Wednesday, October 29, 2008

Understanding Solar Technology -- Take One

Solar technology is a much touted yet profoundly misunderstood form of technology. Many consumers read articles that talk about saving by purchasing a solar system. But the math never seems to add up. Or does it?

Too often, we place a premium on making decisions "off the cuff." But this can render the decision ineffective because, there isn't any real discipline or analytical rigor in the decision being made. These days couldn't provide a better example of that. And with the current state of economic affairs, no time is more important than now to really sit down and truly analyze things. At any rate, the bottom line conclusion drawn from all the reports recently is that we will have to Work Hard & Save in order to get out of this mess. Tom Friedman wrote a piece that touches on this here. And New York Mayor Michael Bloomberg recently stated in a TV News Interview that it is in these tough economic times that we have to invest for the future.

Oftentimes, a short-term financial analysis renders a solar system as a bad investment -- it just doesn't make sense from that perspective. But a long-term analysis changes things. Simply put, a solar system purchased at full installed cost & financed, costs more per month than the electricity it produces. So, when an article touts it as a way to save, they need to change it to long-term savings.

So, here is an example:

If I spend $100/month on electricity then I would have to pay $45,000, on average, to purchase a solar system to produce that approximate equivalent. If you finance this purchase, with a 30-year fixed rate mortgage at 5.5% you would have to pay about $250/month. So you would, in effect, transfer from making payments to the utility to making payments to the bank. The net effect of such a transaction is a minus $150 for the purchaser. Also, the value of this mortgage would be $92,000 double the initial expenditure. So, how then is this a savings? And why should someone purchase a solar system?

Firstly, by paying the bank, you are becoming the owner of your own production system. This is much the same way as paying off the mortgage of your home. You eventually own it. So, the utility is to solar what renting is to homeownership. "Throwing away money?" ;-)

Secondly, utility rates will rise over time and a solar system that can last over 30 years will continue to produce power at a value that increases with utility price inflation. So over this period, the value of production far outpaces the initial cost of the system. Using a 10% utility inflation rate and using the same amount of electricity as the present day $100 amount for 30 years, the homeowner would spend $215,000 but a solar system could produce almost $185,000 in electricity. The difference $215,000 - $185,000 = $30,000 favors taking the action for the benefit of the savings over inaction that supports the status quo.

Thirdly, there are incentives that help to buydown the purchase price of a solar system. The State of Florida has a Solar Rebate Program that provides up to $20,000. There is also a Property Tax Exemption that can be applied to your property for the full value of the installation for up to 10 years. And the Federal Government allows you to apply a 30% tax credit (capped at $2000 until the end of 2008 and uncapped for 2009) for the purchase of these systems. Overall, the value of these incentives range from approximately: $13,670 to $34,175 for 2 to 5 kW DC Solar Electric Systems.

Fourthly, over the long-term, it is sensible to purchase this solar system that pays for itself 17 times over during its lifetime -- in strict financial terms. So, to bring this discussion full circle, the 5 kW DC Solar Electric System that costs approximately $45,000 would have a net cost after incentives of $10,825 ($45,000 - $34,175). It could produce approximately $100/month that with a 10% utility inflation over time will produce approximately $185,000 worth of electricity. This could fully cover your current electric usage. And combined with net meetering, this would make it a fool proof invesment.

Finally, even if you pay the full price without incentives, the longterm benefits is more than double the initial cost. And by the way, did I mention that you can even purchase a larger system to overproduce and get paid by the utility company? It's not a get rich scheme but it is another source of incentives not calculated here.

Another opportunity not discussed here is Energy Efficient Opportunities. Generally speaking, a home lacks Energy Efficient Opportunities if it's annual electric bill is approximately $0.45/sqft. For example, a 2,500 sqft home would have an annual electric bill of $0.45/sqft X 2,500 sqft = $1,125/12 Months = $93.75/Month. More food for thought: An Energy Star Certified Home could have $0.75/sqft which is considered to be 15% more energy efficient than a minimally code-compliant home.

You can use this example to understand your situation. Or you can call us to help you customize your solution.


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