Calculating the value of solar (a slightly different way?)

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phositadc
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Calculating the value of solar (a slightly different way?)

Post by phositadc »

Frequently, people take the net cost of a solar system after all rebates/incentives, let's say that's $10,000 for my example, and they divide that by the amount of electricity cost per year that is saved, let's say that is $1,000 for my example. The result is a 10 year "payback period," i.e., 10,000 / 1,000.

I want to do a slightly different calculation. Suppose that, if I do not spend the $10,000 on solar, I will immediately drop that money into a 60/40 stocks/bond portfolio. For simplicity let's say it earns 6% per year over the next 30 years. So in year 30 I have 10,000 * 1.06^30 = 57,435.

Suppose that, if I do buy the solar, every year I take the money that I save on electricity and drop it into the same 60/40 portfolio that returns 6% per year. Also suppose electricity prices are increasing 1.5% per year. As in my first paragraph example, my year 1 savings is $1,000. My net savings after year 2 would be ($1000 * 1.06) [the savings from year 1 + a 6% return) + ($1000 * 1.015) [year 2 electricity cost saved * inflation] = $2,085. Repeat that for 30 years, and the net savings would be about $110,000 [caught a mistake after I posted. This $110,000 figure should actually be $92,898].

When calculated that way, the net benefit over 30 years of spending the up front 10k on solar panels, as opposed to investing that $10k in a portfolio returning 6%, is $110k - $57.4 = 52.6k [after correcting mistake: 92898 - 57435 = 35,463].

Obviously there are a lot of assumptions here -- investment returns, electric price increases, and also "behavioral" assumptions such as investing every dime saved on electricity costs rather than spending it, and living in the same house for 30 years.

But, acknowledging the assumptions, is the above calculation a reasonable way to think about solar returns? Am I missing any numbers in my calculations that would materially change the outcome? I suppose to be ultra accurate I would need to try to account for maintenance/cleaning costs of the solar system over the course of 30 years, and I would also need to account for taxes on the returns of everything. Anything else though?

Thanks for any input.
Last edited by phositadc on Wed Jul 21, 2021 10:33 am, edited 1 time in total.
BreadandButter
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Re: Calculating the value of solar (a slightly different way?)

Post by BreadandButter »

I don't know if the panel system lasts 30 years. I read somewhere that the lifespan was more like 20 years.
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cchrissyy
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Re: Calculating the value of solar (a slightly different way?)

Post by cchrissyy »

in the "buy solar" paragraph it's as if you start from having already paid for the panels. you're missing some acknowledgement of where the initial 10k came from, or that you begin underwater.
bluebolt
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Re: Calculating the value of solar (a slightly different way?)

Post by bluebolt »

BreadandButter wrote: Wed Jul 21, 2021 1:38 am I don't know if the panel system lasts 30 years. I read somewhere that the lifespan was more like 20 years.
Many panels and inverters now have 25 year warranties.
furiouschads
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Re: Calculating the value of solar (a slightly different way?)

Post by furiouschads »

No taxes on the implicit income of the $1,000 a year not spent on electricity.

If you sell your house, you may receive a capital gain. A Lawrence Livermore Labs study estimated the value of a house to increase by $4 for every DC watt of solar generation installed. In 2015 we paid about $3 per DC watt installed. That was before federal, state, and local subsidies reduced our actual installed cost.
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Re: Calculating the value of solar (a slightly different way?)

Post by sc9182 »

furiouschads wrote: Wed Jul 21, 2021 7:23 am No taxes on the implicit income of the $1,000 a year not spent on electricity.

If you sell your house, you may receive a capital gain. A Lawrence Livermore Labs study estimated the value of a house to increase by $4 for every DC watt of solar generation installed. In 2015 we paid about $3 per DC watt installed. That was before federal, state, and local subsidies reduced our actual installed cost.
Yes - I am for Solar. But there are additional costs; semi-annual or annual cleanup of panels, dealing with inverter typical life of 8-12 years, Electric provider’s second meter fee (typically $10/mo), and Home insurance coverage availability (less insurance Co.s cover panels) & often with increased coverage costs. Charges such as de-install/re-install when replacing roof (more often for folks residing in wind/hail prone geographies ; some of those costs may be covered by insurance but not necessarily in full).

Then there are oft changing net-metering legislations and/or buy
-rate Vs. Sell-rate gimmickry in various states.

Btw - I am for solar, but regulatory landscape, likely to continue to evolve - one way or the other.

On the upside - if you have sufficient battery backup (and cut-off-switch), you likely survive better or mitigate pain during freak weather phenomenon such as Texas extended cold storm .. (assuming natural gas still continues to be supplied, and with gas heating)
Last edited by sc9182 on Wed Jul 21, 2021 7:52 am, edited 4 times in total.
furiouschads
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Re: Calculating the value of solar (a slightly different way?)

Post by furiouschads »

Very few people clean their solar panels. Not needed.

I didn't have to pay for a second meter. If the feedback rates into the grid become unattractive, I will electrify more of my energy consumption. We looked into battery backup. It was not cost-effective at that time. Don't get me started on Texas ERCOT utility regulation.

Panels add life to roof shingles, particularly on southern and western facing roofs. In my case, the panels are the roof of my carport.

I'm not sure what the real life repair costs of inverters after warranty etc will end up being. Ditto for reduction in panel efficiency over time.
Last edited by furiouschads on Wed Jul 21, 2021 7:53 am, edited 2 times in total.
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TomatoTomahto
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Re: Calculating the value of solar (a slightly different way?)

Post by TomatoTomahto »

furiouschads wrote: Wed Jul 21, 2021 7:41 am Very few people clean their solar panels. Not needed.
Yeah. That’s why we have rain :sharebeer
I get the FI part but not the RE part of FIRE.
Point
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Re: Calculating the value of solar (a slightly different way?)

Post by Point »

You will also want to add the increase in electricity cost over time, I would put that at 2-5% per year. And then savings in electricity not purchased are not taxed.
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Re: Calculating the value of solar (a slightly different way?)

Post by RickBoglehead »

With the current life expectancy of solar panels, breakeven lines right up with end of life, i.e. you are lucky to breakeven before replacements are needed.

I wouldn't depend on 25 year warranties...
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Re: Calculating the value of solar (a slightly different way?)

Post by Free to Choose »

phositadc wrote: Tue Jul 20, 2021 5:37 am Frequently, people take the net cost of a solar system after all rebates/incentives, let's say that's $10,000 for my example, and they divide that by the amount of electricity cost per year that is saved, let's say that is $1,000 for my example. The result is a 10 year "payback period," i.e., 10,000 / 1,000.

I want to do a slightly different calculation. Suppose that, if I do not spend the $10,000 on solar, I will immediately drop that money into a 60/40 stocks/bond portfolio. For simplicity let's say it earns 6% per year over the next 30 years. So in year 30 I have 10,000 * 1.06^30 = 57,435.

Suppose that, if I do buy the solar, every year I take the money that I save on electricity and drop it into the same 60/40 portfolio that returns 6% per year. Also suppose electricity prices are increasing 1.5% per year. As in my first paragraph example, my year 1 savings is $1,000. My net savings after year 2 would be ($1000 * 1.06) [the savings from year 1 + a 6% return) + ($1000 * 1.015) [year 2 electricity cost saved * inflation] = $2,085. Repeat that for 30 years, and the net savings would be about $110,000.

When calculated that way, the net benefit over 30 years of spending the up front 10k on solar panels, as opposed to investing that $10k in a portfolio returning 6%, is $110k - $57.4 = 52.6k.

Obviously there are a lot of assumptions here -- investment returns, electric price increases, and also "behavioral" assumptions such as investing every dime saved on electricity costs rather than spending it, and living in the same house for 30 years.

But, acknowledging the assumptions, is the above calculation a reasonable way to think about solar returns? Am I missing any numbers in my calculations that would materially change the outcome? I suppose to be ultra accurate I would need to try to account for maintenance/cleaning costs of the solar system over the course of 30 years, and I would also need to account for taxes on the returns of everything. Anything else though?

Thanks for any input.
You are starting to think about a true financial analysis and making ROI decisions. This is the proper way to analyze it.

The simple payback math is really not the way to make a decision on your "business" investment. The simple way is similar to how many people "analyze" an annuity, "I invest $100k to the insurance company and they give me $6k a year. That is a guaranteed 6% return!" However, the person gave up $100k that they can't get back. The correct return is the IRR over a time period.
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lthenderson
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Re: Calculating the value of solar (a slightly different way?)

Post by lthenderson »

Solar panels degrade about 1% per year so after 30 years, they would produce 30% less electricity and your savings, if everything else remained the same, would be less as well.
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Re: Calculating the value of solar (a slightly different way?)

Post by mervinj7 »

lthenderson wrote: Wed Jul 21, 2021 8:10 am Solar panels degrade about 1% per year so after 30 years, they would produce 30% less electricity and your savings, if everything else remained the same, would be less as well.
Here's the panel I have installed (from 2018):

https://na.panasonic.com/us/energy-solu ... -hitr-40mm
parts and performance warranty that guarantees minimum power output of 90.76% after 25 years
For older panels in the field, NREL did a study a few years ago that showed degradation to 90% after 20 years.

https://www.nrel.gov/state-local-tribal ... anels.html
Last edited by mervinj7 on Wed Jul 21, 2021 9:25 am, edited 1 time in total.
Maverick3320
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Re: Calculating the value of solar (a slightly different way?)

Post by Maverick3320 »

I'm clearly no math wiz, so help me understand - it looks like the way you've done the math results in the original purchase price of the panels being irrelevant (i.e., it's still a sound decision even if the panels cost $100,000). What am I missing here?
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Re: Calculating the value of solar (a slightly different way?)

Post by bluebolt »

mervinj7 wrote: Wed Jul 21, 2021 8:18 am
lthenderson wrote: Wed Jul 21, 2021 8:10 am Solar panels degrade about 1% per year so after 30 years, they would produce 30% less electricity and your savings, if everything else remained the same, would be less as well.
Here's the panel I have installed:

https://na.panasonic.com/us/energy-solu ... -hitr-40mm
parts and performance warranty that guarantees minimum power output of 90.76% after 25 years
For older panels in the field, NREL did a study a few years ago that showed degradation to 90% after 20 years.

https://www.nrel.gov/state-local-tribal ... anels.html
My panel specs say they will produce 92% of their initial power in year 25.
mervinj7
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Re: Calculating the value of solar (a slightly different way?)

Post by mervinj7 »

bluebolt wrote: Wed Jul 21, 2021 9:18 am My panel specs say they will produce 92% of their initial power in year 25.
Sounds about right for a new system.
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phositadc
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Re: Calculating the value of solar (a slightly different way?)

Post by phositadc »

Maverick3320 wrote: Wed Jul 21, 2021 9:02 am I'm clearly no math wiz, so help me understand - it looks like the way you've done the math results in the original purchase price of the panels being irrelevant (i.e., it's still a sound decision even if the panels cost $100,000). What am I missing here?
cchrissyy wrote: Wed Jul 21, 2021 1:44 am in the "buy solar" paragraph it's as if you start from having already paid for the panels. you're missing some acknowledgement of where the initial 10k came from, or that you begin underwater.
I think I am accounting for the initial 10k in my calculation, but I'm no math wiz either, so somebody please correct me if I'm wrong. Here's an excel spreadsheet that I put together. My calculation assumes I have 10k in the bank on day 1. If I do not buy solar, at the end of year 1 I have $10,600. If I do buy solar, the initial $10k is gone, but at the end of year 1, I have 1000 (the amount saved on electricity bills). (BTW, my numbers are different from my OP b/c in one of the calculations in my OP I was using 7% annual return instead of 6% annual return).

Image
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Re: Calculating the value of solar (a slightly different way?)

Post by squirm »

Pay attention to the terms on the utility side. Utilities such as PG&E had lucrative terms initially according to a friend, he's on their E6 rate schedule, but they're sunsetting it. The new schedule is much less lucrative. These things are hard to predict, but as solar installations become more common, the peak rates will be near sunsets.
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Re: Calculating the value of solar (a slightly different way?)

Post by Maverick3320 »

phositadc wrote: Wed Jul 21, 2021 10:30 am
Maverick3320 wrote: Wed Jul 21, 2021 9:02 am I'm clearly no math wiz, so help me understand - it looks like the way you've done the math results in the original purchase price of the panels being irrelevant (i.e., it's still a sound decision even if the panels cost $100,000). What am I missing here?
cchrissyy wrote: Wed Jul 21, 2021 1:44 am in the "buy solar" paragraph it's as if you start from having already paid for the panels. you're missing some acknowledgement of where the initial 10k came from, or that you begin underwater.
I think I am accounting for the initial 10k in my calculation, but I'm no math wiz either, so somebody please correct me if I'm wrong. Here's an excel spreadsheet that I put together. My calculation assumes I have 10k in the bank on day 1. If I do not buy solar, at the end of year 1 I have $10,600. If I do buy solar, the initial $10k is gone, but at the end of year 1, I have 1000 (the amount saved on electricity bills). (BTW, my numbers are different from my OP b/c in one of the calculations in my OP I was using 7% annual return instead of 6% annual return).

Image
Yeah, I understand what you were saying about your calculations. What happens though when you change the purchase price of the solar panels to, say, $100,000? Does it still make sense to make the purchase?
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phositadc
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Re: Calculating the value of solar (a slightly different way?)

Post by phositadc »

Maverick3320 wrote: Wed Jul 21, 2021 10:42 am
phositadc wrote: Wed Jul 21, 2021 10:30 am
Maverick3320 wrote: Wed Jul 21, 2021 9:02 am I'm clearly no math wiz, so help me understand - it looks like the way you've done the math results in the original purchase price of the panels being irrelevant (i.e., it's still a sound decision even if the panels cost $100,000). What am I missing here?
cchrissyy wrote: Wed Jul 21, 2021 1:44 am in the "buy solar" paragraph it's as if you start from having already paid for the panels. you're missing some acknowledgement of where the initial 10k came from, or that you begin underwater.
I think I am accounting for the initial 10k in my calculation, but I'm no math wiz either, so somebody please correct me if I'm wrong. Here's an excel spreadsheet that I put together. My calculation assumes I have 10k in the bank on day 1. If I do not buy solar, at the end of year 1 I have $10,600. If I do buy solar, the initial $10k is gone, but at the end of year 1, I have 1000 (the amount saved on electricity bills). (BTW, my numbers are different from my OP b/c in one of the calculations in my OP I was using 7% annual return instead of 6% annual return).

[snip]
Yeah, I understand what you were saying about your calculations. What happens though when you change the purchase price of the solar panels to, say, $100,000? Does it still make sense to make the purchase?
This is what happens when I change the price of the solar panels to $100k:

Image

So no, wouldn't make sense to purchase, needless to say :o
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Re: Calculating the value of solar (a slightly different way?)

Post by mervinj7 »

phositadc wrote: Wed Jul 21, 2021 1:12 pm This is what happens when I change the price of the solar panels to $100k:
So no, wouldn't make sense to purchase, needless to say :o
OP, have you looked into comparing your calculations with more standard ones like IRR (internal rate of return) and NPV (net present value)? Valuethinker had a write up on my solar post a while back that described how to use them for solar.

viewtopic.php?p=4776965#p4776965

I think your method is interesting in that it assumes the annual savings each other is invested the same as what the upfront install costs would have been. I like it.
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Re: Calculating the value of solar (a slightly different way?)

Post by mervinj7 »

TomatoTomahto wrote: Wed Jul 21, 2021 7:49 am
furiouschads wrote: Wed Jul 21, 2021 7:41 am Very few people clean their solar panels. Not needed.
Yeah. That’s why we have rain :sharebeer
Conversely, it's because we have no rain (at least here in the Bay Area) that I've started getting my panels washed annually along with my gutters. The costs don't justify the increased production but I love the way the clean panels look.
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Re: Calculating the value of solar (a slightly different way?)

Post by TomatoTomahto »

mervinj7 wrote: Wed Jul 21, 2021 1:28 pm
TomatoTomahto wrote: Wed Jul 21, 2021 7:49 am
furiouschads wrote: Wed Jul 21, 2021 7:41 am Very few people clean their solar panels. Not needed.
Yeah. That’s why we have rain :sharebeer
Conversely, it's because we have no rain (at least here in the Bay Area) that I've started getting my panels washed annually along with my gutters. The costs don't justify the increased production but I love the way the clean panels look.
You’re right; location, location, location. We have had the wettest spring/summer on record near Boston. The garden loves it but it’s been a bummer. My heart goes out to the regions suffering from heat and even more rain/floods than we have.
I get the FI part but not the RE part of FIRE.
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Re: Calculating the value of solar (a slightly different way?)

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You’re talking about doing time value of money calculations, which is the correct thing to do when analyzing a potential investment, but you’re making a typical mistake by comparing a safe investment with a predictable return (the power generated by the panels) to much riskier investments (60/40 portfolio). If you’re doing TVM calculations, the alternative investment should probably be one with a similar risk profile.
Yes, I’m really that pedantic.
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Re: Calculating the value of solar (a slightly different way?)

Post by Maverick3320 »

quantAndHold wrote: Wed Jul 21, 2021 2:15 pm You’re talking about doing time value of money calculations, which is the correct thing to do when analyzing a potential investment, but you’re making a typical mistake by comparing a safe investment with a predictable return (the power generated by the panels) to much riskier investments (60/40 portfolio). If you’re doing TVM calculations, the alternative investment should probably be one with a similar risk profile.
I would also wonder about the cost of electricity going forward. Is it really going to rise at 1.5% for the next 30 years? From what I understand, solar alone could radically alter the cost curve of electricity generation, particularly once efficient large-scale storage options are in place.

Full disclosure: I have solar panels. It was $13,000 to install a 4.5 Kw system; after the $3,000 federal tax credit and the $1,000 state credit I ended up with a total cost around $9,000. I didn't make the investment in terms of IRR, as I'm not certain about the 1.5% electric cost rises per annum nor the 6% (presumably real) return in the markets over the next 10-30 years. Over the next 10 years, I'm much more certain about the electricity price floor than I am the 6% return.

It gets weird when I try to figure out what percentage of my solar savings I'm actually investing in the markets earning a 6% return versus consumption.
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Re: Calculating the value of solar (a slightly different way?)

Post by gougou »

You need to compare it against a treasury bond/savings account instead of a stock/bond portfolio. The savings are guaranteed. The return of a 60/40 portfolio could be negative in the next 10 years.

But then the solar panel will probably be worth 0 in 20 to 30 years, so it's more like an annuity than a bond. You should compare it against a guaranteed annuity that lasts for 20 to 30 years.
Last edited by gougou on Wed Jul 21, 2021 3:00 pm, edited 1 time in total.
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Re: Calculating the value of solar (a slightly different way?)

Post by quantAndHold »

Maverick3320 wrote: Wed Jul 21, 2021 2:44 pm
quantAndHold wrote: Wed Jul 21, 2021 2:15 pm You’re talking about doing time value of money calculations, which is the correct thing to do when analyzing a potential investment, but you’re making a typical mistake by comparing a safe investment with a predictable return (the power generated by the panels) to much riskier investments (60/40 portfolio). If you’re doing TVM calculations, the alternative investment should probably be one with a similar risk profile.
I would also wonder about the cost of electricity going forward. Is it really going to rise at 1.5% for the next 30 years? From what I understand, solar alone could radically alter the cost curve of electricity generation, particularly once efficient large-scale storage options are in place.
Agreed, it’s hard enough to predict electric rates that I would probably leave them out of the calculation. If the go/no go decision comes down to predicted rate increases, I would probably just not do it. But that said, in my case, the base rate for electricity in my location has actually increased an average of 2.1% per year in the decade since we got our panels. Higher tiers have increased even more than that, and judging by what my local utility is doing, I don’t think the increases are over.
Yes, I’m really that pedantic.
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Re: Calculating the value of solar (a slightly different way?)

Post by mervinj7 »

quantAndHold wrote: Wed Jul 21, 2021 2:57 pm Agreed, it’s hard enough to predict electric rates that I would probably leave them out of the calculation. If the go/no go decision comes down to predicted rate increases, I would probably just not do it. But that said, in my case, the base rate for electricity in my location has actually increased an average of 2.1% per year in the decade since we got our panels. Higher tiers have increased even more than that, and judging by what my local utility is doing, I don’t think the increases are over.
Ours went up by 8% this year alone. So it's heavily location dependent. But obviously last two years were a bit crazy with the wildfires. Maybe this year will be different...

https://gvwire.com/2020/12/03/pge-regul ... ers/?amp=1
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Re: Calculating the value of solar (a slightly different way?)

Post by quantAndHold »

gougou wrote: Wed Jul 21, 2021 2:56 pm You need to compare it against a treasury bond/savings account instead of a stock/bond portfolio. The savings are guaranteed. The return of a 60/40 portfolio could be negative in the next 10 years.

But then the solar panel will probably be worth 0 in 20 to 30 years, so you should compare it against a guaranteed annuity that lasts for 20 to 30 years.
I was thinking about the value of the system in 20 or 30 years, and it isn’t zero. The panels and inverter will at some point, need replacing, but the rest of the infrastructure; the stands the panels sit on, the wiring that was buried underground, the breaker boxes, the design work and installation, etc, all that stuff was actually the expensive parts, and will still be good a couple of decades from now. When I need to replace panels or swap out the inverter, it’s just a swap out, and the new versions of those things are both cheaper and more efficient than the decade old stuff that I have now. Including labor and permits, I could swap the the panels and inverter for somewhere between 1/3 and 1/2 of what a brand new system would cost (about 1/4 of what I originally paid).
Yes, I’m really that pedantic.
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Re: Calculating the value of solar (a slightly different way?)

Post by RickBoglehead »

Maverick3320 wrote: Wed Jul 21, 2021 2:44 pm From what I understand, solar alone could radically alter the cost curve of electricity generation, particularly once efficient large-scale storage options are in place.
I strongly recommend you read Bill Gates' book, How To Avoid A Climate Disaster. He points out that neither solar nor wind can save us. The production of electricity accounts for less than 30% of total emissions. 70% - steel, cement, transportation, etc. need to change how they use energy to be produced / function. 51 billion tons of greenhouse gases are added to the atmosphere each year. We need to be at zero.

But the main point to bring up on this thread, is that the amount of square footage needed for solar is huge (as it is for wind). Therefore, neither can have a noticeable impact in the production of electricity. What will change the cost curve for electricity generation is nuclear, for which a brand new design has to be found that will be accepted by countries and people.

It's commendable that communities install solar and wind farms, and individuals put solar panels up and try to be carbon neutral. Yes, every little bit helps. But the only way we're going to impact the cost of electricity (for which demand goes up every day), is with nuclear. And the only way we're going to fix the environment is with breakthrough technologies in the production of steel and cement.
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Re: Calculating the value of solar (a slightly different way?)

Post by gougou »

quantAndHold wrote: Wed Jul 21, 2021 3:09 pm
gougou wrote: Wed Jul 21, 2021 2:56 pm You need to compare it against a treasury bond/savings account instead of a stock/bond portfolio. The savings are guaranteed. The return of a 60/40 portfolio could be negative in the next 10 years.

But then the solar panel will probably be worth 0 in 20 to 30 years, so you should compare it against a guaranteed annuity that lasts for 20 to 30 years.
I was thinking about the value of the system in 20 or 30 years, and it isn’t zero. The panels and inverter will at some point, need replacing, but the rest of the infrastructure; the stands the panels sit on, the wiring that was buried underground, the breaker boxes, the design work and installation, etc, all that stuff was actually the expensive parts, and will still be good a couple of decades from now. When I need to replace panels or swap out the inverter, it’s just a swap out, and the new versions of those things are both cheaper and more efficient than the decade old stuff that I have now. Including labor and permits, I could swap the the panels and inverter for somewhere between 1/3 and 1/2 of what a brand new system would cost (about 1/4 of what I originally paid).
You could consider applying a depreciation expense on the solar panels and other parts that you purchased. Say you spent $10K on the panels and $5K on other parts and you expect the panel to be worth 0 in 20 years and other parts be worth 0 in 50 years, your annual depreciation is $10k/20 + $5k/50 = $600

Subtract that from the savings you got from the panel, that's your annual return on your invested capital.
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Re: Calculating the value of solar (a slightly different way?)

Post by quantAndHold »

gougou wrote: Wed Jul 21, 2021 3:26 pm
quantAndHold wrote: Wed Jul 21, 2021 3:09 pm
gougou wrote: Wed Jul 21, 2021 2:56 pm You need to compare it against a treasury bond/savings account instead of a stock/bond portfolio. The savings are guaranteed. The return of a 60/40 portfolio could be negative in the next 10 years.

But then the solar panel will probably be worth 0 in 20 to 30 years, so you should compare it against a guaranteed annuity that lasts for 20 to 30 years.
I was thinking about the value of the system in 20 or 30 years, and it isn’t zero. The panels and inverter will at some point, need replacing, but the rest of the infrastructure; the stands the panels sit on, the wiring that was buried underground, the breaker boxes, the design work and installation, etc, all that stuff was actually the expensive parts, and will still be good a couple of decades from now. When I need to replace panels or swap out the inverter, it’s just a swap out, and the new versions of those things are both cheaper and more efficient than the decade old stuff that I have now. Including labor and permits, I could swap the the panels and inverter for somewhere between 1/3 and 1/2 of what a brand new system would cost (about 1/4 of what I originally paid).
You could consider applying a depreciation expense on the solar panels and other parts that you purchased. Say you spent $10K on the panels and $5K on other parts and you expect the panel to be worth 0 in 20 years and other parts be worth 0 in 50 years, your annual depreciation is $10k/20 + $5k/50 = $600

Subtract that from the savings you got from the panel, that's your annual return on your invested capital.
Agree, except it’s closer to $5k/25 + $10k/50 = $400. And I’m not sure how you’d factor in the fact that replacement parts are considerably cheaper than what they’re replacing.

That said, coincidence or not, when I look at my own actuals over the last decade, the amount I lose from depreciation and the amount I gain from increases in electric rates pretty much cancel each other out. Which to me is a reasonable argument for just ignoring both. I don’t think the extra couple of percentage points of precision you get by including those things in something based on imperfect knowledge of future events really improves decision making ability. At the heart of it, we’re still predicting the future. For one thing, the odds that most of us will still own our houses at the time the panels need to be replaced is unpredictable, but probably pretty low. My wife is 74. Am I still going to be in this house in 15 or 20 years? Probably not.
Yes, I’m really that pedantic.
Maverick3320
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Re: Calculating the value of solar (a slightly different way?)

Post by Maverick3320 »

RickBoglehead wrote: Wed Jul 21, 2021 3:22 pm
Maverick3320 wrote: Wed Jul 21, 2021 2:44 pm From what I understand, solar alone could radically alter the cost curve of electricity generation, particularly once efficient large-scale storage options are in place.
I strongly recommend you read Bill Gates' book, How To Avoid A Climate Disaster. He points out that neither solar nor wind can save us. The production of electricity accounts for less than 30% of total emissions. 70% - steel, cement, transportation, etc. need to change how they use energy to be produced / function. 51 billion tons of greenhouse gases are added to the atmosphere each year. We need to be at zero.

But the main point to bring up on this thread, is that the amount of square footage needed for solar is huge (as it is for wind). Therefore, neither can have a noticeable impact in the production of electricity. What will change the cost curve for electricity generation is nuclear, for which a brand new design has to be found that will be accepted by countries and people.

It's commendable that communities install solar and wind farms, and individuals put solar panels up and try to be carbon neutral. Yes, every little bit helps. But the only way we're going to impact the cost of electricity (for which demand goes up every day), is with nuclear. And the only way we're going to fix the environment is with breakthrough technologies in the production of steel and cement.
I think perhaps we are talking two different things here. I'm not talking about saving the planet, I'm simply saying that the costs of solar installation/solar production are dropping rapidly, and have been for decades. Obviously that can't last forever, but solar is getting cheap, and fast. Further, as panels become more efficient the space requirements will drop as well.

I do agree on your nuclear power sentiments, unfortunately, it's difficult to have a rational conversation (in the US, at least) without the conversation becoming political.
Maverick3320
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Re: Calculating the value of solar (a slightly different way?)

Post by Maverick3320 »

quantAndHold wrote: Wed Jul 21, 2021 3:46 pm
gougou wrote: Wed Jul 21, 2021 3:26 pm
quantAndHold wrote: Wed Jul 21, 2021 3:09 pm
gougou wrote: Wed Jul 21, 2021 2:56 pm You need to compare it against a treasury bond/savings account instead of a stock/bond portfolio. The savings are guaranteed. The return of a 60/40 portfolio could be negative in the next 10 years.

But then the solar panel will probably be worth 0 in 20 to 30 years, so you should compare it against a guaranteed annuity that lasts for 20 to 30 years.
I was thinking about the value of the system in 20 or 30 years, and it isn’t zero. The panels and inverter will at some point, need replacing, but the rest of the infrastructure; the stands the panels sit on, the wiring that was buried underground, the breaker boxes, the design work and installation, etc, all that stuff was actually the expensive parts, and will still be good a couple of decades from now. When I need to replace panels or swap out the inverter, it’s just a swap out, and the new versions of those things are both cheaper and more efficient than the decade old stuff that I have now. Including labor and permits, I could swap the the panels and inverter for somewhere between 1/3 and 1/2 of what a brand new system would cost (about 1/4 of what I originally paid).
You could consider applying a depreciation expense on the solar panels and other parts that you purchased. Say you spent $10K on the panels and $5K on other parts and you expect the panel to be worth 0 in 20 years and other parts be worth 0 in 50 years, your annual depreciation is $10k/20 + $5k/50 = $600

Subtract that from the savings you got from the panel, that's your annual return on your invested capital.
Agree, except it’s closer to $5k/25 + $10k/50 = $400. And I’m not sure how you’d factor in the fact that replacement parts are considerably cheaper than what they’re replacing.

That said, coincidence or not, when I look at my own actuals over the last decade, the amount I lose from depreciation and the amount I gain from increases in electric rates pretty much cancel each other out. Which to me is a reasonable argument for just ignoring both. I don’t think the extra couple of percentage points of precision you get by including those things in something based on imperfect knowledge of future events really improves decision making ability. At the heart of it, we’re still predicting the future. For one thing, the odds that most of us will still own our houses at the time the panels need to be replaced is unpredictable, but probably pretty low. My wife is 74. Am I still going to be in this house in 15 or 20 years? Probably not.
This is all true. I installed my solar panels knowing that we probably won't be in the same house 10 years from now, and quite unlikely 30 years from now (I'm 40). However, credible sources also say that the panels add resale value to the house, so even if you sell in a few years, presumably you'll see some sort of ROI.

Altogether there is probably 10-15 variables that need to be included in any extremely detailed cost analysis of solar installation.
MathWizard
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Re: Calculating the value of solar (a slightly different way?)

Post by MathWizard »

phositadc wrote: Tue Jul 20, 2021 5:37 am Frequently, people take the net cost of a solar system after all rebates/incentives, let's say that's $10,000 for my example, and they divide that by the amount of electricity cost per year that is saved, let's say that is $1,000 for my example. The result is a 10 year "payback period," i.e., 10,000 / 1,000.

I want to do a slightly different calculation. Suppose that, if I do not spend the $10,000 on solar, I will immediately drop that money into a 60/40 stocks/bond portfolio. For simplicity let's say it earns 6% per year over the next 30 years. So in year 30 I have 10,000 * 1.06^30 = 57,435.

Suppose that, if I do buy the solar, every year I take the money that I save on electricity and drop it into the same 60/40 portfolio that returns 6% per year. Also suppose electricity prices are increasing 1.5% per year. As in my first paragraph example, my year 1 savings is $1,000. My net savings after year 2 would be ($1000 * 1.06) [the savings from year 1 + a 6% return) + ($1000 * 1.015) [year 2 electricity cost saved * inflation] = $2,085. Repeat that for 30 years, and the net savings would be about $110,000 [caught a mistake after I posted. This $110,000 figure should actually be $92,898].

When calculated that way, the net benefit over 30 years of spending the up front 10k on solar panels, as opposed to investing that $10k in a portfolio returning 6%, is $110k - $57.4 = 52.6k [after correcting mistake: 92898 - 57435 = 35,463].

Obviously there are a lot of assumptions here -- investment returns, electric price increases, and also "behavioral" assumptions such as investing every dime saved on electricity costs rather than spending it, and living in the same house for 30 years.

But, acknowledging the assumptions, is the above calculation a reasonable way to think about solar returns? Am I missing any numbers in my calculations that would materially change the outcome? I suppose to be ultra accurate I would need to try to account for maintenance/cleaning costs of the solar system over the course of 30 years, and I would also need to account for taxes on the returns of everything. Anything else though?

Thanks for any input.
Yes, you are taking time value of money into account.

I just installed solar panels, and my calculations show that the payback will be about their lifespan assuming
no drastic increase in energy prices. (The panels are a hedge against that.) I used 4% real in my ROI calculations.

You should also factor in an increase in your home insurance.
My $15K system (before rebates) raised my home insurance by $75/yr.

Most Solar installs are grid-tie, so should look at the net metering agreement.
Even on a system that provides 100% of your consumption, you will still
have two costs on your utility bill.
1) The hookup fee , or infrastructure cost, which pays for the meter and the lines that
connect you to the utility, and all their maintenance. You are using that infrastructure
like a storage device when the meter runs backwards during the peak hours of the day
when you are producing more than you consume.
2) Net metering: You bring power back when you consume more than you produce, at night
or cloudy days. The thing is, if you live in a place where the utility bills monthly, some months you
will have a usage, and some months a negative usage. Even though they sum to zero, the
utility pays you less than the charge. For me, it is something like 11 to 13 cents/kwh for use,
but you only get 7 cents/kwh when you have produced more than you use.
If the month that you overproduced account for 10% of your annual usage, and the over consumption was
also 10% , you are producing 100% of your consumption, but you would lose 4 to 6 cents./kwh on that 10% .

Also figure in an extra cost when you reroof, since the panels will need to be removed, and you will
want solar installers to do that, not roofers.


I am doing this more for the environment that my kids will have to live in rather than as a
financial investment.
Strummer
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Re: Calculating the value of solar (a slightly different way?)

Post by Strummer »

As long as we're trying to quantify the value of solar panels, I'd like to throw in one important intangible: the immense level of satisfaction that can come with knowing you are generating all (or some portion) of the electricity that you use.

As tech mad as humans seem to be — waiting for hours for the latest iPhones, etc. — it surprises me that something as cool as generating your electricity from the sun is constantly reduced to spreadsheets focused on payback periods, especially as the effects of burning fossil fuels are becoming more and more obvious.
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Re: Calculating the value of solar (a slightly different way?)

Post by TomatoTomahto »

Strummer wrote: Thu Jul 22, 2021 3:20 pm As long as we're trying to quantify the value of solar panels, I'd like to throw in one important intangible: the immense level of satisfaction that can come with knowing you are generating all (or some portion) of the electricity that you use.

As tech mad as humans seem to be — waiting for hours for the latest iPhones, etc. — it surprises me that something as cool as generating your electricity from the sun is constantly reduced to spreadsheets focused on payback periods, especially as the effects of burning fossil fuels are becoming more and more obvious.
I’m with you. With geothermal heating and cooling, an EV, wells, septic, solar panels, batteries (and in the event of a prolonged outage our sole remaining fossil fuel system - propane generator to recharge batteries), I love it. I wish I knew how to farm. Maybe it’s time to learn.

I refer to the value as “off spreadsheet” or intangibles or externalities. The solar installer ran a spreadsheet. I shouldn’t admit this on BH, but I barely looked at it.
I get the FI part but not the RE part of FIRE.
Maverick3320
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Re: Calculating the value of solar (a slightly different way?)

Post by Maverick3320 »

Strummer wrote: Thu Jul 22, 2021 3:20 pm As long as we're trying to quantify the value of solar panels, I'd like to throw in one important intangible: the immense level of satisfaction that can come with knowing you are generating all (or some portion) of the electricity that you use.

As tech mad as humans seem to be — waiting for hours for the latest iPhones, etc. — it surprises me that something as cool as generating your electricity from the sun is constantly reduced to spreadsheets focused on payback periods, especially as the effects of burning fossil fuels are becoming more and more obvious.
1) Even with prices coming down, a meaningful solar panel array is still 15-20x the cost of an iPhone.

2) The environmental benefits of a solar array are a bit more nebulous; the financial benefits are much more measurable, and much more personal.

3) I'm guessing that there is very little overlap between the people waiting in line for hours for a new iPhone and those that run IRR calculations on "major" life purchases.
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cchrissyy
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Re: Calculating the value of solar (a slightly different way?)

Post by cchrissyy »

I'm another who bought solar because I wanted to have a solar powered house, and not because of financial payback period math. I do enjoy getting energy this way but I understand there was an environmental cost in production so it is not the case that installing solar would fix environmental issues right away even if everybody did it.

What is a new iphone, $800? then for the record my recently installed system that brings in far more electricity than we need cost me 10x
squirm
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Re: Calculating the value of solar (a slightly different way?)

Post by squirm »

What's nice with solar is flipping the ac switch without that constant gnawing that's it's costing you an arm and a leg.
Walkure
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Re: Calculating the value of solar (a slightly different way?)

Post by Walkure »

squirm wrote: Thu Jul 22, 2021 6:20 pm What's nice with solar is flipping the ac switch without that constant gnawing that's it's costing you an arm and a leg.
As someone contemplating getting solar panels, I was wondering if anyone has noticed their cooling consumption going down after adding them? Not just a lower electric bill, I'm talking the actual load on your AC dropping due to the panels creating an extra layer of shading / convective air between the sun and the attic.
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Re: Calculating the value of solar (a slightly different way?)

Post by squirm »

Walkure wrote: Thu Jul 22, 2021 6:42 pm
squirm wrote: Thu Jul 22, 2021 6:20 pm What's nice with solar is flipping the ac switch without that constant gnawing that's it's costing you an arm and a leg.
As someone contemplating getting solar panels, I was wondering if anyone has noticed their cooling consumption going down after adding them? Not just a lower electric bill, I'm talking the actual load on your AC dropping due to the panels creating an extra layer of shading / convective air between the sun and the attic.
I haven't noticed. If there is it's minimal.
bluebolt
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Re: Calculating the value of solar (a slightly different way?)

Post by bluebolt »

MathWizard wrote: Thu Jul 22, 2021 9:25 am You should also factor in an increase in your home insurance.
My $15K system (before rebates) raised my home insurance by $75/yr.
My system cost more than twice yours and increased my homeowner's insurance by $15/yr.
Wannaretireearly
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Re: Calculating the value of solar (a slightly different way?)

Post by Wannaretireearly »

mervinj7 wrote: Wed Jul 21, 2021 1:28 pm
TomatoTomahto wrote: Wed Jul 21, 2021 7:49 am
furiouschads wrote: Wed Jul 21, 2021 7:41 am Very few people clean their solar panels. Not needed.
Yeah. That’s why we have rain :sharebeer
Conversely, it's because we have no rain (at least here in the Bay Area) that I've started getting my panels washed annually along with my gutters. The costs don't justify the increased production but I love the way the clean panels look.
I count myself lucky Noone can see my panels from the front of the house. I think my panels also need a clean tho
Death and taxes. Only one is under your control!
quantAndHold
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Re: Calculating the value of solar (a slightly different way?)

Post by quantAndHold »

Walkure wrote: Thu Jul 22, 2021 6:42 pm
squirm wrote: Thu Jul 22, 2021 6:20 pm What's nice with solar is flipping the ac switch without that constant gnawing that's it's costing you an arm and a leg.
As someone contemplating getting solar panels, I was wondering if anyone has noticed their cooling consumption going down after adding them? Not just a lower electric bill, I'm talking the actual load on your AC dropping due to the panels creating an extra layer of shading / convective air between the sun and the attic.
No, because my panels are sitting on top of my detached garage.
Yes, I’m really that pedantic.
Monsterflockster
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Re: Calculating the value of solar (a slightly different way?)

Post by Monsterflockster »

phositadc wrote: Tue Jul 20, 2021 5:37 am Frequently, people take the net cost of a solar system after all rebates/incentives, let's say that's $10,000 for my example, and they divide that by the amount of electricity cost per year that is saved, let's say that is $1,000 for my example. The result is a 10 year "payback period," i.e., 10,000 / 1,000.

I want to do a slightly different calculation. Suppose that, if I do not spend the $10,000 on solar, I will immediately drop that money into a 60/40 stocks/bond portfolio. For simplicity let's say it earns 6% per year over the next 30 years. So in year 30 I have 10,000 * 1.06^30 = 57,435.

Suppose that, if I do buy the solar, every year I take the money that I save on electricity and drop it into the same 60/40 portfolio that returns 6% per year. Also suppose electricity prices are increasing 1.5% per year. As in my first paragraph example, my year 1 savings is $1,000. My net savings after year 2 would be ($1000 * 1.06) [the savings from year 1 + a 6% return) + ($1000 * 1.015) [year 2 electricity cost saved * inflation] = $2,085. Repeat that for 30 years, and the net savings would be about $110,000 [caught a mistake after I posted. This $110,000 figure should actually be $92,898].

When calculated that way, the net benefit over 30 years of spending the up front 10k on solar panels, as opposed to investing that $10k in a portfolio returning 6%, is $110k - $57.4 = 52.6k [after correcting mistake: 92898 - 57435 = 35,463].

Obviously there are a lot of assumptions here -- investment returns, electric price increases, and also "behavioral" assumptions such as investing every dime saved on electricity costs rather than spending it, and living in the same house for 30 years.

But, acknowledging the assumptions, is the above calculation a reasonable way to think about solar returns? Am I missing any numbers in my calculations that would materially change the outcome? I suppose to be ultra accurate I would need to try to account for maintenance/cleaning costs of the solar system over the course of 30 years, and I would also need to account for taxes on the returns of everything. Anything else though?

Thanks for any input.
I have an electric car. In this case I am not buying gas at over $4 per gallon every 2 weeks. Even more savings!
Jaylat
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Re: Calculating the value of solar (a slightly different way?)

Post by Jaylat »

Obviously returns and payback periods vary depending on your circumstances and location. Here in sunny So Cal with our high utility rates, our new system should be fully paid back in a little over 4 years. We just had our first annual “true-up” so we have some insight into the actual savings.

The IRR of our “investment” in solar is determined by the net cost minus tax rebates ($15,820 -$4,113 = $11,457), and the savings of $2,640 per annum. Assuming a 30-year life and no residual value, that gives an after-tax IRR of 22.0%.

Yes, the efficiency of the panels will degrade slightly over time, but that’s more than offset by the expected inflation in energy costs. The biggest risk is that the utility companies will seek to renegotiate the benefits, or simply change the terms of the solar buying contract unilaterally. As noted previously, buyers tend to factor solar into purchase prices if one decides to sell their home during the period.

That 22% return can be compared to other investments with similar risk profiles. Personally, I find it extremely compelling.
softwaregeek
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Re: Calculating the value of solar (a slightly different way?)

Post by softwaregeek »

Jaylat wrote: Thu Jul 22, 2021 10:56 pm Obviously returns and payback periods vary depending on your circumstances and location. Here in sunny So Cal with our high utility rates, our new system should be fully paid back in a little over 4 years. We just had our first annual “true-up” so we have some insight into the actual savings.

The IRR of our “investment” in solar is determined by the net cost minus tax rebates ($15,820 -$4,113 = $11,457), and the savings of $2,640 per annum. Assuming a 30-year life and no residual value, that gives an after-tax IRR of 22.0%.

Yes, the efficiency of the panels will degrade slightly over time, but that’s more than offset by the expected inflation in energy costs. The biggest risk is that the utility companies will seek to renegotiate the benefits, or simply change the terms of the solar buying contract unilaterally. As noted previously, buyers tend to factor solar into purchase prices if one decides to sell their home during the period.

That 22% return can be compared to other investments with similar risk profiles. Personally, I find it extremely compelling.
I calculated 18% after tax IRR on mine. But PGE is raising rates faster than ever so probably higher now. Thinking about adding more panels. The climate is getting hotter and I want to turn the AC to deep freeze without caring about the cost. This is my long term house and am on track for 5 year payoff on the panels.
Valuethinker
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Re: Calculating the value of solar (a slightly different way?)

Post by Valuethinker »

Maverick3320 wrote: Wed Jul 21, 2021 2:44 pm
quantAndHold wrote: Wed Jul 21, 2021 2:15 pm You’re talking about doing time value of money calculations, which is the correct thing to do when analyzing a potential investment, but you’re making a typical mistake by comparing a safe investment with a predictable return (the power generated by the panels) to much riskier investments (60/40 portfolio). If you’re doing TVM calculations, the alternative investment should probably be one with a similar risk profile.
I would also wonder about the cost of electricity going forward. Is it really going to rise at 1.5% for the next 30 years? From what I understand, solar alone could radically alter the cost curve of electricity generation, particularly once efficient large-scale storage options are in place.
If you live in California in particular, this is a real issue. See papers by Sven Borenstein at UC Berkeley energy lab.

The "Duck Curve" means that periods of peak solar insolation increasingly coincide with low wholesale electricity prices (around 4 pm).

If your electricity tariff is Time Of Use, you may see a sharp fall in the savings in the noon to 4 pm period. The issue is so significant that some advisors are suggesting installing panels facing *west* not south. No output in the AM, but continued output until nearer to sundown.

As the distribution-connected & "behind the meter" solar PV drops off the grid, there is a steep "ramp" in wholesale electricity prices, to attract other sources of generation (long distance transmission from outside California, gas fired power in CA).

The non-load related cost of your electricity will probably keep increasing - depending on what your Public Utility Commission allows. For example PG&E is going to bury 10,000 miles of transmission corridor (to reduce the risk of starting wildfires) - that's going to cost $20bn (says the CEO) and someone (consumers) will have to pay for that.

So it really all depends on how you are being charged for electricity (whether the time of day wholesale prices is factored in) and whether you are in a net metering position (credit for sale back to grid).

If storage becomes widely adapted then this adds to the complexity of the calculation. Home storage batteries will then kick in in that vital 4pm-8pm peak grid load period.

As home heating becomes decarbonised as well (via heat pumps as opposed to say hydrogen gas) then things could shift again. Plus EV charging, of course.
Full disclosure: I have solar panels. It was $13,000 to install a 4.5 Kw system; after the $3,000 federal tax credit and the $1,000 state credit I ended up with a total cost around $9,000. I didn't make the investment in terms of IRR, as I'm not certain about the 1.5% electric cost rises per annum nor the 6% (presumably real) return in the markets over the next 10-30 years. Over the next 10 years, I'm much more certain about the electricity price floor than I am the 6% return.

It gets weird when I try to figure out what percentage of my solar savings I'm actually investing in the markets earning a 6% return versus consumption.
The IRR calculation "looks thru" that problem by assuming and free cash flows are reinvested at the same rate of return.

The NPV calculation, by applying a risk-adjusted discount rate, also surmounts that problem. Any free cash flow created by the project (as returns to the investment ie savings on electricity bills) is discounted back to the present day.

It all hangs on your Terminal Value for the system OR how long you think the useful life of the system is.

If we take Straight-Line depreciation over 25 years, then if we forecast out for 25 years we can assume TV = 0 (fully written off). We can also assume (semi plausibly) that if we sell the house at say 12 years, we get 13/25ths of the original cost back from the next buyer.

(the actual depreciation of the asset is probably more reflective of declining balance depreciation. A lot more in the early years, a lot less in the later years. The correct Present Value calculation would be the present value of the remaining years benefits. So after 10 years, the remaining 15 years of future benefits from the system output x electricity cost saved).
Valuethinker
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Re: Calculating the value of solar (a slightly different way?)

Post by Valuethinker »

Walkure wrote: Thu Jul 22, 2021 6:42 pm
squirm wrote: Thu Jul 22, 2021 6:20 pm What's nice with solar is flipping the ac switch without that constant gnawing that's it's costing you an arm and a leg.
As someone contemplating getting solar panels, I was wondering if anyone has noticed their cooling consumption going down after adding them? Not just a lower electric bill, I'm talking the actual load on your AC dropping due to the panels creating an extra layer of shading / convective air between the sun and the attic.
https://www.eco2solar.co.uk/rooftop-pv- ... csd-study/

it's actually an area (says the article) that has been little studied.

For aesthetic reasons, there's a tendency to to put the panels flat to the roof. Given that panels are themselves dark, the benefit would be near zero. It's only if the panels are mounted on frames at an angle to the roof that you can really get the benefits. Given you are not between the Tropics of Cancer and Capricorn (23.5 degrees N & S) you probably should have angled panels in any case - depending upon the slope of your existing roof.

Don't expect a significant saving from this factor, then be pleasantly surprised when it there turns out to be one.
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