Cracking the Solar Panel Code
John Dumke, owner of Penny and Dumke Real Estate recently self-installed solar panels on his home. In the process of doing tons of the research, design, permitting and self-installation, he became an expert and thought he would share what he learned.
Over the last several years Dumke had met with a couple of solar panel sales people. Usually, young kids that didn’t appear to have a full grasp of what they were selling. The last thing he wanted was a bunch of monkeys up on his roof drilling holes in my metal roof, permanently compromising the integrity. Couple that fear and a lack of transparency with regards to cost, and he was not able to make a decision because he didn’t have a clear picture of the entire process. He was bouncing between questions such as, should I lease, should I buy outright, what are the tax incentives, who gets them, what size do I need….etc. Maybe people have been similarly confused.
Dumke has broken this article into general guidelines for the average consumer followed up by his nerd section for those who like details.
Buy or lease. – He chose to buy his system rather than lease. When a person purchase they assume all of the risks but also reap all of the benefits as well. His concern with leasing solar panels is the length of the lease, often 20 years. If someone is going to sell their home, leases stay with the property and transfer to the new buyer. He has seen several instances where leased solar systems do cause buyer resistance. If someone was going to sell their home 10 years into a 20-year lease, the buyer will have to accept the lease as part of the sale. Or the seller will have to agree to pay off the lease. When purchasing a home, a buyer may be financially stressed. Worried about interest rates, coming up with the down payment, qualifying for a home loan, and home inspections. Taking over the lease adds complexity. A buyer may not be capable of figuring out the legal and financial ramifications. If the buyer can’t wrap their heads around this lease then they may want to negotiate with the seller to pay off the system.
The homeowner must now negotiate with the solar company to buy out the balance of the lease. A lease that is profitable for that company and making that company money. Dumke’s experience is that the solar company will likely want the homeowner to pay a premium for the system to make up for their lost revenue. They will not offer you a price based upon it’s true depreciated value. They hold the lease and they are in control.
When a person leases the panels you don’t get to the 30% tax credit, the leasing company gets the tax credit. On a $20,000 system, the 30% Federal Tax Credit is worth $6,000.
But what about maintenance? When leasing people don’t have to worry about maintaining the system. Maintaining solar panels is largely a false premise as solar panels are largely not in need of maintenance. Equipment failures are covered by most manufacturers 10-20 year warranty and if people are careful in the selection of a good local installer, they will stand behind any problems that arise. The newness of solar technology has society falsely believing we need to have an intermediary help maintain a solar system. A buyer wouldn’t contract with a third party company to install a refrigerator and provide refrigeration in their home? Yet refrigerators are more likely to fail than solar panels. The only maintenance solar panels may need might be cleaning the dirt off them to maintain their efficiency. Dirt can reduce efficiency by as much as 15%.
If someone doesn’t have the means to buy the panels with cash or a loan and leasing still provides the buyer with cost savings then by all means leasing can be a win, but as a rule of thumb, purchasing is more profitable and simpler.
Who might benefit from solar?
Individuals with medium to larger electric needs and people with free space on a preferably unshaded southern facing roof. Obviously, the more electricity a person uses the more they will benefit from solar. The ideal location for solar panels is South Facing at a tilted angle of 35%. North facing won’t work, but east and west facing will, there will just be about a 20% reduction in panel production.
System Sizing – What is the right amount of solar
Dumke gets more into system sizing in the nerd section, but in general, a person would want a system large enough to provide for as much of their electrical needs as possible. This may be limited by roof layout. However, a person does not want to overproduce more than they can use because SCE compensates them for excess production at a very low rate.
How does the meter running backward work? – Net Energy Metering 2.0
The current method of checks and balances with a person's SCE electric meter works as follows. They get credit for the excess energy they produce during the daylight when their solar panels are producing and they can use this energy back during the night. This also applies during long summer days when the monthly production will outpace their usage. This excess summer production can then be used back during shorter winter days. Then every year on a person’s anniversary date, their usage resets and they are charged for their net usage for the year or issued a check for overproduction. While a person is charged about 23 cents on average for electricity used, they are compensated only at the rate of 2-4 cents for overproduction. So overproduction isn’t cost effective.
Typical Solar Needs and Costs – An Example
Here are some rough numbers for a homeowner with a $220 monthly SCE bill. For this homeowner, Dumke might suggest a 6kW system. This 6kW system if placed on a roof in Long Beach on a 30 degree south facing roof with no shading would produce around 10,000 kWh per year which at 23 cents per kWh would result in a savings of around $2,300 per year. This 6kW system would cost about $21,000. Installed solar systems in SoCal are costing about $3.25 – $3.50 per kW. But wait!… If a person pays for the system themselves, even if they finance the system, THEY get the 30% tax CREDIT. Their federal tax bill will go down by $6,300 ($21,000 & .3). So their actual cost for the system will only be $14,700.
The nerd section below will get into more details about how to adjust the above example to your needs.
Financial Return
The system will then pay for itself in about 6.5 years. Or your investment will return 15.6%. Either way free electricity after 6.5 years for the life of the system. Or a 15.6% return? These are some pretty good numbers.
Planning for an Electric Vehicle
SCE by default does not want someone building their solar system. SCE wants the system limited to a purchaser’s last year annual usage. However, John built his system about 10% over his last years' usage knowing that he would be more likely to run his AC now that his electricity was free! SCE does allow someone to overbuild their system if they plan on using more electricity in the future. Similarly, this is true if someone adds an electric charging station in their garage. Their system should be sized to account for this vehicle. If someone has or plans on getting an electric vehicle now is the time to adjust.
Conservation First
The best savings are obviously first made by reducing a person's current usage. For years electrical usage has been growing, but in the last 5 years, there have been big improvements in electrical efficiency. LED light bulbs have finally become cheap, and TV’s and computers have become much more efficient. Before settling on their system needs make sure to consider replacing old appliances that may be inefficient and upgrading all light bulbs to LED.
Look for a local installer
After Dumke read many horror stories of people signing up with large national companies that go bankrupt or are bought out and have trouble getting service from their original installer, he is convinced that the reputable local installer is the way to go. One with at least a 10-year track record. John may have his own opinions on different equipment and what are the pros and cons. But by far the most important decision a person will make will be the installer they choose. A quick survey of a buyers neighborhood will easily reveal 3-5 recent solar installations. It is as simple as getting references from their neighbors. Maybe even neighbors that had panels installed 1-3 years ago, which is long enough to expose any reliability and warranty service issues.
The Solar Industry is just coming of age.
As recently as 2010 solar costs were about $7.5 to $8 per installed kW. Today’s $21,000 6kW system would have cost upwards of $50,000 just 9 years ago. Most of the reduction in costs has been in the area of material costs as labor costs have not gone down. Either way, the ROI on today's prices certainly makes solar more viable than just 9 years ago. But this also means that it is an industry in flux. It is a high growth industry with big profits and lots of change. There will be many companies or products which will not be around in 10 years.
Upgrading an Existing Panel
The above estimate for installation assumes that a person's rent electrical panel can handle the extra load. If their panel is older or outdated a new panel is capable of adding the extrasolar circuit breakers may be required. This may add about $2,000 to the cost of the project.
What is the Condition of your Roof?
Another assumption is that a person’s roof is in good working order and panels can simply go over the top of your existing roof. If their roof is towards the end of its lifespan, they may consider putting on a new roof before installing the panels, as removing the panels and reinstalling them will add to the cost of the new roof.
