CliCk: For tables and interactive tools to help estimate the cost and
future value of your solar investment, go to solartoday.org/costofsolar.
ontario, Canada, may soon restore its Fit program, with payments between 44 and 80 cents
(Canadian) per kilowatt-hour for 20 years,
depending on system size and mounting type.
Please consult a certified tax advisor to
check the applicability and taxability of incentives for a particular situation.
rising electric rates
another factor in renewable energy economics is escalation in electric rates. solar and
wind are escalation-protected investments
because they offset electricity costs at the current prevailing rate. as rates rise, the owner
saves even more.
several useful ways to measure the economic value of a generating system are compound
annual rate of return, increase in property
resale value and cash flow, if the purchase is
financed. in strong economic cases, the annual
returns are more than 10 percent, the cash flow
positive and the increase in resale value greater
than system cost.
Compound annual rate of return, or Carr,
is another term for interest-rate yield — a metric for comparing one investment to another.
For example, a savings account might pay 1
percent interest, and the long-term stock
market has paid about 8 percent (including
dividend reinvestment). in several states, the
results for solar can be substantially better than
Payback Calculators and
Database of State Incentives
for Renewables and Efficiency
The Clean Power Estimator
OnGrid Solar Financial Analysis
the long-term stock market.
a theoretical increase in property resale
value occurs in homes with generating systems
because of the reduced utility operating costs.
according to a 1998 Appraisal Journal article
by rick nevin and Gregory watson, a home’s
value should increase $20,000 for every $1,000
reduction in annual operating costs from ener-
gy efficiency. The rationale is that the money
from the reduction in utility bills can be spent
on a larger mortgage with no net change in the
monthly cost of ownership. nevin and watson
calculate that historic mortgage costs have an
average after-tax effective rate of about 5 per-
cent. if $1,000 of reduced operating costs is
put toward debt service at 5 percent, the hom-
eowner can support an additional $20,000 of
debt. The borrower (homeowner) pays the
bank the amount he or she saved on the utility
bill, so the total monthly cost of home owner-
ship is identical.
solar systems appreciate over time, rather
than depreciate as they age. This is because of
the increasing annual savings solar systems
afford as electric rates rise. all the calculations
in this article assume that electric rate escalation will be 5 percent. if so, the generating
system will save 5 percent more value each successive year, and thus gain from the 20:1 multiplier effect. The property resale value will then
increase 5 percent per year compounded.
This appreciation cannot continue forever,
as the increase in resale value runs into the second limit, which relates to the system’s remaining life. PV modules are warranted at 25 years
to work at 80 percent of their new capability.
Calculations of long-term resale value should
take this into account.
Various Financing Mechanisms
Financing the system is important to many
buyers. For many homeowners who finance
their solar systems using home equity loans, the
cash flow will be positive, either immediately
or within a few years. The cash-flow calculation
compares the estimated savings on the electric
bill to the cost of the loan. Monthly loan cost is
the principal plus interest payment required to
pay off the loan, less any tax savings.
home equity loans are often excellent sources of funds because the payment terms can be
long, the interest rates on real estate-secured
loans are relatively low and the interest is usually tax deductible, so the net monthly payments
are often quite low. as stated, in many cases, the
net loan payment will be less than the savings
the solar system will generate.
over time, electric rates usually rise, so the
savings increase. But the loan cost generally
stays relatively constant, so the situation gets
better and better for the system owner, even as
the savings from the system are paying off the
loan. once the loan is paid off, all the savings
go to the owner.
Those who don’t have equity available can
explore other options, such as community
financing, whereby a city can arrange a loan
for a solar system and allow it to be collater-
alized and paid back on the property tax bill.
The program was pioneered in Berkeley, Calif.,
and is now available in several cities and may
soon appear in other states. see dsireusa.org
for more information on community loans.
two other options for homeowners are com-
mercial financial products applied to residential
situations, such as power purchase agreements
(PPas) and leases. PPas are agreements for one
party to sell power to another at agreed-upon
terms. The sale is for kilowatt-hours of energy
only. solar leases are rentals, where a customer
leases a solar system from another party. in both
cases, the parties owning the systems are under-
written by investors who can use the tax credits
and depreciation benefits.
it is important to compare renewable
energy investments to other investments on
an even basis. For a fair assessment, critical
analysis should look at compound annual
rate of return, cash flow and resale value. For
much more detail on the variables that affect
the results, the methods of financial analysis
and example results for many states, please
see the article at ongrid.net/papers/Payback
solar makes economic sense for many, but
only a hard look at the numbers will tell if it
makes sense for your property. Check it out.
run the numbers, get evaluations and proposals from at least three solar providers and take
the estimates to a CPa to check them out. That
way, the smile on your wallet can be as big as
the smile on your face! GS
Andy Black is CEO of OnGrid Solar ( ongrid.net), pro-
viding solar financial analysis tools and consulta-
tion. He recently served as a board member of the
American Solar Energy Society (ASES) and is on the
advisory board of the NorCal Solar Energy Associa-