per month ($27 x 1.12). Then $33.87 ($30.24 x 1.12), then $37.93, then $42.49, and so on. Look at the yearly savings to see how they add up:
Year Monthly Annual Savings Cost Left to
The payback in this case is 44 months (down from 52 months if the energy costs were to stay the same).
Regardless of how high energy costs go, the amount that's being spent on heating water is locked in at zero. This is a form of hedging, or making an investment that reduces risk.
Here's another benefit, not quite as tangible but still very real: There's no reason to take shorter showers or skimp on that bath, no matter how high energy costs may go! A solar heating system has so much capacity; not using all of it saves nothing.
Thinking about tiered rate structures
In a tiered rate structure, the more energy you use, the more you pay per kWh. So in California, for example, not all watts are created equal. Some tiered rate structures are very punitive, with the highest rates three or four times the base rate. Solar system savings come from the highest tier first. In such a rate structure, cost savings can easily be twice as much. Payback is therefore half as long.
A solar water heater may offset 18 percent of the household energy use, but this may comprise more like 35 percent of the total dollar value in a typical tiered rate structure.
In a tiered rate structure, small investments work best. As the size of your investment grows, the payback gets worse because you get less and less return on your investment.
Appreciating a solar home's increase in value
Suppose some homeowners decide to sell five years after installing a solar water heater. Energy costs are rising, and monthly savings from the solar water heating system are now $48 per month, or $600 per year. A home buyer will pay more for the home because of this built-in cost reduction.
How much more? New systems cost $2,800, and tax rebates are a thing of the past because everybody and their brother are now in the market for solar. A lot of work is involved, and most buyers don't want to do it. They'd have to read some highly technical books, for example (unfortunately, they didn't know about this handy little guide).
Even more importantly, most homebuyers use mortgages, where balancing monthly payments with a fixed income is the game. Forty-eight dollars per month in cost-savings translate into $48 that can be spent somewhere else. A buyer could get a larger mortgage, for example. For $50 a month, after taxes, you can borrow $14,000. So although putting in their own solar system may be an option (after the purchase) for homebuyers, they also have a strong incentive to purchase existing solar equipment with their mortgage.
In terms of appreciation, the homeowners are likely to get about 125 percent of the price of new equipment. For the example, a 25-percent appreciation would be $3,500 (that is, $2,800 times 125 percent). Suppose that with rising energy costs, the original investment of $1,400 paid for itself in 44 months (see the preceding section). After that, the cost savings were all pure profit. At 60 months, the sellers get a further profit of $2,100 at the sale of the house.
It's common to save more on energy costs than the payments on a mortgage equity loan used to purchase a solar system. You pay no upfront cost when you finance an investment. You do have to pay off the loan at some point, but from day one, you save more than you pay. Your cash flow is in the black.
Suppose you borrow $1,400 for a solar water heater with a promise of $27 per month in savings. An interest-only home equity line of credit at 6-percent tax-deductible interest for the $1,400 is only $8 per month (from mortgage payment tables). That's a net gain of $19 per month.
Here's the payback period for this scenario:
At some point the loan is repaid (principal payments usually kick in after five to ten years), although most equity loans get paid off when the house is sold or refinanced. When it's sold, you often get more for your solar equipment than what you paid (see the preceding section for details).
When your water heater crashes, doing nothing is not an option. Now you must spend money, probably a good chunk. How much more do you have to spend for a solar system? Probably not much. Now's really the time to go for it.
For example, a solar water heating system costs $3,000, and a conventional water heater costs $1,400. The difference is only $1,600, whereas if you take out a working water heater in order to upgrade to solar, the real investment is the entire $3,000. (And if you factor in rebates and subsidies, the difference may be zero.)
A solar pool heater does not save money — except when you compare it to all the other options. Solar collectors load the filter pump (make it run harder) so it costs more to run. Sometimes a lot more. If you want a lot of heat, you have to run the filter pump for upwards of 8 hours a day. This extra pump time is solar-system cost, and if you're in a tiered rate structure, it can add up to quite a bit. If you're in a TOU structure, you also get dinged because you need to run your pump at peak times (midafternoon, when it's sunniest).
When you invest in a solar pool heater, you pay thousands to get higher power bills. It's not worth trying to do a payback analysis on a deal like that. The only gain is comfort, and that's hard to value. But people pay a lot for solar pool heaters. In some areas, they're on every roof. Ask an owner, and he or she will probably tell you they're great. Pools cost upwards of $25,000. Another $3,000 to make it much more enjoyable isn't a bad investment. Your swimming season will be extended — a solar heater may triple the amount of time swimmers actually spend in the pool, as opposed to around it.
The other options are insane: a big, gas heater that gobbles propane, or electric, with a 24/7 spinning power meter. (You could light a big fire and boil water, but that's labor intensive.) A solar pool heater not only heats your pool much cheaper than the other options, but the pollution effects are infinitely better.
The investment: an attic vent fan powered by PV panels. Equipment costs $350, and installation takes two hours and requires brains, ladders, roof climbing, and decent tools.
An energy audit determines that the fan will save $25 per month in air-conditioning costs over a four-month summer period (see Chapter 2 for details on energy audits). At $100 per year, the payback is only 3.5 years.
You also boost your comfort. The house is a lot more comfortable on the days when it isn't hot enough to turn the AC on. And because the fan lets hot air escape, you get more of these days.
The alternatives to installing a solar fan? Not installing anything at all and paying for all that extra air conditioning or installing a hard-wired fan for more than $1,500 because you need a licensed electrician to do the installation, as well as county inspections and permits.
You can go off the power grid with a home office. A remote cabin solar power kit costs $1,000, with 12 volts DC (direct current) output and a battery so power is always available. You can use the system to run DC lights, a vent fan, coffee maker, radio, and a PC laptop computer with printer. A small inverter provides minimal 120 volts AC (alternating current) power for telephones and other support gear.
The total investment, including wiring and DC equipment (lights, fans, and an AC voltage adaptor), is $1,500. Installation is extra, but with the kits available, a do-it-yourselfer can tackle the job. And because the solar equipment is used for a business, it's depreciated, which reduces taxes.
The system saves around $30 per month in utility-provided electricity, so the payback is 50 months. When all taxes are taken into account, the payback can be as low as 30 months.
Suppose some homeowners have good roof exposure for solar equipment and they want to install a full-scale, intertie (connected to the grid so that extra generated power is credited to your power bill) PV system in a three-bedroom, two-bath house. Their monthly average electric bill is $260, and energy consumption is 1,600 kWh's per month. The home is all electric.
After an audit, they employ conservation measures to decrease the bill 15 percent to 1,360 kWh's per month, or $221 (Chapter 2 discusses energy audits; Chapter 3 can tell you more about reducing energy use). The goal is to reduce the average monthly electric bill to zero.
A TOU rate structure will apply when the system is in place. The owners believe they can use 90 percent of their electricity in off-peak hours, so they'll be selling most of their solar production back at the top rate and using it at a much lower rate. In California, utilities are required by law to pay you for your excess generated power the same rate they charge you. In some states, the utilities pay you only a percentage of the rate they charge. Look for this to change in the future, because it's a way to encourage solar investment.
A 5 kWh system that'll do the job costs $40,000. The state will give a rebate of $10,000 directly to the PV system contractor so it's not even billed to the homeowners. The total out-of-pocket cost is $30,000. On top of that, the feds will give a $2,000 tax credit for the system, which now costs only $28,000.
The warranty is 20 years on the panels, less for some of the other equipment. Reliability is good on the brand chosen, which isn't the cheapest. In theory, maintenance and repair costs should be very low.
The owners finance this with an equity loan at $140 per month, tax deductible. They're immediately saving the difference between the power bill they've erased ($221) and the cost for the loan — in this case, $141 per month after taxes. From day one, this deal is in the black.
Using 7 percent as the energy inflation rate, the payback is 11 years, but this doesn't account for the fact that the value of the equipment is also rising because demand is rising. With this factor included in the equation, the payback goes down to 7 years.
The potential savings in carbon footprint are 13,000 pounds per year. Not bad!
What will happen to the value of your equipment if rebates and subsidies dry up? Homebuyers will have to pay a lot more if they choose to install their own equipment. The seller providing that equipment with the house has become much more attractive.
Household Y uses 12 kWhs of electricity per month. A solar water heater supplement costs $4,000 and will save 18 percent of the power consumption. A full-scale PV system will offset the entire electric bill for a cost of $30,000. If both systems are installed, the capacity of the PV system can be 18 percent less, for 18 percent less cost.
Here's what installing both a water heater and a PV system will cost:
Going with the PV option only costs $30,000. That's a savings of $1,400.
But is it worth it? Maybe not. Water heaters need maintenance. Some are very reliable and work for decades, but PV systems are relatively trouble-free. You also have two investment projects to contend with instead of one. With these numbers, I recommend installing only the PV system. Your calculations may indicate a bigger divergence, in which case your decision may be different. This decision may also depend on financing. For example, you may be able to finance a big PV system, but not both, so your decision may be to install only PV for this reason.
When does it make good sense to install a solar water heater? A $3,000 investment is reachable in cash for most homeowners. You get a good payback, especially if you're in a tiered rate structure. You can always add PV later, after you've determined how much cost savings you've achieved with the water heater, or when your finances allow for a larger investment.
Or perhaps you can get a solar tax credit of 30 percent of the cost of your system, at a maximum of $2,000. This means you get a $2,000 tax credit for a $6,000 solar water heater, as well as a $30,000 PV system. The percentages are a lot better for the water heater, making its payback much better.
If tax credits or rebates are limited in any given calendar year, you're better off installing hot water and PV in different years.
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