As you can see in the following chart, the real value of a solar investment comes on the back-end. The blue line shows the cost of electricity increasing at its historical rate of 6%/year. The purple line shows the fixed cost of energy created by a solar system. For the first few years, solar power costs more than utility-supplied power; for the twenty years thereafter, solar power is cheaper than utility-supplied power, and savings continue to mount up.
The big challenge -- How to overcome the up-front cost of solar!
Commercial Solar Thermal systems are eligible for the 30% tax credit and state incentives have arrived, and are as much as $500,000.
Financial Partners
Solar Santa Monica continues to look for ways to help support the financing of solar systems. At this time, we recommend that you start by interviewing installers from our Preferred Contractors list to find out what financing – loan, lease or PPA -- their company may provide. As always, we recommend that you consider several options, and obtain several bids SHOWING THE IMPACT OF FINANCING, before making a final decision. If you would like assistance in comparing bids, please contact Solar Santa Monica for a personal consultation.
Installation costs are dropping steadily.
As the California Solar Initiative (CSI) had anticipated, with increased uptake on a statewide basis, the cost of solar would come down. We have seen that to be the case in Santa Monica. When the program began in 2007, the cost of a residential solar system hovered around $9.50/watt AC. Today, in late 2010, the statewide average price is about $8.50/watt AC, while prices in Santa Monica have been quoted as low as $5.50/watt AC. An average residential system of 3 kW has thus gone from a gross price of nearly $30,000 to as little as $18,000.
Needless to say, it pays to shop, and to compare!
CSI Rebates are also dropping.
The gross price of a system is reduced by the rebate offered by the CSI. When the CSI began in 2007, rebates were at $2.50/watt AC. They have now dropped to less than a half. In Santa Monica (SCE territory), the residential rate is at $0.65/watt AC. The commercial rate is at $.35/watt. If you are in the beginning stages of system planning, keep a close eye on the CSI “Trigger Point Tracker.” (http://csi-trigger.com)
If you are outside SCE territory, the above figures don’t apply, of course. Municipal utilities such as LADWP, Anaheim, Burbank and Glendale (to name a few local ones) set their own rates and design their own rebate programs. As of this writing (August, 2011), it appears that LADWP rebates will be back online – Glendale and Anaheim’s programs have been oversubscribed. Again, it pays to stay on top of developments in your area as well as statewide.
In 2010, CSI announced rebates for solar thermal projects.
Based on the size of the system, and whether it offsets gas or electric water heating, a new solar thermal system in SCE territory may now be eligible for a significant rebate through the California Solar Initiative. Actually, the rebate may be applied retro-actively to systems completed in the latter half of 2009. For more details on this relatively new rebate, check the official GoSolarCalifornia website (http://www.gosolarcalifornia.ca.gov/solarwater/)
Federal Solar Tax Credit plays an important role in further reducing costs.
In 2008 the solar tax credit was both expanded and extended. From 30% with a maximum of $2,000 (for residential systems), it went to 30% with no upper limit for both residential and commercial – and was extended until 2016. This one change advanced the industry sharply. On the commercial side, the tax benefit is augmented by accelerated depreciation.
Naturally, tax benefits are only benefits to people or businesses that have a tax liability to offset. And once again, the benefits depend on the tax rate of the system owner, so it’s important to make considered assumptions when doing a financial analysis.
To illustrate, here is an example of the costs and returns for a typical residential system.
Cost for 3 kW AC system
$21,468
Rebates and Tax Credit
-9,652
Net cost
$11,800
System is paid off after 8 years
After 25 years, net profit of $51,914 (Panels are typically guaranteed for 25 years, but may well last 10 years or more past that.)
23.5% Return on Investment (pre-tax)
Residential Internal Rates of Return Charts
(Compares to pre-tax investments)
6,000 kWh Annual Use
Installed Cost
2 kW IRR
3.5 kW IRR
$5.00 per AC Watt
22.4%
19.8%
$6.00 per AC Watt
18.5%
16.6%
$7.00 per AC Watt
16.8%
14.3%
8,000 kWh Annual Use
Installed Cost
2 kW IRR
4 kW IRR
4.8 kW IRR (max size)
$5.00 per AC Watt
27.9%
23.5%
22.2%
$6.00 per AC Watt
23.6%
19.8%
18.7%
$7.00 per AC Watt
20.5%
17.1%
16.1%
10,000 kWh Annual Use
Installed Cost
2 kW IRR
4 kW IRR
6 kW IRR
$5.00 per AC Watt
30.7%
28.1%
24.4%
$6.00 per AC Watt
26%
23.8%
20.6%
$7.00 per AC Watt
22.7%
20.7%
17.9%
Assumptions: Utility Rate increases at 5% annually
CSI Incentive at Step 7: $0.65 per AC Watt
Returns for commercial systems are harder to generalize about – but organizations here in Santa Monica -- able to take advantage of all credits AND solar-friendly utility rates – are regularly achieving internal rates of return in the 8% to 15 % range.
In some cases people simply do not have the money to invest. What options are available for financing?
Home equity financing for solar has just about disappeared.
The housing mortgage debacle of the past several years means that even people with good credit may be unable to borrow using home equity as collateral. Whereas Solar Santa Monica started with high hopes of being able to offer “preferred financing,” several of the companies originally on our list have slowed or even stopped lending for solar systems. While current rates are low on home purchase, home equity or even home improvement loans, the reality is they are exceedingly difficult to obtain.
A market for specialized solar loan products has simply not developed.
“No money down” Solar leases and Power Purchase Agreements have become more popular.
When Solar Santa Monica began in 2007, the concept of a solar lease or a solar Power Purchase Agreement (PPA) was relatively established in the commercial sector, but unknown in the local residential market. Over the past four years these financing arrangements have surfaced and matured, and several of our Preferred Contractors offer them, either in partnership with a third-party financing company or through their own parent company.
Both leases and PPAs have a number of characteristics that distinguish them from direct ownership.
The property owner (host) does not own the system – therefore is not able to take advantage of rebates or tax benefits. The lease company or the PPA provider owns the system, and takes all the tax benefits. Naturally, this means they can pass the lowered cost of the panels through to the host.
The host must meet certain credit eligibility requirements (FICO scores).
The leasing company or the PPA provider is responsible for maintenance and repairs on the system.
The lease payment or the PPA contractual amount may have an “escalator.” That is, it may increase by a certain percentage rate each year or at certain points during the contract.
The lease or PPA contract is typically for a term of 15 to 20 years.
One big question: what happens if the property is sold “mid-lease?” If the new owners meet the credit requirements, they could take over your lease. Or, theoretically the system could be moved to a new house to take advantage of solar conditions and utility payments there. Or, you could pre-pay (pay off) the lease and then wrap the extra cost into the purchase price of the home.
Enter into a solar lease “with no money down.”
A solar lease allows you to enter into a contract to have solar panels mounted on your roof, and to “rent” them, receiving all the energy they produce, for a fixed amount per month. Over time, as regular utility rates continue to go up, the value of the energy your panels provides is expected to increase. At the end of the lease period you will be able to buy the panels (price to be established, but most likely “fair market value,” which may be very low), or renew the lease with new terms, or ask that the panels be removed.
Enter into a Power Purchase Agreement, again “with no money down.”
The PPA is similar to the lease in that it puts solar on your roof with no down payment. The PPA contract requires that you purchase all the power that the system provides at a fixed amount per kWh. This means that your payment will vary somewhat depending on weather conditions, etc. The PPA typically has an escalator clause. At the end of the contract, an arrangement must be made for disposition of the panels.
Rates of return on leases and PPAs – Unlike an investment, where money is committed and then returned by way of dividends and/or by income at the end of the deal, leases and PPAs have no real rate of return. Rather, they are evaluated in terms of savings every month over the life of the contract. Leases and PPAs are generally structured so that the lessee/host gets savings starting the very first month. Even the most conservative leases and PPAs offer savings of thousands of dollars over the lifetime of the contract.
So what’s the best option – buy or go for no money down?
As always, “it depends” -- on the size of your bill and your system, on your utility rates and what happens to them in the future. It depends on your tax status today, and on what happens with credits and rebates in the future. All in all, if you can afford it, you’re financially better off in the long run by owning your solar system. But no matter how you manage getting your solar, getting it sooner rather than later allows you to “lock in” today’s rates for the next 20 years or longer as electricity prices continue to rise.
The roof of the office of Sustainable Works, a busy environmental
organization affiliated with Santa Monica College.
"I was interested in energy conservation and global warming, so when the pool contractor brought up the subject, I invested in a solar thermal pool heating system."
Mehmet C. Pekerol
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"Solar always made sense to us. And although the electrician's bill was more than we expected, we are getting even more savings than we expected - in summer, our bills are 50% lower."
Linda and Gwynne Pugh
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"I wish I could blanket all of my usable roof space with panels. Solar is the most worry free technology I've used. I only have 5 kW."
Nicholas Rouquette
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"I'm very happy overall. I'm getting great savings. My early bill is around $400."
