Payback and other Financial Tests

for Solar on Your Home

By Andy Black

Solar electric systems can be a good financial With Net Metering on an Annual Basis, full retail value is
credited when excess electricity is produced and “sold” back to the
investment for California homeowners with good
utility. This excess usually occurs during summer daytime hours.
sun (little shade) on a south, southwest, or west- This credit gets used up over the winter and at night and can be held
facing roof, if they have a $75 a month or larger on account for up to a year. The utility ends up looking like a 100%
electric bill. The larger the bill, the better the efficient battery that can store energy for up to a year.
investment pays off.
Electricity is billed to customers on either a flat-rate schedule
(PG&E E1 rates), where electricity costs the customer the same any
Rates of return from 10% to 15% are common. If financed, the
time of the day, or on a Time of Use (TOU) schedule, (PG&E E7 or
loan cost is usually less than the monthly utility bill savings. And if
E9), where the cost depends on the time of day and year. The
the home is sold, the solar system should increase the resale value
PG&E E7 schedule has peak rates during summer weekday
by more than the system’s installed cost.
afternoons of 29¢/kWh and winter weekday afternoons of 11¢/kWh,
and off-peak rates at other times at a cost of 9¢/kWh. See Fig. 3.
The above claims are big, so rigorous treatment and critical
analyses from several angles including annual Rate of Return, Cash California Electric Rates: 30 Years
Flow, Lifecycle Payback and Resale Value need to be considered to 16
do a fair assessment. It is helpful to compare the solar investment to 14 Residential
other investments on an even basis. 12 Small Bus
IN THIS ARTICLE:
10
cents

Why solar pays off, including incentive programs that help per 8

How to test the economic value in the ways listed above kWh 6
4
WHY DOES SOLAR PAY OFF NOW? 2
High electric rates, Time-Of-Use metering, and government
0
incentives have contributed to the financial viability of residential
1970 1980 1990 2000
solar electricity. The key element for these analyses is the savings
on the electric utility bill generated by the solar system. A properly Fig. 2. Rates have gone up an average of 6.7% per year for 30
sized, designed and installed solar system can easily eliminate years. Source: CPUC “Electric Rate Compendium” Nov. 2001.
almost all of the total annual electric bill. There are usually only This article assumes inflation will be 5% going forward.
minor monthly minimum charges remaining. Combining Net Metering with TOU allows a solar customer to
“sell” power back to the utility during peak periods at the high rate,
High Electricity Rates and California’s tiered rate system (with and buy back during off-peak hours. The customer gets credited or
top rates of 22¢/kWh) penalizes residential customers with high charged for the value of the electricity when it is bought or sold. The
electric usage. The surcharges in the three top tiers (see Fig. 1) for utility then looks like a 350% efficient battery because most solar
residential customers are among the most important factors in the electricity is produced during peak hours, and most is consumed in a
payback. Rates have also increased steadily at about 6.7% per year residence during off-peak hours. The customer gets more value for
for 30 years (Fig. 2), and 5.4% over the last 22 years. To be the same kWh produced, and therefore needs a smaller solar
conservative, 5% is used in the analyses that follow. system to offset their electric bill.

$over $191
$191 per month
$107

$59

electric bill
up to $44
per month

Electric Usage Before Solar Electric Usage After Solar

Fig. 1. Tiered rate pricing penalizes large users most with a marginal electricity cost up to 22¢/kWh. Solar offsets highest tier usage
first, making the solar customer look like a small user with a marginal cost as low as 11.4¢/kWh. The graphic on the left indicates
which tier a user is in for a given monthly electric bill in San Jose, CA.

NorCal Solar Energy Resource Guide --- October 2005 1

 Residential Time-of-Use Peak Pricing Periods
Sunday Monday Tuesday Wednesday Thursday Friday Saturday
Midnight - 6am Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak
6am - Noon Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak
Noon - 6pm Off-Peak Peak Peak Peak Peak Peak Off-Peak
6pm - Midnight Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak Off-Peak

Fig. 3. Time-of-Use peak and off-peak periods.

This works especially well if the customer can mount their solar depends on a user’s time-value-of-money calculation, the availability
array facing southwest, south, or west, at an angle near 22 degrees of cash, their confidence in system production, and tax treatment of
up from horizontal (equal to a 5:12 roof). Slopes from 5 to 35 the payments.
degrees work well also. Southwest is preferred because it
maximizes afternoon peak generation at a high value. This Currently, the author’s financial modeling tool shows that the new
orientation also better matches the utilities peak load profile. PBI Program is slightly less economically attractive than the current
Rebate Program to a buyer with an ideal production situation,
There are several Government Incentive programs to promote assuming the PBI Program payments are not taxable to the
solar. The California Energy Commission (CEC) Emerging recipient.
Renewables Rebate Program cuts final cost 30% to 40% for most
systems in PG&E and other public utility territories. This program The big unanswered question is the tax treatment of the PBI
doesn’t apply to municipal utilities, but some have their own payments. If these payments are received by the system owner,
programs – see www.dsireusa.org to find these programs. which is most likely since the installer won’t want to be involved after
the installation is complete, they may be subject to state or federal
The CEC program pays a rebate of $2.80 per rated AC watt of taxation, just as the Rebate Program payments are be subject to
system output (as of September 2005) upon installation of a federal taxation. If they are taxable, then this incentive is much less
compliant system. Affordable Housing projects get a higher level of attractive to the consumer, which may explain why so few
rebate. Please see www.consumerenergycenter.com/erprebate for applications have been made to this new program. Municipal and
more information and for reservation forms, or call the CEC at (800) non-profit entities are not taxed and will not be affected.
555-7794. This rebate declines by 20¢ per watt every six months on
January 1 and July 1. The funding situation is uncertain, and it is The author favors Performance Based Incentives, but believes the
possible that the rebate money will run out faster than expected, market would be most efficient at setting the appropriate incentive
possibly as soon as early 2006. To use the rebate program, one level via an auction system. An auction system would reward only
only needs to submit a complete reservation request before the the best systems that needed the least incentive, encourage
rebate level drops. From the time of approval, the project has 6 continuous cost reductions, stretch the incentive money supplied by
months to install the system (18 months if new construction). the public to the furthest extent possible, and create maximum long
term stimulation and stability for the PV industry who could be
The good news is that even after the rebates are gone, many certain that the incentive program money would last the length of the
customers with $155/month or larger electric bills will receive a program period. For more information on this “PBI Auction” concept,
greater than 10% annual Rate of Return because of the combination please see www.ongrid.net/papers/PBIViaAuctionSWCph.pdf
of the other factors discussed in this article. The rebate is helpful,
but isn’t essential to make solar worthwhile for a larger residential Disclaimer: The information in this article regarding taxes, tax
customer. credits and depreciation is meant to make the reader aware of these
benefits, risks and potential expenses, and help avoid overblown
It is important to note that as of this writing, the IRS considers a claims by aggressive salespeople. It is not tax advice, and the
rebate given directly to the homeowner as taxable income. The CEC author is not a qualified tax professional. Seek professional advice
is working to change this. Meanwhile, there is no tax consequence if from a qualified tax advisor to check the applicability and eligibility
the dealer/installer applies for and receives the rebate as part of before claiming any tax benefits.
payment for the job, and passes the lower after-rebate price on to
the customer. This is much better for the consumer – no tax risk, California offers a State Income Tax Credit. The tax credit is
less cash required during the project, and greater leverage over the 7.5% of the net system cost for systems installed by the end of
installer should they do a substandard job. It is a little less attractive 2005. Installed means inspected and legally operational (not just
for the installer because it hurts their cash flow, but there is paid for). Any excess credit can be carried forward for 7 years. The
essentially no risk the CEC won’t pay assuming the installer tax form is CA FTB form 3508, www.ftb.ca.gov/forms).
completes the job and satisfies the inspector. It doesn’t increase the
installers tax because it is part of the job’s revenue which is already For those who itemize their federal tax deductions, the State Tax
subject to taxation, minus their expenses. Credit won’t be worth the full 7.5%. When itemizing, state taxes are
deductible off federal income. Reducing state taxes by the state tax
There is a new CEC incentive program called the “Pilot credit means that federal taxable income will go up. In effect, federal
Performance-Based Incentive Program” (PBI Program). Under income tax is being paid on the value of the state tax credit. For
this program, a solar system owner is paid an incentive based on most people, the state tax credit net value is about 5.4%.
the production of the system in kWh. The more productive a system
is, the greater the incentive. The idea is to reward the best systems The good news is that even if the 2005 installation deadline for the
that produce the most electricity. The current incentive is 50¢/kWh State Tax Credit is missed, there is a new Federal Investment Tax
for the first 3 years of system output. Credit available for solar electric and solar thermal systems (but not
solar pool heating systems). This Federal credit is divided into
Whether this system and amount of incentive payment is attractive Residential and Commercial.
and preferable to the current up front rebate level of $2.80 per watt

NorCal Solar Energy Resource Guide --- October 2005 2

 Pre- kWh System System State Final Net Pre-Tax Appraisal Post- Net Monthly Cash Total
Solar per AC Gross Rebate Cost w/ Annual Equity / Resale Solar Flow Compared to Savings
Bill Month Size Cost @ $2K Fed Return Increase Bill 7% 30-yr Loan Over 25
$2.80 Tax Credit in First Year /mo in First Year Years
$77 600 3.0 kW $26K $8.4K $16.6K 10.2% $17.4K $5 +$3/mo $39K
$180 1100 5.5 kW $47K $15K $30.1K 13.5% $41.4K $7 +$47/mo $92K
$268 1500 7.8 kW $64K $22K $41.3K 14.9% $62.8K $6 +$90/mo $140K
Table 1. Example residential systems and their financial costs and benefits

The Federal Investment Tax Credit for Residential is 30% of Renewable Energy Credits (RECs, also known as Green Tags
net system cost, capped at $2,000. It is a one-time credit, but may or TRCs) are a new and growing way to extract value from a solar
be carried forward (and possibly back) if not completely useable in energy system. RECs represent the bundle of legal rights to the
the installation tax year. It only applies for systems that are installed green part of each kWh produced by a solar system. This green part
in 2006 and 2007. As of September 2005, the IRS hasn’t defined can be sold for a value, which generates additional revenue for the
what “installed” means. It is the author’s best guess that they will seller. California system owners can now sell their RECs due to a
likely view the municipal inspection date as the “installation” date. recent decision is made by the Public Utilities Commission. A market
Seek professional tax advice before making any expensive is being established and the price of solar RECs is expected to be
commitments. between 4¢/kWh and 20¢/kWh in contracts ranging from 1 to 20
years. See www.green-e.org for more information about
The Federal Investment Tax Credit for Commercial and TRCs/RECs and the buying or selling thereof.
Business owned systems (including home businesses) will be 30%
of net system cost with no cap (the current 2005 level is 10%). This One should take care to consider whether they really want to sell
applies for systems that are installed in 2006 and 2007. After 2007, the RECs their system generates. By selling them, they lose the
if not extended, the tax credit will revert to the current 2005 level of right to claim they are using any of the clean green energy
10%. The IRS current federal form is 3468 available at generated by the system. That right would belong to the new REC
www.irs.gov/formspubs. The federal credit may be carried forward owner. The system owner could claim they are a host for the
15 or back 3 years. generation but not a user. The distinction is important in order to
prevent double counting of the RECs, which is important to
Business owned systems may also be eligible for MACRS 5-year maintaining their value.
Accelerated Depreciation using IRS federal form 4562. Most home
systems don’t qualify for depreciation. See the sidebar of questions HOW IS THE PAYOFF PROVEN?
if this is proposed by a contractor (at the end of the article). Note Independent tests of the financial viability of solar energy include:
that the depreciable basis amount is the “After Rebate” system cost
Rate of Return similar to growth and high yield investments
minus 1/2 the 10% Federal Tax Credit amount (for a total of 95% of
Payback in a reasonable time
the “After Rebate” amount). It is unknown whether the depreciable
Total Lifecycle Payback
basis amount will change with the new 30% tax credit. State
Net increase in property value with respect to system cost
depreciation is split between “Corporate” and “Non-Corporate”
Positive cash flow when financing the project with equity
businesses. Non-Corporate businesses use the same MACRS 5-
year accelerated depreciation. Corporate businesses use a standard RATE OF RETURN:
12-year depreciation schedule for their state taxes. Annual Rate of Return on an investment is another term for
interest rate, which is a way of comparing one investment to
Currently in the California Legislature, Senate Bill 1 (SB1) is under another. For example, a savings account might pay 1% interest, and
negotiations. This bill is intended to spur up to 3000 MW of new the long-term stock market has paid about 11%. The author chose
solar in the state over the coming decade. There may be significant 10% as the test point for solar, because that is among the higher of
changes to incentive programs, electric rate schedules, and tax long term average returns from common, readily accessible, higher
benefits for installing solar. The details of which will be worked out yielding investments such as stocks and bonds.
over the coming months (if the bill becomes law, it failed last year).
In order to compare solar to other investments, all investments
This information will be continuously evolving for the foreseeable should be placed on the same side of the tax equation. Since most
future. The author maintains an updated version of this article at: investments are taxable (i.e. stocks, savings interest, etc.), it is most
www.ongrid.net/papers/PaybackOnSolarSERG.pdf o r check meaningful to convert solar savings to its taxable equivalent (i.e.
www.norcalsolar.org for the latest information. PreTax value in the equation below).
A source for information on all state and federal incentive AfterTax dollars are worth more to a taxpayer than the same
programs around the country is available at the DSIRE project: number of PreTax dollars, because PreTax dollars are subject to
www.dsireusa.org. taxation. Therefore, an AfterTax dollar saved (with solar) is worth
more than $1 on a PreTax basis, by an amount proportional to the
Customers in higher income tax brackets see comparatively taxation rate. To find the PreTax value, the following equation can
more value because residential electricity expenses are paid with be used to adjust each AfterTax amount, where TaxRate is the net
after-tax dollars – they aren’t tax deductible. More on this in the total effective income tax rate:
“proof” section of this article.
AfterTax
Pr eTax =
Installed system costs have generally declined 5%-7% per year (1 − TaxRate)
due to manufacturing economies of scale, installation efficiencies, Once the value of the savings, maintenance costs and other
new products, and competition. However this trend has recently amounts are properly adjusted to their pre-tax values, they can be
reversed because of growing worldwide interest in solar, a rapidly inserted into a 25-year financial timeline (the warranted life of most
expanding market and a shortage of solar panels. Installed system solar electric/PV modules) representing the cash flows for each year
costs are likely to be stable or rising for the next couple of years, to calculate the annual Rate of Return. This allows the accurate
then may begin to decline again. inclusion of all relevant cost and benefit components.

NorCal Solar Energy Resource Guide --- October 2005 3

 Investment Investment Interest Earned or After-Tax After-Tax Payback
Type Amount Electric Bill Savings Value the Value the including
First Year Eighth Year inflation
Savings $30,000 $300 (at 1% rate) $188 $188 160 years
Stocks $30,000 $3,300 (at 11% rate) $2,069 $2,069 14.5 years
Solar – 5.5 kW $30,000 $2,069 (1st year) $2,069 $2,815 12 years
Table 2. Payback Investment Comparisons. Note, solar savings grows due to inflation, so payback is faster.

The initial capital cost is the only amount that doesn’t get adjusted. paybacks on other investments really are, when taken on an after-
That amount is the net system up front cost (total out of pocket), and tax basis.
is unaffected by the taxation or lack thereof of future savings in the
utility bill. Consider it the same as principal that is invested There are numerous other flaws in using payback for a residential
anywhere. The principal is not taxed upon its departure or return. long-term investment; it does not properly include the tax savings
and consequences, it does not account for maintenance or inverter
Tax savings and consequences, inverter replacement, replacement expenses, and it makes it difficult to compare to other
maintenance, and other significant financial events can be included investments such as stocks, savings, etc. because of inflation and
at their appropriate places on the timeline. Inflation and module other factors.
degradation are also easily included. Then total cash flow for each
year in the analysis can be summed. Using the Internal Rate of TOTAL LIFECYCLE PAYBACK:
Return (IRR) tool in a spreadsheet, one can find the effective annual Comparing the savings of a solar electric system over 25 years of
interest Rate of Return for the investment. operation to its initial cost is a better way of looking at payback,
because it more fairly values the savings due to the compounding
Please see Table 1 for several examples showing returns from effect of electric rate inflation. Because of this effect, the savings in
10% to 15%. These cases are for full service residential system the later years is much greater than the savings in the first few
installations in San Jose, California, using typical installed system years. Typical systems give back 2.3 to 3.5 times their initial cost.
costs on a simple composition shingle roof. See Table 1 for several examples. One drawback to this analysis is
it fails to account for the time value of money. A dollar saved in the
Assumptions for Table 1: future isn’t worth as much as a dollar saved today, so that a total

Pre-Solar Bill: electric bill before solar using PG&E E1 Flat lifecycle payback isn’t worth quite as much as it might initially
Residential Rates appear. The better methods of comparing solar as an investment

Post-Solar Bill: electric bill with solar using PG&E E7 Time-of- are the annual Rate of Return, Increase in Property Value, and Cash
Use Residential Rates Flow.

System AC Size refers to the CEC AC power rating, which
includes some (but not all) loss factors. The analyses here-in $8,000 Cash Flow when Financed
include the CEC’s and additional loss factors to give a $7,000
(including inverter replacement)
conservative estimate of production (1,580 kWh/yr per kW of CEC
$6,000
AC rating) for use in calculating the Post-Solar Electric Bill

Final Net Cost refers to the total net cash out of pocket $5,000 Utility Bill
without Solar
including total of installed system costs, permitting, sales tax, $4,000
at 5.0%
PG&E fees, the new federal tax credit for residential. The state tax $3,000 inflation
credit isn’t included because it expires soon, and its net effect isn’t $2,000
substantially different from the new federal tax credit. A system is Initial Cost paid Total Lifecycle Savings
$1,000
eligible for one or the other, but not both. back in 12 years is several times larger

Assumes the customer is in the 28% federal and 9.3% state tax $-
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
bracket and is eligible for the Federal Tax Credit. Electric rate Utility Bill without Solar at 5.0% inflation
inflation is 5.0%. Module degradation is 0.5% per year. System
maintenance cost is 0.25% of gross system cost per year, Fig. 4. Simple Payback vs. Total Lifecycle Payback. Total
adjusted for inflation. Inverter replacement costing $800/kW Lifecycle Savings is several times the initial cost represented by
occurs in year 15 the savings up until year 12

An alternative tool to evaluate/verify solar financial results is the Clean

INCREASE IN PROPERTY VALUE:
Power Estimator: www.consumerenergycenter.org/renewable/estimator
Solar electric systems increase property value by decreasing
utility operating costs. According to the Appraisal Journal (Nevin,
PAYBACK:
Rick et al, “Evidence of Rational Market Valuations for Home Energy
What about calculating the payback? Payback is a simple but
Efficiency,” Oct 1998, (available at various locations on-line, and at
crude tool for comparing investments. Solar is an inflation-protected
www.ongrid.net/AppraisalJournalPVValue10.98.pdf), a home’s value
investment but many others are not. This improves the payback for
is increased by $20,000 for every $1,000 reduction in annual
solar (electric rates double every 13 years at 5.4% historical
operating costs from energy efficiency.
inflation). To properly calculate the solar payback, it is necessary to
add in the inflation adjusted savings of each successive year until
The rationale is that the money from the reduction in operating
payback has been achieved. Savings in the latter years is larger
costs can be spent on a larger mortgage with no net change in
than savings in the first years, so the payback is faster than simply
monthly cost of ownership. Nevin states that historic mortgage costs
dividing the cost by the savings.
have an after-tax effective interest rate of about 5%. If $1,000 of
reduced operating costs is put towards debt service at 5%, it can
Payback analysis on an after-tax basis does not reflect the true
support an additional $20,000 of debt. To the borrower, total monthly
value of the saved utility expense, because after-tax savings are
cost of home ownership is identical. Instead of paying the utility, the
worth more on a pre-tax basis. However, trying to do payback using
homeowner pays the bank, but their total cost doesn’t change.
the pre-tax value gives an unrealistically optimistic view of when
“payback” has occurred. The examples in Table 2 show how long

NorCal Solar Energy Resource Guide --- October 2005 4

 Please see the column labeled “Appraisal Equity Increase” in multiplier effect. The resale value will then increase 5% per year
Table 1 for examples of the increase in home value. With as little as compounded.
a $65/month electric bill, a solar system can increase home value by
more than its cost to install. This effectively reduces the payback This cannot continue forever, as the increase in resale value runs
period to 0 years if the owner chose or needed to sell the property into the second limit, which relates to the remaining life left in the
immediately. It could even lead to a profit on resale in cases where system. For these analyses, the system is assumed to be worthless
the electric bill was higher than $65/month. at the end of 25 years. This is probably very conservative, since the
panels are warranted to be working at 80% of their new value. So if
There are two limits to the increase in resale value over system the system is worthless at the end of 25 years, the only value the
net installed cost. First, why should a homeowner pay in total more system has as it nears that time, are the remaining savings it can
for a home with a solar system, when they could buy a non-solar generate before the end of the 25th year. Fig. 5 shows both the
home, and solarize it for less money? Yet this happens with other increasing value due to increasing annual savings and the remaining
remodels. Decks, on average across the nation, return 104% of their value limitation that takes over at approximately year 11. If the
cost upon resale. However, in certain markets like San Francisco system does have additional resale value, so much the better.
Remaining System Lifetime Savings
and Boston, decks add more than 215% of their value upon resale $140,000
(Alfano, Sal, “2003 Cost vs. Value Report”, Remodeling Online –

Resale Value / Remaining Savings

www.remodeling.hw.net downloaded March 5, 2004). Other types of $120,000
remodels like kitchens and bathrooms had similar results related to
$100,000
geography. So it makes sense that in certain geographies where the
sun shines brightly and the electric rates are high, solar would return $80,000
more than its installed cost, while in other states with less sun and
lower rates, the return might be much lower, with a national average $60,000
comparable to other types of remodel. Table 3 lists projected resale
$40,000
value of various solar systems, compared with nationwide averages
for some other home improvements. $20,000

Home Improvement Investment Resale % $-

Type Amount / Net Value Return 1 3 5 7 9 11 13 15 17 19 21 23 25
System Cost Increase Year
Resale Value Increase
Solar 3.0 kW $16.6K $17.4K 105%
Remaining System Lifetime Savings
Solar 5.5 kW $30.1K $41.4K 138%
Solar 7.8 kW $41.3K $62.8K 152% Fig 5. Resale value increases over time because savings get larger
Deck Addition $6.3K $6.7K 104% each year. Total remaining lifetime savings in the system declines
Bathroom Remodel $10.1K $9.1K 89% annually, putting a limit on the increase in resale value after year 11
Window Replacement $9.6K $8.2K 85%
Kitchen Remodel $44K $33K 75% Still, the skeptical homebuyer might question the above assertions
Table 3. Resale value comparisons of various home improvements in light of the lack of hard evidence. Perhaps the best evidence to
present would be a stack of old bills showing usage and cost before
The increase in property value to date is currently theoretical. A solar, and a stack of new bills showing a substantial savings. The
very high fraction of the grid-tied solar electric systems in California question might be posed, “What are a continuous, if not growing,
were installed since the start of the state’s Power Crises and the stream of these savings worth to the prospective buyer?” That sort
Deregulation fiasco just four years ago. Most of these homes have of evidence can’t easily be ignored.
not been sold, so there are no broad studies of comparable resale
values available. Of course, other factors will weigh heavily in the value. How
attractive is the home? A tidy, attractive installation should add all of
However, some evidence is beginning to emerge that there are the value shown above, but like a spa, some prospective buyers
significant jumps in resale value being realized by some solar home may not care or value it, while others may love it.
sellers. The author is aware of 4 anecdotal cases, in which the
sellers believe they got all of their cost as a premium, and have or As an additional benefit, solar systems installed between January
plan to install a PV system on their new home. 1, 1999 and January 1, 2006, are exempt from triggering Property
Tax reassessments (California Taxation Code, section 73).
The NREL (National Renewable Energy Laboratory) study
Comparative Analysis of Homebuyer Response to New Zero Energy CASH FLOW: FINANCING vs. BUYING ON CREDIT:
Homes, (www.nrel.gov/docs/fy04osti/35912.pdf), August 2004, by Two ways to look at using loans to finance a solar project include:
Farhar showed that 15 Shea Zero Energy Homes with 2.4 kW PV
Making the purchase more affordable to a larger audience
systems in San Diego increased in value faster than 12 comparable
Making a smart investment using borrowed money, the
conventional homes in a nearby community. On average, the Shea repayment of which (principal and interest) are less than the
homes increased in value $40,000 more than the conventional savings on the electric bill due to the investment
homes, at a higher rate of appreciation, and with a shorter length of
ownership. This boost in resale value even outstrips the estimates Buying on credit eliminates the large capital outlay for a solar
shown in Table 1 and Table 3. It is likely that many factors were system, making the purchase achievable to more consumers. The
involved, and this sample size is not statistically significant. key determinant is how large a monthly payment the bank will
However, it is at least, not negative evidence. approve for the borrower. This use of credit can expand the solar
market, but isn’t useful as a financial test to demonstrate the
It is also interesting to note that PV systems will appreciate over economic viability.
time, rather than depreciate as they age. The appreciation comes
from the increasing annual savings the system will yield as electric Financing the cost of a solar project as an investment through
rates and bill savings rise. All the calculations in this article assume borrowing yields savings on the electric bill. However borrowing has
electric rate inflation will be 5%. If so, the PV system will save 5% a cost. If the cost of borrowing is lower than the savings, then the
more value each successive year, and thus gain from the 20:1 project is Cash Positive. This result depends on the interest rate

NorCal Solar Energy Resource Guide --- October 2005 5

and payment terms for the loan, the tax bracket of the borrower if Shining Sunlight on Solar Financial Analysis
the loan is deductible, and inflation increasing the savings over time.
In the recent past there have been some “optimistic” claims and
Home Equity loans are excellent sources of funds because presentations regarding the financial payback of solar systems.
interest rates on real estate secured loans are relatively low, Here are some questions that will help provide a more
payment terms can be long, and the interest is generally deductible. conservative perspective, clarify where the legitimate tax breaks
The net cost of these loans is often less than the savings on the are, and avoid the liabilities.
electric bill. This effectively reduces the cost of ownership to less 1. Is the CEC rebate calculated accurately, based on CEC
than $0 per month. It actually pays the owner, creating a positive rating of the equipment?
cash flow from day one. With a fixed interest rate loan, as electric 2. Is the 7.5% state tax credit being applied to the net (after-
rates rise, the equation gets more cash positive over time, even rebate) installed cost of the system (not the gross, pre-rebate
when the interest deduction decreases. Fig. 6 shows the net cost)? Systems must be operationing by the end of 2005.
monthly expense of a 5.5 kW system (loan + new utility bill) is less
than the original pre-solar utility bill each year for 20 years, until the 3. Is it clear that the net value of the state tax credit will be
loan is paid off. Then the savings get really big! marginally lower because lower state taxes will generally mean a
lower federal tax deduction, and thus a higher federal tax?
4. Are business tax advantages (MACRS accelerated
depreciation) being improperly used in a non-business setting?
5. Is the customer being pushed to create a home office to
capture the business tax advantages? Strict rules must be met
for this benefit, and it attracts audits.
6. Is the proportion of business tax advantages proportional to
the square footage of business use in the home? In most homes
this is usually 10-25%. Is the loss in business tax deduction due
to reduced electrical expense included?
7. Is the 20/20 program benefit being claimed? This was the
Governor’s conservation program which existed in 2001 & 2002
only, and specifically excluded solar systems.
8. Are annual maintenance costs and inverter replacement
costs included?
9. Is the time-value-of-money included (the depreciation is
spread over 6 to 12 years, the electricity benefit is over 20-30
years) in the payback and annual Rate of Return (ROR)
calculation? Return on Investment calculations can hide the time
value of money, and give optimistic results.
10. Does the annual ROR seem reasonable? Normal ranges
are 5-20% pre-tax for residential, and 4-15% after-tax for
businesses.
Fig. 6. Effect of 5.5 kW solar system financed over 20 years at 7%
As always, have a financial professional review any claims and
on a $180/mo electric bill.
calculations presented. Protect your exposure. Ask the hard
Refer to Table 1 for several examples showing the initial monthly questions. It’s your money!
cash flow assuming 100% financing of a solar system’s Final Net
Cost using a 7% 30-year loan. The monthly cash flow becomes CONCLUSION:
more positive each year due to the 5% inflation in electricity prices. It is important to compare the solar investment to other
This inflation increases the savings due to the solar system. The investments on an even basis. Rigorous treatment and critical
large spike at year 15 is the replacement cost of the inverter. It analyses from several angles including annual Rate of Return, Cash
causes a one time negative cash flow for that year. However, when Flow, and Resale Value need to be considered to do a fair
the total savings are accumulated as in Fig. 7, the dip is negligible assessment.
compared to the savings to date, and especially to the savings yet to
Solar will make economic sense for many, but only a hard look at
come.
the numbers will tell. The reader is encouraged to check it out. Run
$60,000 the numbers, get evaluations and proposals from solar providers,
"Accumulated Net Savings"
with Loan plus New Bill and take them to a CPA to check them out. The sidebar gives
$50,000 additional thoughts to make sure the presentations stand up to the
light of day!
$40,000
©Copyright 2005, Andy Black. All rights reserved. This information
will be continuously evolving for the foreseeable future. The author
$30,000 maintains an updated version o f t h i s article at:
www.ongrid.net/papers/PaybackOnSolarSERG.pdf. For analysis
$20,000 tools, papers, and more info on payback, see www.ongrid.net.

Andy Black is a Solar Financial Consultant and owner of OnGrid

$10,000
Accumulated Solar Energy Systems, specializing in the financial aspects of solar
Savings
electric systems. He is the Treasurer and a board member of the
$- NorCal Solar Association, and is a board member of the American
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Year Solar Energy Society. He can be contacted at (408) 428-0808 or
Fig. 7. Accumulated savings of 5.5 kW solar system financed over [email protected] for questions about the payback on solar.
20 years at 7% on a $180/mo electric bill.
NorCal Solar Energy Resource Guide --- October 2005 6