Over the last few weeks I’ve been writing about our move to solar power. In case you’ve missed the articles, let me bring you up to date. For Earth Day this year, I started to explore whether going with solar power would save me money. Then I forgot about it until the question of leasing solar panels came up on another blog post. That got me motivated to have a company give me a free initial proposal which showed that solar could cover 83% of our energy needs. In meeting with the company, we came up with a revised proposal that would cover 101% of our energy needs.

Finally, I wrote about financing our solar panels. That was an adventure in itself as the bank the vendor partners with uses an example loan of 9% interest over 20 years. Fortunately, an alternative is to use home equity to get a loan or line of credit at a rate much closer to Prime (currently 3.25%), which we intend to pay off in 2-3 years. However, a loan with tax-deductible interest at such a low rate is tempting to keep around awhile.

Today, I thought I’d cover the value of “free” electricity. I have to put “free” in quotes, because buying and installing solar panels is anything but free. In fact, the cost for our 7700 watt system is around $33,110. However, after state grants and federal tax credits, the real cost to us is $16,440.

This system is expected to produce 8772 kWh of electricity. We used 8625 kWh of electricity, so it would replaced our entire bill which is currently $1522 a year. As I’ve found from readers we should be very grateful that we have equal net-metering… the extra power we produce gets sold back to our electric company for the same price what we pay to buy from them.

So what is the value of saving that $1522 every year? Academics have written papers on how much money people need to retire. For years it looked like that number was 25 times your annual expenses. This was figured out by taking a big sum of money, say 1 million dollars and realizing that investing it over time would produce $40,000 in income that could be withdrawn indefinitely. These rules became known as the rule of 4% and the multiply by 25 rule.

Everyone loved them and there was much rejoicing to have those rules in place. (I imagine it as the financial equivalent to “unicorns, show ponies, ‘where’s the beef?’!”)

Someone forgot to remind people that rules were meant to be broken. Over the last year or two, many academics and media articles have suggested the rule of 4% should be adjusted down to 3.5%. This makes for a less than sexy rule of 28.571428. That only flows off the tongue of Sheldon Cooper.

We can bring back the unicorns and show ponies, because here’s the beef: Either number gives a good estimate. So to not through the baby out with the bath water, I’m going to pick a number in the middle, call it the rule of 27.

My newly coined Rule of 27 says that to have $1522 indefinitely, I’d have to save and invest $41,094. With that number invested, I could (more or less) safely withdraw $1522 a year to pay my electric bill.

So to eliminate that annual electric bill, I could put $16,440 into a solar system or I can put roughly $41,094 into some investments (which will remain undefined as that is a study in itself). The way I see it, I save $24,654 going solar.

One thing that is worth mentioning is that solar isn’t forever. The panels get less efficient over time (around 0.7% per year) and the warranty ends after 25 years. It’s almost impossible to predict 30 years down the line, but it seems reasonable to presume that it is nearly 80% efficient. In that scenario, it would still be producing $1200 worth of electricity at today’s prices. That would still be $32,000+ dollars invested.

This level of analysis has helped me make the decision that under the right circumstances solar can provide substantial value.

Earlier this week, I wrote about how I am investigating a move to solar energy. I highly recommend reading that article first. There’s a lot to learn about solar energy in general and this article builds on the information in that article. In addition, the decision to go with solar is highly dependent on one’s specific situation and a lot of that information on my situation is there.

When I left you on Monday, I had just received a packet of information from a local solar vendor. The estimate was to put 24 panels on my garage, which would supply 83% of electricity we use each year (assuming that the last year was “typical”). Our electric bill would go from $1,522 to $309 in the first year. According to the company, we will keep 4.82 tons of CO2 out of the air each year, equal to 144 trees processing CO2 or avoiding burning 497 gallons of gas.

In short, we’ll save a lot of money and do a lot of good for the environment. If I can’t plant 3600 trees over 25 years, this seems like the next best thing, right?

The vendor wanted to meet and talk over the proposal. I was eager to the same. We met for an hour and a half and I got every question I had answered.

My biggest question was, why put the panels on the garage and not the main part of the house?

The answer came from measuring the solar efficiency of the roof. In order to measure a roof’s potential they take four measurements from all the corners with a sophisticated device and average them together. In order to receive state grants the roof must be 80% efficient. In looking at the numbers from my house, I have two corners that were north of 95% efficient and one that was 79% efficient. The last corner was 47% efficient… a killer.

I had known that I had a tree potentially blocking part of the roof, but I didn’t think it would be a big deal. I was wrong. As the sun gets lower in the horizon, it blocks more and more of the roof. The vendor and I went out to look at the tree and it actually looks a little dangerous, leaning towards the house. In a storm, the could hit our house and do some damage. Even if I didn’t go with solar, it would be wise to have some tree people check out the situation.

I asked the vendor if I cut that down, would we be able to use the main roof for additional capacity? He said we definitely could and that it would probably be more efficient than the garage we were planning on.

We went from putting 24 panels on the garage (in a 6×4 arrangement) producing 83% of our energy needs to putting 28 total panels on both roofs producing 101% of our projected energy needs. The plan would be to put 16 panels (8×2 arrangement) on our more efficient main roof and an additional 12 (6×2 arrangement) on the garage. This would reduce our bill to $44 a year. It would be the equivalent of 175 trees processing CO2 and not burning 606 gallons of gas.

The solar panels get less efficient every year… on average 0.7% less efficient. After 25 years, the panels will be “only” 82.5% effective. That’s still very good. Considering that projections are for 25 years, everything after that is gravy. It’s kind of hard to think 15 or 20 years in the future, but we’ll have half the space on the garage to build further capacity. Who knows what they’ll sell then, but hopefully they are a standard size. Then I could buy 6 more and put them in the most efficient part of the main house and shift the older ones to the space on the garage. That kind of boost could extend the life of the whole system producing 100% of our power to 35-40 years.

The Cost of the Panels/Installation

As previously mentioned, there are two vastly different prices when it comes to solar: the actual price and the price after state and federal subsidies. In the case of the 24 panels, my original cost would be $28,380, but after state grants it would be $20,130. The solar company applies for the grants in our name and takes that money off the cost right away. (Let’s pause to celebrate a big Lazy win!) That $20,130 is eligible for a 30% federal tax credit making the final price $14,091. The price is inclusive of labor, permits, wiring, etc.

The 28 panel that we are looking to go with would cost $33,110, but state grants bring it down to $23,485. The federal tax credit brings it to $16,440. The timing of the federal tax credit, is of course after filing taxes, so there’s an area in there where about $7,000 is due to come back to us, but we have to foot the initial money. It’s not ideal, but these credits come amazingly close to cutting the price exactly in half for us.

This all begs the question of “how do finance this move to solar?” It is far from a trivial question and is worth it’s own article. So stay tuned for that.

A couple of days ago, I read an article on My Journey to Millions by Evan about how he is considering leasing solar panels.

The arrangement is such that another company, Vivint, ponies up the cash for the equipment and Evan would agree to buy energy from them instead of his electric company. On the surface it sounds like a win-win. Evan would pay less money per month and he doesn’t have to come up with $20,000 or $25,000 for equipment. Presumably it pays off for Vivint too, because, well, let’s just assume that they are pricing electricity at a point that it is profitable.

(Before I go any further, I think “leasing” is the correct word as I’m not sure if he’d own them after 20 years. It could be a rent-to-own situation.)

The article particularly caught my attention because a few months back, I also explored saving money with solar power.

My research was mostly dedicated to buying the solar panels. “Research” may be too strong a word. Truth be told, I didn’t venture off of my keyboard. I realized that one of my first steps would be to determine the age of our roof. If it is old then it doesn’t make much sense to put solar panels just to pull them down again. It looks like our roof is old enough where I put the research on the back-burner.

However, should I have explored leasing as well? While I pitched it as a win-win above, I’m a little skeptical if it optimal. As I said above Vivint wouldn’t offer it unless they making money. So if I could find a way to fund that equipment myself, I could enjoy the benefits of a greatly reduced or perhaps even zero electric bill.

Let’s start by presuming that we don’t have a spare $25,000 in our bank account, which is fair considering we have activated “ultra-frugality mode”. And for sake of argument let’s presume that $25,000 is a fair cost of the system (it could be more). I’m also going to use some of Evan’s numbers for how much he pays for electricity (around $170 a month).

Let’s start with the tax credits. As Evan explained Vivint would take the $7,500 federal credit and he’d get to keep a $500 state credit. However, if you bought the panels you’d get to keep both, well presuming that your state offers a credit. I did a little quick look-up and it seems that the federal credit is 30%, which does turn out to be $7,500. Because we are talking about a tax credit instead of a deduction, the value is a full $7,500. Since I don’t know if your state offers a credit, I’ll conservatively assume there is none.

So now we are paying $17,500 for our system. That’s still a lot of money and you have to wait for the tax credit.

This is where a little of my past experience helps. This past year we put in a central air-conditioning system that was around $15,000. We found that they offered 0% financing for a year. If we can do this for the solar panels it helps buy time for the tax credit to kick in. In addition, during this time we wouldn’t be paying for electricity so we could funnel the $2000 we spend a year on it to paying down the bill. Our $25,000 system is now a $15,500 system.

Unfortunately, I can’t seem to come up with any other ways to lower it from there. However, we spread the payments out just like we do with our current electricity bill. Our local bank is offering a Home Equity Line of Credit (HELOC) at a 3% interest rate. Using the this helpful loan calculator we see that it will take 107 payments to pay off the loan – just about 9 years.

If you lease the solar panels over 20 years you save right away, but this way you’d get 11 free years of electricity presuming a 20-year lifespan. The efficiency of the panels probably get worse over time. In year 20, they probably don’t produce the same amount of electricity as they do in year 1. However, since electricity will likely be more expensive in year 20 than in year 1, it may be possible to save the same amount of money.

I found another article covering the types of calculations that need to be done to determine if it’s right for you. It’s helpful in that it covers some of the basic, important calculations that I glossed over such as, how much electricity we actually use. The numbers in the article’s example are much, much bigger, perhaps reflecting more expensive systems from a few years ago. An expert there suggested that a good payback time is between 5 and 10 years, so this estimate would fit right into that range.

One thing that Evan and I share is living in the northeast. According to these government solar maps it is pretty much the worst for solar power. So if it looks feasible here and is better just about everywhere else in the continental United States (sorry Alaska readers), it seems like many people should be jumping on board, right?

So why haven’t they? The only thing I can think of is that the cost of solar power is getting cheaper every year. You wouldn’t want to commit to a laptop for 20 years would you? I see it as kind of the same thing.

So what do you say? Lease or buy solar power? Have you looked into it? Can we use it to eliminate one of our necessary expenses? Can I get through this whole article without mentioning the awesome environmental benefits? Nope, but I came very close.