REBATES, COSTS AND PAYBACK
does it pay?
Figuring the financial value of a solar or
wind energy system.
By Andy Black
How long will it take for your new solar or wind electric system to pay for
itself? That depends on your local climate, utility rates and incentives. In
sunny or windy states with expensive electricity, the payback is faster than in
calm or misty states where power is relatively cheap.
The most important factors for making solar an attractive investment include
high electric rates, financial incentives, net-metering policies and good sunlight
(available in almost all of the continental United States).
Where net-metering laws exist, solar energy offsets the retail cost of the
electricity generated. In some regions, solar systems are allowed to operate on
a time-of-use rate schedule, enabling users to sell back electricity to the utility at
peak rates, which can be even more valuable. Time-of-use rates vary electricity
price by time of day, with higher rates occurring during times of shortage (for
instance, when air-conditioning loads are high), when the utility must pay more
to purchase electricity from generators. Solar tends to produce electricity during
these higher rate periods.
Direct incentives can include tax benefits such as credits or depreciation.
The most celebrated recent incentive is the federal tax credit for solar systems that
went into effect Jan. 1, 2006. The credit is for 30 percent of the system cost, up to
$2,000 for residential systems (there’s no cap on commercial credits). For photo-
voltaic (PV) systems, that typically means a $2,000 credit on the purchaser’s tax
return for the year the system was installed. This credit can be coupled with state,
local and utility incentives. Consult a certified tax advisor to check the applicability
of incentives to your situation. The federal tax credit is due to expire on Dec. 31,
but advocates are working hard to get Congress to extend it.
A big factor in the economics is inflation in electric rates. Solar and wind are
inflation-protected investments because they offset electricity costs at the current
prevailing rate. As rates rise, the owner saves even more.
New forms of direct incentives are performance-based incentives (PBI) and renew-
able energy credits (RECs,or “green tags”). Both incentives are paid on a per-
kilowatt-hour basis. Unlike rebates, they don’t help reduce the up-front cost, but
they do increase the cash payments the owner receives after commissioning the
system. Where available, payments can be as much as 39 cents per kilowatt-hour
for five years for the PBI, and between 1 cent and 5 cents per kilowatt-hour for a
five-year contract on RECs if the system is large enough (usually at least 10 k W).
Because these payments often can be combined with net-metering value, the PV
system is capable of garnering substantial revenue per kilowatt-hour generated,
where favorable policies exist.
Several useful ways to measure the economic value of a generating
system: compound annual rate of return, cash flow and increase in property
resale value. In strong economic cases, the annual returns will be more than
10 percent, the cash flow positive and the increase in resale value greater
than system cost.
Database of State Incentives
for Renewables and Efficiency
Compound annual rate of return,
or CARR, is another term for interest-
rate yield — a way of comparing one
investment to another. For example, a
savings account might pay 1 percent
interest and the long-term stock market
has paid about 10. 5 percent. For more
detail on the following calculations, see
the articles at ongrid.net/papers.
The cash flow will be positive, either
immediately or within a few years, for
many homeowners who finance their
solar systems using home equity loans.
The clean Power Estimator
OnGrid Solar Financial
PV Watts- rredc.nrel.gov/solar/
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. In the case of “deductible”
loans, such as home equity-based loans, the interest is usually tax-deductible and
thus the loan effectively costs less. Home equity loans are also excellent sources
of funds because interest rates on real estate-secured loans are relatively low and
payment terms can be long.
Inflation affects rates and thus effectively increases the savings from a generating
system over time. Inflation doesn’t affect loan rates, particularly with fixed-rate
loans. Hence, as electric rates rise, the savings grows, but the cost of the loan
stays relatively constant (it rises a little over time as the interest portion of the
payment declines and the tax deductibility declines).
An 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 increases
$20,000 for every $1,000 reduction in annual operating costs from energy ef-
ficiency. 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 after-tax effec-
tive rate of about 5 percent. If $1,000 of reduced operating costs is put toward
debt service at 5 percent, it can support an additional $20,000 of debt. To the
borrower, total monthly cost of home ownership is identical. Instead of paying the
utility, the homeowner pays the bank, but the total cost in unchanged.
Generating systems appreciate over time, rather than depreciate as they age.
This is because of the increasing annual savings as electric rates rise. If electric
rate inflation averages 5 percent, property resale value will increase 5 percent
per year compounded. r
Andy Black is CEO of ONGrid Solar, providing solar financial analysis tools and consultation. He serves as a board member of the American Solar Energy Society and
the advisory board of the NorCal Solar.