You’ve likely noticed that solar panels have been popping up on scores of homes and businesses in recent years. The rising popularity has been driven by the fact that the costs to get started with solar have plunged in recent decades to the point that they have finally become cost competitive with fossil fuels. In fact, in many cases choosing solar can save literally save homeowners thousands of dollars over the long-term.
Last year I made the plunge and decided to put solar panels on my roof. I liked the idea of driving down one of my fixed costs as low as possible while simultaneously lowering my carbon footprint.
I recently crossed the one year anniversary of putting solar panels on my roof. Here’s a review of our experience with solar thus far.
My initial options
I started out by calling a few vendors to give me detailed quotes. Two vendors showed up and took all of our measurements from our roof and then presented us with numerous options.
The first choice was called a “Net Metering” program. Using this option our utility meter would spin forwards like normal when we were a net-user of electricity (at night or on rainy days) and backwards when we were a net-producer of electricity (when the sun was shining).
Under this program, the value of the electricity that we generated would have been equal to the retail price that we purchased it at (which in Rhode Island is quite high at $0.172 per kilowatt/hour).
Choosing this option would have qualified us for a tax-incentive through our state’s “Renewable Energy Fund.”
Here’s how that math would have worked out.
Solar Panel Purchase Price: $26,100
Renewable Energy Fund Grant: ($7,308)
Net Metering Price: $18,792
30% Federal Tax Credit: ($5,637)
Net Upfront Cost: $13,154
If we signed up for this program then our electricity bill was estimated to drop from about $1,450 per year to $330 per year.
That’s a $1,120/year savings, which works out to a cash-on-cash return of 8.5% ($1,120 yearly savings / $13,154 net upfront purchase price).
Overall, this was an attractive option given then low up-front costs to get started with solar.
The second option that was presented to us was called the “Renewable Energy Growth Tariff Program”. If we signed up for this program then all of our solar production would be fed back into our local grid to be used by us and our neighbors. While we wouldn’t use all of our electricity ourselves, our utility agreed to buy the electricity from us at a price of $0.3475 per kilowatt/hour for 15 years. That’s nearly double the price that we paid to consume electricity on the open market.
However, if we choose this program then we wouldn’t qualify for the state’s generous upfront grant.
Here’s how the proposed math worked out for option 2:
Solar panel purchase price: $26,100
30% Federal Tax Credit: ($7,830)
Net Upfront Cost: $18,270
Our system was estimated to produce more than 6,500 kilowatt/hours of electricity per year. When multiplied by the price that we would get to sell our electricity back to the grid at ($0.3475 kilowatt/hour), the value of the energy that we were expected to produce was over $2,200.
That works out to a cash-on-cash return of about 12% ($2,200 / $18,270)
While the lower upfront costs from the Net Metering program was highly attractive, we ended up going with the Renewable Energy Growth Tariff program because of the higher ROI.
Once we signed all the paperwork we had to wait about six months for the panels to be installed, inspected, and turned on.
The actual numbers
Our solar panels went live a little over a year ago. Here's the actual math shook out in the first year:
Purchase price: $26,130
30% Federal Tax Credit: ($7,830)
Net purchase price: $18,270
Actual Electricity Production: 6,129 kilowatt/hours
Reimbursement rate: $0.3475 kilowatt/hour
Actual Production Value: $2,130
Cash on Cash Return on Investment: 11.66%
1.75% <— Best Savings Account Rate
2.75% <— Best 1-Year CD Rate
9.71% <—Total Stock Market Index Return
If anyone else knows an almost guaranteed way to earn double-digit returns on investment, I'm all ears!
Why does the Renewable Energy Growth Tariff Program even exist?
You might be scratching your head as to why my local utility company would be willing to pay nearly double the going rate for electricity. I asked my local solar rep to explain why this program even existed.
Here’s what he stated:
- National Grid is required by law to prove that a certain percentage of its electricity comes from renewable sources. Paying an above-market rate incentivized homeowners to make their own power and helps National Grid to meet this regulatory requirement.
- When homeowners add solar to the grid it eliminates the need for them to produce additional power and minimizes the need for high-cost “peaker plants”, which are generally only turned on (at great cost) during periods of maximum demand (such as a heat-wave).
- Residential solar turns one of the utilities fixed capital costs (building a new plant with a high upfront expense) into a variable cost (with no upfront cost). They only pay for the electricity that is produced so the ‘risk’ of non-production is transferred to the homeowner.
- Utilities are monopolies that are heavily regulated. They usually operate on a “cost plus” model. They have a built-in profit margin and all costs are passed along to consumers. National Grid still comes out ahead financially by using this program.
- Producing and consuming power in a local microgrid lowers National Grid’s transmissions costs. It also reduces the stress placed on long-haul equipment and lowers vampire losses.
- Having said all of that, my rep told me that the reimbursement rate has been falling as solar becomes more popular. A few years ago they were paying homeowners as much as $0.44 per kilowatt/hour. I signed a contract at $0.3475 per kilowatt/hour. The current rate is under $0.30 per kilowatt/hour and falling.
Other benefits of solar
Beyond reducing your electricity bills and enabling a solid return on investment, there are other benefits of going solar:
- Solar panels increase the value of your home (wouldn’t you pay more to own a home that featured a negative electricity bill?)
- Solar creates local jobs even if you use a national installer
- Solar protects you against rising energy costs
- Solar reduces your carbon footprint
- Solar is a great conversation starter with friends & family
Is Solar right for you?
Here are a few questions that you can ask yourself to figure out if solar is worth investigating.
How high is your electric bill? The higher it is, the higher the likelihood that you’ll save big over the long run. As a very rough rule of thumb, you should investigate solar if your average monthly electric bill exceeds $75.
What are your costs of electricity? Electricity prices vary widely from state to state. In the Northeast, Hawaii, and California, they are very high. However, costs tend to be much lower in the Midwest and Southern U.S.
How much sunshine do you get and what is the slope of your roof? The more sunshine you get and the more southern exposure your roof has, the more productive your panels will be.
How are you going to finance the system? Do you have the cash on hand to pay for the system up front (ideal), or will you need to take out a loan or (gasp!) lease them? As a member of the FI community, you know that paying cash is the best option, but other financing methods can still be worth investigating even if you don’t have a chunk of cash to invest up front. In fact, with many leasing options, you can literally have solar installed on your house for $0 upfront.
How old is your roof? If you need to replace your roof in less than 5 years then choosing solar won’t make sense since the panels will have to be uninstalled during the roof replacement. We moved into a house with a 25-year-old roof so we decided to replace the roof before we put on solar panels. However, it is worth pointing out that companies like Tesla are now starting to offer solar roofing options that might be worth checking out so you can kill two birds with one stone.
How to get the best deal:
Just like any other major purchase, it pays big time to shop around.
As a Tesla shareholder and huge fan of Elon Musk, I initially assumed that Solar City (which is owned by Tesla) was going to be the no-brainer choice. Solar City is the largest solar installer in the country, so I thought they must also be the lowest priced option.
Thankfully, I decided to let a local solar installer named Newport Solar compete for my business just so I could have a point of reference. It turns out that Newport Solar provided me with a better deal and they were much more knowledgeable about the state’s current incentive program. In fact, when I called the state’s energy department to get more information they told me that they had done hundreds of installations with Newport Solar and only a handful with Solar City. They actually recommended that we choose Newport Solar.
When you’re shopping, make sure you get multiple bids for your business. Ask local friends or family members who have solar about their experiences or get in touch with your state’s energy department to see if they have an approved list of vendors. You can also check out the Database of State Incentives for Renewables and Efficiency.
If all else fails, shopping portals like energysage.com can help you get multiple bids.
What I’ve learned after a year:
Here are my key takeaways from this experience.
It’s a lengthy process: From start to finish, it took us about seven months to get the panels installed on our house. Scheduling time for multiple roof inspections took about a month and then after we placed an order we were told that it would be a six to seven-month wait because of the backlog. Even after the panels were installed on our roof we had to wait for our utility to come and inspect the panels before they could be turned on.
Curb appeal is not much of an issue: My wife and I were very concerned that the panels would look ugly and subtract from the curb appeal of our house. We asked the installers to put them in the most inconspicuous spot on the roof to minimize the loss of curb appeal. However, more often than not, we have to tell our guests that we have solar installed on our house. We’ve found that very few people look at our roof directly when they pull into our driveway, so the panels do not detract from the curb appeal of our house at all.
Take productivity assumptions with a grain of salt: We were told that our panels would generate about 6,500 kilowatt/hours of electricity in any given year. Our actual production in the first year was 6,100 kWh, or about 6% less than projected. This didn’t alter the math too badly, but the solar company obviously wanted to present me with the best possible scenario data to make choosing solar as compelling as possible.
I wish I started sooner: The math would have looked even better had I been able to sign a contract with National Grid above $0.40 per kilowatt hour.
If you've ever thought about solar I’d highly recommend starting today by giving your local solar company a call. Panel prices have continued to drop since we had our installation, so it's possible that you could even get a better deal than we did.
Also, the 30% tax credit is set to start phasing out in 2019. If you’re on the fence about researching solar, get started today!