The New Economics of Solar(and how you will benefit.)
Perhaps what is most impressive about solar power is the dramatic decrease in cost that has taken place in the last ten years. Until recently, alternative energy was considered a luxury mostly enjoyed by the eco-conscious affluent. For the rest of us, solar was more of a curiosity and because of the substantial up front costs, installation of a solar array was considered impractical.
But before an economic case for photovoltaics (pv) is made, it is worth noting some other advantages of installing solar on your home or business.
A recent study conducted by the National Renewable Energy Laboratory (NREL) found that solar powered homes sold 17% faster and 20% higher than non-solar homes.
Solar qualifies for numerous incentives-federal tax credits and grants, accelerated depreciation (for businesses), special property tax assessment for Illinois residents.
Energy security. Reduced exposure to electric pricing fluctuations -your rate is locked in for 25+ years.
Money saved is after-tax dollars.
Solar modules have a 25 year power warranty.
Excellent reliability due to little or no moving parts in the system.
Attractive rate of return on your investment.
Metrics: The Tools to Evaluate
There are several metrics one could use to judge the profitability of solar. We will start with a projection of energy capture and its potential to offset the electric bill of an average American home.
According to the U.S. Energy Information Administration (EIA), the average American home uses 897 kW hours (kWh) of electricity per month and pays 12.9¢ per kWh.
A 7kW solar array is capable of producing 230,000 kWh over a 25 year period. ( An interval of 25 years is chosen because most solar modules have a 25 year power warranty.)(1)
Assuming no electric rate increases for 25 years, the solar system would generate $29,670 worth of electricity over the 25 years of operation.
However, the U.S. residential electricity rate has risen 2%/yr. on average for the past 11 years. Taking a 2%/yr. increase in rates into account, the same solar array would generate $34,304.50 worth of electricity during its 25 years of operation.
Another metric used to determine the financial viability of a solar project is the Levelized Cost of Energy (LCOE). In the simplest terms,
While the measure is more often used in large commercial projects, it is a calculation that produces a result that allows comparison to your current utility bill. Using the 230,000 kWh mentioned earlier, a 7kW solar array could have a LCOE below 5¢/kWh. It is worth noting, that when making comparisons to a utility bill, the LCOE of solar would contain no taxes, adjustments, or fees.
A metric used to estimate the profitability of an investment is called the internal rate of return (IRR). The IRR is a great tool to compare the yield of alternative investments. Calculating the savings for an average home that has installed a 7 kW array at a cost of $1.95/watt, the IRR would equal 12.55%.
Now, consider the cost of doing nothing.
Given the numbers from the EIA, the average household would spend $44,476 on electricity assuming a 2%/yr. rise in electricity rates. See chart below.
Contrast the cost of electricity with the savings from a roof mounted, south facing 7kW array .(2)
How Solar Competes With A Traditional Investment
In the graph below the red bars represent the annual returns of a 7% investment minus the cumulative annual cost of electricity. The green bars represent the cost of the array and the savings from solar minus the annual cost of electricity with solar.
The investment would yield more than $52,000 over a 25 year interval, but the cumulative cost of electricity would be $44,476. The difference between the yield and the cost would equal $7,529.00.
Solar, on the other hand, would yield a savings of $25,923 after system cost, but the cumulative cost of electricity would be $6,910. The difference would equal $19,013.
The Best Of Both Worlds
What if the savings from solar were invested?
The graph below models the annual return of an investment (red) and the annual return of an investment with monthly contributions from the solar savings (green).
Again, the investment alone would yield $7,529 after taking into account the cost of electricity for the 25 year duration.
However, when the monthly savings from solar (starting in year 8) was placed in an investment with a 7% interest rate, the balance on year 25 would be $32,456.
Not too shabby!
DISCLAIMER: This information is provided as an illustration of potential financial benefits stemming from ownership of a solar electric system. This is not a production guarantee. A professional accountant or tax advisor should confirm these estimates. Blue Stone Solar LLC does not warrant the applicability of these estimates and disclaim all liability.
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