Do Solar Panels Make Sense?
Welcome to Saving Money with Andrew!
Where I live, electricity is expensive (~$0.25/kWh and rising) and I’d like to help the environment, so I’ve been considering installing solar panels on our roof. If you’re in the same boat and have tried to consider your options, it’s quite overwhelming. Here are some tips to consider whether solar might make sense for you:
Start With Project Sunroof
Google’s Project Sunroof is a great place to start. All you need to do is enter your address and it will give you an overview of the estimated cost of adding solar panels to your home, the estimated electricity generated, the number of years it would take to recoup your investment (the “payback period”), and the environmental impact. Make sure to enter your estimated monthly electric bill so the site can estimate how large a solar array you need.
The math is very rough, but the site provides a great starting point for the relative costs and benefits of adding solar.
In our case, the site recommended an 11 kW solar array at a cost of $34,000. After subtracting $14,000 in federal and state subsidies, the upfront cost would be $20,000. The array would save us just under $3,000/yr on our electric bill, for a payback period of seven years, and would reduce our annual carbon emissions by 9.6 tons.
Sounds Great, Right? But Be Wary
The savings from solar panels come from two sources. First, you’re able to use the electricity you generate when you generate it, allowing you to consume less power during the day. But second, in most (but not all) states, you benefit from net metering, or the ability to send the excess electricity you generate back to your utility and get credit for that additional generation against power you use at other times. In some states, you may generate so much power that the utility pays you.[1]
Most calculations, from Project Sunroof to the estimates that a solar company is likely to give you, depend on key assumptions about (i) electric rates rising (which makes the savings look better) and (ii) net metering remaining in place for your entire ownership period. The latter assumption may not always be true, and in many states there have been debates about whether net metering programs are too generous. While the calculations may assume zero risk to these benefits, it’s possible that by purchasing a system, you are taking one-sided risk that these benefits could disappear, significantly reducing your savings.
Are These Savings Worth It?
In most of the country, Project Sunroof will estimate a payback period anywhere from about 5 to 15 years. Typically on the low end if you live in a sunny place with high electricity prices, and on the high end if you get less sunlight and your electric rates are lower.
When making a home efficiency investment, above all I try to think about whether it provides an attractive return on investment (LED bulbs - YES!, Gas dryer - yep!, insulation - meh).
I’ve heard from many homeowners who installed solar panels, and the common thread to those conversations is that almost none of them thought of this as a dollars and cents decision. In some cases, they were early adopters who like gadgets (no judgment, so am I), in others, a salesman convinced them it was a good deal.[2]
Don’t be those people. This is not the right way to think about making a five-figure investment in your home. At the very least, you should be thinking about the payback period, or the number of years it takes to recoup your investment. True “no-brainer” home efficiency investments have payback periods measured in months, or at most a few years or so. The median homeowner stays in their home for about 13 years, and first-time homebuyers are likely to have a shorter stay in their “starter home”.[3] So if you make an efficiency investment with a long payback period and decide to move sooner, you are depending on the next homebuyer paying you for it to have any chance of recouping your investment, let alone earning an attractive return.[4]
I also found this discussion of payback period very interesting. It claims that in the weatherization business (not solar, but home improvements), six years or less is viewed as a yardstick for an attractive payback period. And I found Lawrence Berkeley Lab’s Home Energy Saver site great for putting the savings into context relative to other more mundane home efficiency moves you can make, many of which have significantly more attractive payback periods and economics. It gave me a great list of ideas to research.
What Did We Do?
The calculations for us seemed favorable, but we decided not to buy a system for a few reasons:
The payback period of 7 years was pretty good, but significantly higher than other major home efficiency improvements we’ve made.
With the rate of improvement in solar panel technology, it’s likely the payback period will continue to decrease and we may be able to purchase a significantly higher output or lower-cost system in a few years.
Local permitting restrictions would mean we’d have to go through some extensive approvals to get our system installed. We’ve gone through this process before, but it’s a hassle and didn’t seem worth it for a borderline investment.
At the same time, trying out the Home Energy Saver gave me a bunch of new and interesting ideas for home improvements, which I can work on while I wait for solar panel technology to improve and the economics to become even better. The price of solar panels (per watt generated) has declined by almost two-thirds in the past decade, and I’m excited to check back in a year or two to review our options again.
And now, Andrew’s pick(s) of the week:
Leading actors (men and women) are getting older! From The Golden Age of the Aging Actor
In the past 20 years—and particularly the last 10 to 15—the average age of actors appearing toward the top of the bill in film and TV projects has risen significantly. Whereas the star, or the top two or three stars, of the typical movie or TV series released in the closing decades of the 20th century was typically in their late 30s—several years older than the median age of the United States population at the time—today’s average actor age has reached the mid-40s and is steadily climbing toward 50.
Also: most indicators of activity (travel, restaurant bookings, sporting events) are back to 2019 levels, but daily office occupancy remains below 45%. I wonder what this is telling us. Big Cities Can’t Get Workers Back to the Office
And, The Bear on Hulu is incredible. The NYT has a great article about the making of the show—In ‘The Bear’ on Hulu, a Kitchen Staff Is Nearly Eaten Alive
Finally, please, tell me Why Are We Still Disinfecting Things?
I hope this has been helpful. If you liked it, please share it on social media! Also, please send me your feedback, requests, and success stories.
[1] In some states you receive the retail (higher) rate for electricity, in other states you may receive a lower wholesale or other rate.
[2] In other cases, the homeowner just wants to help the environment. This is a worthy goal, but it’s important to put in context how much you are reducing emissions. In our case, Project Sunroof estimated we would reduce our emissions by about 9.6 tons per year. This is a great benefit, but we have been able to reduce our emissions much more cost-effectively through switching to LED bulbs (saving ~3 tons per year for about $150, paying for itself in weeks), switching to a gas dryer, and buying a hybrid car. The social cost of CO2 is estimated at about $50/ton (with a very wide range of opinion), so the environmental benefit is meaningful but relatively small in relation to the cost of the solar panels. And the environmental benefit is why federal and state governments already provide substantial subsidies.
[3] A brief tangent—I’m not a fan of the term “starter home”, because many people who believe it’s perfectly normal to buy a first home and move out in a few years fail to factor in the considerable transaction costs of buying/selling a home. Normalizing the idea of buying a first home quickly with the expectation of trading up quickly can be financially dangerous. This blog post offers a reasonably good summary of the common arguments against “starter homes”.
[4] If you are more quantitative, you may want to consider the internal rate of return (the “IRR”) of your solar panel investment, which allows you to compare the rate of return to other things you can do with your money, such as other home efficiency investments, or investing the money in something low risk like a bank CD or US savings bonds (not recommending I Bonds, but they do exist!), or a higher-risk investment. You can calculate IRR in Excel (or Google Sheets) using the IRR function (for simple series of annual cashflows) or XIRR if you want to use dates that aren’t just annual (e.g., monthly periods).