Net-Zero, a house that produces all the energy that it uses
In 2012, we built the first certified Passive House in the
state of CT. Since a Passive House is an
ultra energy efficient house that requires very little energy to heat and cool,
we knew that through the purchase of a solar PV system, we'd have the
opportunity to also be a net-zero house, i.e. one that produces all the energy
it uses. The idea of our home having a
zero carbon footprint and zero energy bills was very appealing, but would the
expense of the solar panels be worth it?
Solar panels are a financial investment
I spent much of my 22 year career in the financial services
industry analyzing fixed income investments.
When you purchase a solar PV system you make an investment upfront to pay
for the system and you receive investment returns over the next 25 years in the
form of savings on your electricity bill.
The cashflows here are very similar to that of an annuity or long-term
bond. Furthermore, the savings are after
tax savings, so it's comparable to a tax-free annuity or a long-term municipal
bond. It makes sense then to analyze the
investment in a solar system the same way you would a financial investment, by
discounting future cashflows and computing a yield on the investment.
One complication is that we don't know exactly what the
future savings will be. In order to
estimate the future savings we need to make some assumptions. Solar providers are pretty good at estimating
the amount of electricity a system will
generate over its life. Using the
average annual generation provided is a reasonable place to start. But, the future price of electricity is much
more difficult to estimate. The best we
can do here is to look at history and analyze the yield of the investment using
several different assumptions for the energy inflation.
When I bought my system in 2012 the net cost after state
rebates and federal tax credits was about $3 per kW for our 10.78 kW
system. I created a spreadsheet (borrowed from somewhere on the internet) and
figured out that the yield on my system was about 1.1% plus whatever I assumed
for annual electricity inflation. If I
assumed electricity inflation was 4% the yield was 5.1%. If assumed 6%, the yield was 7.1%. If I assumed 1%, the yield was 2.1%. Historically, I think that energy inflation
has averaged around 5% per year for the last few decades. Back in 2012 yields on long-dated municipal
bonds were in the 2%-3% range. The
investment in solar PV seemed like it would return more even under very conservative
assumptions for electricity inflation. When
I bought my system our utility charged $0.14 per kWh. Now they charge $0.17, an increase of more
than 23% over just 3 years. Unless there
is a persistent and significant decline in electricity prices going forward, this
will have been an excellent financial investment. It's a bet that I'm happy I made.
Prices have dropped dramitically and investment yields have
gone up dramatically
Prices for solar PV panels have decreased dramatically over
the last 3 years. Additionally, our town
is part of CT's Solarize program enabling residents to get bulk purchase
discounts. With the Solarize Harwinton
pricing residents can get a solar PV system installed for less than $2.00 per
kW. Even if you have a partially shaded
site and you assume zero electricity price inflation, a solar system through
this program today yields 5.8% and again, that's an after tax return. If you add in modest electricity price
inflation of 4%, the yields are closer to 10%.
If you have a site without a severe shade problem with modest energy
inflation you could see yields close to 12% and again, these are after tax
yields.
In conclusion, solar PV panels seem like an amazing
investment today. Where else can you get
after tax returns of 6%, 10% or 12% for 25 years? Stocks?
Bonds? I don't think so. And, as a bonus you get to do something good
for the environment.
I've attached the spreadsheet I used for the analysis if
anyone's interested in playing around with it.
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