Solar Panels- My Biggest Investment This Year

I’ve been tossing around the idea of installing solar panels for several years. Just the idea of harnessing natural resources has an appeal to it. But it’s a huge investment, and I was doubtful that the payoff would really match a payoff in traditional investments, so I kept kicking the can down the road. Finally, this past year I got serious about scratching my itch. I figured I had to weigh the numbers and make a decision.

The Initial Investigation

Perhaps I could have done more detailed research, but I just used a simple google search for solar installers in my area. One in particular, CB Solar, was by far the most responsive, so I dropped the others and ran with them. And yes, I can already hear howls about how I should have gotten multiple quotes.

CB Solar installs a ‘turn-key system’. Once you give them the go ahead, they handle everything including filing the paperwork with the utility company. I’m sure I paid more for this arrangement, but it definitely saved me a lot of headache. As far as I’m concerned, that’s worth it. Right off the bat, CB Solar did an analysis of our location, projecting our production rates throughout the year. Based off of this projection and off of our past electric usage, they then recommended a system for our situation.

Pulling the Trigger

Two things in particular convinced me to go ahead with solar panels. First, the data that CB Solar gave me convinced me that there was potential for a good rate of return. Second, their panels came with a 10 year parts warranty and a 25 year production warranty, guaranteeing that at the very least the system will almost completely pay for itself before it went bottoms up.

The Numbers

The initial cost of the system was $11,973. Like I said, a pretty significant number to swallow. And probably a big reason why you don’t see more solar panels being put up. However, a federal tax credit in place (expiring in 2019) for 30% of the installation cost brought our cost down to $8,381. Additionally, Iowa grants a 15% tax credit, bringing our cost down to $6585. We still have to pay $11,973 up front tho, since the tax credits are awarded when we file our income tax return next year.

The return on our investment is a little more complicated. Actually, it’s a lot more complicated. First, since we don’t live on the equator (or anywhere near it), the length of our days vary throughout the year. CB Solar’s production projection definitely helped with this.

 

More complicated is the value of the production. Our house remains connected with the public electric grid, and we have a meter that monitors incoming and outgoing electricity. It does not simply run backwards when we feed electricity back into the grid. If the solar production offsets our current consumption, meaning we don’t feed it back into the grid, it is essentially worth the regular electric rate (11c per kWh). Unfortunately, when we generate excess electricity and it gets fed back into the system, our utility company only pays us 4.7c per kWh. So we could send power back to the grid at 4.7c one minute, just to draw it back an hour later at 11c. So although we have our past electrical usage stats, our power consumption isn’t completely steady throughout the day. Figuring out how much of that usage takes place during the night, how much occurs during the day, and how much will get fed back into the system can only be a rough estimate.

Since the majority of our electricity usage is during the day, which is when the solar panels will be producing electricity, I figured a conservative 70% of our production will directly offset our consumption (worth 11c). The rest gets fed back into the system and is worth 4.7c. Based on CB Solar’s projection of 5,265 kWh produced per year, I arrived at the following.

My return depends largely on how long the solar panels actually last. CB Solar uses American/German made panels as opposed to Chinese made panels, so they have a longer life expectancy of 30-40 years. Of course, the worst case scenario would be all 14 of my panels failing right after the 10 year parts warranty is done.

To calculate my return, I can use any basic ROI (Return on Equity) calculator here or here. For my cost I’ll stick with my after-tax amount of $6,585, since I’ll recoup the remainder of the cost within a year. With a 30 year lifespan, my return would be $14,389 or a 2.64% return annualized. With a 40 year lifespan, my return would be $19,185, or 2.71% annualized.

By themselves, these numbers would be paltry. However, as energy prices rise, the amount my solar panels are saving me will also increase. Over the past 20 years, electricity rates have risen by about 4.7% per year. Again, I’ll assume a very conservative 2% going forward.

Year	1 Year Return	Total Return
1	$ 479.00	$479.00
2	$ 488.58	$ 967.58
3	$ 498.35	$ 1,465.93
4	$ 508.32	$ 1,974.25
5	$ 518.49	$ 2,492.74
6	$ 528.85	$ 3,021.59
7	$ 539.43	$ 3,561.02
8	$ 550.22	$ 4,111.24
9	$ 561.22	$ 4,672.47
10	$ 572.45	$ 5,244.92
11	$ 583.90	$ 5,828.81
12	$ 595.58	$ 6,424.39
13	$ 607.49	$ 7,031.88
14	$ 619.64	$ 7,651.52
15	$ 632.03	$ 8,283.55
16	$ 644.67	$ 8,928.22
17	$ 657.56	$ 9,585.78
18	$ 670.72	$ 10,256.50
19	$ 684.13	$ 10,940.63
20	$ 697.81	$ 11,638.44
21	$ 711.77	$ 12,350.21
22	$ 726.00	$ 13,076.21
23	$ 740.52	$ 13,816.74
24	$ 755.33	$ 14,572.07
25	$ 770.44	$ 15,342.51
26	$ 785.85	$ 16,128.36
27	$ 801.57	$ 16,929.93
28	$ 817.60	$ 17,747.53
29	$ 833.95	$ 18,581.48
30	$ 850.63	$ 19,432.11
31	$ 867.64	$ 20,299.75
32	$ 885.00	$ 21,184.75
33	$ 902.69	$ 22,087.44
34	$ 920.75	$ 23,008.19
35	$ 939.16	$ 23,947.35
36	$ 957.95	$ 24,905.30
37	$ 977.11	$ 25,882.41
38	$ 996.65	$ 26,879.06
39	$ 1,016.58	$ 27,895.64
40	$ 1,036.91	$ 28,932.55

 

Now, after 30 years, I’m realizing a $19,432.11, or a 3.67% annualized return. If all my panels make it to 40 years, it’ll be a 3.77% return. For a relatively fixed investment, these are rates I can live with. But what if energy rates continue to rise at a 4% rate?

Year	1 Year Return	Total Return
1	$ 479.00	$ 479.00
2	$ 498.16	$ 977.16
3	$ 518.09	$ 1,495.25
4	$ 538.81	$ 2,034.06
5	$ 560.36	$ 2,594.42
6	$ 582.78	$ 3,177.20
7	$ 606.09	$ 3,783.28
8	$ 630.33	$ 4,413.61
9	$ 655.54	$ 5,069.16
10	$ 681.77	$ 5,750.93
11	$ 709.04	$ 6,459.96
12	$ 737.40	$ 7,197.36
13	$ 766.89	$ 7,964.26
14	$ 797.57	$ 8,761.83
15	$ 829.47	$ 9,591.30
16	$ 862.65	$ 10,453.95
17	$ 897.16	$ 11,351.11
18	$ 933.04	$ 12,284.15
19	$ 970.37	$ 13,254.52
20	$ 1,009.18	$ 14,263.70
21	$ 1,049.55	$ 15,313.25
22	$ 1,091.53	$ 16,404.78
23	$ 1,135.19	$ 17,539.97
24	$ 1,180.60	$ 18,720.57
25	$ 1,227.82	$ 19,948.39
26	$ 1,276.94	$ 21,225.33
27	$ 1,328.01	$ 22,553.34
28	$ 1,381.13	$ 23,934.47
29	$ 1,436.38	$ 25,370.85
30	$ 1,493.83	$ 26,864.69
31	$ 1,553.59	$ 28,418.27
32	$ 1,615.73	$ 30,034.00
33	$ 1,680.36	$ 31,714.36
34	$ 1,747.57	$ 33,461.94
35	$ 1,817.48	$ 35,279.42
36	$ 1,890.18	$ 37,169.59
37	$ 1,965.78	$ 39,135.38
38	$ 2,044.42	$ 41,179.79
39	$ 2,126.19	$ 43,305.98
40	$ 2,211.24	$ 45,517.22

 

Now at 30 years, we have $26,864.69, or 4.8%. At 40 years, we’ve now saved $45,517.22, or 4.95%.

Is your head spinning yet? Mine is. Like I said, trying to predict my rate of return gets complicated. My highly unlikely worst case scenario (all panels failing at 10 years) is only a $1,795 loss or a -0.79% annualized. My much more likely range of returns is from 2.64% to 5%. These are rates of return that are slightly better than most bonds. And remember, even bonds have the potential to take losses. Furthermore, unlike most other investments, solar panels are merely trimming my expenses, so their ‘returns’ don’t incur income tax. I’m tracking my actual results, so I’ll keep everyone updated!

Who Should Consider Solar Panels

Solar panels are not for everyone. Lots of variables go into determining the return on your investment. If your state offers a better tax incentive, solar panes can be a fantastic investment. But if your state has no tax credit, they may not pay off at all. Our electric rates are pretty close to the nationwide average (12c). If your rates are higher than average, solar panels make more sense. How your utility company treats solar power also matters. Some utility companies charge a monthly fee to have solar panels hooked into the main grid. Other utility companies are more favorable, and will pay the regular rate for electricity fed back into the system.

Your property also matters. Our property is relatively void of shade. This is ideal for solar panels. Obviously if you have lots of trees, solar panels may not make as much sense.

In most cases, solar panels are not yet an astronomical investment. Without tax credits, they are an even less attractive investment. However, it’s nice having an inflation buffer, and for the most part, solar panels have a limited downside.

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- While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.