How to “solar” – Part II: Doing The Math

Hi, solar energy fans. Thanks to everyone who read my Location, Location, Location blog post.

Now that you’ve had a chance to consider whether you have a good place to put solar panels, I wanted to begin to answer the questions all of you have on your minds: How much money can I save?

I’m going to express my “savings” answer like a banker or an investment advisor: as an annualized rate of return on investment (ROI). I do this not just because I’m an accountant, but because going solar is a long-term investment. Defining money savings in terms of ROI lets you compare your solar savings apples-to-apples against all other long-term investment options. It also helps you determine how big a system would be right for you. Furthermore, there are a number of ways to finance your solar electric project, and your ROI number will help you distinguish the good from the bad.

ROI and interest rate are not the same thing. For instance, at the time of my writing, you could buy a 30-year US government bond and receive a 4.69% interest rate. So, for every $1000 invested, you’d get $46.90 in interest per year. If you’re in the 15% Federal Tax bracket and your state income tax rate is 3%, your governments will take away about $8.45, leaving you $38.45 and an ROI of 3.845%.

Return On Investment: A Sample Solar Electric System

Suppose you were able to buy the following solar electric system under the following terms (the system we purchase was slightly larger and at a lower overall price, but at a time when local utility incentives were about 10% higher than they are now):

· Rated capacity: 6000 watts DC

· Out of pocket cost after all tax breaks and utility incentives: $12000

· Warranty on solar panels: 25 years

While your solar panels usually will have a 25 year warranty (some have just 20 years), a key component will NOT. The inverter (the device that converts DC energy from the solar panels into AC electricity you can use in your home or, if/when you produce more than you use, put to the grid) usually will carry a 10-year or 15-year warranty. Out of the desire to be conservative, I’m going to assume you’ll need to replace this during the 13^th year of your solar array for $5000 (in year 2023 dollars).

Also, one negative feature of solar panels is that each year they’re less-effective than the last. The solar panels’ 20/25-year warranty usually provides for the panel to be producing at least 80% of the power on the last day of the warranty as it did on the day it was installed.

The ROI on this system depends upon 3 other things:

1. the current all-inclusive price of electricity during daylight hours,

2. your “noon-equivalent cloud-free sunshine” (also known as your Solar Resource)

3. the expected rate of electricity inflation.

In order to simplify things, my calculations are going to assume a 3.5% electricity inflation rate over the next 25 years. Relative to US electricity inflation since the 1980s, this inflation figure is moderately conservative. Actual inflation has varied from state to state; Arizona’s has been lower & the northeast US has been higher (as they say on CNBC: past performance is not an indicator of future results).

So that leaves two variables, electricity prices and Solar Resource.

In my bullet point above, I expressed the price variable as “all-inclusive daytime” price of electricity. Electricity is often subject to sales tax. In Phoenix, state and city sales taxes (plus fees that act like sales taxes) apply, totaling more than 12.5%. Under this scheme, daytime electricity nominally priced at about 14.5 cents per kWh actually costs me about 16.3 cents per kWh at the bottom line of my electric bill.

In my previous blog post, I gave you a link to a map that would help you determine your Solar Resource. Below is a listing of select cities and their approximate Solar Resource values (+/- 0.1).

City	Solar Resource		City	Solar Resource
Milwaukee WI	4.2		Dallas TX	5.2
Cleveland OH			Miami FL
Boston MA			San Francisco CA
Washington DC	4.7		Salt Lake City UT
Louisville KY			Boise ID
Chicago IL			Las Vegas NV	6.2
Minneapolis MN			Phoenix AZ
			El Paso TX
			Palm Springs CA

Below is a chart showing the estimated 25-year ROI at various Solar Resource points (corresponding to the cities above) and various electricity rates that might be in effect at the installation date.

Solar Resource	Price of Daytime Electricity (US cents per kWh)
(kWh/m2/avg. day)	8	10	12	14	16
4.2			5.8%	7.9%	9.8%
4.7			7.3%	9.5%	11.6%
5.2		6.2%	8.7%	11.1%	13.4%
6.2	5.6%	8.6%	11.4%	14.2%	16.9%

The table above has some conservative assumptions built into it. Your actual ROI would go up if:

1. The out-of-pocket cost of the system was lower either due to

a. Lower pre-incentive prices OR

b. More-generous tax or utility incentives.

2. The solar panels last longer than the warranty.

3. The solar panels perform better over time than indicated by the warranty.

4. The initial inverter lasts significantly longer than warranty.

5. Electricity inflation is higher than estimated.

Implications of Solar Power ROI

Investment Implications

First, let’s compare solar energy to the 30-year bond example I gave earlier.

· Where sunshine, electricity prices, and financial incentives are ample, solar energy’s ROI can be substantially higher than the ROI for government bonds.

· You pay taxes on bond interest, but not on your lower electric bill.

· The investment risk is comparable. Since the USA has existed, (a) the government has paid its debts every day and (b) the sun has risen in the east every day. Reputable manufacturers generally put out products to a quality level that vastly exceeds their warranties, and in the rare cases when the products fail, they make good on their warranty claims.

The fact that solar energy often pays a higher return than government bonds isn’t reason enough to go forward unless you have absolutely no debt and want a relatively risk-free place to put your money. Most of us have debt and many of us couldn’t fund a solar energy project without some debt. The values in the ROI table will help us determine whether solar power makes enough sense to go into debt (or to stay in debt).

If you plan to get a home equity loan, it makes sense if the term of the loan is less than or equal to the warranty life of your solar panels AND in the following scenarios:

1. Your interest rate is lower than your Solar ROI AND

a. The loan is a fixed rate loan OR a variable rate loan capped at or under your Solar ROI.

b. Every dollar of interest is tax deductible (consult your tax advisor)

2. Your interest rate is more than 3% lower than your Solar ROI AND either

a. The loan is a fixed rate loan

b. The loan is a variable rate loan capped at or under 3% less than your Solar ROI.

As for credit cards… in a word: DON’T. Your ROI is almost never as big as your credit card interest rate. The only exception to my credit card rule: it would be OK to use a credit card a bridge to a tax refund. And then, I only condone using a credit card for the portion of the cost you will recover within the next 15 months from credits on your federal or state tax returns (consult your tax advisor for more information).

In fact, if you have more than $2500 in outstanding credit card debt, don’t buy a solar power system now. Instead, pay your credit card debt down THEN go solar. That goes for any other debt over $2500 where the interest rate is higher than the ROI.

“Buy or Lease” Implications

So far, my post has focused on the purchase of a solar electric system. There are companies that will lease systems to you. Most leasing companies will charge you little or no up-front cost (especially if your credit is good). You won’t get any tax credits or utility assistance (because it wouldn’t be YOUR system).

The reasons I chose a purchase over a lease when I opted for solar power were

· the initial monthly lease payment quoted me were as high as 90% of the cost of the electricity the system would replace (where’s the ROI?)

· the lease also included an “escalator” clause, which would have increased my payment 5% or 6% per year (remember, in Arizona, electricity inflation has been about 2.5% in the past 20+ years).

· I would need to concern myself with replacing the leased system (or renewing the lease) in 15 years

· a purchased system has the possible upside of lasting much longer than the warranty and I wanted to capture that upside.

Sizing Implications

It isn’t worth it to build a system that will produce substantially more electricity than you use long-term.

Right-sizing one’s solar array is a topic unto itself, so I’ll reserve that for my next post.

Thanks for sticking with me.

 

You can read How to “solar” – Part I here.

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How to “solar!” - Part 1

So, as many of you are aware, we recently went “solar.” I talked about it a little in this post. I don’t think we showed you the finished result up on the roof though! So here it is.

Prior to the installation, but after our addition and extended roof line:

And here we are after the panels went up:

{Please ignore the dead plants … that’s what several nights of  hard frosts in the dessert do to new-ish landscaping!}

  

I had visions of ugly huge panels, sticking out like a sore thumb! To be honest I was quite surprised how little we notice them. In fact, they don’t seem to “stick” out at all!

Of course it helped to have the roof built pretty much to specification angle and size wise, so no “scaffolding” was necessary, but more about that later. Suffice it to say that it sure helps the aesthetics that they are as flat to the roof as possible!

We are two months into it now and whenever my husband or I randomly post how much we generated this month/week/day and what that means for our electricity bill, we have an onslaught of questions in our inboxes from folks interested in this.

Since the majority of the research and the process was done by Ian, my husband, I finally twisted his arm enough to write a blog post about our process, what steps we had to take when, what the important things to watch out for are, where the pitfalls were and how we ended up where we are now.

Where are you now, you ask?

In the last 30 days we generated 921 kwh of solar power. Bear in mind that this is winter and the days are shorter and often overcast, even here in Phoenix!

Our latest electric bill was $32 ($1.23/day) plus credits for ~$35 future electrical use. So essentially the electric company is at this point paying US!

Same electric bill last year: $147 ($4.35/day) – and it was warmer too last year which means we used less electricity then as the heating barely had to kick in, but this year we had several hard frosts, which means that the heating did come on a fair bit!

Not too shabby, right?

Well, without further ado … here is Ian with the details!

Hi everyone!

I'm amazed… amazed that a repost of my 3 line Facebook post would command so much interest and attention. 

Perhaps I shouldn’t be amazed. I suppose if I knew very little about solar power and if an acquaintance was saving serious money with it, I’d want to know how he did it too.

At any rate, I’m flattered and humbled by your interest.

I’d like to show my thanks for your interest by embarking on a series of blog posts about my experience with solar power and other home energy topics.

Starting a series of blog posts about home energy with the topic of solar electricity is sort of like how George Lucas must have felt when he began producing the Star Wars movie series… the first film in the theaters was the fourth story in his saga.

Installing solar panels was only my most recent home energy project. I can’t promise you my words will be nearly as exciting as seeing Luke Skywalker blow up the Death Star, but maybe they’ll help you blow a hole in your electric bills.

Before I proceed, let me first warn you that I am from the United States. My terminology, units of measure and cultural references likely will be USA-centric. I hope people in other countries will find some of the concepts useful too.

Let me start my blog post in earnest with the 3 most important planning considerations for a cost-effective solar electric system.

They are:  Location, Location, Location

I say this because there are 3 elements of location that play a huge role in the determining the costs and benefits of a solar electric system, also known as a photovoltaic system.

The most-important location element is geography. The dot on Google Earth (or for middle-aged guys like me, the dot on “the map”) that represents your house is significant for several reasons.

• It indicates how much sun you get. Sunlight is your fuel source in this equation. To see how much sunlight would hit your solar panels, view this map at the National Renewable Energy Laboratories (NREL) solar map site.  
  The units on the map are best understood as the average daily hours of “noon-equivalent cloud-free sunshine” received in a location. Most of the continental USA gets between 4 hours (olive green) and 6. 5 hours (reddish-brown). 
  
  
• It indicates what state you live in. The Federal Government offers a 30% tax credit to most taxpayers who install a solar electric system. This credit, unto itself, is not yet beneficial enough to make solar power economical to most homeowners. Some states offer a tax credit in addition to the federal tax credit. Some states also waive their Sales Tax on purchases of renewable energy systems. 
  
  
• It also indicates (roughly) how much you pay for electricity and to whom. If your electricity is relatively expensive, you’ll get payback sooner. Also, individual utilities (typically under pressure from State & Federal regulators) also provide financial incentives to install solar power systems. In my experience, my electric utility’s contribution to the construction of my system was larger than my Federal Tax Credit. The Database of State Incentives for Renewables & Efficiency (DSIRE) is a good resource for indicating State-sponsored and utility-sponsored programs, as well as links to the relevant state agencies and the utilities’ renewable-energy program websites. 
  
  
• Your location also indicates your place in the solar-power supply-and-demand scheme. Locations where solar installations are rare might suffer from a relative scarcity of contractors qualified to install photovoltaic systems (a licensed contractor must install your solar system in order to ensure you’re getting the same quality of electricity as you would from your electric utility {the grid} AND in order that you qualify for all tax credits and utility incentives). 
  
  
  Also, you might be stuck far from a facility that makes solar panels. The manufacturers will charge higher shipping costs to your contractor, who WILL pass along the shipping cost to you. 
  
  
• No one geographic consideration trumps the others. For instance, if you looked at the NREL map alone, there doesn’t appear to be much cause for a photovoltaic system in Connecticut, but electricity rates in Connecticut are among the highest in the USA, and according to the DSIRE site, the state-sponsored incentives are decent. So, take heart; it still might be worthwhile to put the sun to work for you!

The second location consideration is a suitable place on your property for the solar panels. The ideal place for a photovoltaic system is your own home’s roof IF

(a) part of the roof faces south or nearly south 

(b) the slope of that roof is about equal to or a bit less than your location’s latitude (for Phoenix: 20-35 degrees is best; 35-50 degrees for New York City).

Building an additional structure specifically for your solar panels probably isn’t worthwhile. You’ll lose the use of the land underneath the structure. You’ll need to build the structure strong enough to withstand the same wind, rain, snow and earthquakes for which the roof on your main house already has been built. Most importantly, it adds to the total cost of the system… and you cannot get a tax credit or a utility subsidy for building a structure to support your solar panels.

Stationary solar panels will capture sunlight the best when facing south and when tilted at your latitude’s angle. Panels that face due east or due west will generate 20-25% less energy than if they face south. A tilt of +/- 15 degrees from your latitude costs you 3-6% in power output. However, there are a few strategic reasons you might intentionally stray from the highest absolute power output.

1.) Time of use electrical pricing.

If you pay substantially more for electricity in the afternoon than in the morning, southwest- or west-facing panels are much more favorable than east-facing panels… and may prove a bigger cost-saver than south-facing panels.

2.) Seasonal differences in electrical usage or price.

If you use a lot more electricity in the summer than in the winter and/or the price of electricity is higher in the summer than the winter (a la Phoenix AZ), panels with a tilt of 10-to-15 degrees less than latitude {tilting toward the summer sun} is financially favorable to an “at latitude” tilt.

There are mounting systems that let your solar panels track the sun, but they add at least 50% to the cost of the system and only allow you to collect, at most, 40% more power. Also, you can’t attach them to the roof of your house (ground mount only) and sun-tracking systems, because of their moving parts, are more expensive to maintain than fixed systems.

I’ll describe the cost structure of a solar electric system in a later post, but for now, I’ll say there are fixed costs (like the building permit) and costs that vary according to the size of the system (like the solar panels).

Because of the fixed costs of the system, it is almost never worth building a rooftop system unless you have at least 300 square feet (27 m²) of usable roof space... and I don’t think you’ll get attractive returns on a system of less than 400 sq. ft. (36 m²).

What constitutes usable roof space?

That brings me to my third location consideration: where are your sources and potential sources of shade?

Shade is a killer for solar panels, partially because of the way they’re engineered. A solar panel is made up of 30+ individual cells. Due to the way they’re wired together, if any one of the individual cells is in full shade, the productivity of the whole panel goes to zero. If half of a cell is in full shade, and the rest of the panel is in full sun, the panel will produce only half of its potential energy (thus half of its potential payback).

Not all shade is equal. Full shade or hard shade is cast by solid, opaque objects, like your neighbor’s house, block wall, or any protrusion of earth (embankment, hill, cliff). The hardness of their shadows does not vary with the distance of the object. Avoid hard shade at all costs. Soft shade is cast by things like tree trunks and power poles, and less so by tree branches, wires and flags. The hardness of these objects’ shadows varies with their distance. Also, branches of deciduous trees cast harder shadows than branches of conifers.

That said, any part of your roof that’s in hard shade when it’s 2 hours after sunrise or 2 hours before sunset on Christmas should not be considered usable. Following this rule would give a system a minimum of 6 hours of potential sun exposure in Phoenix (or 5 hours on Long Island, NY) on even the shortest day of the year.

As for soft shade, it’s a little harder to generalize, but I’d avoid any area where there is a source of soft shade (excluding power lines or other wires) less than 15 feet (4.5m) away from your prospective panel space. If it’s especially tall shade or dense shade, you’ll need to put even more distance between it and your panels.

Also consider potential shade from the neighbor to the south. Does your neighbor plan to plant an oak tree or build a second story? If you live next to commercial property (especially vacant commercial property) or land that sits on fuel or mineral wealth, what could be built there and how high?

Particularly in the wetter parts of the country, some homeowners will be presented with the conflict of choosing between their 100 year old Oak Tree and their ideal solar site. If that old Oak has sentimental value for you, it will be a very tough decision no doubt. 

However, if your only obstacle is the thought of "I don't want to reduce my carbon footprint with solar panels only to raise it by chopping down some trees," consider this: you can donate $200 to the Arbor Day foundation for them to protect more than an acre (50000 sq. ft. or 4650 m2) of tropical rainforest.

That'll do more for the planet's carbon profile than any dozen trees in the temperate zone... and a cost-effective solar electric system would pay you back that $200 and then some.

To be continued …

Part II - Doing The Math

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Making the home more energy efficient

By now, most of you are probably aware, that we’ve been doing a LOT of stuff to our house since we bought it just over 2 years ago.

This will be the first post in probably a series on the things we did and are in the process of doing to our house to make it more energy efficient and environmentally friendly.

In many ways, the changes were to change outdated decor, outdated fixtures, adding livability, functionality as well as aesthetic value to the house etc

However, the biggest changes we made to the house and many things in it are not even that obvious, yet they are designed to help us be a LOT more energy efficient which will be very good for our pocket book and good for the environment in the long run.

Here are some of the little and large things we have done or are in the process of doing:

 

1) Windows.

When we moved into this house, the windows were a joke. I think they were just there to look like windows as they did little of what windows were actually supposed to do. When it rained, the water came right through. Granted we don’t get much rain around here, but when we do it is usually rather a lot all at once and well it came right through the flimsy frames. They were drafty as all get out, which in Phx means the HEAT gets in a lot and the air-conditioned air gets out a lot. And they didn’t do much as a noise barrier either.

So, one of the first things we did was to get energy efficient windows. The process was so much easier than I thought. They left the old, flimsy aluminum frames in and retro fitted the new energy efficient windows right over them! There was very little mess, it took them less than an afternoon to do the entire house.

I can’t begin to tell you what a HUGE difference this made. The first thing I noticed was how much more quiet it was. Don’t laugh, it was really noticeable! Not only did we barely hear the constant barking of the dog next door anymore, it seemed so much more quiet because the air conditioning wasn’t on all the time anymore.

See, I don’t do heat very well for various reasons. So, our house is kept somewhere around the 72-75 F mark most times, which is not easy or cheap to do in Phoenix!

The windows however went a LONG way to get the costs of that down! The cold stays in, the heat stays out and as a nice side effect, so does the volume of a lot of other somewhat annoying noises! Like dogs barking …

 

And they look so much nicer too!

 

2) Insulation.

My husband’s hobby horse! The house we bought had minimal insulation. Even though built in the mid 80s, it still hadn’t been included in the more insulation-conscious era of building around here. So, this meant, no insulation in the attic. We don’t have much of an attic space but it is very much enough for heat to accumulate and to warm up the entire house, making the air conditioning work harder yet again.

So, my husband spent many hot summer weeks up there in the attic at 5 am or earlier as this was the only time you could bear to be up there for an hour or so and installed radiant barrier insulation sheets. In case you are not familiar with radiant barrier systems, their function is to reflect the heat, rather than trying to absorb it, like some of the more traditional insulation materials (fiber glass, styrofoam, etc)

 

Once he was done with that, we had several inches of insulation fill blown in to add another barrier from the roof to our ceilings.

The same principle applies to our extension. We used aluminum faced plywood etc. It creates a radiant barrier and sends the heat back out before it can even enter the house!

 

3) Light Bulbs.

Obviously this is the easiest way to lower your energy bills. We have energy efficient light bulbs in absolutely everything in the house. For the most part we choose the ones that have the extra glass bulb around it, as it reduces the risk of accidental breakage (and with that mercury spillage) greatly. It seems important in a house with two toddlers!

 

4) Energy Efficient Appliances.

This pretty much goes without saying. We had to replace all of our appliances anyway (except washer and dryer, which weren’t all that old.) Obviously it makes sense to get the energy star rated ones! I found that even a few years seem to make a huge difference in how much more energy saving appliances can be!

 

5) Air Conditioning Unit.

That unit is my baby. As I have said before, I don’t do heat well. And it’s hot here. Very hot, and a lot of the time. So the air conditioning unit is very necessary not only for survival, but for well being around here.  It also happens to be the MAJOR component on our electricity bill.

So having the air conditioning unit in tip top condition is very important. However, it goes further than that. The unit we got with the house was relatively new – 3-4 years old.

However, even though we had no problems with it, we had it checked out only to find that there were some components that were badly installed that could have meant a failing unit years before it’s time, but also really drained us on energy costs.

Air conditioning costs in PHX during the summer are horrendous and a lot of the energy efficient task work to the end of reducing that cost! So we have our unit on a maintenance program with a company here. The find things before there is a problem and they fix them for a much lower price.

 

Another thing that influences the energy efficiency of an air conditioning unit is  it’s suitability for the size of your home and how efficient air flow is. We found that our house had some very strange duct work going on, that led to some rooms being incredibly hot, while others were way cold. We also found that the living room, which was furthest away from the unit hardly got any air flow.

My husband solved the problem by opening up the vents in the various rooms and wedging a piece of radiant barrier material in. It directs the air flow significantly and we now have a pretty balanced output.

It is also important to check your thermometer. Make sure it is updated and programmable. I had no idea just how much difference the updating of the thermometer alone can make in the workings of a unit as well as the monthly bill!  We experienced a significant difference in both in our old house when we changed ours!

 

Obviously cleaning out the ducts and changing the filters regularly are a good way to help the air quality in your home and help the unit to work less hard, which in turn promotes the good running of it!

 

6) Water Heater.

Our water heater was old and in terrible shape when we bought the house. Earlier this year we managed to get into the government’s “Cash for Appliances “ program which saved us a bundle. We’re talking several 100s of dollars on the unit itself and we’re going to get 30% back come tax time too! Not to mention what that water heater is going to save us on a monthly basis!

 

7) Low Flush Toilets.

We had to replace both toilets in our house anyway and opted for the low flush kind. They weren’t any more expensive, we can’t tell any difference in terms of flush volume. The waste goes away fully every time even with so much less water. Even prior to the new toilets, we had a brick in our water cistern, so it really didn’t mean much of a change for us.

 

8) Going Solar.

Before the year is out, we will have a bunch of solar panels installed on our roof.

When we built the extension, we also had this in mind and made sure that the roof was at an optimal angel for this. Making the roof optimal for solar panels was also a huge part of our decision to do construction to the house!

But the whole process of “going solar” will be a separate post, as I want to be much more detailed about everything that goes into that, comes out of it and what the cost and the savings is in the end!

 

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So, after doing all that, how much are we saving? Currently an average of about $60-80 a month (depending on on just how hot the  year turns out to be.)

That’s without the impact of the solar panels. We stand to save an average of another $120/ month once those are hooked up! And that is with a larger house, since our addition.

We also get back 30% on the water heater, the energy efficient windows etc on our taxes.

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