Many homeowners are concerned that the investment they are about to make in solar will not be a good investment. They make a quick computation of the amount of time it will take to break even and leave out some important details. Although the break-even stated on solar contracts may seem like a long time to recoup your investment, it’s actually much better than that!
Let’s back up though and talk about the current climate of the renewable energy market. Many states are invoking strict regulations and tight timetables to switch over their grids to renewable energy. The enormous costs involved in making those wholesale changes is going to put pressure on utilities to raise prices even more aggressively than in the past. States like California have been feeling this for several years now, and are experiencing the highest electric rates in the nation. Nevada recently voted to amend their constitution, citing a 50% renewable mandate by 2030. The investment in upgrades will not be free, and Warren Buffet is not going to foot the bill for us. Higher rates are coming. In fact, NV Energy just announced a 7.71% rate hike to take effect in northern Nevada on Jan 1, 2021 [another 2.83% April 1st, 2021 and another 1.22% October 1st, 2021 totaling a staggering 12.15% for 2021 alone]
Let’s look at the numbers for a typical homeowner here in Reno. Typical electricity consumption in Reno is around 11,000 kWh per year. Middle of the road I’d say. We have four seasons here, so the AC isn’t always running, but summers are pretty warm. We also have great sun hours here, it’s one of the sunniest cities in America, so we’ve got that working for us. A system that provides 11,200 kWh is about a 7.00 kW system. On average, the cash price of a system that size is about $22,750. Some dealers charge more, some less, but for a quality system with great warranties, installed by a reputable company like Freedom Forever Solar, that’s a pretty good price. First off, if you earn a paycheck and pay federal income tax, (as of the date of this article) you will receive an Investment Tax Credit of 22% in 2021 [The Federal ITC has been extended. 26% in 2021 and 2022, and 22% in 2023]. A tax credit is different than a tax deduction. Tax deductions come off of your income before you compute your income tax. Tax credits get subtracted directly from the taxes you owe. For instance, if you owe $8,000 in Federal Income tax and have a $5,000 tax credit, you will owe $3,000 after you take the credit.
So, your investment tax credit money goes directly into your pocket, tax free. Not a bad start! That means you have now spent a net total of $17,750 for your solar system. Still a lot of money. But what about your electric bill? After you invest in a solar system, as long as you don’t exceed your electricity production, you won’t have a power bill. For the system we’re working with, you’re replacing a power bill of about $90 per month in Reno, or $1,080 per year. That’s $1,080 savings, which is better than income, because you don’t pay taxes on savings. So, $1,080 is a 6.08% annual return on your investment, tax free. Not accounting for any inflation of your utility bill, which will happen. What that means is that your 6.08% tax free annual rate of return is also protected against inflation. Not bad.
But what about your initial investment? How do you recoup your capital? According to Money.com, the average home with solar in the US can fetch an additional 4.1% over a home that does not have solar. What that actually represents is the present value of a series of payments, namely your power bill. When you think about it, there is definitely value in not having an electric bill when you buy a house! So the value of the system is the value of the payments for the remaining life of the system (a solar system today has a usable life of about 30-35 years). Interestingly, there is only one home improvement that has a better return on your home than solar. Steel doors. Yup, weird.
The average home price on Reno around $408,000, so the 4.1% premium for solar in Reno would be about $16,750+/-
Okay, let’s review.
- It costs you $22,750
- You get $5,000 back, tax free
- You receive a 6.08% tax free, inflation proof, annual ROI for as long as you live there
- You get a 4.1% premium on your home sale, or $16,750 on average
Here’s what that looks like after just 5 years:
|Home Improvement Premium||$16750||$16750|
|Net Profit / (Loss)||$4,400||$5776|
In fact, you would only lose money on your solar system if you had it for less than one year! So you may think that your “break-even” for your solar system is years down the road, but the actual numbers tell a different story.
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