Going Solar - Am I thinking of this correctly?

[Philociraptor]

Here in the backward theocracy great state of Texas, the fragility of our electrical grid is legendary. That being said, we live in a fairly new house and haven't had any outages so far, even with peak demand breaking records multiple times already this summer. We were considering whether to get solar with a battery backup due to this, so I used a solar installer quote aggregator website. None of them would spec a battery backup without a phone call, but the average cost for installation of panels that would meet 100% or more of our current electricity demand without battery back-up is about $18,000, minus the $5k or so we'd get back at tax time next year. I ran the math though, and this looks like a pretty terrible deal overall.

Here are my inputs:
$100 average bill now
3% inflation
8% market return

In year 0, we either keep the money invested or spend $18,000. In year 1, we either make 8% on the $18k ($1,440), or we save $5k through taxes and 12x$100x(1.03)^1 on our electricity, resulting in a net loss overall of $11,488. In year 2, we either make 8% on the $18k + $1,440 (2,224.8 gain total), or we save 12x$100x(1.03)^2 (9,900.4 loss total). Taking this out 30 years yields the attached, with keeping the money invested running far, far away from the savings. Being extremely generous and changing inflation to 5%, market returns to 6%, and our average bill to $120, assuming the up-front cost wouldn't change, would have the panels finally beating the opportunity cost in year 26, beyond the warranty period on the panels.

Furthermore, new renewable energy comes online every year, so I figure supply/demand forces will eventually turn inflation around on energy needs, but I'm not factoring this into my math. Am I thinking of this correctly? Is there anything obvious that I'm missing here?

[wenchsenior]

I've been mulling the same question now that our brilliant city leaders have voted to leave our formerly awesomely stable local grid and join the famously unstable ERCOT grid.

[SweatingInAR]

The general consensus last week (literally 3 days ago), was to consider a solar investment equivalent to a bond portion of your portfolio that is indexed to inflation. It is like a dividend-producing stock whose dividend scales with the price of electricity in your area.

https://forum.mrmoneymustache.com/ask-a-mustachian/solar-panel-payback-calculator-with-opportunity-cost/

If you are only worried about power outages: Get a boring and cheap gas or propane generator. A $500 2kw generator will run a window AC unit (or mini split) and your refrigerator. If power outages become a concern of mine, I would relocate the outlet for my fridge to inside a neighboring cabinet so it could be unplugged without being pulled away from the wall.

Home battery systems can be economical in some cases, but they often are not. Using them to curb "demand charges" or time-of-use billing can pay off if you cannot control your energy usage.

[dandarc]

Might want to look at financing possibilities - often costs 25-30% more on sticker price (with 25-30% higher tax credit), but I ran math and found a 1.99% solar loan actually cost approximately 5% / year, fixed for 25 years. We got this done in January this year before interest rates started going up as fast as they have been - might be a different situation today.

Paying cash being the only alternative explored leads to maxing the apparent opportunity cost. But you can finance solar panels on long-term fixed rate loans, so it isn't a truly binary choice where you either go solar and have the full opportunity cost or don't go solar. There is middle ground.

[deborah]

Solar is more viable if you use it to meet your minimum demand rather than your maximum. You can even out your usage by turning on your air con (if your house is already the right temperature turning it off for a while doesn’t make much difference) and heating hot water whenever you aren’t using the max, putting on your clothes washing and vacuuming in non peak times…

Also, an electric vehicle can be used as a battery.

[ChpBstrd]

I can't tell for sure, but here are some possible things you might be missing:

1) Cost of electricity: Does it reflect your actual cost per kWh? Is it scaled to increase by the forecast rate of inflation through the future?
2) Replacement of micro-inverters, the occasional squirrel-chewed wire, etc.
3) Can you get rid of your natural gas bill by switching to all electric? Are you also powering a car?
4) Panel degradation: Assume maybe 1% per year.
5) Production: It generally requires a professional quote to factor in cloud cover, latitude, shade, and all sorts of other factors. If you just applied an arbitrary percentage of maximum capacity here, then a minor tweak in assumptions could change everything.
6) Net Metering: Texas is an inconsistent mess. This blog may help: https://www.solarreviews.com/blog/texas-net-metering-complete-guide
7) Most utilities will not allow you to sell back more than you consume in a given time period. Thus if you scale for 100% of your energy needs, you may end up producing more than you are allowed to sell back. You might get a better ROI from a system that covers 80% of your usage than you could get from a system that covers 100% of your usage if it eliminates those circumstances.
8) Insurance: Your homeowner's policy may go up by a small amount to cover damages to your system.
9) Compounding: Due to inflation in the price of electricity, your system will probably generate a yield that increases over time. If you compared this to a nominal yield, such as a preferred stock or bond paying a flat 6% which never changes, you are comparing a flat nominal return to a return that is scaled to rises in the price of electricity.
10) Sequence of Returns Risk: Your alternative investment might be a bond or stock portfolio paying 8%, but those sources of income are tied to market outcomes. As a retiree, your success or failure will depend on whether a "SORR event" occurs early in your retirement and the extent to which your portfolio outcomes are tied to market outcomes. You can't do anything about the first condition, but you can do something about your portfolio. Your solar panels as a source of income are an engineering outcome completely detached from the stock/bond markets, and will generate earnings for you regardless of how much your portfolio is losing in a downturn. This means less selling of assets during downturns, which means higher portfolio survivability.

My spreadsheet approach is a little different. You adjust the discount rate until the NPV of an option is near zero, and that's roughly the rate of return. It worked out to 6-7% for me, so I went for it.

[NorCal]

Your analysis looks pretty solid.  The only other considerations:

1. Your assumed portfolio returns are on a pre-tax basis.  You should adjust to factor in taxes to make it comparable.  There are never any taxes on expense savings.
2. Solar is better compared to a "risk free" return.  While the stock market does return 7-10% over the long term, there is significant variation over different rolling periods.  I view solar (or other expense savings projects) as almost as a component of your asset allocation as opposed to a direct comparison.  Think about how this fits into your overall risk appetite, and if allows you to take different risks elsewhere in your portfolio.

Edited for clarity.

[AlanStache]

people I know for whom the math worked out were spending 200-300$/mon on power, I like you am in the <100$/mon boat and when I have done the numbers they are similarly not-great.  but thinking of it as a bond is not a bad idea.

[FIRE 20/20]

I'm the OP from the post that @SweatingInFL referenced.  I am finding the same thing that you are.  It looks to me that if you don't spend a lot on electricity it's really hard to make the math work to support buying solar panels.  I've spent a lot of time looking into solar in the days since I posted, and it seems that the solar companies use a flat out wrong payback calculation to try to sell people on their products.  I'm sure many people do save money going with solar, and I trust that most Mustachians have done more thorough research than just taking the solar provider's word for it.  But I do think that for many of us who try to minimize our electricity usage solar panels just aren't a financially rational way to spend our money.  There can be plenty of other benefits - reducing our contributions to dirtier forms of energy, reducing monthly expenses, essentially locking in lower long-term energy costs for the life of the panels, etc.  But everything I've found is that the financial benefit and payback times the solar companies claim are vastly overstated.   
For those of us in the same position that you're in with a questionable at best cost/benefit ratio, it seems that solar panels are very much like paying off your mortgage early.  It make be sub-optimal financially for us to go solar (or pay off our mortgage), but there are other psychological benefits that do carry some weight. 

[Syonyk]

It looks to me that if you don't spend a lot on electricity it's really hard to make the math work to support buying solar panels.

It's easier if you do the work yourself at $1.25/W pre-incentive.

I've spent a lot of time looking into solar in the days since I posted, and it seems that the solar companies use a flat out wrong payback calculation to try to sell people on their products.

They lie about the same as your typical bottom of the barrel used car salesman.  Reverse engineering their math is fun.

There can be plenty of other benefits - reducing our contributions to dirtier forms of energy, reducing monthly expenses, essentially locking in lower long-term energy costs for the life of the panels, etc.

That's how I view them.  They're certainty regardless of what markets and prices do.

For those of us in the same position that you're in with a questionable at best cost/benefit ratio, it seems that solar panels are very much like paying off your mortgage early.  It make be sub-optimal financially for us to go solar (or pay off our mortgage), but there are other psychological benefits that do carry some weight.

If you're going to pay someone else to do it, that's about right.

Do the work yourself and the numbers look a lot better.

[secondcor521]

The solar tax credit is non-refundable but carry-forwardable.  So if you don't have at least a $5K tax liability in your Year 1, some of it would need to be carried forward to Year 2 and maybe future years.  The tax credit is also scheduled to expire in the next year or two (although Congress has extended it a few times I think).

To put a rough number on what @Syonyk is saying, when I checked into it a few years ago the solar companies - the ones who have cool names like "BlueSolar", and post ads on Facebook, and do a "roof analysis", and come to your house with a nice brochure and presentation - charge you about 50% of the project price for their marketing and project coordination.  So if you're getting a quote from them for $18K, the actual nuts, bolts, permits, and qualified electrician installation is probably about $9K.

Solar panels also seem to get more energy efficient over time.  So every $1 of installation might buy you 10% more kilowatt-hours of energy next year.

On the financial side, I've always thought it comes down to (A) the price of electricity where you are, (B) the amount of solar energy available, and (C) the generosity of solar credits in your state.  For me, I have cheap electricity (a lot of it renewable, BTW), decent solar energy, and medium solar credits.  Every time I've run the numbers, they haven't been compelling enough for me to pull the trigger.

[AlanStache]

Was it NPR that recently had a story on some of this where traditional roofers were starting to get into the solar business.  As in someone who needs a new roof anyway can up-grade to solar.  The installer has little marketing and they are already going to the house to inspect and work any way, were some good opportunities for cost efficiency - just needed to get the crews trained up in the new tech.

[Syonyk]

The tax credit is also scheduled to expire in the next year or two (although Congress has extended it a few times I think).

It is unclear if one can continue carrying forward after it expires, though with how much the IRS seems to not care about the energy credits, I'd try it and wait for them to complain.  "Put number here.  Is big?  Ok!" isn't exactly rigorous.

So if you're getting a quote from them for $18K, the actual nuts, bolts, permits, and qualified electrician installation is probably about $9K.

I've not see much legitimate for "paying someone else to do it" below about $2.50/W.  You can easily find stuff in the $3-$4/W range, with some going higher.  I'd say, if you don't want to do it yourself and someone is under $3/W, sign.

Solar panels also seem to get more energy efficient over time.  So every $1 of installation might buy you 10% more kilowatt-hours of energy next year.

Panel efficiency has almost nothing to do with total installed cost.  The only time efficiency matters is if you're space constrained - a power trailer that can only fit two panels, or a small roof that needs to generate a lot of power.  $/W tends to be optimized in the middle of the range, because the panels are so much cheaper per watt that the mildly increased mounting costs don't overwhelm the reduced panel cost.  This is moreso if you're doing a ground mount without per-panel electronics, somewhat less so if you have a rooftop system with per-panel electronics.  But optimize for $/W, not panel efficiency.

Every time I've run the numbers, they haven't been compelling enough for me to pull the trigger.

So do it yourself and I bet they will! :D

Seriously.  If you're a homeowner, let's chat.  I want to help with the homeowner installed stuff out here, and your AHJ sucks a lot less than mine.

[yachi]

You have some hidden assumptions in the calculations that I'm not sure if you're doing on purpose or not:
1)  You're not hitting the opportunity cost with any monetary inflation - your 8% return is after inflation.  No doubt you can get that some years.  But the last 12 months would have required your return to be 17.1%, with no risk of a decline during recessions.*

2)  What you call inflation is really electricity-only cost inflation, and it does look like there is a slight downward trend after adjusting for monetary inflation: https://www.usinflationcalculator.com/inflation/electricity-prices-adjusted-for-inflation/

3) At each step of the way, you value the solar panels at $0.  That may be fair enough, and expected at year 30, but if you're at all interested in their value at 10 or 14 years, I think you should look at that.

*The variation of inflation + market returns is the reason for the Trinity Study, and the predominance of a 4% withdrawal rate.  To be fair, that's somewhat of a minimum rather than an average, but you should somewhere acknowledge that the steady return of electricity from a solar panel installation is not at all similar to the lumpy, recession-prone returns of the stock market.

The reason I highlight market returns, inflation and the 4% withdrawal rate is because you'd have to set aside $30,000 to cover your $100/month electricity bill during FIRE.  If you can cover it with $18K ($13K after tax savings) I think you've gained something.  The real question then, is how long before the solar panels no longer produce enough electricity to cover your needs.

[Syonyk]

The real question then, is how long before the solar panels no longer produce enough electricity to cover your needs.

Does it really matter?  Even as they degrade over time (most warranties are around 80% of production at 25 years, handwaves go here), they'll still cover most of your power costs, and the most expensive bits, too.

The real risk is net metering changing out from under you - and without knowing way more about your power company, I can't offer useful advice there.  I'm grandfathered in for 25 years, but most people won't have that, and if it changes to a different model (hourly net, monthly net, etc) that will change some of the calculations, possibly significantly.

But even then, if you get your initial costs low enough, it doesn't really matter.

[secondcor521]

The tax credit is also scheduled to expire in the next year or two (although Congress has extended it a few times I think).

It is unclear if one can continue carrying forward after it expires, though with how much the IRS seems to not care about the energy credits, I'd try it and wait for them to complain.  "Put number here.  Is big?  Ok!" isn't exactly rigorous.

So if you're getting a quote from them for $18K, the actual nuts, bolts, permits, and qualified electrician installation is probably about $9K.

I've not see much legitimate for "paying someone else to do it" below about $2.50/W.  You can easily find stuff in the $3-$4/W range, with some going higher.  I'd say, if you don't want to do it yourself and someone is under $3/W, sign.

Solar panels also seem to get more energy efficient over time.  So every $1 of installation might buy you 10% more kilowatt-hours of energy next year.

Panel efficiency has almost nothing to do with total installed cost.  The only time efficiency matters is if you're space constrained - a power trailer that can only fit two panels, or a small roof that needs to generate a lot of power.  $/W tends to be optimized in the middle of the range, because the panels are so much cheaper per watt that the mildly increased mounting costs don't overwhelm the reduced panel cost.  This is moreso if you're doing a ground mount without per-panel electronics, somewhat less so if you have a rooftop system with per-panel electronics.  But optimize for $/W, not panel efficiency.

Every time I've run the numbers, they haven't been compelling enough for me to pull the trigger.

So do it yourself and I bet they will! :D

Seriously.  If you're a homeowner, let's chat.  I want to help with the homeowner installed stuff out here, and your AHJ sucks a lot less than mine.

If the tax credit expires, I'm quite confident that the IRS will remove the line where the tax credit goes, so one wouldn't be able to even try to claim it.  But that's just my educated guess as an AARP Tax Aide volunteer tax preparer.

On the pricing, what I meant was dollars per watt on the panels, so I should have said price efficient or cheaper, not more energy efficient (although I guess that's happening too).  Specifically, when I last did the analysis (surprise, it looks like it was in 2007, so not as recent as I thought), a 130 watt panel was $599.  A quick google check today suggested the same wattage panel can be purchased for $330 or so.  Point being if you want a system of a particular capacity, the price decrease from $599 to $330 means you can get the same size system for about half the cost of 2007 (just looking at panels and ignoring mounting, inverters, electrical tie in, etc., but I think the cost of the panels is still the majority of the system cost).

I think for me there are two variables now - there's the fact that my roof needs replacing first.  Then I also want to get a real idea of how much the residual value is in terms of resale to have a solar install on my house.  I think it should add value to the house on resale, but I don't really know.

But in general, I'm not really keen on doing a solar panel installation DIY.  Pretty much beyond my ability levels.  I still have an exterior outlet that isn't working and needs to be screwed back in that I'm not really very high confidence in my ability to fix it.

[NorCal]

I think for me there are two variables now - there's the fact that my roof needs replacing first.  Then I also want to get a real idea of how much the residual value is in terms of resale to have a solar install on my house.  I think it should add value to the house on resale, but I don't really know.

My observations are anecdotal, and are based on me living in a neighborhood where all houses were built with tiny ~2kw solar systems. 

I've observed that people don't really add value to the property based on it having a solar system.  And if they do, it isn't impacted by the size of the system.  Most people just don't know how to assess this, and it isn't a major component of why they'd select one house over the other.

On the flip side, they don't subtract value from the property if the solar system is financed.  So if you finance the solar system separately from the house and pass that lien to the next buyer, they end up paying for it.  I'm generally an anti-debt kinda person, but this could be a winning strategy if moving might be in your future.

[secondcor521]

I think for me there are two variables now - there's the fact that my roof needs replacing first.  Then I also want to get a real idea of how much the residual value is in terms of resale to have a solar install on my house.  I think it should add value to the house on resale, but I don't really know.

My observations are anecdotal, and are based on me living in a neighborhood where all houses were built with tiny ~2kw solar systems. 

I've observed that people don't really add value to the property based on it having a solar system.  And if they do, it isn't impacted by the size of the system.  Most people just don't know how to assess this, and it isn't a major component of why they'd select one house over the other.

On the flip side, they don't subtract value from the property if the solar system is financed.  So if you finance the solar system separately from the house and pass that lien to the next buyer, they end up paying for it.  I'm generally an anti-debt kinda person, but this could be a winning strategy if moving might be in your future.

I've heard similarly.  I suspect that *most* buyers don't care, but a few might care quite a bit.  Can't really hang your hat on finding one of those buyers.

I wouldn't do a lease; I just don't like them.

Not moving any time soon yet.  Waiting to see when my "popcorn" offspring actually fully launch.  Maybe in the next 2-5 years?  Time will tell.

[Syonyk]

If the tax credit expires, I'm quite confident that the IRS will remove the line where the tax credit goes, so one wouldn't be able to even try to claim it.  But that's just my educated guess as an AARP Tax Aide volunteer tax preparer.

I wouldn't expect them to entirely remove it, given rollover, and the fact that some of the sunset schedules are a 10% ongoing thing.  We'll see.  But if you're stretching it out 10 years, yeah, probably not ideal.

...a 130 watt panel was $599.  A quick google check today suggested the same wattage panel can be purchased for $330 or so.

Um.  No idea what you're shopping, Amazon or something?  Those are obscene prices.

I paid $0.50/W for my panels back in 2019, and just got an order of 100x 72 cell panels in earlier this year at $0.43/W for some other installs locally.

Point being if you want a system of a particular capacity, the price decrease from $599 to $330 means you can get the same size system for about half the cost of 2007 (just looking at panels and ignoring mounting, inverters, electrical tie in, etc., but I think the cost of the panels is still the majority of the system cost).

"If you ignore the entire rest of the system, panels are the only cost!" is... true, but useless.

Pre-tax, materials should run in the $1.25-$1.50/W range, so panels are at most a third of the total system cost.  That's mounts (for ground mount), per-panel electronics (for roof mount), rails, etc.  It turns out that if you can do ground mount and string inverters, the cost is enough cheaper that your ground mounts should be largely the same cost as the per panel shutdown stuff for roof mount - if you build them yourself, cheaply, etc.

But in general, I'm not really keen on doing a solar panel installation DIY.  Pretty much beyond my ability levels.  I still have an exterior outlet that isn't working and needs to be screwed back in that I'm not really very high confidence in my ability to fix it.

*shrug*  Ok.  It's basic electrical and mechanical work.

[chops]

I had pretty similar #s to the OP, ~$100/mo electric bill and was getting ~18k quotes for a 6kw system.  Maths didn't work for me.

So I checked out MMM's DIY solar blog post:

https://www.mrmoneymustache.com/2018/02/07/diy-solar-power/

That is where I started, and then watched a bunch of other DIY solar videos, and read a bunch of other instructable style articles online.  DIYing was way easier than I expected, and I started with very minimal knowledge of electricity. 

In the end I had fun learning how to do it and I saved ~$14k.  Passed the inspection easily.  Now I only have a connection charge per month (~10/mo).  So those maths work out pretty well.

 - Chops

[Loren Ver]

So I think about going solar (or wind on occasion, just for kicks) every so often.  I live where there is no payment for giving the grid your extra power, but they gladly accept donations.  HA!

I didn't consider the cost of lost investments, because I always get stuck on the cost of the actual solar part.  I never want to get actual quotes so bad on me (what can I say, I know I'm not going to buy so why waste every ones' time).  But I do look at the estimators for my area, a DIY install (to cover most usage) would be 12-15 years to break even given my low(ish) electric bills, then I could start actually saving the money.... 

Whimper. 

I wouldn't have enough federal income tax to be able to get credits so it would all be out of pocket.  Sure loans (without jobs, that would be a fun conversation), but still, that just extends everything and adds a different set of costs.

Your post now has the poor little hamster (that runs on the squeaky wheel in my brain) climbing past the wreckage of those break even points to look at the opportunity costs to my poor investments.

Sad hamster whimpers. 

That's doubling times, and for an aggressive investor like myself (that avoids bonds, even photovoltaic shaped ones), possibly more than one.  EEP!

I guess I'd better just boost the old hamster back on the wheel and be happy with the check box of "willing to pay more for solar and/or wind power" I checked on my electric bill and continue to line dry my clothes. 

[Just Joe]

I just skimmed the conversation but did not notice anyone mention that batteries don't last forever regardless of the chemistry. So there is that cost too.

This is a topic I'm interested in learning about as well so I'll just step back and lurk.

If you go house generator - consider how you might fuel it. NG? Gasoline? Propane? How much fuel do you need for the expected emergencies? What about the cost of the fuel for a week without power?

Did the TX ice storm a few years ago stop NG flow or simply make it unaffordable?

Consider owning a propane tank so you can pick and choose suppliers without a contract so your generator could run on that independently of the neighborhood gas supply.

https://resources.kohler.com/power/kohler/residential/pdf/g4248.pdf