Since buying our house in 2014, I have always been interested in going Solar. Living in Southern California means you have likely had at least a dozen or more Solar representatives come to your door. Our usage for a 3,300 sqft house is much lower than most in the neighborhood and I had always assumed that going Solar would not pencil.
The typical conversation would go something like this (in 2014 during our first summer in the house):
Solar Guy: Is the home owner available?
Me: Yes, I am the home owner. How can I help you?
Solar Guy: Have you ever considered going Solar? Because we have a killer deal going on right now…
Me: I would love to go Solar, but I didn’t think it would be worth it based on our usage. Most of my neighbors all have pools, are home during the day, and run the AC 24/7. My wife and I are both gone during the day, we don’t have a pool, and we only run the A/C in the summer at night.
Solar Guy: What is your average electrical bill? You would be surprised what we can do…
Me: (Excited that this time might be different)…My bill probably averages about $45/month, but we have only been here for about 7 months.
Solar Guy: Oh…Wow! Your usage is really low. Most of your neighbors I have been speaking with have bills that average $150+/month, with summer bills running them in excess of $300. Your right, this probably doesn’t make sense for you until your bill is over $100/month.
Me: (now bummed)…Ok. Well, thanks for stopping by.
In the summer of 2014, I probably had this conversation at least 9-10 times. The Solar guys stopped coming to our house altogether. We must have been flagged as the weirdoes with extremely low power usage. And honestly, I never did a lick of research on my own, because I just assumed that it wouldn’t work.
Fast forward about a year and our average has almost doubled over the last 12 months to $81.74.
- In July of 2014 we bought a Danby Chest Freezer for the half cow we purchased with a friend (we are down to our last 20 lbs out of 200 lbs).
- In September of 2014, we built an outdoor kitchen and installed a Bull Mini Fridge.
- In October of 2014, we rented 1 of the 5 bedrooms in our house (@ $600/month, he moved out in August of 2015).
- In April 2015 we got a credit that is artificially lowering our bill (please ignore).
- We rented out a 2nd room in our house in April of 2015 and through June of 2015. And then rented it to the same friend starting in October of 2015.
- In August of 2015 we installed our new hot tub (was only hooked up for half the month). It is supposed to cost about $19/month if we keep it hot all the time, which we intend to do since we use it almost nightly.
- We have had an incredibly hot summer compared to last year and have been running our A/C much more this year.
- And lastly, rates have gone up.
Simply put…Our usage has gone up, which also means we move up in the 4 tiered system (where rates per kWh are higher) that we use here in Southern California (to be consolidated down to 2 over the next 2 years). The consolidation will only lead to a higher rate per kWh for everyone’s current usage that falls under the first 2 tiers.
I expect that our bill from November of 2015 through August of 2015 to increase by at least the $19/month for the hot tub. With that alone, we will be looking at an average monthly bill by next October of about $100/month before any rate changes from the electric company.
Solar may finally make sense. This would be great, because as you all know I am also looking for ways to defer taxes, and solar comes with a nice fat 30% tax credit (not a deduction, but a tax credit). My lips are already salivating.
Time to Re-Evaluate Solar
Before we go any further, it is probably a good time to let you guys know that this was all inspired by Vawt over at Early Retirement Ahead, when he shared his Solar Update. For some reason after reading that post, I decided to do my own homework and reach out to a few solar companies to get quotes and put them through my own financial model.
The two companies that I reached out to were Solar City (an Elon Musk company) and SolarMax (the company my neighbor went with and recommended). I actually started my due diligence process with Solar City because a friend of mind was actually involved with them. She submitted my information into the system and I patiently waited for my call, which to my surprise took almost 2 weeks. Solar City is trying to test out a direct sales force through referrals and the bugs in the process and technology have not been completely ironed out just yet.
Here is how the conversation went when I got my first call from Andre (Solar City Rep):
Andre: Hello sir, I have been informed that you are interested in finding out more about going solar, is this correct?
Me: Yes, I really want to see if it is a viable option that pencils for me. I want to let you know upfront that I am only interested in owning the system, I don’t want to lease it, pre-pay, or pay for what I produce. I want to own the system.
Andre: Thanks for letting me know. This helps me narrow down the information I will share with you.
Me: I would also like to address one other concern before we get started. I have had conversations with other Solar reps in the past and have been told that Solar really doesn’t pencil unless my bill was at least $100/month or more on average for the year.
Andre: We can certainly work with you. Our minimum requirement is $60/month. We custom build the system to your needs.
Me: That is great news. Let’s continue then.
This conversation already started off better than the ones I had in the past. After reviewing my usage and bills over the last 12 months he sent me a proposal for a 3.45 kW system that was estimated to produce 97% of my usage (based on the last 12 months). Andre presented me with the proposal for both the outright purchase (pay for the system all up front) and their 30 year financing option (with no pre-payment penalty). The price before the tax credit was $17,570 and $12,299 after the 30% tax credit from the Federal Government. Unfortunately the California fund is all used up 🙁
Armed with the inputs I needed for my model I went to work and calculated a 30 year IRR and NPV for both options.
Then I set up a call with SolarMax, the company that my neighbor used and he thought I should at least get a second quote from. He was confident that they would be cheaper, as Solar City is known to be one of the highest priced solar systems (because they are Solar City).
This time I had a similar conversation but a rep actually came to my house. After going through my bill and usage the rep proposed a slightly bigger system at 3.90 kW that would produce 111% of my usage based on the last twelve months. He suggested I might want a little extra in case our usage creeps up as we eventually have kids and people are home more. It made sense, and he said also reiterated and it will still be cheaper than what Solar City proposed.
I asked for the same two options as before with an outright purchase and their financing option. They actually had several financing options, but the longest term they had was 20 years, so I asked for that one. This bigger system came with a price before the tax credit of $15,017 and $10,512 after the 30% tax credit.
After gathering all the information and running all the inputs into my model this is the summary of the options:
The Assumptions Used in The Model
- That rates would increase 4% per year. I know we are actually getting a much bigger jump that that over the next 2 years as they consolidate the tiers from 4 into 2.
- That our usage would go up by 10%.
- Assumes no credits back from the electric company. Which that will likely not be the case.
- Used a discount rate of 7% to calculate the NPV.
- The financing option in the Solar City option is 30 years at 4.99% interest. No prepayment penalty.
- The financing option in the Solar Max option is 20 years at 5.654% interest. Includes a 3 month grace period before first payment is due. No prepayment penalty.
- The warranty for the panels and the central inverter for Solar City is 30 years.
- The warranty for the panels and the micro inverter system for Solar Max is 25 years.
- The model is based on a 30 year time frame.
- The panel’s efficiency of converting sun into power will degrade about 0.5% per year.
- I don’t have anything built in for cleaning. I think I can do this myself, we will see.
- Zero down in the financing options.
What Company and Option Did I Choose?
When I first started this whole thing I was biased to the fact that I was likely just going to purchase the system outright and pay for it all up front. But I wanted to see what the numbers looked like if I allowed some leverage. My thinking was that if the numbers still worked with financing that it might be a better option, so that I could use the capital for something else entirely (like a 2nd investment property in 2016).
Until I modeled this out, I totally missed the fact that because of the ZERO down financing and the relatively up front tax credit (within year 1), that financing would be the best option from both an NPV and IRR stand point. This made for a rare situation where I could get the system with no money out of pocket and would have no payback period as the tax credit made it a profitable venture from day 1.
As a refresher, a positive NPV says that the project is worth considering, and if it was negative then all bets were off and Solar would be off the table. The IRR is the rate that makes NPV zero and is the rate you use as a comparison of what you could get if you allocated the funds to other investments. In this case, there is no investment, but the IRR is still very robust at 23%. If you model this yourself you will realize that you can’t use the regular IRR calculation in excel, you actually have to use the MIRR (modified IRR) function.
So, can you guess what company and option I chose?
Yep, I went with Solar Max and took them up on the ZERO down financing for 20 years at 5.654% interest. It had the highest NPV at $11,861 with an IRR of 23%. Oh, and did you catch the fact that I also get a Free iPad mini to boot? My wife was pretty happy about that, she has already claimed it.
A Deeper Look at the Numbers Over Time
I ran multiple scenarios and in all cases, this was still a great financial move. I decided to share the case that I think is most probable and in my opinion a bit conservative. The upfront cash flow in year one is an amazing gift from the government. You can see that cash inflow in year one in the chart above (Orange bars).
When evaluating a financial problem such as solar, you need to be able to calculate the net cash flow via a cost/benefit analysis. In this case, you take the old expense minus the new expense to calculate your savings (at least in this example it is a savings), which then becomes your stream of cash flows used to calculate NPV and IRR. In 27 out of the 30-year analysis, there is a savings or positive cash flow. However, if you study the chart carefully above, you will notices that solar will actually be slightly more expensive in year 2 through year 4.
The cumulative incremental expense over this period (year 2 through 4) is $210, which is more than offset by the huge tax credit in year 1 of $4,505. And to be honest, I’m pretty confident that in actuality Solar will prove to be cheaper. This is for a few reasons:
- I did not factor in any credits back from the electric company for the over production of 11% of our usage that our system will produce. We will be producing approximately 600 additional kWh above and beyond our usage. Selling this back to the utility at tier one pricing of $0.15/kWh, we should get a check of $90/year or more based on rates going up and the consolidation of the tier system here in California.
- I modeled an average rate increase of 4% a year. Historically it has been in the 4-6% range, however, I know that the jump will be higher in 2016 and 2017 due to the tier consolidation.
These are assumptions that I believe will only lead to upside or at the very least cover anything I might have missed when putting my model together.
Note: I think it is a good time to point out how the tax credit works for those not familiar. First, a tax credit is way better than a tax deduction. With a tax deduction, you are getting 30 cents on the dollar (or whatever your effective tax rate is), where a tax credit is literally a credit against your tax liability. For example, if your total tax liability is $15,000, and you have a tax credit of $5,000…your new tax liability is now $10,000. You also want to make sure that you have a big enough tax liability to benefit from the tax credit. Meaning that you need have at least a tax liability the size of the credit.
If you typically get money back when you file your taxes, then this would increase that return. Or if you typically cut a check to the IRS like I do, this will reduce or possibly even eliminate the need to write a check at all. In in the best of scenarios maybe even get a refund…that would be a nice change 🙂
The last chart I want to share is the cumulative projected savings over 30 years. Over the 30 years, solar is projected to save us about $41,000. The cool thing is that the panels will continue to produce power beyond the 30 year period, the problem is, no one knows for how long. Only time will tell, but I did read about 60-year-old solar panels that were still producing power.
This was a very special opportunity to use debt productively. It still blows my mind that this was possible. The warranty is 5 years less than that of Solar City, but I’m willing to take my chances for those additional 5 years. The numbers are so good, it doesn’t even mater.
Benefits of Going Solar:
- Tax Credit of $4,500 for 2015 tax year. That is money in our pocket. Now I don’t think I will actually get a refund, but it will be $4,500 that I don’t have to hand over to Uncle Sam.
- We gain some energy independence.
- We are reducing our carbon foot print, which is good for the environment.
- It will actually be accretive to Net Worth. Net Worth actually benefits by the amount of the tax credit.
- It made for a fun blog post to write.
The system will be paid off in 20 years with the warranty ending in 25 years. What happens after that?
Well, the manufacturer guarantees that by year 25 they will still be generating at least 83% of the power they did when you first had the system installed. This means that at year 25 the system will still be producing about 92% of my usage. At some point, I may have to replace one or multiple inverters after the warranty expires. But what is great about the micro inverter system that I chose is that if one goes out it only effects the one panel and not the whole system. A lot of the systems around me are set up with a central inverter system that is only warrantied for 10 years and if it goes out, your entire system goes down until it’s fixed.
The other thing I can do over time is add a solar panel here or there to keep the system producing 100% of the energy I need. The beauty of a micro inverter system.
I’m looking forward to sharing the performance of this system over time with you all (thinking semi-annually). I personally think I modeled this thing pretty conservatively and am actually expecting to see some upside from what I modeled. But only time will tell.
Have you ever considered Solar?
Did you know the tax credit expires in 2016 It was actually extended another 5 years after publishing this post? Run the numbers to see if it might be a viable option for you. It’s easier in California because of all the sunlight we get.
-Gen Y Finance Guy
p.s. as I publish this, we are about 3 weeks from getting our panels installed.
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