Recently my wife and I received an estimate for having solar panels installed on our house. The sales documents made what appeared to be a compelling case for solar. With such a big purchase is seemed like a good use of time to see if I could reproduce the numbers in the estimate and prove to myself that I understood them. So I did a little thinking and ran some numbers and my surprising conclusion is that contrary to the sales information it would not make sense for us to get solar. And I'll go a little farther: I don't think it makes sense for most people.
Just to be clear we live in a fairly sunny place and our roof surface area was projected to cover 80% of our electric needs. All things being equal we should be a good candidate for solar.
Let me walk you through the numbers that the salesperson generated to show us why solar makes sense. Then I'll walk you through what I think he missed.
I'm going to use my actual numbers because it's what I'm most used to thinking about but I think they are not that far from typical values. Also you can change these values quite a bit and it still doesn't help.
Some concrete values for the worked example:
- Installation cost: 35k
- Federal tax credit: 10k
- Net cost: 25k
- Yearly electric bill rate increase: 3% (They quoted 7% but that seems insane)
- Current electric bill per month: $98 (fwiw we use natural gas for heating/cooking)
- Monthly loan payment on 35k (assuming 25 year loan): $194
The (reasonable sounding) sales pitch:
Your electric bill is currently $98 a month. It will go up 3% a year (they claimed 7% but doesn't matter in the end). If we calculate out month by month and project forward 25 years you can expect to spend a total of $42,876.09 during that time.
Now with solar the idea is that the system costs 35k but you get a rebate of 10k (w/in a year or so of purchase) so that the net cost is 25k. You can pay out of pocket or get a loan. They quoted a loan with interest rate of 4.5%. Also the panels were expected to cover 80% of our electric needs so we'd still have to pay 20% of our electric bill. So over all the comparison is that you start off paying more for solar (20% of old bill + loan payment) but you are now limited by how high your bill will ever get over time. Now instead of a growing electric bill for 25 years you have a flat loan repayment during this period. In this case the total cost over 25 years is $16,213.96. Lower is better so that's the choice. Go solar!
(One little weirdness here is that we are calculating this by taking the 10k rebate and investing that and letting it compound the entire 25 years). If you just spend the 10k then you loose this game real bad. Paying off the loan early is also not as good as investing. NOTE: I'm using 7% as average market return but changing this doesn't change things too much)
Ok, so there is one little thing that's weird about this solar vs no solar comparison. And honestly it took me a while to see it. Thinking of the two scenarios as two different people, initially in Mr No Solar is paying much less per month ($98) and Mr Solar is paying way more ($214). So for sure there is going to be a gap of time until having solar pays off. But there is another very important thing to consider, in the scenario where someone pays $98 for electricity instead of $214, they are not only saving money at first but if they are smart they will invest that difference. So to fully compare the two scenarios the person who is paying less (electricity bill + loan repayment) has more money to invest, and they should.
Just to be really clear what I'm saying here: if we were running a study on which habits/decisions lead to best return on investment for electric power spending the only fair way to study this question would be to give everyone in the study the exact same budget per month as everyone else in the study to use how they want. If they just pay the bill and pocket the rest, that is one choice. If they get a solar system and pay down a loan, that's another choice. I'm suggesting here that one choice would be to pay your normal bill and take the extra money (compared to the solar enjoyer) and invest it. We are being careful to inject the same amount of money into both scenarios and observing what happens.
Overtime electricity will get more and more expensive. At some point it is certainly going to be more expensive that the solar option of repaying a loan but up until that point Mr Non Solar will be banking the difference and accumulating compound interest.
If we add this aspect to the forecast we now have Mr Non Solar actually *earning* compared to Mr Solar over the 25 years. They still have a 25 year cost of $42,876.09, but they also earn quite a bit on their money they were investing at the beginning. If fact it is significant: $73,390.13. So that means they actually made money ($73,390.13-$42,876.09 = $30,514.04) compared to Mr Solar who paid out $16,213.96 during those 25 years. Ummm... what?! Mr Non Solar made money by paying his bill? What we are seeing here is that if you have a fixed budget for electricity bills then just investing in the stock market is way better than investing in solar.
This makes me a little sad because I was sort of excited to get solar. But I'm more exited to not waste money.
I don't know why I've never seen this sort of analysis before. Everyone seems to think that solar is a good idea. Especially with the incentives from the government. Maybe I'm making a huge mistake somewhere in my reasoning or in my spreadsheet. I'm hoping that by putting this out there someone will notice if I have. But at this time my conclusion is that without government incentives it would be an absolutely terrible mistake to get solar. With the government incentives its just a really, really bad mistake.
One thing that might help your intuition is that electric costs would need to be growing faster than stock market returns for it even to be in the ballpark of a good idea to get solar. And even then you'll lose money on the loan.
I'm tempted to do a variation where I don't get a loan and just pay for the solar system with cash. But I don't need to. Paying 25k out of my pocket means I've lost 25k that was earning 7%. I'm immediately behind because I'm paying 25k and getting something that only protects me from a 3% cost increase. That's an immediate net loss. My 25k was doing me much more good sitting in an investment account.
I mostly wrote this to tighten up my reasoning on the surprising suspicion that buying solar panels doesn't make sense. I was quite surprised by how much it doesn't make sense. I hope this analysis is useful to others as well. Let me know if you need anything clarified. If you own solar panels and think that it made sense for you I'd love hear your numbers. (email: madeofmistake AT gmail.com, twitter: @madeofmistak3)
Here is the spreadsheet I made to produce the estimates in the above
Some helpful replies on reddit
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