WHAT’S THE PAYBACK FROM A SOLAR PHOTOVOLTAIC (PV) SYSTEM?

SolarPanelsApr15By Jack Barnett and Jim Sanders, Sustainable Energy Education and Development Support (SEEDS) Copyright 2014 by SEEDS of Northeast Pennsylvania

 

You’re heard it somewhere, if not from SEEDS: the prices for solar panels have fallen 80% since 2008. So is investing in a solar electric system for your home the right thing to do? There are lots of reasons to want your own solar system (e.g. energy independence, reduced pollution, reducing your home’s carbon footprint, etc.), but let’s focus simply on the financials and explore the details of how to answer this question for yourself. There are five key parts to the question:

  1. Is my home a good location for solar?
  2. What size PV system do I install?
  3. How much will it cost?
  4. How much money will I save?
  5. And, is PV a good financial investment?

We will take each of these in turn. But first, let’s clarify the type of system we will be discussing here. We are not talking about ‘off-the-grid’ battery backup systems because batteries are expensive, toxic, and require a controlled environment with significant maintenance efforts. Rather, we will focus on the most common, grid-tied, battery-less, solar photovoltaic (PV) system. Nearly every home is already connected to the electric grid, and with Pennsylvania’s net-metering regulations2, the utility will act as a virtual battery for you, crediting you for any excess electricity your system produces. In effect, your electric meter will run backwards during the times when your PV system is producing more than your home is using (and the utility then gets to sell that to your neighbors). Of course, you must still pay the flat-monthly connection fees, taxes, etc. (currently from PPL this is a little less than $15 per month), as well as for any electricity that you consume that is greater than what your PV system generates in total during the year.

Is my home a good location for solar PV?

There are LOTS of factors here, but the biggest concerns are orientation and shading. In our area, the PV modules (as the panels are referred to in the industry) should be mounted so that they face directly south and at a tilt angle of approximately 25-45 degrees toward the horizon. The most common place to mount them is on a south-facing roof. If your roof is not facing directly solar south or is not at the optimum angle, some efficiency will be lost, but it still may be viable.

Also check to be certain any trees, utility wires, dormers, chimney, or satellite dish, etc. do not shade the array site between the hours of 9 a.m. and 4 p.m. It’s best to be totally unshaded even in winter when the sun is lower in the sky. In cases where a roof mount is not possible, ground mounting in an unshaded area can be a good alternative.

Solar#1If you have questions about the suitability of your site for solar, have an evaluation performed with an instrument called a Solar Pathfinder. At least three SEEDS volunteers have one of these tools and are glad to help other members in assessing possible sites (contact Jocelyn Cramer, our SEEDS Executive Director at jocelyn@seedsgroup.net). Professional solar installers will also have one of these, or a similar tool, and often include a free site evaluation as part of estimating the cost of a solar installation.

What size PV system do I install?

Sizing a system is also something a professional installer can do with you. Your site may be physically limited by the available unshaded roof space (or ground area). Or, you could be limited by the overall amount of money you have to invest. For the optimum financial return, you want a system that produces no more than the electricity your home uses in a year.

Note: In PA during each April billing cycle, a utility pays for any excess kWhrs that its net-metered customers have collected. However, they don’t pay at the full retail price that you’d pay to them; rather they pay out only at the “price-to-compare” rate, which does not include the per-kWhr distribution rate or certain taxes and fees.

Now find your past electricity bills, or use your utility’s website, and locate your home’s total annual consumption in kWhrs. According to the US Energy Information Agency, the average Pennsylvania residence consumes 10,400 kWhrs3; so let’s use the round number of 10,000 kWhrs for the rest of this example. To avoid over-sizing, we don’t want your PV system annual production to exceed this amount.

Solar#2It is important to know that nearly all PV modules sold in the US are tested and rated by one or more independent laboratories for their capacity to produce electricity. The ratings are in units of “wattsdc” or in other words, when there is full sunshine on the module, it will produce its rated quantity of watts in direct current (DC) electricity. Most of the modules targeted for the residential market today come with a rating of between 230 and 340 wattsdc. For this example, we will use modules that are rated at 250 wattsdc, since these are likely to be among the least expensive. The next question is: how many PV modules do you need to generate 10,000 kWhr of electricity in a year?

Production will vary with weather, especially clouds and snowfall. But we have a simple rule of thumb based on experience from the local installers and existing system owners for an average system: For every one wattdc of rated capacity, a PV array in our area will generally yield approximately 1000 watt-hours, or one kWhr, of electricity annually. Alternatively for those so inclined, there is a web-based modeling tool called PVWatts4 that takes into account decades of weather station and satellite monitoring across the country. PVWatts shows (see example on the last page) that for a perfectly oriented and completely unshaded PV system in Honesdale PA, every one wattdc of PV capacity will produce 1178 watt-hours (or 1.178 kWhrs) of electricity during an “average weather” year. If your site is more than 10-20% away from prefect, then you should use the PVWatts model to determine the appropriate yield factor for your situation/location (see page 5 for how-to instructions).

So for the example house load of 10,000 kWhrs, when divided by our rule of thumb yield factor of 1000, that equals to 10,000 wattsdc, or 10 kWdc, of PV capacity required to match the annual electricity consumption. Since each module produces 250 watts, we will therefore need 10000 ÷ 250 = 40 modules (round up, if needed). If we were to choose more efficient modules, then this number would be smaller (and the array would use a smaller space on your roof). But what matters to us is how this will affect the cost.

How much will the system cost?

For a definitive answer, you’ll want to get a quote from one or more solar installers. Every house and construction site is different with all kinds of potential issues that can increase (or sometimes decrease) the costs. Will the system be attached to the roof (and how), or be ground mounted? Will your system use US-made or imported components? How efficient and/or stylish will it be? DIY labor, or not? All these factors will affect the total cost of your system. Plus each town has different building permit and inspection fees that add to the total cost as well.

The PV modules are generally the largest cost element of a new system installation. While PV module prices have been dropping in recent years (due to additional factory capacity in Asia and in Europe), the rest of the system components (referred to as the “balance of system”) and labor costs have not.

The second biggest cost element is the invertor. This is an electrical box that converts the DC power coming from the PV modules into the alternating current (AC) power that is used in your home and on the electrical grid. Invertor efficiency is important, and there are many different models and options as well. You could choose a single inverter, typically mounted near your electrical breaker box, or multiple micro-inverters that are typically mounted directly underneath each PV module. Generally, a single invertor will be less expensive with the larger number of modules you have. But, regardless of which type, the invertor(s) and other components must be sized correctly to the number and ratings of the PV modules.

Solar#3Your installer will design and verify this as part of his/her job, or you can come to a SEEDS Solar PV DIY Forum to learn how. The key point is that the DC rating of a PV system drives many, if not most, of the costs of a professional installation. For this exercise, we’ll use a local industry benchmark of $3.50 for each wattdc, which is a rough average for a basic system installation cost over the past year in northeast PA. Or with a DIY installation, for just the non-premium materials cost, the benchmark is probably closer to $2 per wattdc. So, for a professionally installed system with a rated capacity of 10,000 x $3.50 = $35,000 is the estimated total cost; or if you’re handy and can do the labor and electrical connections yourself, approximately $20,000 in materials.

Now, $35,000 is a lot of money for any home improvement project. So first consider SEEDS’ primary premise, that energy conservation is a lot cheaper than installing solar, AND the payback is much better. It’s going to make more financial sense to invest first in good insulation, reduce air leakage (by improving the envelope), reduce water usage, replace inefficient appliances, and especially eliminate wasteful lighting and phantom electrical loads BEFORE investing in a solar PV system (see the SEEDS’ home efficiency checklist5 for suggested places to start). So get those projects done first, then re-estimate your reduced annual electrical consumption.

If, after conservation measures, your budget still can’t afford this amount, a smaller system size will usually work to get started. There’s no reason you can’t add multiple PV systems on the same house over time, or in some PV system designs (especially with micro-inverters) you may be able to add to your system in stages. Plus, there are government incentive programs that can help make the investment more affordable.

How much will I save in the future?

The good news is that there are currently federal and other incentive programs available that help homeowners to financially justify installing a PV system. We’ll cover two such programs, but there may be other incentives available from the state or your local community, utility, or even some installers. Commercial (including residential rental properties), non-profits, and government entities in PA may have different programs available6. Visit http://dsireusa.org for a great summary of the renewable energy and efficiency incentives throughout the US.

Note: the PA Sunshine Grant program for residential and small businesses ran out of funding during 2013, and is now closed. We are hopeful that legislative efforts in Harrisburg may revive it at some point.

  1. Federal Income Tax Credits7 – If you owe individual federal income taxes, you can claim a credit against those taxes (i.e. dollar for dollar reduction) of up to 30% of the costs you paid (not including DIY labor) for a solar system added to your primary residence through December 2016.
  2. Solar Renewable Energy Credits (SREC) – The state of Pennsylvania requires investor-owned utilities to include a very small percentage of their electricity sold in PA to be generated by solar. The current requirement increases slightly each year to reach just 0.5% of their total “portfolio” in 2021. This is called a renewable portfolio standard (RPS), but the specific language used in PA is AEPS, or the alternative energy portfolio standard8. To meet this requirement, the utilities need to purchase “credits” (i.e. each credit being the right to claim one megawatt-hour of solar production for this purpose) from generators, including from residential PV systems! Previously an SREC might sell for as much as $250 and PV owners could sign multiple year advance supply contracts. However, due to some loopholes (e.g. generation outside of PA can qualify), the SREC market in PA has performed poorly, and the current market price is only around $30 for each MWhr (after market commissions and income taxes), or about 3 cents per kWhr. The future market for SRECs may change, but let’s assume for now this price will be constant in the future.

Both of these programs will help with affordability. As with all such programs, the fine print matters, so investigate to ensure your system will fully qualify for these incentives, and be sure to shop around for the best SREC broker.

In addition to these programs, of course, you actually get to use the electricity produced by your PV system (or “bank it” via net-metering and use it later in the year) and therefore, you avoid paying the utility for that amount of electricity each year. If you are currently paying 11.9 cents per kWhr (check those utility bills again), and you install a 10kW PV system in our area, your savings would then be $0.119 x 10000 = $1190 annually (average, depending on the weather). Of course, this assumes electricity prices stay constant into the future. Yes, there is some chance of prices declining (as they did briefly in 2011 and 2012), but the most likely future scenario is for electricity prices to increase. The PA Public Utility Commission9 reports that over the past 10 years, average retail electricity prices in PA have risen by 3.3% annually (including inflation). If we assume this long-term trend continues (but removing inflation), then the electricity supplied from utilities could reasonably be priced 1.5% higher each year. Therefore your PV system’s production (no fuel costs!) will be worth that much more in real savings to you!

Is PV a good financial investment?

Putting all these elements together, from a $35,000 investment in PV, you can expect to receive back:

$10,500 in federal income tax credits in the first year (if you owe that much, or this can be carried over to future years),

$300 from selling SRECs each year, plus

$1190 in savings on electricity bills in the first year, and increasing 1.5% each year thereafter.

Using a spreadsheet (below), we calculate that the payback period for this investment will be just over 15 years and have an internal rate of return of 4.5%. Yes, that’s a long time, but the warranties on most PV modules and inverters are for 20 or 25 years, and they could keep producing for as long as 50 years (no moving parts!). Once the system is paid for, each and every year thereafter, the system will be returning a profit to you (as well as cutting carbon emissions and other pollutants over that whole interval). And, especially for those on a fixed budget, your price for this electricity won’t be changing every few months. Even if you are not likely to own your home for that long, the investment can be recouped earlier from the increased value10 of your house when you sell it.

Conclusion

A return of 4.5% may not be what you could get from Wall Street, but then you won’t be taking nearly as much risk with this investment. And this rate of return is far better than the current interest rates on a bank account or new CD, and is roughly the same average return as from recent 10-year US Treasury bonds11. We think solar is a good investment in northeast PA, but as with any investment, you will need to make your own decision specific to your situation. At SEEDS, “education” is literally our middle name, so we hope this discussion has helped you learn more about the economics of solar PV.

Please send any questions or comments on this topic you may have to jack@seedsgroup.net.