solar panels with payback of 8-10 years?

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Iorek
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solar panels with payback of 8-10 years?

Post by Iorek » Tue Sep 25, 2018 10:06 am

Hi,

We are considering installation of solar panels on our house and it looks like the expected payback is about 8-10 years. I feel like that's the range where it's reasonable to go in either direction so I thought I'd get some perspective from others who maybe have thought about it or have advice from their own experience.

Here's more details. It would be a 7.8 kw system, expected to generate about 8 kwh per year (we are in the mid-atlantic and have some shade issues so production may look a bit on the low side). Cost after credits etc. would be $11k. I believe our state does have net metering but I am not really expecting to overproduce. I am also not really counting on anything from SRECs (although $100/year seems like a reasonable estimate). We are currently paying 17 cents/kwh, but that's a little high because we are paying for wind energy (we probably could pay 15-16 cents without that).

All in, I am expecting the panels could save me $1000-1400/year, depending on how much they produce and what the charge for electricity is. That gives me a payback period of around 8-10 years. Panels are not premium, but from my limited research seem like a solid product and should in theory be producing at at least 80% after 25 years (I'd expect the inverter would need to be replaced at 10 years or so, but that probably just adds a year to the payback). We are replacing our roof this year, so I don't expect there would be any need to replace the roof before the panels.

I'm not great at figuring out internal rate of return, but as best I can tell we'd be in the range of 7% or higher. For comparison, the money we'd spend is in my NWFCU CD earning 3%, and would probably stay in a taxable CD if we don't spend it here. As noted above, we also have some interest in supporting non-fossil fuels so that's a factor that gets mixed in somewhere.

I think at the end of the day it makes sense even with a 10 year payback but would appreciate any thoughts from others as to the financial calculations or practical considerations.

thanks

Thegame14
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Re: solar panels with payback of 8-10 years?

Post by Thegame14 » Tue Sep 25, 2018 10:10 am

my system is larger than yours, 11KW system, and I get about 1 SREC per month and it is around $200 and that changes the payback a lot. For us, we our saving $2K per year on electric bill plus getting another $2K per year in SRECS, so that is 4K per year and they system after the credit was about $20K, so for us that is a payback of about 5 years, not including the interest on loan, which is a factor, so maybe payback is then 6 years.

Also if you replace your roof at the same time as your panels you can put some of the cost of the roof in the solar and get a credit on part of the roof as well..
Last edited by Thegame14 on Tue Sep 25, 2018 10:14 am, edited 1 time in total.

Thegame14
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Re: solar panels with payback of 8-10 years?

Post by Thegame14 » Tue Sep 25, 2018 10:12 am

also it raised the value of our house and NJ rules are that our property taxes cant go up based on the value of the house going up from solar, so to me, it is a no brainer, I pay $20K my house goes up in value by $20K, you can look at the rest as gravy even. and those SRECS in NJ last for 15 years, and electric bills will probably keep going up in the future.

squirm
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Re: solar panels with payback of 8-10 years?

Post by squirm » Tue Sep 25, 2018 10:16 am

Your return on investment time depends on the utility rates. $.17/kwh is relatively inexpensive. I think you meant it would produce 8mwh/yr. That's a little over $1000/yr in return. Plus when you still the house there is value in the system.

mervinj7
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Re: solar panels with payback of 8-10 years?

Post by mervinj7 » Tue Sep 25, 2018 10:31 am

The Missoula FCU has a spreadsheet that you can use to calculate your returns. You can find the link on their website but the spreadsheet can be imported to google drive if you prefer.

https://missoulafcu.org/wp-content/uplo ... Model.xlsx
https://missoulafcu.org/environment/

Valuethinker
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Re: solar panels with payback of 8-10 years?

Post by Valuethinker » Tue Sep 25, 2018 4:43 pm

Iorek wrote:
Tue Sep 25, 2018 10:06 am
Hi,

We are considering installation of solar panels on our house and it looks like the expected payback is about 8-10 years. I feel like that's the range where it's reasonable to go in either direction so I thought I'd get some perspective from others who maybe have thought about it or have advice from their own experience.

Here's more details. It would be a 7.8 kw system, expected to generate about 8 kwh per year (we are in the mid-atlantic and have some shade issues so production may look a bit on the low side). Cost after credits etc. would be $11k. I believe our state does have net metering but I am not really expecting to overproduce. I am also not really counting on anything from SRECs (although $100/year seems like a reasonable estimate). We are currently paying 17 cents/kwh, but that's a little high because we are paying for wind energy (we probably could pay 15-16 cents without that).

All in, I am expecting the panels could save me $1000-1400/year, depending on how much they produce and what the charge for electricity is. That gives me a payback period of around 8-10 years. Panels are not premium, but from my limited research seem like a solid product and should in theory be producing at at least 80% after 25 years (I'd expect the inverter would need to be replaced at 10 years or so, but that probably just adds a year to the payback). We are replacing our roof this year, so I don't expect there would be any need to replace the roof before the panels.

I'm not great at figuring out internal rate of return, but as best I can tell we'd be in the range of 7% or higher. For comparison, the money we'd spend is in my NWFCU CD earning 3%, and would probably stay in a taxable CD if we don't spend it here. As noted above, we also have some interest in supporting non-fossil fuels so that's a factor that gets mixed in somewhere.

I think at the end of the day it makes sense even with a 10 year payback but would appreciate any thoughts from others as to the financial calculations or practical considerations.

thanks
Internal rate of return is =IRR(values, [guess]) in Excel. The values are just a range of cell references eg A1:A12. The first value has to be negative (the investment, an outflow) -- it won't generate an IRR without a negative cashflow. You don't normally need to put in a guess -- it is optional.

This is simply the discount rate that balances the costs and benefits. i.e. Net Present Value (discounted value of all the cash flows, positive and negative) equals 0 at a discount rate = IRR.

To estimate those cash flows you have to include inflation in power costs (2% p.a. is probably a safe guess) and in the costs of replacing the inverters (say after 12 years) and any other maintenance costs, which will reduce your cash inflows in those years.

A more accurate tool is =IRR(values, dates) where you feed it 2 columns or rows, with matching pairs of cash flow, date of cash flow.

But IRR assumes end of year cash flows (except for the initial cash flow, which is beginning of year) and should give you a close enough approximation.

However:

- you either run this to end of system life (say 25 years?) OR you have a terminal value at an earlier time period. In the latter case, you have to guesstimate what that will be - say the cost of the system less some allowance for depreciation -- you might argue the system say cost $10k and will last 25 years, so depreciation (straight line) = $400 pa and after 12.5 years it is worth $10,000 - (12.5 x 400) = $5000. You can probably get away with that kind of very basic assumption

Simple payback assumes no discounting. Thus system costs you $10k, saves you $1k pa = 10 years. It makes no assumption then what the system is worth.

Couple of other factors:

- returns are after tax, so when comparing to taxable investments, you have to figure in their after tax expected return

- this is not like investing in an equity or debt fund, where your returns include a terminal value greater than or equal to your initial investment (we hope). And there's no liquidity in this. If you decide to move halfway through the life of the system, it is our guess that you will get $5k for it. Opinions differ if you will (seems in part to depend on how familiar your local RE market is with solar installations)

SmallSaver
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Re: solar panels with payback of 8-10 years?

Post by SmallSaver » Tue Sep 25, 2018 4:57 pm

If your utility doesn't have net metering that's a pretty big deal. Production (obviously) follows the sun, but load doesn't at all, and actually probably peaks in the morning and evening, unless it's really hot and you have a high AC loan, and, and and....those mismatches are pretty important--any time your production exceeds load you'll just be giving that electricity away. Also, you need to take a look at your utility rate structure: you generally pay a fixed monthly rate plus a variable per-kWh rate, and it's this latter that really gives you "income" in the way of avoided electricity costs. Also, if you have a more complex rate structure (tiered by total use or time-of-day) that factors in as well. If you're a DIY type the NREL model SAM handles the more complex structures well, or you can ask installers and see who knows their stuff.

As mentioned above, the return can be good but the investment is very illiquid. until you've reached your payback your return is negative. The three metrics I'd look at are: payback, IRR (which is the closest to what we think of as "rate of return" in the general sense), and the NPV.

If you follow that link above to Missoula Federal Credit Union there's a report "Financial Analysis of Residential Solar" that talks about a lot of this. For the veneer of anonymity let's say I was, uh, heavily involved with it.

Iorek
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Re: solar panels with payback of 8-10 years?

Post by Iorek » Tue Sep 25, 2018 9:54 pm

Thanks. The Missoula calculator was helpful. There's also a Colorado State one that was ok, and then some others that weren't. Seems like it makes financial sense even when I try to be conservative about my assumptions.

SmallSaver
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Re: solar panels with payback of 8-10 years?

Post by SmallSaver » Wed Sep 26, 2018 12:04 pm

Glad it was useful. Do note that the calculation assumes you are net metered, you're credited at the full retail rate of electricity, and it's a simple rate (no time of use pricing, no tiered use)--all of which are true in MT. A lot of details I know, and if you don't want to get into the weeds I'd advise getting bids from a couple good contractors and asking a bunch of questions about the economics. Also, many states have not-for-profits that promote renewables who may be of help (e.g. the Montana Renewable Energy Association).

Thegame14
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Re: solar panels with payback of 8-10 years?

Post by Thegame14 » Wed Sep 26, 2018 3:17 pm

also you cant look at it as an IRR that way because whatever you paid for the panels increases the value of your house, so it isn't a suck cost. If you pay 15K and you get back 30% from the govt in taxes, then you paid $10.5K but the value of your house now has gone up $15K, so you are net positive 4.5K from day one, then factor in the yearly saving of electric, $1,400 plus you should get 8 SREC's per year at $200 each so that is $1,600 per year, so you are net positive $4.5K equity from the start then positive $3K from savings and SREC's, so you paid $10.5K, but are positive 7.5K year 1, plus the $3K In year 2 then you are at your 10K, so your pay off is really more like 2 years.

gold99xx
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Re: solar panels with payback of 8-10 years?

Post by gold99xx » Wed Sep 26, 2018 3:58 pm

OR pay it off in one year.

Read below , interesting article either way.

http://www.mrmoneymustache.com/2018/02/ ... lar-power/

SmallSaver
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Re: solar panels with payback of 8-10 years?

Post by SmallSaver » Wed Sep 26, 2018 7:22 pm

Thegame14 wrote:
Wed Sep 26, 2018 3:17 pm
also you cant look at it as an IRR that way because whatever you paid for the panels increases the value of your house, so it isn't a suck cost. If you pay 15K and you get back 30% from the govt in taxes, then you paid $10.5K but the value of your house now has gone up $15K, so you are net positive 4.5K from day one, then factor in the yearly saving of electric, $1,400 plus you should get 8 SREC's per year at $200 each so that is $1,600 per year, so you are net positive $4.5K equity from the start then positive $3K from savings and SREC's, so you paid $10.5K, but are positive 7.5K year 1, plus the $3K In year 2 then you are at your 10K, so your pay off is really more like 2 years.
I've found it very difficult to tell what the impact on the value of you house is. Leaving aside tax impact, solar adds value to your house to the extent that you could sell it for more with solar installed, but sales price depends on tons of things including some very intangible ones. This report is the best I've seen trying to answer the question, and my take away was that the central tendency is that you can recoup the replacement cost of the system at the time of sale but there's a ton of variability.

not to be pedantic, I've just spent way too long thinking about this.
Last edited by SmallSaver on Wed Sep 26, 2018 7:29 pm, edited 1 time in total.

Iorek
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Re: solar panels with payback of 8-10 years?

Post by Iorek » Wed Sep 26, 2018 7:29 pm

Thanks. We do have simple electric rates and a form of net metering, where you can get a full retail credit for the next month, and then any cumulative annual excess as of April is paid at the wholesale rate. My expectation is that we won't have a cumulative annual excess under that system (and I tried to run calculations accordingly).

I hope to stay in this house for 20 years, so for me there doesn't seem much purpose in treating the installation as an asset which I then have to depreciate but I appreciate the point that if something unexpected happens it's not entirely lost money.

The article was interesting-- will be using some of that same tech for our installation (but glad not to DIY it).

emoore
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Re: solar panels with payback of 8-10 years?

Post by emoore » Wed Sep 26, 2018 8:54 pm

Iorek wrote:
Wed Sep 26, 2018 7:29 pm
Thanks. We do have simple electric rates and a form of net metering, where you can get a full retail credit for the next month, and then any cumulative annual excess as of April is paid at the wholesale rate. My expectation is that we won't have a cumulative annual excess under that system (and I tried to run calculations accordingly).

I hope to stay in this house for 20 years, so for me there doesn't seem much purpose in treating the installation as an asset which I then have to depreciate but I appreciate the point that if something unexpected happens it's not entirely lost money.

The article was interesting-- will be using some of that same tech for our installation (but glad not to DIY it).
That's awesome that you are going solar and that the payback is so short. My payback is a bit longer but I'm not only going solar for financial reasons. Congrats.

Iorek
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Re: solar panels with payback of 8-10 years?

Post by Iorek » Wed Sep 26, 2018 10:21 pm

emoore wrote:
Wed Sep 26, 2018 8:54 pm
Iorek wrote:
Wed Sep 26, 2018 7:29 pm
Thanks. We do have simple electric rates and a form of net metering, where you can get a full retail credit for the next month, and then any cumulative annual excess as of April is paid at the wholesale rate. My expectation is that we won't have a cumulative annual excess under that system (and I tried to run calculations accordingly).

I hope to stay in this house for 20 years, so for me there doesn't seem much purpose in treating the installation as an asset which I then have to depreciate but I appreciate the point that if something unexpected happens it's not entirely lost money.

The article was interesting-- will be using some of that same tech for our installation (but glad not to DIY it).
That's awesome that you are going solar and that the payback is so short. My payback is a bit longer but I'm not only going solar for financial reasons. Congrats.
Thanks -- you too!

Valuethinker
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Re: solar panels with payback of 8-10 years?

Post by Valuethinker » Thu Sep 27, 2018 2:36 am

SmallSaver wrote:
Wed Sep 26, 2018 7:22 pm
Thegame14 wrote:
Wed Sep 26, 2018 3:17 pm
also you cant look at it as an IRR that way because whatever you paid for the panels increases the value of your house, so it isn't a suck cost. If you pay 15K and you get back 30% from the govt in taxes, then you paid $10.5K but the value of your house now has gone up $15K, so you are net positive 4.5K from day one, then factor in the yearly saving of electric, $1,400 plus you should get 8 SREC's per year at $200 each so that is $1,600 per year, so you are net positive $4.5K equity from the start then positive $3K from savings and SREC's, so you paid $10.5K, but are positive 7.5K year 1, plus the $3K In year 2 then you are at your 10K, so your pay off is really more like 2 years.
I've found it very difficult to tell what the impact on the value of you house is. Leaving aside tax impact, solar adds value to your house to the extent that you could sell it for more with solar installed, but sales price depends on tons of things including some very intangible ones. This report is the best I've seen trying to answer the question, and my take away was that the central tendency is that you can recoup the replacement cost of the system at the time of sale but there's a ton of variability.

not to be pedantic, I've just spent way too long thinking about this.
Thank you. Very good analysis.

Terminal value is a key factor in any Discounted Cash Flow/ Net Present Value/ IRR calculation.

And it's a hard one, so any justifiable assumption is important.

Iorek
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Re: solar panels with payback of 8-10 years?

Post by Iorek » Thu Sep 27, 2018 7:00 am

I was reading one of the state guides to solar energy and they were pointing out that if you are installing panels in part because you want to increase use of solar and/or run your house on solar energy then you should consider keeping your RECs. Obviously the electricity is being generated and put into the system in either case, but selling the RECs may reduce the market for solar (and make it easier for utilities to meet RPS goals).

My installer was pretty candid that I should not expect much from my RECs, and the srectrade website seems to confirm that by indicating they currently sell for about $5, so it's not a consequential decision for me either way, but I wondered if anyone had considered not selling their RECs for intangible/value based reasons.

arsenalfan
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Re: solar panels with payback of 8-10 years?

Post by arsenalfan » Thu Sep 27, 2018 7:43 am

I'd place SREC value at $0 in your ROI equation. Sure NJ is $200, but look at MD - it once was in the $100 range, now it is $5.

We did it. 12kw system, total cost after rebate/tax break was $20k, ROI is 11 years. As we plan on being in home 20 years, pretty straightforward. Year 3 currently. Fun to see a $6 electric bill (grid hookup fee I think), and love the environmental warm fuzzy feeling. Plan on upgrading to electric cars in next 5 years, so should be even more profitable to charge our cars than SREC credit.

squirm
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Re: solar panels with payback of 8-10 years?

Post by squirm » Thu Sep 27, 2018 7:52 am

Didn't notice you're in a non-nem area. Make sure you'll be able to take advantage of the production during the day. We're in a NEM area, without that, I very much doubt it would be worthwhile to have solar...

Thegame14
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Re: solar panels with payback of 8-10 years?

Post by Thegame14 » Thu Sep 27, 2018 8:02 am

Iorek wrote:
Thu Sep 27, 2018 7:00 am
I was reading one of the state guides to solar energy and they were pointing out that if you are installing panels in part because you want to increase use of solar and/or run your house on solar energy then you should consider keeping your RECs. Obviously the electricity is being generated and put into the system in either case, but selling the RECs may reduce the market for solar (and make it easier for utilities to meet RPS goals).

My installer was pretty candid that I should not expect much from my RECs, and the srectrade website seems to confirm that by indicating they currently sell for about $5, so it's not a consequential decision for me either way, but I wondered if anyone had considered not selling their RECs for intangible/value based reasons.
Then maybe your state is much different, I just sold my last SREC for $210. I have had solar for a year, and each SREC has been right around $200. My system is designed to generate about 10 per year, so $2,000 per year for 15 years is $30,000 which more than pays for the system itself.

https://www.srectrade.com/srec_markets/new_jersey
Last edited by Thegame14 on Thu Sep 27, 2018 8:05 am, edited 1 time in total.

Thegame14
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Re: solar panels with payback of 8-10 years?

Post by Thegame14 » Thu Sep 27, 2018 8:04 am

arsenalfan wrote:
Thu Sep 27, 2018 7:43 am
I'd place SREC value at $0 in your ROI equation. Sure NJ is $200, but look at MD - it once was in the $100 range, now it is $5.

We did it. 12kw system, total cost after rebate/tax break was $20k, ROI is 11 years. As we plan on being in home 20 years, pretty straightforward. Year 3 currently. Fun to see a $6 electric bill (grid hookup fee I think), and love the environmental warm fuzzy feeling. Plan on upgrading to electric cars in next 5 years, so should be even more profitable to charge our cars than SREC credit.
I am hoping the same, I am thinking that in 3-4 years I can get a pre-owned tesla for like $15K and charge it mostly at home and then it would increase the value of my solar since I am better off using the energy instead of gas, vs net metering at the end of the year at their price per watt.

livesoft
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Re: solar panels with payback of 8-10 years?

Post by livesoft » Thu Sep 27, 2018 8:16 am

I wonder if anybody who bought solar panels 8 to 10 years ago could comment. These things have been out there awhile now. Have they lived up to the hype? Maintenance costs? Repairs? Thanks.

I see arsenalfan gave one data point for the past 3 years.
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sunny_socal
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Re: solar panels with payback of 8-10 years?

Post by sunny_socal » Thu Sep 27, 2018 10:21 am

I think it totally depends on where you live.

In California we always had solar. There were state rebates, federal rebates. Cost of electricity without the system was very high and I imagine it was somehow due to taxes (eg. $250/month)

Here in TX things seem to be different. Few people have solar and electricity is dirt cheap. We rented a 2BR/2BA apartment for a couple months, bill was a paltry $15/month. I don't know what it will be for our new house but I'm guessing something like $100/month (4BR/2BA.) No way I'm getting solar if it's indeed that low, the math would not work.

It seems CA is overly regulated and taxed but if you happen to be out there solar is a good option. (It's as if you stick someone else with your tax bill, LOL!)

Iorek
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Re: solar panels with payback of 8-10 years?

Post by Iorek » Thu Sep 27, 2018 10:41 am

Thegame14 wrote:
Thu Sep 27, 2018 8:02 am
Iorek wrote:
Thu Sep 27, 2018 7:00 am
I was reading one of the state guides to solar energy and they were pointing out that if you are installing panels in part because you want to increase use of solar and/or run your house on solar energy then you should consider keeping your RECs. Obviously the electricity is being generated and put into the system in either case, but selling the RECs may reduce the market for solar (and make it easier for utilities to meet RPS goals).

My installer was pretty candid that I should not expect much from my RECs, and the srectrade website seems to confirm that by indicating they currently sell for about $5, so it's not a consequential decision for me either way, but I wondered if anyone had considered not selling their RECs for intangible/value based reasons.
Then maybe your state is much different, I just sold my last SREC for $210. I have had solar for a year, and each SREC has been right around $200. My system is designed to generate about 10 per year, so $2,000 per year for 15 years is $30,000 which more than pays for the system itself.

https://www.srectrade.com/srec_markets/new_jersey
yes-- in DC SRECs sell for about $300, a few miles away in MD they sell for $5.

livesoft
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Re: solar panels with payback of 8-10 years?

Post by livesoft » Thu Sep 27, 2018 10:49 am

sunny_socal wrote:
Thu Sep 27, 2018 10:21 am
Here in TX things seem to be different. Few people have solar and electricity is dirt cheap. We rented a 2BR/2BA apartment for a couple months, bill was a paltry $15/month. I don't know what it will be for our new house but I'm guessing something like $100/month (4BR/2BA.)
Our total past 12-month electricity bill was $1,044.61 for a 3000+ sq ft 4BR/3.5BA McMansion here in South Texas.
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