The cost of solar has fallen significantly over the past several years, making the choice to install a solar energy system on your home much more economically attractive than it was a decade ago.
The millennial generation, which ranks far above average when it comes to being early adopters of technology and tends to be more environmentally conscious than older generations, is particularly interested in solar power; according to a recent survey, more than half of millennials plan to install solar panels within the next five years compared to less than one-fifth of baby boomers. But despite this strong interest from the millennial generation, the question remains: are solar panels worth it?
While switching to solar does have positive environmental effects and can be financially beneficial in many situations, a variety of factors come into play when determining the magnitude of monetary gains or losses. Each situation is unique, so if you are a millennial who is considering investing in a solar energy system, answer the following questions to determine whether or not it will ultimately pay off for you.
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How Much Will My Solar Energy System Cost?
Solar power is capital intensive, which means it requires a relatively large investment in order to operate. The most significant cost comes upfront when purchasing the equipment and paying for the installation. If you choose to go with a solar-plus-storage system, the cost of the battery will also need to be factored in.
In addition to the upfront costs of solar, you’ll need to consider the ongoing costs of operating and maintaining your system. For example:
- Will you be charged a monthly fee to be connected to your local utility grid?
- Are you planning to insure your system?
- If something goes wrong or breaks with the system, will you be responsible to cover the cost of replacements or repairs? (Most systems come with warranties for standard maintenance or faulty product functionality).
Because the actual cost of solar varies greatly from home to home, you’ll want to know exactly what these costs will look like for you by taking advantage of consultations and obtaining quotes from your preferred solar companies.
Which Solar Incentives Are Available to Me, and How Much Are They Worth?
Incentives from the government and your local utility can help to offset the costs associated with purchasing and maintaining a solar energy system. The U.S. federal government currently offers a solar energy investment tax credit worth 30 percent of the total upfront system cost to anyone in the United States who purchases a solar energy system. However, this credit is set to step down at the end of 2019 and may or may not be extended.
In addition to the federal investment tax credit, many state governments and local utility companies offer their own solar incentive programs with benefits such as state tax credits, rebates, SRECs or other performance payments, property tax exemptions, and sales tax exemptions. Information on local solar incentives in your area can be found on the Database of State Incentives for Renewables & Efficiency.
What Will My Yearly Solar Savings Be?
One of the biggest financial benefits of solar energy is a lower electricity bill, but whether or not you’ll actually receive savings and if so, the amount of solar savings you’ll receive depends on a number of factors.
- System size. Installing a larger solar system that offsets a major portion of your energy usage will result in higher savings on your electric bill than installing a smaller system that only offsets a minor portion of your electric bill because less power will need to be pulled from the grid.
- Roof exposure. If you live in a sunny area, your solar panels will produce more energy than they would if you lived in a shady or cloudy area. More sun means more savings on your energy bill.
- Local utility prices. If you live in a state with steep electricity prices, you’ll see higher dollar savings on your bills than you would if you lived in a state with lower electricity prices. In fact, if you live in an area where retail utility prices are low, your solar payment may be higher than your electricity bill would be without solar for several years until utility prices increase to a certain level.
- Net metering. When you first install a solar module, it will be connected to the public-utility power grid. During the day while the sun is shining bright, your system will power your home and send any surplus energy that you aren’t using back to the grid. At night when your system is no longer producing, it will draw power back from the grid. This process is regulated and tracked through what is known as net metering. Different states have varying net metering laws and ways of crediting solar owners, so you’ll want to check with your local utility and see what you’ll be subject to.
- Time-of-use and rate design elements. Some states also require solar owners to participate in time-of-use billing, which means they will pay more for electricity during peak hours and less during off-peak hours. Peak hours happen when demand for electricity is high, typically in the late afternoon and evening, while off-peak hours usually happen during the daytime when electricity demand is lower. Since solar panels are generally most productive at generating energy during off-peak hours (10am – 2pm) when it is cheaper to draw power from the grid and not as productive during peak hours when it is more expensive to draw power from the grid (5pm-8pm for a summer-peaking utility), this can greatly impact your utility bill savings.
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What Is My Payback Period?
The payback period is the amount of time it will take for you to break even on your solar investment. Once you’ve determined the costs associated with your solar energy system, the total value of the solar incentives you’re eligible for, and your projected yearly electricity bill savings with solar, you can calculate the payback period.
Steps for calculating solar system payback period:
|Net Solar Energy System Cost||Subtract the value of any incentives you’ll receive upfront, such as tax credits and rebates, from the total upfront cost of your solar energy system.||Total Upfront Cost of Solar Energy System - Incentives (tax credits, rebates, etc.)|
|Net Annual Financial Benefits||Subtract your expected annual operating and maintenance (O&M) costs from the sum of the annual financial benefits you’ll receive, such as yearly utility bill savings, performance payments, and property tax exemptions.||Annual Financial Benefits (utility bill savings, performance payouts, property tax exemptions) - Expected Annual O&M|
|Payback Period in Years||Then, divide the total upfront costs from Step 1 by the dollar value of the expected annual benefits from Step 2 to determine the number of years it will take for you to recoup your investment.||Net Solar Energy System Cost / Net Annual Financial Benefits|
How Long Do I Plan to Stay in My Current Home?
Solar is a long-term investment, so if you want to see a profit, you’ll need to live in your home long enough to take advantage of the financial benefits. Considering that millennials make up about two-thirds of first-time home buyers in today’s market and more than four-fifths of millennials do not plan to live in their current home for more than 10 years, it’s likely that you are planning to purchase or are living in a starter home that you won’t inhabit permanently.
If you determine that your projected payback period is longer than the amount of time you plan to be at your current residence, solar may not be the best investment for you at this point in time. Although research suggests that a solar energy system will increase a home’s value, this is highly dependent on your local real estate market and what’s important to your potential buyers, so don’t bank on recovering that extra portion of your investment if you sell your home before you’ve reached your payback period.
However, if you do plan on residing in your current home longer than your projected payback period, solar may be a good option for you financially. While you won’t receive maximum economic benefits unless you live in your house for the entire life of your solar energy system, you will still receive financial gains if you stay in your home longer than your payback period.
Is Investing in a Solar System the Right Choice for Me?
Under the right circumstances, investing in a solar energy system could be a great step to take toward reaching financial independence. For those of you debating between living in a condo vs. apartment, many utilities have begun offering access to community solar gardens where you don’t need to have a roof to host a system but instead own a panel through a utility-operated system and have bill credits allocated for your pro-rated share.
Alternatives exist for customers who do not have community solar garden programs in their utility service area, such as Arcadia Power. These programs operate in a manner similar to a community solar garden whereby a solar project is owned and operated by a third-party and the power is sold to a utility company at a fixed price. You receive the pro-rated share of that power sale agreement and the money is then credited to your utility bill to offset the cost of your monthly energy use.
Be sure to evaluate all the options discussed above and identify if your investment would result in significant cost savings and rapid payback on the investment. Some areas are rich with solar resource and have high utility rates, and offer favorable net metering rules. This combination can result in the best return on investment.
About the Site Author and Blog
In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time. My job routinely required extended work hours, complex assignments, and tight deadlines. Seeking to maintain my momentum, I wanted to chase something ambitious.
I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity. I launched the site with encouragement from my wife as a means to lay out our financial independence journey and connect with and help others who share the same goal.
I have not been compensated by any of the companies listed in this post at the time of this writing. Any recommendations made by me are my own. Should you choose to act on them, please see my the disclaimer on my About Young and the Invested page.