Solar Economics: Would You Pull A Lever to Get $12,000 if Somewhere in Massachusetts a Person Lost $58,000?

With articles about solar prices coming down, and living in Phoenix (one of the best solar sites in America), I yet again have priced out solar for our home.  The short answer is that it makes sense, IF you don't mind reaching into the pockets of all your neighbors.

For this analysis, I will use the prices here.  The $72,167 cost for a 11.76kW system is pretty competitive at $6.13 per watt installed  (this is rated watts, not actual -- see footnote).  The panels themselves can be bought for about $3 per watt, with about $1 a watt for other equipment like inverters and $2 per watt for installation.  Do-it-yourself packages for a similar size system are here and go for around $4-$4.50 per watt.

The solar company estimates that this system in Phoenix will save me$2,779 a year on my electric bill.  I have not checked their math, but I assume they are not under-estimating this number in their marketing literature.  Taking this savings, we get a payback on the installation of about 26 years.   This ignores future electricity price increases, but also ignores the time value of money.  At 8% over 20 years, it has a net present value of  NEGATIVE $41,558.   At the end of the day, this is a terrible return -- in fact a huge value destruction.

But I began this post saying a solar investment might make sense.  How?  Well, that is where your willingness to reach into your neighbor's pocket comes in.  Our solar company estimates the following tax breaks and rebates on the system described above:

  • Utility rebate:  $35,280
  • State income tax credit: $1,000
  • Federal income tax credit:  $21,650

So, in building this $72,167 improvement on my house, I get to use $57,930 of other peoples' money**.  As Steve Martin says in the Jerk:  "That takes the pressure off!"

Like in many other cases, other peoples' money suddenly makes solar a good investment.  Now we are looking at $2,779 a year in savings from a net investment of $14,237, or about a five year payback.    Over 20 years even assuming no inflation and an 8% cost of money that has an NPV of $12,081.

So -- I officially reverse my past conclusions that home solar does not pay.  It can in fact be a good investment -- for you.  For the country, it is a terrible investment.   Your neighbors are contributing $57,930 in subsidies while you receive just $12,081 in benefits.  The remainder, just over $45,000, is a dead-weight loss to the economy.  It is money destroyed by the government.

This is surprisingly like the ethics problem of pulling a lever to get a million dollars but someone you don't know in China dies.  The only difference is that you get $12,000 and someone you don't know loses $58,000.

** Footnote: Yeah, I know, theoretically the utility rebate is a substitute for the capital spending and not a wealth transfer.  But trust me, it's a wealth transfer.  To understand this, we have to shift from rated solar watts to actual capacity in watts.  In Phoenix, one of the best solar sites in the world, panels produce only about 25% of their rated capacity in a day (6 equivalent sun hours per day divided by 24 total hours in a day).  So, on average, a 100 watt panel is producing 25 watts.

This means that by APS paying about $3 per rated watt in rebates, they are paying about $12 per actual watt.  And there is no way this is what they are paying for other capacity.  A typical brand new power plant might be $2-$3.50 per watt.  So at $12, this is clearly a transfer mandated by the PUC, and not a smart substitute for capital expenditure.   Besides, if this payment made economic sense for the utility, there would not be an annual cap on the amount paid out.

As wealth transfers go, this is a particularly egregious one, as it tends to add costs to the electric bills of the poor and middle class so rich folks can build hobby solar systems so they can tell their friends at cocktail parties that they are "green."

Update: All of this is not to say that I am so good a person as to not take the money that is being put at my doorstep.  I'm still thinking about it.

  • DrTorch

    Well, if it's Massachusetts, it might be morally acceptable. They'd just waste the money on some other useless endeavor.

  • m

    You pay more than $2,779 per year in power bills? Granted, we have hydro, but we pay about $0.68 per sq. ft. Is that comparable to what you pay?

  • Danny

    I don't know all the specifics to know if this is a relevant comment or not, but the economics of peak level consumption are quite a bit different than average consumption. Peak level consumption often requires gas turbines as peaker plants. The operation of these plants is very expensive and the capital cost is as well. And since these are heat engines, the cold side of the input is much warmer during this time of the day which reduces efficiency by quite a bit, especially in Phoenix.

    By stroke of luck, solar cells produce the most power at the very time that power is peaking. It reduces dependency on expensive gas turbines, so the effect on utility capital costs is much greater than what you are expecting.

    Whether that effect is net neutral or better, I don't know.

  • @m - Geez... I'm paying $2 more per ft than you. Of course, I'm in California and I have some servers around the house but I think the main factor is that we're, as Dennis Miller put it, buying our electricity at minibar rates.

  • Getting a tax credit is taking money from other people?

    To believe that, you must accept the premise that the money you would have paid in taxes belongs to other people. Then you're right back to the social contract issue.

    What would the figures work out to be if you claimed the tax credits, but declined the utility rate subsidies?

  • feeblemind

    How is qualifying for a tax credit taking money from someone else?

  • Charlie B

    "How is qualifying for a tax credit taking money from someone else?"

    Unless the government reduces expenses by the amount of the credit, the somebody else's are paying more taxes to cover the shortfall.

  • ben

    Bit of a Clayton's choice. Take the money and then be reminded daily courtesy of your new ornaments of the stupidity of the median voter in electing people who think $57,000 subsidies to produce a $12,000 benefit is a good idea. Or leave the money and be ornament free.

  • Cecil

    You play by the rules to get to licenses and fill out there forms. The governments are encouraging you to get some of your money back.

  • gsparson

    The money is lost anyway. In my opinion, you should take the money and then document as much as you can how much of a bad deal this was for society as a whole, in as mockingly as possible. Then, document how you spent the money you made off the deal, such as buying tons of coal and setting it alight in a trench for entertainment purposes.

  • kane

    This seems to leave out the increased value of the property from adding solar panels. Many (most?) folks would pay more for a home with solar than one without, especially if it saves them $2779/year, or $231/month. How much more is it worth? Well, one way to estimate is to ask the question, "How much more home would $231/month buy me?" For a 30 year 6% mortgage, that would buy you about $39,000 more home.

  • DKH

    kane:

    Sure, that might be one way to estimate its worth. It appears coyote has estimated the worth by looking at the discounted cash flow over a period of some years. Keep in mind that if one realizes the increased value of the house (say by selling it), that person gives up the future cash flow.

    By the way, if I discount your dollar value ($39,000) over 20 years with your 6% cost of money, I get $12,160, which is pretty close to the $12,080 that coyote quotes. I know I'm not discounting correctly, but I don't think your method really ends up that different from coyote's.

  • Chris

    I think if everyone took the tax credits it could speed up the default of FEDGOV. Isn't that a moral imperative?

  • feeblemind

    re Charlie B: Well if that is your logic Charlie, I sincerely hope you are not taking any deductions and are paying the maximum tax possible, because any legal tax deduction has the same effect as the credit. It lowers one's tax liability causing others to pay more. I never said the tax code was fair.

  • K

    11.7 KW is a monster system for a home but it is probably best to go over rather than under.

    And with subsidies so large you should probably put in the most and best if you live around Phoenix. Grid power won't get any cheaper and as the special interest group of homeowners enlarges the utilities will be forced to buy daylight excess at even higher rates.

    I would also check permit costs for the construction and sales taxes. On a gross project cost over $70K they might be substantial.

    What would this would do to a property tax bill? Not much, perhaps 5% for me. Less that the license and taxes on a new car, even a $14,237 car.

    I live near Phoenix and have been considering solar. But that has been deferred by falling home prices, at some price level I will buy a larger home.

    nit picking. a tax credit is far better than a deduction of the same amount. But each does mean more cost to someone, somewhere. Someone probably named Chen or Lei or Wang. (Hee-hee, he say wang.)

  • Michael Miller

    I would feel totally comfortable with this kind of egregious wealth transfer if the liberal/socialist/marxist/climate change alarmist taxpayer were the target and forced to bear the full tax burden of their self-serving schemes.

    In fact, nothing would delight me more.

  • Michael

    You list the dollar to watt cost. Is that the dollar to watt cost for a brand new and perfectly clean panel? I saw the picture of your freshly washed Volvo you left out over night. Just how much cost in time and materials is involved in keeping the system clean enough to be functional for your needs?

  • I looked into this a couple of weeks ago. If I weren't planning on selling (if I can), I might consider it also. However, I was also interested in off-grid capability (I'd like to have electrical power to keep me alive in Phoenix after a disaster - EMP is increasing in probability, other things are possible). Off-grid takes batteries which are beau coupe expensive and require periodic replacement.

    BTW, re: EMP - if one is serious about that, you've gotta keep a spare inverter wrapped in aluminum foil, but one won't fit under my tin foil hat 🙂

  • Midwesterner

    Speaking from "flyover country", can we pull the lever more than once? ;^)

  • Nicole

    What on earth do you need 11.7 kW for? That aside, in the past 30 years there have been plenty of people who solarized their homes without taking a tax credit and had a huge return on investment within 7-10 years.
    And why is photovoltaic equipment still so expensive to buy? The panel you pay $1000 for in the store costs only about $50 to produce. A large part of the markup is royalties to patent holders.
    Don't get me wrong, I agree that the govt. should stay out of this. But I have full confidence that solar energy would have proliferated to a dominant position if we had had a genuine free market all this time (which also means no IP because that's a govt. intervention too).

  • Bill

    A friend of mine just had a 6KW solar power system installed on his (flat) roof. He's getting around 50KWH at the moment and is seriously thinking about expanding after seeing how it does in the winter. His out of pocket costs were less than $10K once the credits are taken. It's cut his $450 power bill to $225, so it will pay off quickly for him.

  • perlhaqr

    Nicole: I suspect a large part of it is because there's no downward price pressure because the main purchasers of solar panels are using someone else's money to buy them, a'la subsidies and tax credits

  • tomw

    Who do you suppose paid for the solar panels atop Algores acre sized home? Us or him? Any bets?
    Ok, I am being rude, but he just irritates me so much when he preaches about AGW. But still consumes megawatts and causes the spewing of CO2 [to use his types of negative descriptors]. He has or will become a mega-millionaire pushing his 'one world' agenda.
    If Cap and Trade comes into effect, what does that do to the 'payback' time period, NPV, etc?

    tom

  • very interesting read, many thanks. nice one.