You Can Afford Solar Power

Enlarge Image Image Gallery In the best cases, the returns on solar power will be more than 10 percent, the cash flow positive and the increase in property value greater than the system cost. LIQUID LIBRARY, MATTHEW T. STALLBAUMER

October/November 2006 Issue #218

By Andy Black

For years, questions about returns on the expensive investment in a solar-electric system were dismissed with the analogy, “What’s the payback on your swimming pool?” That sentiment might speak to the converted, but for most people considering solar power, the financial case is a major deciding factor.

Fortunately, photovoltaic (PV) technology has matured such that we now can offer serious answers to the payback question, backed by solid math and accounting. Answers vary significantly by local climate, utility rates and incentives, but in the best cases, the returns will be more than 10 percent, the cash flow positive and the increase in property value greater than the system cost. In other parts of the country where electric rates are low and incentives may be less, a grid-tied system may barely cover its maintenance costs.

What Factors Improve Payback?

The most important factors for making solar an attractive investment include high electric rates, net-metering policies, financial incentives and good sunlight. Unlike the other factors, sunlight is available in almost all of the continental United States.

High electric rates can take various forms. California, Hawaii, New York and other states have average rates well above 15 cents per kilowatt-hour (kWh). California’s tiered pricing system penalizes large residential users with prices as high as 33 cents per kWh. Solar energy offsets highest-tier usage first, making the customer look like a smaller net user.

Under most net-metering laws, which vary by state or utility, solar energy generated by users offsets the retail cost of the electricity they use. Even better, in California, solar systems are allowed to operate on a time-of-use rate schedule, which enables users to sell electricity back to the utility at peak rates, which can be even more valuable. These high rates are the most important factor in improving the payback.

Direct incentives can include tax benefits such as credits or depreciation. A federal tax credit went into effect Jan. 1 for 30 percent of the cost of a solar system, up to $2,000 for residential systems (there’s no cap on commercial credits). For PV systems, that typically means a $2,000 credit on your tax return for the year the system was installed. Then there are state incentives, including rebates, which can discount up to 60 percent of a system’s cost. Some states also offer tax credits, which can further reduce the upfront cost of a system. Consult a certified tax adviser to check the applicability of such incentives to your situation.

A big factor in some calculations is inflation in electric rates. Solar power is an inflation-protected investment, because it offsets electricity costs at the current prevailing retail rate. As rates rise, the owner saves even more. New forms of incentives, including renewable energy credits, or “green tags,” can be combined with net metering and other incentives. With these, a PV system can garner substantial revenue per kWh generated.