Pop quiz: What’s the appliance that uses the most energy in your home? Today, it’s likely your refrigerator. But what about in the future?
A client recently asked us to help analyze whether she should install solar panels on her home. While the quotes she got from three solar panel installation companies seemed to make sense, many assumptions in the analyses were subjective. Will her home energy usage go up—from, say, the purchase of an electric car? Or will it go down, if she upgrades her family’s refrigerator?
Tax incentives for solar installation are a big factor in the analysis, and include both federal and state incentives. However, you only get a credit if you buy—and not lease—the panels. Three ways to obtain solar panels, also known as Photovoltaic or PV systems, are buying, leasing, and Power Purchase Agreements (PPAs). Variables such as the home’s shade and weather conditions affect the productivity of solar panels, so it is important to have the house evaluated to find out if adding solar panels is sensible. While leasing and PPAs are good alternatives to getting electricity from your utility company, buying solar panels is generally a better financial decision in the long run.
Who Is the Ideal Candidate for a PV System?
Before deciding if solar panels are right for you, go over your energy usage, appliance by appliance. For some people, energy-efficiency measures will be more cost-effective than solar. Check out www.energystar.gov for tools and info, including where to start saving energy at home. Additionally, Energy Star has a database that lets you type in an appliance model number to see how much energy it uses. Just upgrading a refrigerator could cut your energy usage dramatically.
A southern-facing roof that gets no shade is the best candidate for panels. The angle of your roof and the amount of sunshine in your area are extremely important, too, as a house in the shade would not benefit at all from a PV system.
The amount of energy a household uses is another important factor in the decision. If you’re using a large amount of energy (Do you use air conditioning?), or if you have plans for more energy usage in the future—that electric car?—the more sense it makes to install solar panels. Even if you’re planning to sell your home, it may still make sense to install solar panels if you’ve passed the criteria above. A New York Times article references research done by Lawrence Berkeley National Laboratory and concludes that homes with PV systems have sold for a premium over comparable homes without PV systems.
Buying Solar Panels: Maximize Your Tax Incentives
A federal tax incentive is available for buying a PV system by the end of 2016. The Residential Renewable Energy Tax Credit is 30% of the initial installation of a solar panel system. If you live in California, the California Solar Initiative (CSI) provides rebates for customers of investor-owned utilities (such as PG&E, SCE, or SDG&E) to help with the cost of solar installation. Solar systems installed by 2016 are eligible for a property tax exclusion on the value of the installed panels. Local rebate programs can add to your financial assistance.
Energy rates are tiered; once you have used a certain amount of electricity at a given (base) rate, the electricity you use from that point onward is charged at a higher rate. By owning your solar panels, you will not be charged the base rate until you have used up all the energy your panels produce. Solar panels can help consumers offset energy usage and get back into lower cost tiers. With the proliferation of more smart meters, which are used to track the electricity the general public uses at a given time and make peak usage more expensive, solar panels are a valuable strategy to offset increasing energy costs. During the summer months, solar energy systems produce the most electricity at times when air conditioning use is the highest. Those with solar panels can shift their energy demand to lower off-peak rates. Additionally, they will get Renewable Energy Credits that actually run the meter backwards when their panels produce more energy than they need.
Tier shaving is a concept whereby a household purchases several panels to move into a lower energy tier, but it still gets the majority of its energy from traditional utilities.
Solar Power Purchase Agreement: An Attractive Option for Some
A solar Power Purchase Agreement (PPA) is a leasing arrangement from a solar services provider. As a customer, you are responsible for paying predetermined electricity prices for 10 to 20 years. Other than a potential down payment of $1,000, there are no up-front installation costs or maintenance fees. Some PPAs charge a flat electrical rate, while others are calculated to rise over the term of your agreement. If you sell your house before the end of the PPA period, you can transfer the agreement to the new owner. The big downside to PPAs is that all tax benefits, rebates, and Renewable Energy Credits go to the company providing the system, not to the individual installing it.
Leasing Solar Panels: No Money Down
With leasing a PV system, there is usually no down payment, and instead of paying for the power your solar panels generate, you set a lease payment that rises every year. This rate increase may be less than the historical rate increases by electric companies, and a lease can be transferred to a new homeowner. Just like with PPAs, the tax incentives, rebates, and Renewable Energy Credits from a solar power lease deal will go to the company providing the PV system. For people who have the cash, buying is generally a better alternative than leasing, since with a purchase you’ll avoid interest payments, and often the PV system will last much longer than the lease terms. PV panels are guaranteed for 25 years, and most leases terms are 20 years.
Before deciding to install PV panels, review your energy usage and look for ways to reduce it by upgrading appliances–especially your refrigerator. Then, recalculate your annual electricity bills and get quotes from at least two solar panel installers. Solar evaluations of your home are free, but be skeptical about the assumptions used, as they may make leasing from these companies look like the best option when in reality it may not be. The price of solar panels has dropped dramatically in recent years and will likely continue to decline, so waiting a few years may not be a bad idea. Although PPAs and leases are good options for those who cannot afford panel installation, an outright purchase of a PV system makes the most financial sense—if you can afford it. For most people, PPAs and leases should lower your energy expenses, but use a solar calculator to find out how much better off you could be by buying.
If you’re buying the panels, calculate the federal, state, and local solar energy incentives in your area.
And finally, if your heart tells you that installing solar is the right move for you—even it’s not the best decision for your wallet—installing solar may come down to an ethical choice and not just a financial calculation.