Today I am happy to welcome Larry who blogs at The Skilled Investor and has written a two-part post about home rooftop solar electric power systems. We just bought 17 panels to put on the house and probably power a solar pump for our well on the land development so it was perfect timing. I hope you enjoy it too. Let me know if you would like to guest post on RFI.
Comparing the finances of competing home rooftop solar systems proposals
Recently a Southern California client called to say that he and his wife had just bought a high-end Tesla electric car. They were considering adding a photo-voltaic rooftop solar electric power system to their home to charge the Tesla. He had already received three very detailed written bids from home solar system installation vendors, but he could not figure out how to compare them properly.
My client asked me to try to make sense of the bids, so that he could decide which one to choose. A year earlier, we had worked together to develop a comprehensive retirement financial plan for him and his wife. Since I could deal with the complexities of lifetime financial planning and had written books and developed financial planning software, my client thought that I might be interested in this assignment.
On the surface, this should have been a straightforward analytic task, but it was not. All three bids were for an installed 9,000 watt DC solar voltaic rooftop system with panels, racking, AC inverters and all necessary equipment on the roof and in the home. One of the vendors had also suggested that a 6,000 watt system might be sufficient and submitted a bid for that smaller system, as well.
The bottom line numbers in all three 9kW system bids were very similar with total vendor costs varying by only a few thousand dollars. Two of the vendors volunteered that they would be price competitive and willing to negotiate, so clearly competitive forces were at work. Total system gross prices were around $45,000 with around a $13,000 savings due to federal tax credits for solar power systems. Solar tax credits lowers the initial cash outlay to around $32,000 give or take. There were minor differences in equipment and solar panel prices and similar warranties.
At first glance the problem would have seemed to have been to decide which vendor might be more reliable and then to have a bit of fun negotiating the price down. However, if you are going to spend just over $30,000 of a rooftop solar panels power system, what is the financial justification for such a large capital expenditure?
Would there be a significantly positive financial return over the 20+ year expected life of the system? The payback is where the complexity entered and that caused my client to pick up the phone and call me. Each vendor claimed a cash payback period of roughly eight years, but the numbers to justify that payback period differed from one proposal to another.
Differing financial justification assumptions make similar solar vendor bids difficult to compare
All three vendors supplied cost of ownership analyses for similar equipment that were very different. In general, these cost justification models considered estimated annual electricity production broken down by month. Obviously, over any year solar electric production would rise and fall depending upon the angle of the sun and duration of sunlight. Comparisons were made to the known historical electrical consumption of the home over a year. With a 9kW system, solar production was projected to replace and exceed daytime power consumption during many of the months of the year. Production would be significantly less throughout the winter.
None of these systems had any provision for power storage, so excess power that could not be sold back to the utility, Southern California Edison, would be wasted. Since these systems could not store solar power, overnight electrical consumption would still depend upon the utility grid. The same was true of any daytime periods when household demand would exceed the output of the rooftop solar array. These situations were most likely to occur in the winter when power generation was less due to a lower sun angle and shorter days. In addition, occasional cloudy and overcast days would block the sun in the winter, but almost never in the summer.
We looked at whether the Tesla could act as the house “storage battery,” but this is not yet feasible. In the coming years, an electric car battery array might serve as a reserve for home power needs, but the technology is not trivial and does not yet exist commercially. Furthermore, other issues will need to be resolved, such as car battery warranties, if used in this manner.
During some months of peak production from late spring to early fall, a 9kW system was very likely to produce excess electricity that could not be used by the home in the daytime. Vendor quotes for the 9,000 watt systems, made financial assumptions about the price that the utility would pay for excess rooftop output. All vendors supplied assumptions about the value of the credits that might be earned, but these figures varied significantly between vendors.
While utilities have an incentive to buy back home generated power during peak daytime usage periods, it is not clear what reasonable price assumptions would be for such buybacks over twenty years. Of course, the solar installation vendors supplied assumptions, but there are so many future variables that could influence utility power buybacks that it was hard to have a high degree of certainty related to crediting such projected income to justify much of the $30K plus system investment.
Furthermore, multi-tiered Edison utility pricing added to the complexity. In addition to evaluating the credits that one might earn, it was necessary to calculate the cost of power that still needed to be draws from the grid and at which tiers that power would be priced.
In my written analysis after reading and evaluating the three proposals side by side, I told my client that “you could tweak these three 9kW proposals all you want and fiddle with assumptions and modeling and you still would not be able to differentiate one from another in any significant way that would lead a clear choice of one over another from a financial standpoint.
The largest difference between the financial assumptions of the three proposals related to how much each vendor asserted that the resale value of my client’s million dollar home would increase to reflect the fact that it now had an installed and function 9kW solar power system on the roof. Assumptions about enhancing the value of a home were $24.3k for Vendor A, $49.5k for Vendor B, and $70k Vendor C. Now remember, the net cash cost of each of these systems was a little over $30k.
Clearly, an non-intrusive solar system installed on a relatively flat roof should enhance the value of an expensive home to some degree. However, the wide range of assumptions asserted by the vendors was rather amusing. Since I had helped numerous financial planning clients to understand the long-term financial implications of home ownership, and I had integrated a sophisticated home buying calculator into the financial planning worksheet software that I had developed for my clients over the past decade, I had a pretty good understanding of the many factors that could influence the resale value of homes. Few real estate renovation investments beyond a new paint and new carpets face lift to an older home will increase market values much above the cost of the investment.
However, if the estimates from Vendors B and C were to be believed, then every homeowner planning to sell a million dollar home in Southern California, should go right ahead and install a solar system on the roof, take the tax rebate, and then pocket around $15k to $35k in extra profit by selling the home. Me thinks two of these vendors were stretching the real estate enhancement value of their systems by more than just a wee bit.
How to decide between vendors, when rooftop solar power systems proposals are very similar?
While the financial comparison exercise did not yield a direct answer about which vendor to chose, it did help my client and me to reach some very useful conclusions. In fact, because we looked at the various proposals carefully, we developed a clear understanding of the financial factors that would influence the financial payback model for the home solar power system. In the end, my client reached the conclusion that a smaller 6,000 watt rooftop solar power system was probably a much better idea for his home.
All three vendors had quoted a 9,000 system which was more closely matched to the total yearly needs of the home. With a first look at the situation, a 9kW might have seemed made sense. Perhaps more than a bit coincidentally, the 9kW systems were advantageous to the vendors, as well. When a home solar system vendor can justify and sell a larger system, obviously they would make more money.
However, a 6kW system was voluntarily proposed by one of the vendors to their credit, and it made a lot more economic sense. The economic advantage was not simply because it was a cheaper system at about $22,000 net cash cost after tax rebates for a cash savings of about $10,000 versus a 9,000 watt solar system. The real financial advantage was caused by the tiered electric utility pricing system of Southern California Edison.
A 6kW system had the effect of knocking down total electric usage by two thirds over the year. However, since the solar system was replacing utility supplied power during most peak usage hours during the day and during most high electrical usage months from spring to fall, the 6kW system would cut out the most expensive power charged by the utility through the tiered pricing system.
Southern California Edison had a standard home four tier pricing system which rose with higher usage over any month:
* $.13/kWh for Tier 1
* $.16/kWh for Tier 2
* $.27/kWh for Tier 3
* $.31/kWh for Tier 4
(Note that there was a fifth pricing tier listed for even higher total monthly consumption, but the $.31/kWh price was the same as Tier 4.)
The 6kW system vendor proposal demonstrated that power usage would be cut by 2/3s, but the total annual utility bill would be cut by about 90%. In effect, the 6kW system had the effect of eliminating almost all billings for the much more expensive Tiers 3 and 4.
If a 6kW system could be supplied by any vendor, then the question became whether the potential to eliminate the remaining 10% of the total utility bill plus the opportunity occasionally to sell power back into the grid at unknown future prices was enough to justify the extra $10k up front cash outlay to trade up to the 9kW system. I decided that it was not worth the added cost, and I recommended to my client that he chose a 6kW system. Moreover, because the smaller home solar power system replaced the most expensive utility power, the lower cash investment was likely to have a shorter cash break even period with lower risk.
Since the initial investment costs before any negotiations of ~$32k for the 9kW system and ~$22k for the 6kW system were roughly proportional, my client was likely to reap the greatest savings with the smaller system. Furthermore, he would not have to worry about uncertain “solar power credits” that might be earned by selling excess production capacity back to the utility grid. If the economic of these credits were unattractive, any excess power would “go to waste.”
These rooftop solar photo voltaic systems configurations tended to be modular. In the future, if my client’s electrical usage and/or potential utility solar power purchase credits justified it, he could always add an additional 3kW capacity to the roof. In addition, 3kW of capacity added in the future might be purchased at a lower inflation-adjusted price, given the declining real dollar price per installed solar kW that the industry has exhibited.
Lawrence J. Russell wrote this article. He is a registered investment adviser, the author of numerous do-it-yourself financial planning and investing books and articles, and the developer of the VeriPlan, which he believes is the best retirement planning software for home use.
Stay tuned next week for Part 2…