The Economics of Solar Energy

June 26, 2013 / by / In

Written by Ted Torre-Bueno President of Empowered Energy Solutions

I would like to explain the economics of renewable energy and energy efficiency. We’ll examine the costs and benefits associated with saving energy and generating your own, including an exploration of the pros and cons of the various financing methods available. We’ll also look at some of the additional benefits of sustainable buildings, such as increased productivity, health, and comfort.

Sustainability matters to home and business owners because almost all buildings in the United States are profoundly non-sustainable. They were built to a relatively low efficiency standard—underinsulated, poorly weatherized, with inefficient heating and cooling systems that waste considerable amounts of electricity and natural gas. Since most (more than 90%) of electricity comes from non-renewable resources—primarily coal and natural gas—these homes are non-sustainable. Future generations will have less than we have enjoyed ourselves.

Besides harming future generations, there is another more immediate reason to strive for sustainability: money. By failing to incorporate sustainability into our buildings, we have all paid an enormous cost that has damaged our individual financial well-being, and ultimately damaged our entire economy. It is now considerably cheaper to be sustainable than it is to be non-sustainable.

In the past, we assumed that sustainability and environmentalism were more expensive than the alternative (being non-sustainable). It is this thinking that has driven most homes and businesses to shy away from sustainability and continue operating as they always have, buying large quantities of non-renewable resources at increasingly high prices just to maintain the status quo.

To demonstrate why this thinking is obsolete and actively fiscally damaging, let’s look at an actual case study. Our subject is a typical 2,200 sq. ft. home in Southern California built in 1978. It has four residents, and an average monthly electrical bill of $200, which represents 1,000 Kilowatt Hours of electricity usage. The effective electrical rate for this home is $0.20 cents per kWh. This means that to keep a 100-Watt light bulb lit for ten hours costs the homeowner 20 cents. (100 Watts X 10 hours = 1,000 Watts or 1 kWh).

The easiest thing to do would be nothing and that is what most people are doing right now. Given that utility rates are guaranteed to increase in Southern California at 7% per year for the next four years, this will be a painful strategy.

There are a variety of energy efficiency measures that might be deployed to the home, and some of them receive incentives. Let’s stick to the simplest possible solution—installing a solar system to eliminate the electrical bill.

How large a solar system would we need? Assuming we can mount the system in such a way that it gets reasonable production (and most houses will support such a mounting) a solar system will produce about 1.55 times its wattage rating per year. Therefore our house needs a 7,741 Watt solar system (7.741 kW).

Many people have been confused by solar, perhaps because solar salespeople often try to make solar more complicated than it really is. Simply put, a solar panel is a solid-state electrical device (i.e., it has no moving parts) that makes electricity when sunlight shines on it. A 100-Watt solar panel will make 100 Watt hours of electricity per hour of sunlight. If a 100-Watt solar panel sits in sunlight for 10 hours it will make 1,000 Watt hours of energy or 1 kilowatt hour (1kWh). With about 5-6 hours of useful sunlight per day a 100-Watt solar panel will offset a 100-Watt lightbulb as long as the lightbulb isn’t on more than 5-6 hours per day.

Resuming our case study—the 7.741 kW solar system that our house needs should cost in the neighborhood of $4.30/Watt to install, or $33,286. After the 30% Residential Renewable Energy Tax Credit (more information on this one at the cost would be $23,300 (70% of the original cost). Were we to finance this cost on a standard long-term low-interest loan (such as a Home Equity Line of Credit HELOC) for 20 years at 4% interest, the monthly cost would be $141.19. Compare this to the previous monthly electric bill of $200 and it’s easy to see that our homeowner is paying a considerable premium ($708/year or 29.5% of the total bill) to buy energy instead of produce their own. The proposed solar system financed in this way will reduce the net monthly cost of energy for this homeowner by almost 30% from day one. This is only the beginning of the financial argument for residential solar, however.

Another factor to be considered is the question of expense vs. investment. When you buy non-renewable energy from your local utility you’re not making an investment. If you invest in a solar system (or energy efficiency) you generate energy that goes back into the grid and potentially have control of your utility costs. In many ways solar and energy efficiency are better than normal investments since the return is in avoided expense, rather than out-of-pocket income. This means that the return on investment in solar is tax free.

Viewed as an investment, a typical home retrofit project incorporating an optimal mix of solar and energy efficiency (we’ll get deeper into how one optimizes these projects in a future article) will have an Internal Rate of Return (IRR) between 15-20%. To compare this to another income-generating investment such as a stock or bond, you’d have to find a stock that would have a minimum of 15% IRR, guaranteed, tax free. At present, the author is unaware of any such financial offering.

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