Month: May 2019

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TDSF Power Plant Part 3: Are Solar Panels Right for Your House?

The state paid me to install solar panels!

In Part 1 we learned how solar panels work. In Part 2 I showed our electric bill and discussed how much money we expect to save each year ($1748). In Part 3 I am going to discuss how to decide if installing solar panels is right for both your wallet and your house.

To be clear, I love my system and it seems to be working great for us. That said, let me state emphatically that solar panels are not for everyone. There are both technical and financial reasons why you may not be a great candidate for solar, at least at this time. Let’s see why…

Some Technical Issues to Consider:

  • Do you have a south-facing roof with little or no shade?

    If the surface area of your roof faces mostly north, east, or west, or if your southern-facing roof is highly shaded, it’s probably not worth getting solar panels (there is an exception I will discuss later).  

    You can visit:  https://www.google.com/get/sunroof to get an idea of how much sun your roof gets. This tool allows you to enter your address and get an overhead view of your home and an estimate of how much solar energy you might generate. (Note the age of the picture if you can, as conditions may have changed since it was taken.)

  • How old is your roof? 

    The best time to add solar panels is soon after replacing your roof.  If you have to replace your roof after the panels are already installed, you’ll have to pay someone to take the panels down and then put them back up (after your roof is done being replaced).  If your roof is 20 years old, it’s probably better to wait 5 years or so, and then add solar panels when you replace the roof.

Financial Considerations

Financial Considerations break down into 3 categories:

  • What is your final cost after incentives?
  • How long will it take you to break even (payback period)?
  • Can you afford it?

Final Cost After Incentives

What you end up paying is the difference between the purchase price (what the installer receives) and monies returned to you, based on a number of possible incentives. As these incentives will vary by where you live and when you purchase, you will need to keep on top of what is a changing situation. This information is valid as of May 2019 – please do your own research as I am not qualified to give any tax advice and this information is subject to change.

Pre-purchase Incentives

Solar-electric property

-30% for systems placed in service by 12/31/2019

-26% for systems placed in service after 12/31/2019 and before 01/01/2021

-22% for systems placed in service after 12/31/2020 and before 01/01/2022

-There is no maximum credit for systems placed in service after 2008

-Systems must be placed in service on or after January 1, 2006, and on or before December 31, 2021

-The home served by the system does not have to be the taxpayer’s principal residence

  • State, Local, and Utility rebates – These vary by location – you will have to look them up. Your sales representative will probably have the latest accurate information (but do your own research as well – mine did a great job but missed a couple of small points which I will discuss as we come to them).

Your final purchase price is adjusted for these incentives. Note that you have to spend the full amount up front and you get the incentives later. (there is an exception to this I will cover, but to be clear, it is not an option I approve of).

My state currently offers a $1,000 payment after the system is operational. We went live on March 26, 2019. Our check arrived less than one month later:

Before receiving this check I was asked to supply my SSN. Apparently, there is some fine print. I am going to get a 1099 for this and may owe taxes on it – one of the items the sellers neglected to mention.

My county will also kick in a $2,500 credit on my property taxes. Some fine print here too perhaps – I recently received a letter from the county acknowledging the credit – which is to be applied to the house portion of my taxes, not the land portion. I believe I pay less than $2500 a year on the portion of my county property taxes that applies to my house – not sure if the rest will roll over to next year or will be lost – stay tuned!

Post-installation Incentives

Once your solar system is producing electricity you may qualify for some additional incentives, based on the amount of electricity you generate. My solar system qualifies for two post-installation incentives, net-metering and SRECS.

  • Net-Metering: If your state allows net-metering, they will install a special meter that runs forward and backwards. As your rooftop panels produce electricity over and above what you consume, the excess is sent to the grid and the meter runs backwards. Note that the exact details on how this works varies by state.

    In my state, the cumulative surplus, if any, is cashed out once per year. This is not true in all states, so please do your research.

  • Solar Renewable Energy Credits (SRECS) – one credit is issued for each MegaWatt Hour of electricity produced by your system – the value of these SRECS varies by state and over time.

In Part 2, I described both of these concepts in more detail.

Payback – how long until I break even?

A solar system is not a cheap investment. Before considering this expense, please take the time to estimate how long it will take to get your money back, AKA, your Payback period.

To calculate the payback period, you will need to know:

  • Your annual usage (in MWh) of and expense for electricity.
  • Your expected annual production in MWh.
  • Cost of your system (up front).
  • The total amount of your purchase incentives.
  • The total amount of your production incentives.

You will have to estimate some of these numbers, just do the best you can.

Calculate your net cost:

Net Cost = Purchase Price – Purchase Incentives

Calculate your annual savings:

For simplicity, assume that you produce more each month than you consume or that previous credits cover the difference so that you never pay an electric bill.

Annual Savings = Annual Electric Cost + Annual Net-Meter Payout + Annual SREC Payout

In my case, the Net Cost will be about $15,400 after purchase incentives, including federal tax credit (30%), state payment of $1,000, and county property tax credit of $2500.

The TDSF annual net savings is $1748 (based on assumptions described in Part 2).

Payback = Net Cost/Net Savings per year

$15400/$1748 = 8.81 years

So if our assumptions prove correct, our Payback Period will be less than 9 years. The system is expected to last about 25 years (it is warrantied for that). In effect, we will be getting free electricity for about 16 years, should we remain in our house that long.

Use this Payback Estimate, along with the other data you are collecting, to help you decide if this investment is good for you. This is, of course, a personal decision. For us, the idea of no longer having an electric bill for the next 25 years (or occasionally a very small bill), and the idea of generating some income from this investment was a compelling argument for our purchase.

As we approach retirement we have looked for ways to reduce our fixed expenses to free up funds for things or experiences that bring us more joy, and to make it easier to ride out any rough stock market periods that may be ahead. We look at this as a form of investment diversification, something I wrote about in an early posting on this site.

Can You Afford It? (What questions should I ask about my finances?)

You have done your research – you know what your Purchase Incentives are, you know what your Post-Purchase Incentives are, you have a Payback Estimate and an idea of how much cash you will have to lay out (some of these numbers will only come into play once you meet with some sales teams, a process I will describe in another post). The big question now is Can You Afford It? Here are some questions to ask yourself to help you figure out the answer:

  1. How long do you plan to live in your current house? While no one can say with certainty, it might be foolish to install solar panels if you know you’re moving (or planning to move) in the next few years. 

  2. What is your financial situation now, and what does it look like for the future? If you’re deep in debt or have a low income, solar panels are probably not financially the right move for you.

    The federal, state, and local incentives favor those with at least a strong middle to upper middle class income. Mathematically, if you don’t pay much in federal income taxes, the federal tax credit can’t save you much. While the tax credit can roll forward (the unused portion can apply to your taxes in future years), in any one year it can only bring your taxes down to zero (again, I’m not giving tax advice — as always, consult your adviser and do your own due diligence).

  3. Does it make sense to pay up-front for future savings that are likely, but not guaranteed? You are putting up money now (either cash you already have or money you are borrowing) to pre-purchase the ability to generate an expected but not exactly guaranteed amount of electricity for the next 25 years, more or less. To make this decision, you need to understand how much you spend on electricity now (I show you how much we spent over the past 15 months in part 2 ), and what you’re likely to spend in the future. Hopefully the information I’ve covered will help you to start collecting the numbers you will need.

  4. How do you know if you will benefit financially from pre-paying for electricity? If you’re not moving immediately, if you see a benefit in reducing your electric bill, if you’re already well-invested in other markets (e.g. retirement funds, after tax stock investments, real estate) you can think of this as another kind of diversification. It will also reduce the cost of your monthly expenses in the future.

  5. How will this impact the future value of your home? It’s possible that solar panels will make your home more attractive when you sell it sometime down the road. This paper discusses serious research on this topic:  https://emp.lbl.gov/sites/all/files/lbnl-6942e.pdf.

    Warning 1 – it is complex.

    Warning 2 – many other sites quote from this paper – this is the source. If a site is trying to sell you solar energy they may cherry-pick the numbers they reference from this paper. For example, I see a number of sites using $4 per watt for additional home value.

    But it’s not that black and white in the original paper. If you read the full paper you’ll see that California homes come in a little above $4 per watt added value, but homes outside California are closer to $3 per watt additional home value. There are other variables that affect the value of your solar panels as well, like how old the system is when you go to sell your house.

  6. Should I worry about my solar panels being an eyesore? There is an emotional component to the aesthetics of solar systems. Some people just don’t like the way they look. Some are ok if the panels are on the side or rear of the house, but do not want them facing the front of the house. These opinions could limit the pool of potential buyers.  On the other hand, some potential buyers may appreciate having solar panels already installed, and that could make your house more attractive.

How do I pay for solar panels?

Solar panel salesmen will present you with multiple payment options. Like all salesmen, their goal is to make a sale, and if you can’t pay in cash they will be happy to present you with several payment options. I strongly suggest that you pay in cash (OK, I did put part of the cost on a credit card to get some points, but I paid that off immediately).

Here are some of the payment options they’ll offer you, and why I think they’re a bad idea:

  1. They’ll offer to arrange the financing. You’ll pay for the panels over time, with interest. Their rates may be less than a credit card (if you have a good credit score) but they’re still not low – I am no expert, but I see rates from 5% (best credit score and shortest term of course) to 17% and higher advertised on the internet.

  2. Arrange your own financing. You could probably get a lower rate by taking out a home equity line of credit with about 4% interest. Even though 4% interest sounds better than 17%, remember that if you finance $25,000 at 4%, you will pay almost $1000 in interest the first year.

    Now think back to your annual electric bill – how much will you actually save? Our bill was $1433 per year, so this interest would have reduced our savings to perhaps $450 the first year.

    Even if you pay this off in 5 years, you will not start seeing real savings on your bill until year 3 or later. And that is a best-case scenario. If you finance at 8% you may pay more in interest the first couple of years than you paid in electricity on your electric bill. (8% of $25,000 is $2,000 – compared to an annual spend of $1433 on electricity).

    Since these systems have a useful life of about 25 years, and the first few years are the most productive,* why would you borrow to do this installation? 

    Note: If you’re building a new house and the panels are an expense that ends up rolled into your mortgage, you may not notice a significant difference in your monthly payments.

    * Solar panel output tends to decrease about 2% the first year and roughly ½% every year thereafter (your mileage may vary). So after 25 years, you can reasonably expect your panels to produce about 85% of the electricity they produced when they were initially installed. So they may still be useful, but after 25 years the newer technology is likely to be both better and cheaper.

  3. The company will arrange for someone else to buy the panels. Basically, you end up in a lease or power purchase agreement where you’re committing to buy your electricity from whoever purchases the panels, at a specific rate (that may increase by a known amount over time). 

    While this is a zero-down option, the real purchaser gets all the tax breaks (and the SRECS), and you still have an electric bill. You’re also setting yourself up for a headache when you go to sell your home, because these leases don’t always transfer easily.

In case I am not being clear enough already, I am very much against these alternative options. If you don’t have the cash on hand and the income to support the tax credits, solar panels are probably not a wise financial choice for you, at least not right now.

In the words of Suzie Orman, ‘YOU CANNOT AFFORD IT – DENIED.’ If you prefer the words of Dave Ramsey, ‘I never agreed to borrowing to pay for (solar panels) and I’m not going to start now.’ Okay – he inserts car purchase or college here, but you get the idea: pay with cash or don’t do the deal!

Stay tuned for Part 4, where we will discuss how to choose a company to buy your solar panels from.

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TDSF Power Plant Part 2: Show me the money!

Actual electric bill spending

In Part 1 I explained the mechanics of how solar panels work, and how they connect to both your house and the power grid. In Part 2 I’ll explain how solar panels can save you money on your monthly electricity bill, and even generate some income (depending on your local rules).

Let’s start by defining some terms you’ll need to understand, and then we’ll  use those terms to talk about how solar panels can save you money.

What’s a kilowatt hour?

Watt – a basic unit of electricity that plugged in items consume. The typical incandescent light bulb that we all grew up with used 40 – 100 watts per hour.

Kilowatt – 1000 watts

Kilowatt Hour (KWh) – What your electric meter measures. If a 100 watt bulb burned for 10 hours that was 1 kilowatt hour (10 * 100 = 1000).

A few other examples of 1 kilowatt hour:

  • If you have 10 lights, each with a 100 watt bulb, on for one hour
  • If you have 25 lights, each with a 40 watt bulb, on for one hour
  • Using a 1000 watt hair dryer for one hour
  • Using a 1000 watt microwave for one hour

Megawatt Hour (MWh) – 1000 Kilowatt hours

So, how many KWh does a typical household use?  Well, I can’t speak for every household, but here’s our recent usage:

TDSF household electicity usage based on due dates

Note 1: The cost of the meter is rolled into the electric bill calculation. The real spend for determining our payback is about $100 less per year, as I will get an $8.26 charge per month for the meter, even if net consumption is 0.  So, as of now, I think about our annual spend as about $1433. 

Note 2: We used a lot more electricity in January and February of 2018 than in 2019 because of extra work in taking care of a senior pet. I believe the rolling 12 month number (10,560 KWh/year) is more indicative of our annual usage, which is still decreasing from month to month compared to last year.

Pause here to deep dive into an electric bill. If you are able to, please get one of your bills to see how this deep dive applies to you. Here is the electric usage details portion of our last bill before we went solar:

Last bill before going solar!

First, note the meter readings – there are two of them – the last conventional reading, at 625 KWh used and the first reading from the new meter at 12 KWh, for a total usage of 637 KWh for this billing cycle. 

On Monday, March 25th about 7:30 AM a guy from our electric utility knocked on our door to let us know he was replacing our meter with the newer two-way net-meter. I asked if I could throw the switch to turn on the panels, but he explained that they still had to do the paperwork back at the office to get me on the new billing system. The new net-meter started at 00000.  So by the time they closed out the last bill and started me on the new billing period, we had used 12 KWh. 

As you can see, our electric bill is divided into 3 parts:

  • Supply – About .09 per KWh these days (price can vary)
  • Delivery – About .04 per KWh (plus the meter charge of $7.90).
  • Taxes (AKA, the government’s share) – a little over .01 per KWh

Unlike pizza, there is no option to pick up the electricity, we have to pay the delivery fee.  This supports the infrastructure that connects us to the power grid.

The government gets a piece of almost every transaction – check out your phone bill, internet bill and/or cable bill and you will see taxes and fees there as well.

Except for the 2 meter readings, your bill should look something like mine.

How much will we save on our monthly electric bill?

First the simple answer: if our system produces enough electricity each month to equal or exceed the production we’ve seen so far, and we hold at current consumption levels, we’ll save $1433 per year. 

But life is not that simple.

Each month that we produce more KWh than we consume, the extra is retained by the utility company as a credit, just like the old cell phone plans with rollover minutes (except these are rollover kilowatt-hours). If we accumulate a surplus one month, and then have a deficit (meaning, we use more electricity than the panels produce) the next month, the utility company applies our “rollover KWh”  to our bill.  We only pay for electricity if we’ve used more KWh than we produced, AND we’ve used up all of our credits from previous months. 

Because the billing calculations are done monthly, we can still end up owing money to the utility company some months, if we use more electricity than we’ve produced that month (and didn’t have any “rollover credits”). If that happens, it would subtract from our annual savings, even if annually, the total amount of electricity our panels produced is more than the annual amount of electricity our household used.

Wait. What happens at the end of the year if you still have extra “rollover credits”? Do they roll into the next billing year? Unfortunately, no. At the end of every billing year (every April), the utility company cashes out our extra credits. I don’t know how much they’ll pay for them (yet), but my understanding is that they’ll pay a wholesale rate. When this payout happens, we start our next billing year at 0 credits.

Because our electricity company buys electricity wholesale and sells to us at retail, I am expecting that they will pay us perhaps .05 per KWh or $50 per MWh. They only compensate us for the energy supply portion of the bill, not the delivery or taxes and fees portions.

One last factor:  SRECs – these are Solar Renewal Energy Certificates – we earn these for each MWh our system produces. The price will vary over time. For the purpose of this exercise we will use $20 per MWh.

If our solar panels produce 12 MWh per year, we would earn $240 cash for these SRECs. 

Putting this together, our projected annual savings is the sum of:

Electricity generated (and therefore not billed), plus electricity sold back, plus SRECs. For example, if we consume 10.5 MWh and produce 12 MWh this works out to:

$1433 – amount we would have spent on electricity

+ $75 – payout at .05 per KWh for the extra 1.5 MWh generated.

+ $240 12 MWh * $20 per SREC

= $1748 per year.  $315 of this is cash returned each year.

I will use this number in my next post when I discuss the economics of going solar.

Will it really be that precise or clean? Probably not. Some factors that could complicate these calculations:

  • If the price of electricity goes up, the amount avoided gets larger and our savings goes up.
  • If we use our credits during a low producing month and owe the electric company a small amount.
  • If we produce less than 12 MWh we do not earn as much in payback credits at the end of the year, or as much in SRECS.
  • If the value of SRECs go down.
  • If our electricity consumption goes down, the amount of extra electricity we can sell back to the utility company is higher.

The solar panel installer expects us to produce about 11 MWh per year, but they admit that they purposefully underestimate by 10%.  They want to under-promise and over-deliver.

In Part 3 I’ll discuss the economics of going solar – what it really costs and perhaps some guidelines as to whether this decision is right for any one specific home.

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TDSF Power Plant is now operational!

TDSF Power Plant is Now Operational

Part 1: How do at-home solar panels work?

When I mention with not a small amount of enthusiasm that we have installed solar panels on our roof, I get a lot of questions:

  • How do solar panels work?
  • Am I using the power from my solar panels?
  • What happens if I generate more power than I need?
  • What happens when the sun goes down (or if it’s cloudy, rainy, etc)?

Let’s start with the basics…how do solar panels work?

As the sun shines on solar panels, the panels create DC (direct current) electricity – the same thing a battery creates. However, you need AC (alternating current) electricity to run your house. So the panels are wired to a box called an inverter, which converts DC -> AC. The inverter connects to your home’s power panel (where your circuit breakers are located).

Your house continues to operate as it always did – when you need electricity, you draw it from the power panel. 

All of this is illustrated below:

http://clipart-library.com/clipart/8TxrRX5nc.htm

This drawing came from an Australian site so the terminology is a little different. What they call the switch board we think of as the circuit breaker box or power panel. What they call the mains grid is our electric utility company. So it flows like this:

Power Panel is where your circuit breakers are located.

Am I using the power from my solar panels?

If the power panel is getting enough power from your solar panels, you do not use any electricity from the grid (your utility company). You are using the electricity you generated on your roof.

What happens if I generate more power than I need?

If the power panel is getting more electricity from your solar panels than you need right now, the excess electricity goes back to the grid – which means you are now a power plant! Your neighbors will use this power (and pay the utility company for it). You get credit for this excess power – your electric meter runs backward!

What happens when the sun goes down (or if it’s cloudy, rainy, etc)?

If the power panel is not getting enough power from your solar panels, the grid will supply the difference (and you are charged for this). Your panels can absorb sunlight even when it’s cloudy or raining (though much less than on a sunny day) – UV rays get through even when it doesn’t appear sunny out. It’s possible that you’re using more power than your panels are generating under these conditions. In that case, the power to your outlets is a combination of the solar power you are generating and power from your utility company. 

At some point, as it gets dark, the panels stop producing power and all of your power needs are supplied by the grid. Basically, your house works just like it does before you had solar panels – the power flows from the utility company through your meter to the power panel and to your outlets. 

In Part 2 I’ll explain how solar panels can save you money on your monthly electric bill, and maybe even generate income – stay tuned for Part 2 next week!