Thursday, September 8, 2016

Rooftop Solar as a Finacial Investment

One of the biggest obstacles to the deployment of solar energy, especially in small-scale residential systems is the lack if accurate and up to date information.  The powerful fossil fuel industry has done a marvelous job with the media over the years, denouncing climate change and the potentials that renewables offer in creating the transition that ultimately will occur.
Recently Donald Trump pooh-poohed solar with a shrug saying "an 18 year payback...come on!"  A retired friend in the Sacramento area said he would love to go solar, but it would never pay for itself in his lifetime.  Another person asked what the payback period was on my personal system, and adamantly said that number was the most important number in the solar discussion.  What they are missing is an understanding of what that number really means, and how its value measures up with today's financial investments.
Let's analyze what an 18-year payback period for a certain dollar investment in a solar system means in a grid-intertied system.  During the day, electricity is produced, and is used to run our appliances and other electric loads as needed.  We are producing our own electricity, and saving the cost of buying what we need at that time from our utility.  If we produce more than what use, the excess is fed into the grid, essentially running the electric meter backwards and giving us a credit.  We are getting money one way or another for what the electricity produce.  We could store our excess in batteries, but in reality, a grid-intertied system is very simple “storage system,” and ultimately has major benefits for all.  At night, or when conditions demand more electricity than what we can produce at that time, we buy KWHs from the utility, just as always.  Your meter is a two-way portal. How much we produce relies on how large a system we install, what the weather conditions are during that day, what the "solar window" looks like on our roof with regards to southern orientation, shading from tree or buildings, and the season...more and better sun in the summer months than in the winter…and a variety of factors.
The dollar value of the solar electricity produced depends on many variables, mainly in which state you live in.  Like property taxes, sales taxes, and income taxes, each state and its utilities varies greatly in what it "pays" for solar generated electricity.  This is a very large problem...often a huge many places, and political battles are being fought in Nevada, Florida, and Arizona, where there is a huge abundance of solar potential that is being squashed by the energy industry's effective lobbying.
Let's focus on California, and my utility...PG&E.  The setting of utility rates for various users by the state PUC is virtually incomprehensible; but for my energy account, the cost of a KWH is atg the moment 18 cents.  This price includes the cost of electricity generation (bought on the wholesale market), transmission and distribution, taxes, insurance, special programs, nuclear decommissioning, wages and CEO salaries, shareholder dividends, and all the other costs associated with doing business.  When I use one KWH from PG&E, my meter records it, and  18 cents is added to my monthly bill.  When I put a KWHfrom my solar system back into the grid, running the meter backwards, I am paid 18 cents.  This is called net-metering, and is a huge issue in the solar debate, since the average wholesale price nationwide is somewhere between 4 and 10 cents/KWH depending on where you are, and when you are using that electricity.  Utilities complain that they are paying way more for that residential solar than what they could buy on he open market, and that the solar generators are not paying their fair share for the other costs of the grid. Fair enough...non-solar producing customers are subsidizing solar generators.  Arizona and Nevada, the loudest complainers, moan the fact that less than 4% of their customers are on solar…a huge burden on them and their ratepayers.  What about all the subsidies to nuclear, natural gas, and coal?  The utilities should be the ones "owning" the solar systems so they could control the flow of electrons and reap the benefits.  But that's another story.  So in California, at least for now, you size your system to produce as much electricity as you want, but try NOT to exceed 110% of what you use in a year.  If you produce more than that, PG&E will pay you about 6 cents/KWH for that excess electricity (the wholesale price), and not 18 cents.  Again, fair enough for now.  A friend has a great solar site, has a huge system producing way more than he uses, and got $212 from PG&E.  They certainly wouldn't want everyone to become individual power plants; that would add competition and muddle up their traditional business model.  Things, of course, are in flux, especially with businesses, such as Apple and Google, who can now sell their excess electricity on the open market.  This all is very complicated stuff, and will eventually get worked out as more and more people and businesses go solar, and as storage comes on line down the road, and the cost of baseload nuclear and coal continues to climb.  But for now, my 3.7KW system is estimated to crank out about 90% of my annual electricity demand.
My system cost around $13,000 after tax credits, etc.  I preface this by saying I could have gotten it cheaper, but as with almost anything we buy such as cars, cameras, cell phones, etc., there are many personal choices and decisions to be made as to how much money we spend.  My system should produce about 4000KWH per year.  At 18 cents/KWH, that’s $720 per year that stays in my pocket, not having to buy that equivalent amount of electricity from PG&E.  So what is the payback period?  18 years.  In 18 years, the system will have paid for itself.  Wow...I hope I live that long! 
Now let's look at this with a broader for view.  The $13,000 I INVESTED is giving me a fixed annual income return of 5.5%!!!!!!!!!  Is this significant?  I think so.  (See below for a discussion of investment percentages.) I recently asked a financial advisor if he could put some of my money in an income yielding investment that would give me 5% TAX FREE, and he laughed and said those days are long gone, and he could probably do around 3% taxable.  It's all Obama's fault; maybe after the election things might get better; blah, blah, blah!!!!  When I told him of my solar investment, he quickly changed the subject and blurted out "how 'bout them Giants...!"  He wouldn't even rationally discuss it because he probably didn’t understand the significance of it, or because it would strike at his heart having to realize his thinking has been wrong for so long.  He also can’t make any money advising it to his customers. So, according to him, if you have $10-15 thousand, put it in treasury bonds at 2%, or a money market for 0.8%?  You could put it into stocks that pay a dividend...PG&E is paying 3.5% (taxable), Exxon-Mobil 3.1% (taxable).  Payback period of about 30 years!  Even compounded interest, payback is about 20 years, and taxable.  With solar, and I'm not advocating investing in stocks of solar companies, you have a stable, fixed value investment that in my case gets better.  PG&E has raised the electricity rates three times since I put in my system, and filings with the PUC show that they will go up again in the future.  You don't have the worry of what the market will do, whether that stock price will go up or down, since the value and income is relatively long as the sun shines.  And after it has paid for itself, it will still be there generating dollars for years to come.
Of course, there is a lot of old information still floating around. “The system won't last 18 years, it’s too expensive, and something cheaper, like new nuclear or fusion, will come along, etc.”  Today's PV panels are very dependable (mine have a 25 year warranty), and experience is showing they will perform for 40 years, if not forever.  There are no moving parts, and the current degradation in the glass coatings is less than 0.4% year. The system is virtually maintenance free, other than a hosing down a couple of times a year.  My panels are 18% efficient under ideal conditions (18% of something free ain't bad, considering steam-generated electricity is about 33% efficient, and automobiles are around 18%.)  As the technology improves, increasing efficiency means less surface area is needed.  The 4 new panels I recently put up are the same size and cost the same as those I bought a year and a half ago…yet they put out 25% more electricity.  The technology and manufacturing processes are bringing down the cost.  Also, as with most economies of scale, the balance of system...inverters, racks, and even installation time and labor costs are coming down.  Lot's of beats working in a hole in the ground mining there's for a new bluegrass song!
I live in the heart of the Redwoods, three miles from one of the foggiest airports in the US.  My neighbor recently put a system on his house, and will soon install a 15KW system on his fish smoking business a few miles inland.  He said it was a no-brainier...after all the tax credits, business deductions, etc, it has an 8 year payback...12% return (tax free), and he has the satisfaction of doing the "right thing."  He is also getting an electric vehicle!
It's interesting how we don't really ask or talk about the “payback period” when we make other purchases.  You buy a new car, and of course you pay for what you want and can afford; and you hope that it will last X number of miles or for so many years.  You may even now be concerned with MPG or how much it might cost to operate.  And it depreciates in value the minute it leaves the dealer's floor.  Think about replacing your spend tens of thousands of dollars on a 20-30 year roof, which is basically worthless when the time comes to re-roof.  What’s the payback? Elan Musk recently said a lot of people spend money a on a new roof, then spend more money on a solar system to put over it...the solar system should be the roof, and the roof should not only pay for itself, but should make you money!  I saw several of these roofing systems in Northern Italy, but they haven’t caught on here in the US yet.  Just wait!
When the financial world finally realizes that solar, small and large, is an investment that makes money for the investor, things will really take off.  We already have opportunities to not only install on our own roof, but there are growing businesses that allow people who do no have an appropriate site, or are renters, to invest in systems on some roof somewhere when they want a safe, secure investment.  Companies now are "renting" your roof...paying for and installing systems, and reducing the homeowner's electricity bill.  If they can get 10-15% return, then they can afford to give you 3-4%.  Of course there will be scams, failures, and obstacles, but the bottom line is that the costs are coming down, clean electricity is being produced with free fuel, and individuals are allotted more personal freedoms.  A fiscal conservative’s dream!  A Koch brothers nightmare!  Power to the people!

Growth rates and Percentage

Things grow at various rates and percentages.  There are two main kinds of investments most of us make.  Here are some examples.
Simple percent rate, also called fixed income.  Let’s say you invest $1000 and get a rate of return of 5%.  That means at the end of the first year, you will receive $50, and you can go out and spend it however you want.  The same is true for the next year, and for each of the 20 years it will take to payback your original $1000 investment, $50 at a time.  That $1000 is working for you, and you can continue getting $50 a year as long as the % rate stays the same.
Compounded interest, or what most long-term investment vehicles offer.  Take the $50 you got from that $1000 investment, and instead of spending it, you leave it in the account.  Your investment is now worth $1050.  The next year the 5% pays you $52.50.  If you leave that in, your investment value is now $1102.50.  The next year, the value increases to $1157.63, and your money continues to grow at an exponential rate.  You’re getting 5% on your original investment plus all the interest it is accruing.  The time to double is a simple formula: T2=70/%, (in this case 70 divided by 5) so the value of the account will have doubled (will have paid for itself) in 14 years.  It will be worth $2000.
That is 6 years earlier than in the fixed income scenario; but you do not have access to the “interest” that it is making.  If you want your money to grow over a long period of time, ie, you’re saving for retirement, then this makes sense.  At a constant 5%, that $1000 will be worth $8000 in 42 years!  Put money in a money market account, and you might get 0.8%…better to put it in an account in the Caimans!
A solar system is a fixed income vehicle, giving you whatever percent the sun generates   from your investment, and once it has paid for itself, you still have the system making you money.  Hopefully you have spent the money you made each year wisely and have had a good time!

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