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of money, say 1 million dollars and realizing that investing it over time would produce $40,000 in income that could be withdrawn indefinitely.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.
Emily @ Simple Cheap Mom says
How often do panels need to be replaced? There is a lot more risk involved here due to malfunctions or breakage of the panels. But I agree with your off the cuff calculations.
The fun part would be reducing your consumption, making money off the power company and getting your pay back period down then taking the money to the bank!
Lazy Man says
The panels come with a 25-year warranty. After that, whatever you get is gravy. It’s unlikely that they break down at exactly 25 years though, so I’m projecting 30. At that point, I don’t mind replacing a few broken ones with new ones, because they will have done their job.
Unfortunately, you can only earn credit from the power company, you can’t ask for that cash back. Maybe I could dig a tunnel to my neighbors house and sell him my extra electricity to get cash instead of credit. I’m kidding, as the system is set up to use the credits in lean times like winter and times of peak power usage like mid-summer with air conditioners.
[email protected] says
The cost benefit analysis is difficult, so I like how you compared solar costs to an investment to put it in terms that are easily comparable.
Ever thought about getting an electric car? That would be one way of using up the electricity efficiently so you don’t have to worry about those silly credits.
Lazy Man says
I have thought about getting an electric car. With a 2-year old, 10-month old, and 80-pound dog, we decided that SUVs are the way to go for us. As this Forbes article points out, we need to take a number until it becomes a reality in the US. We bought new cars last year and the year before. Ideally we’ll drive them to the ground and revisit in 12-15 years.
I’m not too worried about the credits. It’s played pretty close to breakeven and I can think of worse things than having electricity credits.
That said, an electric car powered by the solar in my house would be very cool. I hadn’t thought about how my home’s solar power could reduce our transportation costs.
Lazy Man says
Just doing a little more research on plugin SUVs and it seems like the two that are coming out (Tesla and Toyota’s RAV4) don’t come with 4-wheel drive. That would be an issue for us as well driving in New England winters.