I have always been interested in alternative forms of energy.
It’s not that I’m a “tree hugger” on a social crusade for the environment.
But if I could find a natural, cheaper (or even neutral) way to provide energy for our home, why wouldn’t I? It would be a win-win.
I’ve especially been interested in solar energy since we moved to Colorado, a place where there’s more sun than anywhere else we’ve lived.
But every time I’ve investigated the options, there’s always something like a 20 to 25 year payback.
Knowing that I probably wouldn’t be living in a place that long (and it likely wouldn’t increase the property value that much), it just never made sense to me.
So when I was chatting with my friend Michael from Your Money Geek and he mentioned the financial details of his experience buying a solar panel system, I just had to have him write a guest post on the subject.
I won’t spoil the punchline for you, but if you’ve ever wondered if solar panels were worth the cost and answered “no”, then you will want to read this for sure. 🙂
Without further ado, let me turn it over to Michael…
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Solar Panels: Green Investment and Passive Income
When I started my career as an advisor, I was fresh out of college, full of idealism, and on a mission to change the world. I hoped to create a niche out of socially responsible and green investing; little did I realize the hornet’s nest I was stepping in.
No one seemed to agree, on what Social Responsibility meant. Fund managers and investors often had widely different opinions on what Green investing should look like.
Is Nuclear green? Some fund managers felt so, while not unsurprisingly my clients did not. Eventually, reality collided with idealism, and reality won. I tabled socially responsible investing and instead encourage clients to invest in more traditional options and give generously to environmental charities.
I never lost my passion for green investment options and kept my finger on the pulse of the industry. Luckily a few years later, an increase in government incentives and a decrease in the costs of photovoltaic (PV) systems created a new and compelling reason to invest in solar.
Ironically the investment opportunity wasn’t in investing in the manufacturers of solar panels. Overseas manufacturers, such as China, were dumping massive amounts of solar PV onto the market. This caused panel prices to plummet (comparatively), so while solar panels were worth it for the consumer, the manufacturers struggled to make a profit.
Little did I realize this paradox of what could be good for me, may not be great for corporate shareholders and would have a profound impact on how I manage and make money long term. This is my personal experience in installing solar panels.
But before we dig into the specifics, let’s step back a bit and quickly review the various reasons solar energy makes sense.
Why You Should Consider Installing Solar Panels
Green Energy
There are numerous benefits to installing solar, which I will get to in a moment. However, when I have discussed solar with others, I found that if they do not have a passing interest in reducing their carbon footprint, then it is unlikely the economics will sway them.
Likely, you may point out a few investments that would have yielded better returns than my solar PV system. However, the reduction in energy consumption is worth more to me than a few extra percent returns or some opportunity costs.
It may be some of that left-over college idealism, but I’d rather leave a legacy of clean air, and the possibility that energy independence could lead to a day where our children won’t need to fight wars in the middle east.
Security
Our two solar PV systems produce more than what is necessary to run our hobby farm and our home. Psychologically, not needing to worry about an energy bill is remarkably gratifying and provides a fantastic sense of security.
Since we have effectively pre-bought all the energy we will ever likely need, I do not need to worry about energy inflation, shortages, traffic, embargoes, or even storms. Energy independence is strangely liberating; energy is no longer a variable I need to concern myself with on my path to financial independence.
I would be remiss if I didn’t mention that the system does depreciate over time. As such I have factored in maintenance and replacement. The solar panels are warranted for 25 years, and panels produced over 40 years ago are still functional today.
The panels that are produced today are manufactured with tighter tolerances and better materials. Before the panels need to be replaced, they will have paid for themselves four to five times, and possibly more depending on inflation.
The earliest projections of panel replacement would place me at approximately age 78. Hopefully, by then, I will be able to purchase an Iron Man Arc Reactor.
Economics
The economics of going solar are surprisingly strong. Today, solar electricity has reached grid parity and in most locations is cheaper than utility electricity. This means the power you produce at home is less expensive than what you can buy.
However, what makes solar panels worth it, are the robust federal, and state incentives. The Federal government offers a tax credit of 30% of the cost of a qualifying solar PV installation. The government is effectively contributing nearly 1/3 of the price of your going solar.
That’s a pretty good deal courtesy of Uncle Sam. However, it gets better.
If you are a business owner, solopreneur, side hustler or independent contractor and the solar PV system is part of your business you can also depreciate some of the costs of your installation. Depending on the amount of your taxable income, combining depreciation and tax credits, it’s possible to get between 50% and 70% back from the Federal Government.
Should you qualify for any additional State, USDA, or utility incentives then you may receive a further reduction in net installation costs.
Note: The various government and state programs can be tricky to navigate with multiple factors to consider. If you are considering a renewable energy project, consult with a qualified tax professional that has experience dealing with these incentives. Nothing in this post should be regarded as, tax, legal, or investment advice.
Are Solar Panels Worth It?
The short answer is “Yes!”
My wife and I installed a solar PV system back in 2010 for our hobby farm, and despite a few headaches and setbacks, it has been one of the best decisions we have made. Since we have a hobby farm, the installation was part of our farm and is separate from the system that powers our house.
The farm system is a 31KW system. To put the size in perspective, our home system is a 10KW. Our home system produces more than what is necessary to run our home despite our liberal use of central air, and the pool equipment running during the summer.
Our Costs
The system cost a little over $235K. The estimate from the solar company was $230,670.09 to be exact.
However, a few small items came in over budget — we had to hire an engineer to sign off on the plans a few times to satisfy the township, the electric company mandated a few upgrades, and a few other odds and ends.
When we installed the system, we did not have a spare $230K laying around, and unfortunately, everything had to be paid for upfront before we could receive reimbursement from the State or Federal Government. To pull it all off, we took out a loan for $170k and cashed in some investments.
Our Incentives
The state offered $47,860.00 towards the installation. We had to apply to the program and use one of the state’s approved installers. This award was to be paid no later than 60 days after completion of the system. The state took the full 60 days and a few extra.
The Federal Investment Tax Credit was worth $69,201.00. At the time you could apply to have the credit paid to you as a grant. It was a relatively simple process and great incentive. The only downside, if any, was you had to submit annual reports for five years regarding your energy production.
Since this was a commercial installation, we were able to depreciate a portion of the installation. The ability to depreciate some of the costs saved us approximately $68k in self-employment and income taxes over the next several years.
All said we received approximately $185,061 in incentives on a $235,000 installation. As such our net cost to install our commercial solar PV system was $49,939.00.
How Our Solar Panels Monetize
Several states have programs where they require utility companies to produce a certain amount of energy from renewable energy. Instead of purchasing or installing renewable energy, to comply with the state mandate the utilities may buy certificates or SREC (Solar Renewable Energy Credit) from owners of solar PV systems.
These certificates allow the utility to claim “they” produced the renewable energy to meet the state’s requirement.
Every 1000 kwh your solar PV system produces you earn one SREC. Our commercial 31kw PV was estimated to generate 36 SRECs annually. In practice, the system has been producing closer to 39 or 40. I signed a contract for five years to guarantee I would earn a guaranteed $280 per SREC.
At the time SREC’s were selling for much more. However, I wanted to ensure I recouped my money if prices fell. Sure enough, SREC prices plummeted. As of today prices are trending upwards again; however, they are still well below what the once where.
However, don’t let that discourage you, solar panels were about $5 a watt when I stalled my system and today prices are less than half of that.
Additionally, the system produces electricity. 1 kwh of electricity costs us 11 cents to purchase — our commercial system produces over, 39,000 kwh of electricity a year. A sizable portion we can use, the excess gets sold back to the utility company at wholesale rates of 5.5 cents.
All said for the first five years the system produced over $10k a year in SRECS and saves/generates approximately $3,900 in electricity yearly.
There was some interest on the loan and some other minor little assorted costs. We figure we hit break-even sometime between year four and five. Today, the system still produces between $3,600 and $3,900 in electricity and SREC’s are selling for approximately $25 apiece.
So, Was Solar Worth It?
It’s a weird asset to value.
We received all our money back and made a small profit within five years.
However, we will receive a “dividend” in perpetuity (if the panels last) of approximately $4K a year.
If electric rates continue to rise, and solar panel prices continue to plummet, then when I am 78, I will look like a genius. However, if I am wrong about where prices are heading, I won’t lose any sleep over it.
If you value some of the non-economic benefits, then it’s certainly worth looking into. The Federal Investment Tax Credit is scheduled to start phasing out in 2020, so if you are interested in installing solar panels you may not want to wait.
How to Save Money When Going Solar
If I have persuaded you to consider going solar either for your home or business, then there a few things you can do to save money on your installation.
First, have an energy audit conducted. The cost of solar panels are at historic lows; however, even with such low prices, it is more cost effective to reduce energy consumption than it is to produce energy.
When we first decided to go solar with our home, we were shocked by the results of our energy audit. Our house was only a few years old when we purchased it, and we assumed it was relatively airtight and energy efficient.
We decided to upgrade our insulation and windows, and as a result, were able to reduce the size or our AC and furnace by more than half. This also means that we were able to reduce the size of the Solar PV we needed significantly. Before installing solar, our monthly electric bill was $150 a month. By becoming more energy efficient we were able to reduce it to below $100.
The windows and insulation were a little shy of $10k, and most people probably wouldn’t spend that much to save $600 dollars a year. However, it reduced the cost of the PV system necessary to run the whole house by $25K.
Second, when speaking with installers, make sure they itemize out all the labor and equipment costs. When we were looking into systems, the installers could tell I was green, as in new. They had to explain the PV jargon and terminology to me like I was five multiple times.
I still can’t explain all the technology, but I understand money. The quotes I was receiving all seemed ridiculously high, plus I couldn’t comparison shop because they were not itemizing costs.
Eventually, I was able to find an installer who was willing itemize all the costs. Once I had a sense of what items cost, I was able to make better decisions.
I found that our installer was using an expensive vendor for panels. I found a company in NJ selling panels for much less and bought them myself. Not only did I save money, but I also put the panels on my American Express to receive the cash back.
Third, optimize your installation to fit your budget and your needs. Do you use most of your electricity during the summer? If so, then consider installing your panels at an angle that favors summer production.
Many times, installers will merely try to sell you on what is comfortable and convenient for them opposed to what is the best option for you. When we were searching for an installer, several wanted to toss the panels up on the garage roof. I was not in love with the idea of roof-mounted solar as the roof was not the ideal pitch for production.
This led us to find an installer willing do a ground mount system, not only did this allow for optimum placement of the panels, the ground mount was less money.
When we installed our commercial system, we built a new barn and had the trusses constructed to provide the perfect pitch for the panels. The little bit of pre-planning building the barn allowed us to save money on the installation. Finding an installer who was willing to work with us and educate us on what we need to know was imperative.
Solar Myths
When I first started looking into solar it was uncommon in our region of Northeast PA. The closest solar installer was located over two hours away. When I told family and friends what I was planning, the common retort I would hear is “we don’t have any sun here.”
Had I listened to them instead of spending a little bit of time researching it for myself I would have missed out on a great opportunity. What I have experienced with my own system, and from others locally who were early adopters is that solar panels manage to produce in gloomy, rainy and even snowy days.
There have been days when my panels are covered in several inches of snow, and they still managed to produce a serviceable amount of electricity.
The National Renewable Energy Laboratory (NREL) has a great free tool you can use that will estimate energy production at your location. Having spoken with other solar owners on the various forums the consensus is the NREL tool is accurate and if anything tends to undersell production.
What Not to do When Going Solar
Don’t let price be your only consideration. Solar panels are warrantied for 25 plus years and are expected to last much longer that. However, the warranty is only as strong as the company behind it. You want to purchase panels from quality manufacturers that will be around in the future.
For our home system we used a lessor-known brand for our panels. For our commercial system we went with SunPower. The SunPower panels consistently out produce the lessor-known brand.
I have some clients who installed solar, and those that have used inexpensive off-brand panels have run into various issues. Even with the generous incentives, going solar is a sizable investment, so don’t cheap out with unknown quality panels.
Also, do not DIY your solar tax planning or rely on the advice of individuals online or on the forums. I have seen incorrect information online about what expenses qualify for the credit or depreciation, how state and utility incentives impact your cost basis, and tax treatment of SREC’s.
Conclusion
Investing in solar can be a great way to save money and hedge against inflation. However, the various options and incentives can be difficult to navigate on your own, and it is best to reach out to knowledgeable installers and tax professionals who have worked with the various state and federal incentives.
Knowing what I know now, would I install solar again?
Absolutely, just this time my rallying cry would be “who needs bitcoin when you have chickens and your own power plant?”
Dave @ Accidental FIRE says
This question as you point out depends on your local jurisdiction and what policies they have. I’ve been waiting for a while now for my locality to come down to a decision about solar and how they’re going to deal with it (tax breaks, buy-back, etc). They’ve been kicking the issue around for years now and not moving forward, it’s frustrating. I really want to install as much as I can but don’t want to do it if it’s not going to be worth it.
Ryan Phillips says
There are good points to this article. Although all the figures are way off bow a days. A 31k system does not cost any where near 200k+ any more. The average installation here in Florida is $2.65 a watt installed. Commercial is getting close to $1.85 to 2.15. With those numbers this article with advice changes 10x more positive.
Michael says
Hey Ryan
I agree the costs are much lower today, and solar is a compelling as ever.
Solar panels themselves are now much cheaper. However, labor and balance of system costs such as; inverters, wiring, racking, etc. have not fallen.
Labor, alone typically accounts for 40 to 50% of the installation costs.
Additional, SREC’s and carbon credits have fallen, and many states have reduced incentives.
Lastly, tax rates are lower today, so there’s less ”value” for the depreciation.
The net result is the ROI and time to recoup your investment have remained relativity unchanged.
The numbers I provided we’re from my experience, and while they might not reflect current prices, I think it’s helpful for people to hear real-world stories of people who have been thrilled with their install.
Kevin Mitchell says
I installed a 9.9kw system. The out of pocket was 17k. I did the installation myself. The cost after tax credits, rebates etc was 8.5k. I also bought an electric car. The system produces enough power for the house and car. The ROI considering the risk makes this best investment we have. If you consider that it takes $1.35 of income to pay for a $1 of electricity….
Michael says
Kevin
I didn’t want to go off the rails in their post but your correct.
To payout a dollar you have to earn a net dollar to spend. It’s not just Fed income taxes, you have to pay FICA, unemployment ins, State tax, etc.
That dollar you spend may cost you 1.50 to 1.70 when all of your costs are factored in.
Then you have to try and save enough money to produce that dollar in perpetuity to pay your electric bill.
If that isn’t hard enough, when you finally hit FIRE, you most likely will have to pay taxes on all that income you produce to pay for your expenses.
Bernie Johnson says
Interesting article that provides real world experience to the subject. I have researched this subject a few times and it still does not make sense for us at this time. If incentives continue for business owners, it adds an interesting option for a side hustle or home based business. Self reliance and independence is definitely a key aspect of my psyche, so I certainly expect to go solar within my lifetime.
I think the technology will continue to evolve. Buildings will become more energy efficient and exterior surfaces of structures will be solar power collecting material and possibly standard and/or part of the required building code.
BJ
KR says
Just walked around the neighborhood the other day and saw someone got some new panels. My grand-aunt and uncle also just got a new system for their house. Unfortunately I am still starting our FI path and didn’t have plans to look at investments like solar anytime soon. However by 2020 maaaybe we could and it depends on the tax breaks.
Quick question, would it have been possibly better to use a HELOC instead of a loan to pay?
GT says
I installed solar in my last home. We had a pool and the electric bill made it a very easy decision. In my new home without a pool and very energy efficient the ROI just isn’t there.
My last home the system paid for itself in 7 years. That’s free electricity for the next 13 assuming a 20 year life.
One other thing is that roof repairs or even replacement in support of solar can also be added to the federal tax credit.
This crowd should really have no problem determining wether this makes sense. Look at your bill history and do the math.
It does lock in rate hike protection too.
Xrayvsn says
A few years ago I had contemplated going solar. I had just bought an electric car (Tesla) and thought this would be a great green project to undertake as well.
At that time the finances did not make sense to me. My local electricity has quite low rates (9 cents/kwh with no peak rates). It is true that panels have come down in price. The fact that the govt incentives about to start phasing out also might make it a good time to reconsider.
Dave Whitworth says
Great article! I love the real would example. I installed a 10 kWh system over the course of last year in Utah. It finally went online the end of January. I had figured it would cost me $15k before incentives, but because of city requirements it ended up being $20k. That included an electrician and a licensed solar installer signing off on my plan and using their license and skills to hook up the wiring, back up my install (make sue it was right), and have them help me with the install.
After state and federal incentives, my system will cost $12k and I expect a payback in 7-8 years, less if we depreciate any of it for my wife’s business.
It still doesn’t provide all the power we us, but after some more adjustments in the house, changing the range and dryer to gas, we should be using much less.
Thanks for the article.
Wolf says
I installed all solar in my home 25 years ago. I even had a 12 volt fridge freezer, low energy lights. I never was able to do all the things electricity required, depriving myself of some luxury. I found that solar was NOT the way to go. Everything wears out, especially storage batteries and I am back on the grid and happy. Comparing solar to grid power, in the end price wise for me they work out about the same with grid power affording me more freedom to use what I really want electrical wise. I would not go back to solar. My neighbor was on his own solar system and just a few years ago went on the grid for the same reason. He is no dummy, has an engineering degree.
Michael says
Modern grid tied solar PV systems have all the benefits of being connected to the grid. In fact most SREC programs mandate that the system be connected to the grid.
Comparing the options available today, to what was available 25 years ago, is like comparing an Apple 2 to an iPad.
Art says
What happens in 10 years when a new asphalt roof is needed? Does it add additional cost to roof replacement? If so how much? Do most roofers even have the expertise to complete the job.
tom carl says
He has a brand new steel roof. and I must say the solar panel layout looks GOOD!
Dave says
A friend of mine installed solar on his roof a few years ago to help offset his electric bill of close to $400/month. Unfortunately, he was close to a golf course and lost a few panels to those pesky golfers. When he moved, he paid about $7k to have all 30 or so of them moved to his new house.
My plan, in another 10-15 years, many years after my system has paid for itself, is to replace the roof. I’ll remove all the panels, mark with a long nail or dowel, the holes where the mounts go, then shingle over top, and replace all the panels. I’ll either do it or pay someone else.
It’s definitely a concern, but not enough of one to not do solar. Warranties of 25 yr for panels, 10 yr for inverters. Pay for itself after 7-8 years. 10 yrs from now I’ll buy new inverters as needed at $1k each. 30 yrs from now, I’ll replace the panels with bigger, badder, cheaper panels.
Steve says
We have asked several times and our home owners’ association continues to forbid any and all solar panels in our development. It’s really unfortunate that a HOA has the authority to forbid any and all installations. I would welcome a regulated, approval process for design and installation along with a requirement for permitting etc but a complete ban with no exceptions seems unreasonable.
We have already purchased land in northern Michigan and intend to install a system when we move. We specifically selected the property for the view of Lake Michigan as well as the opportunity to instal solar panels. We look forward to moving out of our current neighborhood.
CHERIE Disque says
Florida has a law that HOA can not stop you.
Kelvin says
Yes! they are definitely worth investing to. Especially with the current state of our climate and the earth keeps getting hotter every year.
Lynne says
Something my father didn’t consider when he installed solar on his roof was the horrendous cost to remove and replace them when his shingles need replacing. He was recently quoted about $5,000 for that task, on top of $10K for the roof itself, and his solar is not producing enough to fully offset his power bill in an 1800 square foot house that has a gas clothes dryer.
Personally I wouldn’t install solar unless it was ground mount or going onto a metal roof with a very long lifespan.
jj says
Here in Las Vegas, many homes have curved clay roof tiles rather than shingles. We get a lot of wind and they crack all the time, so I have to have my roof inspected yearly, and some tiles always need to be replaced. I’m not about to incur the expense of removing solar panels every year so the tiles can be inspected.
I think it’s great that Michael was able to put up a new building with a roof designed to optimize the solar panels, but I think most people wouldn’t have the space or budget for something like that.
Taylor Anderson says
It’s so cool that installing solar power can save a lot of money on power bills. I live in a sunny, hot area, so I’ve been thinking that solar power may be a good idea. That’s for sharing all this great information on solar power and some of the pros and cons.
Justin Brown says
This article is perfect and very informative. We found with regular cleanings we get the most out of our panels, and ultimately save the most. I also like how you included other things you can do like upgrading windows. Solid advice for solar investment. Thanks for publishing!
GH says
Fantastic article! I’ve always loved the idea of harvesting the sun’s energy to produce electricity. It”s a genius way of linking our way of life with mother nature. The fact that the government is contributing 1/3 of the cost to go solar shows we’re in the right direction as a whole. I believe the Federal Investment Tax Credit should extend longer than 2020 to allow newer generations to take advantage because I think over the last few years there has been more of a focus to educate the younger crowd on energy efficient practices. I’m glad you mentioned the solar panels still produce energy when covered by a few inches of snow, so that people know they are still relevant in areas that experience snowfall. Best part of reading this article was when you said “I’d rather leave a legacy of clean air, and the possibility that energy independence could lead to a day where our children won’t need to fight wars in the middle east.” THAT part really resonated with me. Thanks for sharing this and sharing ways to save money going solar! Very useful article!
Eileen Benson says
It was interesting when you said that solar energy is cheaper that using utility electricity, at least in most locations. My husband and I are both concerned about the environment and want to make some changes to start living “green” in the next few months. Reading your article made me feel more comfortable with the idea of having solar panels installed in our home!
Michael says
Eileen
Great feed back. We actually have our house system mounted on poles in the back yard.
The cost between ground mount and roof mount is approximately the same. Mounting on roofs is usually done due to space constraints, not for economic reasons.
My preference is for a ground mounted system as maintenance is easier and if set up correctly ground mounted systems can out produce roof mounted.
Some people do not like the looks of aground array, but I think they are kinda of cool. I have seen some great looking installs where the panels are incorporated into a pergola or shade structure.
Conrad O'Connor says
It’s good that you point out that having solar panels installed on your home can help you reduce your carbon footprint. I want to do my part to save the planet, so I’m considering switching to solar energy on my property. I’m going to look for a good company in my area that does solar panel installation.