Is Solar a Good Investment?
Is solar a good investment?
For some, this is the million dollar question. Actually, it’s more like a $13,000 question. According to EnergySage, a typical American who can get tax credit for their installation will spend about this much for a solar installation.
People install solar panels for reasons beyond saving money. For example, some people are interested in living a net zero home or want to help contribute to the energy grid or reduce greenhouse gas emissions. In this article, we’ll look at installing solar panels from an investment perspective.
First, let’s look at what others have said about installing solar panel as an investment. Here are two articles trying to answer this very question.
The first article is a bit too negative, but it highlights the grievances of someone stuck with a bad investment. The second article takes a more fair-minded approach in thinking about solar panels as an investment.
Essentially, solar panels generate electricity that your utility company will credit you for. The big question for many is the following:
Just like any investment, when will the gains from the solar panel installation pay off the cost?
Maintenance Costs Not High
How about the maintenance cost of the solar installation? According to HomeAdvisor, here are some annual maintenance costs to consider:
- $150 / year cleaning the solar panels
- $150 per inspection
- Varying costs for replacing panels or batteries
DIY cleaning is a pretty good alternative to professional cleaning. Also, judging from the experiences from our network of home energy advisors, things don’t break down that much. Unless, you get really unlucky, you can ignore the maintenance costs of your solar installation when roughly assessing its return on investment.
Calculating What Matters
Like any long-term investment, we think about it like this:
- How long will it take for it to pay itself off?
- How much “free money” (or returns) will I start reaping afterwards?
Legend has it that the Bellagio hotel in Las Vegas cost $1.6 billion to build, but in its first year of opening, it paid that $1.6 billion off. After that, it was “all gravy,” making huge returns for its investors for years.
Well, solar installations aren’t casino resorts, but we think of it the same way. In our case, the question that really matters is this:
How much will I really save on my energy bill per month installing solar panels for $13,000?
Note: You can replace “$13,000” with the upfront cost you are looking at. The calculation remains the same.
You divide [cost of installation] by [savings per month] to know how many months it will take to pay off the installation cost.
Months Before Pay Off =
Cost of Installation / Savings Per Month
$50 Per Month Won’t Cut It
For example, if you save $50 per month, then it will take you 260 months, or about 22 years to pay off your solar installation. A good solar installation lasts 25 years. That means you have to wait 22 years for your “free money,” and you only have 3 years left for a return of $50/month.
If someone asked you to give him $13,000 only to pay you back 22 years later, and then give you $1,800 three years after that, would you take it?
The answer is no. So, how much do you have to save per month to make a $13,000 solar installation a good investment?
General Rule of Thumb: Seven-Year Pay Off Period
We agree with others who believe that a solar installation that can pay itself off in 7 years is a good investment. Some people argue that even at 12 years, it’s a good investment, but life is unpredictable. You may move, or your electricity bill could change dramatically. A financier would call this “carry risk.” Also, we leave some room for miscalculations upfront. We think 7 years (or below) is a good target pay off period.
For a $13,000 solar installation, we simply divide this figure by 84 ( 7 x 12 months). That gives us $155 per month.
Divide the cost of your solar installation by 84 to figure out your necessary savings per month to pay it off in 7 years.
After the solar installation pays itself off after 7 years, you have 18 more years of saving more than $1,800 per year. That ends up being a total return of $33,000 for your initial investment of $13,000 over the course of 25 years.
This is equivalent to someone asking you to pay him $13,000. He will give it back gradually after 7 years and then gradually pay you $33,000 more for the next 18 years. That doesn’t sound too bad of a deal, especially if he adds that it can help reduce greenhouse gas emissions and help with electric demands of your community.
A financier would say you got a 250% return in 25 years. Compared to other safe long-term investments, like a bond or annuity, this isn’t bad at all. Of course, this would clearly beat a savings account that pays 1% interest rate. Actually, a solar installation like this would beat a lot of long-term safe investments giving you 4% per year (but a financier would say you’re taking other risks that are not priced in).
How Much Will You Really Save Per Month?
How much will you really save per month? This is the only question that matters, and you want to estimate this as best as you can. You want the monthly savings on your bill to be high enough so that the installation pays off itself within 7 years.
- Estimate savings with someone trustworthy. If you really want to consider solar as an investment, work with someone you trust who knows the in’s and out’s. Most importantly, if you smell a rat or sense too much aggression, walk away and find a better referral. Knowing how much you will actually save can get quite involved.
- Size of electricity bill. Of course, the more you have to save, the more a solar installation can potentially credit against. You want to have a sizable bill compared to your solar installation. In the case of a $13,000 installation, we need to save $155 per month consistently. If your electric bill isn’t even $300 per month, then you would have to save more than 55% off your bill. Saving this much can happen, but make sure it’s true. If you had a $500 monthly energy bill, it’s more plausible that your solar installation can save you 30% of your bill.
- Get a Lot of Sun Year Round. To get the maximum power generation from your solar panels, make sure your home is situated (1) in a climate zone with a lot of sunshine and (2) such that there’s sizable part of the roof that has an unobstructed access to the sun. One good way to assess your own situation is to get some feedback from people in your neighborhood who has installed solar panels for at least one year.
- Utility Company Plans. Utility plans vary in terms of how they charge for electricity and how they credit households for electricity generated by solar installations. This can get quite involved how much your solar electricity is worth. Generally speaking, if you have a high electricity bill, and you use a lot of your electricity during the sunny days in the summer, then you are maximizing the credits you get for your solar installation.
- Talk to a Neighbor. People don’t talk to their neighbors anymore, but in the case of a solar installation, their experience is invaluable. It can be someone just close to your neighborhood who has installed solar panels for more than a year. They would have faced similar conditions to you.
Last Words
People install solar panels for reasons beyond making a good investment. However, if making a good investment is important to your pocketbook, our general advice is this:
- Make sure you are working with someone trustworthy. Trust your gut.
- Be diligent about estimating how much you will save off your energy bill per month. Talk to a neighbor with solar panels.
- Make sure the solar installation pays itself off in 7 years.
