“What was your solar installation’s ROI?”
This was a question recently posed to me packaged with context issues (is solar financially sensible, discussing Chinese panels, solar panel production pollution (without mention of coal’s pollution), and otherwise). When I began to a typically geekish ‘it all depends’, the interjection: no, what was YOUR solar system’s return on investment. The quick answer: about (under) three years.
In other words, an over 20 percent per annum, year-in, year-out return. This is an extremely high ROI for a (mainly) low-risk investment. And, that is an after-tax ROI.
Upfront, that ROI is unusually good and not replicable in most circumstances today even though solar on the rooftop remains a good to excellent low-risk investment for most people in most circumstances.
However, the quick “about three years” answer obscures complexities and provides a distorted window to support 2022 decision-making about solar installations. Join me, after the fold, for a quick exploration of some of those complexities. (Though, to be clear, not all will be discussed. For example, there are many complexities re taxes (both decreasing and increasing taxes) that are a labyrinth not to be lost in.)
A quick background. In 2010, we installed a 24 panel, 5.5 kilowatt DC (or 4.7kw AC) solar system. (We also have solar hot water which isn’t included in the ROI discussion below.) We paid a total of $31,564 or $5.72 per watt installed.
While this was a big check to write, the solar cost came along with a bigger cost for some home improvement and a small extension. Facing some serious check writing, we refinanced our home to a lower rate and incorporated the solar investment into that refinancing. (Speaking of complexities, the interest rate savings alone could be said to pay for the solar installation but, well, let’s not include that in the discussion.)
Entering into complexity
2010 isn’t 2022
When it comes to clean energy technologies and costs, a year can seem like an eternity. Twelve years is almost a different world. Solar, in 2010, was somewhat niche. In 2022, it is mainstream. Over that period, costs plummeted while quality improved pretty much across the entire clean energy world. Every $ invested, today, in a solar project goes a lot further than a 2010 $, (And, well, here is yet another complexity example: a 2010 $ is worth roughly $1.30 today. If, in the general economy, “A dollar today only buys 76.923% of what it could buy back then,” when it comes to solar, a $ buys over twice as much today as in 2010.)
Many factors make 2022 better for solar ROI than 2010:
The ROI question came within a ‘does it make sense to do solar today’ context? With that in mind, several factors make today (far) better than 2022 for a home solar installation:
- Installation cost will be 50% (or less) of our $5.72 per watt.
- Note that I am not tracking this closely in our area. However, close friends bought a slightly larger system in 2016 for 50 percent of our cost per watt. Solar Sage reports that March 2022 (with spiking inflation) average Virginia installations are $2.88 per watt.
- Efficiency per watt is up. Our modules are about 14 percent efficiency while it is possible to get 20(+) percent panels on a home installation. In other words, a nearly 50% increase in productivity per watt installed.
- Combine the two above and a 2022 installation should lead to produced electricity costs of about 25-30% of my 2010 installation even while offsetting the exact same utility electricity rate.
In my particular situation, several factors drive a lower than optimal electricity production. The primary (16 of 24 panels) is east facing, thus roughly 85 productivity of a south-facing exposure. The system was poorly planned as our chimney has significant impact on two panels (reducing production by about 50 percent) with some impact on several others). And, a tree to the southwest shades during (late) afternoon and reduces overall productivity by perhaps 5 percent. All told, I ballpark this as somewhere in the range of a 15-20 percent loss of efficiency against an optimal installation.
A better 2022 installation of the same kilowatts (what would be called the system’s nameplate capacity) should produce, therefore, over 50 percent more electricity in its first year than my panels did in theirs.
Our 5.5kW system produces a bit more than 6 megawatts (or 6,000 kilowatt) hours of electricity a year. At 12 cents per kWh, that is about $750 in electricity value. A modern, better designed system should be ballpark 8-9 mWh or around $1000. That 2022 installation should be, before other factors, about $15k which would put the straight, simple ROI in the range of 6-7 percent.
Utility bills aren’t the entire equation
Of course, the sticker price isn’t the price and isn’t all to be concerned with. The Federal tax credit of 26% raises that 2022 installation’s ROI to 9 percent. But, well, those tax credits have changed and thus back to our installation.
Factors driving a better ROI for my installation
Several items boosted my ROI compared to today:
- Tax credits and government programs
- The Federal solar tax credit was 30 percent in 2010 and is 26% in 2022 (to be 22% in 2023).
- In 2009/10, Virginia used a portion of the Stimulus Package for the Virginia Renewable Energy Incentive Program which provided just under another 30 percent coverage of the system’s cost. This was a targeted program that doesn’t apply today.
- Combined, these two programs designed to spark a clean-energy industry and boost deployments, lowered our net system cost to about $13,500.
- Solar Renewable Energy Credits (SRECs)
- A dozen years ago, Virginia solar installations were eligible for many of the states in the regional (PGM) (SREC) program. This began to be cut off roughly a decade ago but our system was grandfathered into several of the states’ markets and we ended up receiving just over $20,000 in SREC payments. On our system, this contributed 15% ROI per year.
- The SRECs were the most uncertain and highest risk part of the ROI. The payments varied, sometimes quite significantly, from year-to-year. The actual payments ended up much higher than expected when we installed the system. (We were offered $2,000 for our ten years of SRECs when installing them but I decided to gamble and ending up doing far better than that.)
- Utility charges are another complicated arenas as the fixed charge for home solar installations (guaranteeing a minimum payment even when sending more power back to the grid than receiving under net metering) has been increasing. So far, this has been annoying rather than significant in terms of total ROI.
Some ROI value streams many are unaware of
In Virginia, localities are allowed a very specific solar subsidy: reduce the house assessment by the cost of installation (pre tax-credit) for a five-year period. This reduced our real estate tax burden by about to 6 percent of installation cost. (This is another great example of complexity. Reduced real estate taxes also meant higher federal and state income taxes even as it was a net financial benefit.)
Homes with solar sell faster and at a higher valuation. Re the second, Zillow finds homes with solar sell for four percent more. Some work suggests a ballpark equivalent to 20x the annual electricity savings (for our house, that would be about $12k or about 90% of the net installation cost) while others point to as much as $5k per kilowatt installed (or $27.5k for my home, though this is hard to believe because that is perhaps twice today’s cost to install panels). (As part of the complexity equation, our neighborhood is besieged by teardowns and our (much) improved home might be a teardown to create space for a McMansion. That would eliminate the $12k-$25k additional property value.)
Numerous other value streams further complicate the ROI equation
A wide range of other benefits and value streams add further complexity to understanding the return on investment. Here are two with real financial returns that are essentially never calculated into the ROI equation:
- Solar panels, for example, protect the roof and increase longevity (for areas under the panels, at least).
- Solar installation shading reduces heat gain inside the house and reduced air conditioning loads (balanced against much lower increased heating requirements) might lead to energy savings of five percent of the cost of installation over the system’s life (and thus perhaps a 0.25-.5% addition to the annual ROI).
Not everything is $ and ¢
When it comes to returns and valuations, not everything is clearly calculable in dollars and cents terms. Having solar on the roof ‘brands’ my household as walking the talk of clean-energy advocates. Soon after installation, my kids told me that they liked going to the bus stop because “we have the coolest house in the neighborhood”. It’s been a door opener as, more than a few times a year, someone walking by will stop and say hello while I garden and start a conversation about the solar panels. And, giving directions pre-Waze was eased by being able to tell people “the white house with solar panels”. And, well, I am (we are) happy that about 70 percent of our home and car electricity requirements come off the rooftops. Is all that “worth” $13.5k? No, but it is does have value.
Looking to some other questions
As indicated in the opening, some other issues were raised beyond the seemingly simplistic “what was YOUR ROI” questions. These included longevity and implications of Chinese panel production.
Longevity
We installed our panels in 2010. Very roughly, they should have been ballpark 90% of Day 1 production in year 10 (e.g., 2020) and 85% in year 25 (2035). Solar panels theoretically could continue to produce electricity essentially indefinitely but there will/would be a continual degrading (perhaps 0.5% per year).
The other side of issue is that capacity per square meter + productivity per watt installed increases every year. Our panels are 230 watts. Equivalent options today are 380-400 watts (and there are panels available for purchase approaching 600 watts). E.g., a 50% increase per square meter.
And, the efficiency per watt installed is also up in the range of 50%.
My installation is 24 panels of 230 watts (5.52 kilowatts total) producing at 14 percent efficiency with 6-7 mWh/year of production. If replacing today, on the same footprint, the installation might be 24 panels of 400 watts (9.6 kw) producing at 20 percent efficiency with production in the range of 16 mWh/year. In terms of longevity, at some point it could be energy resiliency (my current system doesn’t enable a battery installation), power demand, and financially sensible to replace installed panels if the home’s time horizon makes this viable (and, well, living in tear-down central makes this uncertain).
To reiterate, while the cost to install has gone down by over 50%, the improved efficiency means that the cost of produced kilowatt hour has gone done by perhaps 60-70+%.
My scribbled on the back-of-the-envelope ballpark calculation is that a 2022 installation would have a 6-8 year ROI without including the improved resale value and other (in)tangible benefits (potential for battery storage for resiliency AND improved power quality in the house; making a public statement supporting clean energy; etc …). One could put panels up today and ‘forget they are there’ for the next 20+ years.
So many societal value streams
There is value to the system for far more distributed power generation. Right now, solar on the roof provides far more value to the grid/system (reduced demand on power lines, reduced requirement for buying very high cost peak electricity, reduced requirements for grid improvements/maintenance) and society (reduced pollution) than the home owner receives via the net metering system.
As to “Chinese panels”
- Let me be clear, I (strongly) support more global (including in US) panel manufacturing.
- However, let us recognize that solar panels are really a commodity product: lowest cost producer meeting some quality standards wins in the market.
- The PRC, unlike so many other countries, has actual industrial — and clean energy industrial — policy. There are many supports in the PRC that perhaps the United States should match to boost solar panel production.
- However, let us be clear, the panel is now a small fraction of the installed cost.
- Very roughly, expect a rooftop solar installation to cost about $2.50-$3 per watt. On the wholesale market, solar panels cost about $0.15-0.20 per watt (and perhaps $0.40 to an installer).
- E.g, the solar panels, themselves, are perhaps 15 percent of the cost of installation. Labor + soft costs (permitting, BD, etc) are far more significant (and local).
- The full hardware (racks, inverters, …) cost, in the US home market, is far less than half the installed cost as hardware costs have fallen far more than soft costs and labor.
- This is a big part of the change from when we installed where the wholesale solar panel cost was about $2 per watt (and all the hardware components were about $3 per watt).
- Very roughly, expect a rooftop solar installation to cost about $2.50-$3 per watt. On the wholesale market, solar panels cost about $0.15-0.20 per watt (and perhaps $0.40 to an installer).