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Solar Economics 101

Posted on Thu, Mar 28, 2013

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.

electricity bill redacted

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

Cost of Power

As a first step, let's look at the cost power for a typical household. Electricity consumption is generally measure in a unit called 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-meeting 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 new 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 metting, 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 (70 kWH x 18¢ per kwh). As elecrcity prices rise, the savings will also increase.
(See Department of Energy info on electricity prices and comsumption in your state).

Incentives and Installation Costs

Okay, so you now have a sense for how putting solar panels on your roof can drastically loewr 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 afforable. 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 Like 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 maintence and insurance coverage for the solar electric system, over a 25-year period, the value of owning a solar electric system will totaltotal $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.

Energy Savings1
Maint. & Ins.
Net Energy Savings

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)

This blog was reposted from Sungage's Solar Wealth blog with permission by the company.

See also: Solar Energy


About Solar Wealth and Sungage:

Sungage is a financial services company committed to helping more people own solar.  Sungage created the first loan for residential solar that allows homeowners to own solar electric systems from day one, without requiring home equity or a lien on the home.  Sungage products and services are only available through their network of Partner Installers.  For more information, please visit www.sungage.net


Solar-wealth.com is a blog managed by Sungage.  This is a space where members of the solar community can share their insights on solar ownership.  Readers of solar-wealth.com can expect to read perspectives from other homeowners, installers, policy makers, as well as experts in economics and finance.  We cover a range of topics to help educate, inform and support people who are interested in solar ownership.