Solar Economics 101

So you’ve been thinking about going solar, but you may not be sure whether putting solar panels on your roof makes good financial sense.  Let’s evaluate the economics of solar.  It’ll take a little arithmetic, but walking through some basic calculations will help you make a more informed decision.

There are a few key factors that influence a potential investment in solar: the cost of power for your household, the incentives available, the cost of installing solar and the expected increase in  electricity prices over the lifetime of your panels.

Cost of Power

As a first step, let’s look at the cost of power for a typical household.  Electricity consumption is generally measured in a unit called a kilowatt-hour (kWh).  So what the heck is a kWh?  Imagine turning on a lamp with a 40-watt bulb.  For each hour the lamp is on, the bulb will use 40 watt-hours (40 watts x 1 hour).  Now think of all the electrical appliances and equipment in your house that use electricity.  A typical household uses about 950,000 watt-hours or 950 kWh per month (1 kilowatt-hour = 1,000 watt-hours).  A meter at your house keeps track of how much power you are using, and at the end of each month, your utility bills based on your usage.

So where do solar panels fit into the equation?  If you have solar panels on your roof that are creating electricity for your household, then you can buy less electricity from your utility.  Now, things get really interesting in many states that have net-metering programs.  Net metering means that instead of having a meter that only counts forward, tracking the power you’re taking from the grid, the meter also keeps track of any electricity that you’re putting back on the grid.  Basically, when your solar panels are creating more electricity than your household needs, like on a sunny day when everyone is at work or school, the meter actually counts backwards, giving you a credit on your utility account (see actual utility bill with net metering below).  This allows you to net out the extra electricity your panels generated against the power your household used from the grid when the sun wasn’t shining.  With net metering, you get fair credit for the power that your solar panels generate.  This leads to big savings on your utility bill.  In Connecticut, for example, where electricity prices are approximately 18¢ per kWh and average consumption is about 740 kWh per month, these savings would be on the order of $130/ month (740 kWh x 18¢ per kWh).  As electricity prices rise, the savings will also increase.

(See Department of Energy info on electricity prices and consumption in your state.)

Incentives and Installation Costs

Okay, so you now have a sense for how putting solar panels on your roof can drastically lower your power bill, but what about the cost of installing the panels in the first place?  As of today, for a typical house, the total cost is approximately $35,000.  Yikes, I know, that’s a lot of dough.  But don’t fret just yet.  Many states offer incentives that help make solar more affordable.  In addition, the federal government will give you a tax credit equal to 30% of the cost of your solar electric system.  So, the net cost to you could be as low as $14,000, depending on what programs your state offers.

Electricity Inflation & the Life of Your Panels

Let’s say that power prices in your area are rising at a rate of 5% per year and that a solar electric system designed for your roof will help you save $100 per month on your power bill. A solar electric system has a useful life of at least 25 years.  Ongoing costs for things like periodic maintenance and insurance coverage for the solar electric system should run approximately $125 per year.  If we put all of the pieces together, over a 25-year period, the value of owning a solar electric system will total $50,171 (see table below).  If it costs you $15,000 initially to install your solar electric system, the net value created by your investment in solar is $35,171 ($50,171-$15,000). Now that’s a good chunk of change.  The return on this investment is approximately 10%.  Sure beats many other investments.

I should say that these numbers are indicative of a residential solar investment in Connecticut, but these numbers will vary state-by-state.  In addition, sadly not all homes are well-suited for solar.  If your house doesn’t get a lot of sun due to shading from trees or because no part of your roof is facing south, these numbers won’t hold.  Many solar installers will perform a preliminary analysis of your house with no obligation and give you indication of whether or not your site is a good one for solar.   This may be a good next step in figuring out if solar makes good financial sense for you.

Year Energy Savings1 Maint. & Ins. Net Energy Savings
1 $1,200 $125 $1,075
2 $1,254 $125 $1,129
3 $1,310 $125 $1,185
4 $1,368 $125 $1,243
5 $1,430 $125 $1,305
6 $1,494 $125 $1,369
7 $1,560 $125 $1,435
8 $1,630 $125 $1,505
9 $1,703 $125 $1,578
10 $1,779 $125 $1,654
11 $1,859 $125 $1,734
12 $1,942 $125 $1,817
13 $2,029 $125 $1,904
14 $2,120 $125 $1,995
15 $2,215 $125 $2,090
16 $2,314 $125 $2,189
17 $2,418 $125 $2,293
18 $2,526 $125 $2,401
19 $2,639 $125 $2,514
20 $2,757 $125 $2,632
21 $2,880 $125 $2,755
22 $3,009 $125 $2,884
23 $3,144 $125 $3,019
24 $3,284 $125 $3,159
25 $3,431 $125 $3,306
Total $53,296 $3,125 $50,171

1 Assumes power price inflation of 5% and solar electric system production declining by .5% per year
(Annual output from a solar electric system generally declines a small rate; this is known as degradation)

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