An investment paying 12.9% per year

As I’ve mentioned more than once on this blog, the stock market is ridiculously overvalued right now. This comes at a particularly annoying time for me, as I suddenly have cash to invest and nowhere to put it.

I don’t want to put my money into stocks when valuations are high and projected future returns are low.

I don’t want to put my money into bonds when interest rates are near all-item historic lows.

I already have a sizable portion of our money in real estate and I’m not that interested in buying more. Plus, as with any asset, I prefer to buy real estate when it’s cheap, not fully valued. Real estate crowd funding seems to be all the rage these days, but as with personal lending (Prosper, etc.) the business model hasn’t been proven to be viable through a recession.

This has left me actively searching, rather unsuccessfully, for investment opportunities. I recently realized that if I can’t find anyplace to invest, perhaps there’s something I can do to reduce my ongoing living expenses. That is, rather than growing my assets perhaps I can reduce my future liabilities.

After digging into our yearly expenses I saw that we are averaging about $187.50/month in electric costs. It’s higher in the summer (air conditioning) and lower in the winter (we use natural gas for heating).

I decided to look into solar to see if it made sense to switch.

The roof

The Money Commando Family has been considering going solar for a few years now. Unfortunately, our roof has prevented us from making the switch. The issue is that our roof was made of concrete tiles installed sometime in the 1980’s. Those concrete tiles were supposed to be “lifetime” tiles but apparently started to break down after just a decade or so of exposure to sunlight. Once this issue became apparent the manufacturer of the concrete tiles was promptly sued out of existence.

Fast forward to 2012 when we bought the house. We were alerted to the issue during our home inspection and we were reminded of it whenever we needed work done on the house. We wanted to get DirecTV installed but the installation technician took one look at our roof and said he couldn’t put the dish on our roof. Apparently the issues with the concrete tiles are bad enough that DirecTV has a company policy against doing any work on that type of roof.

We had a lot of rain this winter and during a particularly hard storm we found some leaks in the roof. And by “found some leaks in the roof” I mean “there were puddles forming in our living room and dining room from all the water dripping from the ceiling”.

On top of that, when the house was built in the 1970’s it had a large attic. In the 1980’s a previous owner renovated the house and blew out the attic to create awesome vaulted ceilings. Unfortunately, the attic was the only insulation because there is absolutely no insulation in the roof. We have the defective crumbling roof shingles, the plywood under the shingles, and the ceiling under the plywood…and that’s it.

We realized that the roof needed to be replaced soon, and we couldn’t get solar until we replaced the roof anyway. We’ve decided to do all the work at once. We are going to replace the roof, add insulation, then install solar.

Going solar

The equipment to be installed will be:

Inverter(s) and DC optimizers
1 SolarEdge Technologies SE7600A-US (240V)
23 SolarEdge Technologies P400

Solar panel modules
23 Panasonic Group SANYO VBHN330SA16

Rated Size of Proposed System:
7.590 DC kW (STC) | 7.050 DC kW (PTC) | 6.873 AC kW (CEC)

Est. System Output (First Year):
12,584 kWh

This is a total of 23 panels, each connected to their own inverter. It’s important for each panel to have its own inverter because with older systems all the panels operated on the same voltage. This meant that if one of your panels was partially shaded (a tree branch, a bird sitting on the panel, a cloud, etc.) and was only generating 75% of maximum power, then ALL of the panels operated at 75% efficiency. In short, with older systems all panels generated power at the level of the panel generating the last power.

Newer systems have panels that operate independently (each with their own inverter). Each panel generates power depending on how much sunlight it receives at any given time.

The costs

Although I’m excited about the environmental impact of going solar, I can’t justify it if it doesn’t make sense financially.

It turns out that the economics of solar are pretty good, especially considering the federal tax credits for new solar installations.

The first thing our solar technician did was to take a look at our electrical panel to see if it is ready for solar. Unfortunately, it isn’t. Our house has a 100 amp service panel and it needs to be upgraded to 225 amp to handle the input from the solar panels. The service panel upgrade will not only enable us to get solar, but it will provide a few side other benefits:

  • The existing service panel is completely full – there is no more space for additional breakers/circuit. We are looking at adding some outdoor heaters and a hot tub at some point in the not-too-distant future. We wouldn’t be able to do those things with the existing service panel.
  • Today the lights in the house briefly flicker whenever the air conditioner turns on or off. The 100 amp service panel is barely enough for our current demands. Upgrading to a 225 amp service panel should solve this problem.

A new electrical panel will be $2,500 – that includes the box, the permits, and installation.

The cost for the solar system (solar panels, inverters, cabling, wiring to the new electrical service panel, and labor) is $30,360.

Total cost of the service panel upgrade + the solar equipment is $32,860.

We then get a 30% Federal tax credit (not deduction), for a total tax savings of $9,108. After taxes the total cost is $23,202. Note that this tax credit is not refundable, but it does carry over to future years. So if we had a total Federal tax liability of $7,000 and a credit of $9,108, then we could use $7,000 of the credit to reduce our taxes this year to $0, and carry over the remaining $2,108 of credit to future years to offset future tax liability.

How much money will this save us and when will the break-even point be?

The analysis

In order to calculate the return from our solar system it’s important to understand how tiered pricing works.

We pay a progressive price – the first kWh of power we use costs less than the last. You are given a “baseline” usage amount. All usage up to that baseline is considered Tier 1, and all additional usage is charged at Tier 2 rates. In either tier the highest price for power is from noon – 6 pm on the weekdays (when power demand is the greatest). The rate at this time of day is $0.39/kWh.

The great thing about solar is that peak generation is when the sun is highest in the sky – roughly 9-3 pm. This means that our solar system will be producing the most power when power costs the most.

During the summer we are always in the Tier 2 pricing structure. From the chart above you can see that the highest rate is either $0.22 or $0.39/kWh. The power generated by solar should reduce our usage to the Tier 1 Off-Peak rates, and almost all power purchased from our power utility will be outside the On-Peak hours.

In the last year we purchased 10,436 kWh of electricity. With this system we’ll be generating an estimated 12,584. We are on a plan that bills based on time-of-day. Unfortunately, even though we’ll produce more power than we use, we will still have an electrical bill. This is because when you buy electricity from your electric utility you buy it at the retail rates listed above. But when you generate more electrical than you’re using and you sell it back to the utility you sell it at wholesale rates. So, on average, we’ll need to buy electricity during off-peak hours for $0.18/kWh and sell it back to our electric utility during On-Peak hours (when our panels are generating the most power) for $.03/kWh. I’m not sure why the electric company can buy power from you during On-Peak times for $0.03 and turn around and immediately sell it to somebody else for $0.39/kWh, but those are the rules.

(A quick aside – this difference in the rate you buy power vs. sell power is one reason something like the Tesla PowerWall makes so much sense. Rather than selling your excess power back to the utility company you store it and use it later. Selling a kWh of power to the electric utility for $0.03 during the day and buying it back for $0.18 at night results in a net cost of $0.15/kWh. Storing it and using it later is an incremental cost of $0/kWh. Of course, you’d need to do the math on how much money this would save and if it justifies the cost of the PowerWall or not.)

Here’s how our electric bill will look before and after solar:

Electricity analysis

I was initially surprised that we’d need to purchase power during the winter (since we use the most power during the summer to run our air conditioning), but after thinking about it, it makes sense. In the winter the days are substantially shorter: 14 hour and 27 minutes of daylight at the summer solstice compared to 9 hours and 51 minutes of daylight during the winter solstice. In addition, the sun is lower in the sky in the winter, resulting in lower power generation. So, even though we use half as much electricity in the winter we will generate less than half as much electricity.

The payback

The total investment, after tax credits, will be $23,202. Assuming that our electrical utility rates continue growing at 6%/year, it will take 8.6 years for the savings to cover the cost of the system. The yearly savings will result in an IRR (Internal Rate of Return) of 12.86%/year.

Given today’s high valuations, I’m assuming annual returns from the stock market of around 3-5% per year for the next 10 years. Our investment in solar should crush those returns.

Plus, the payback period above assumes that the solar equipment, once installed, has zero value. The reality is that installing solar should increase the value of your house. After all, assuming buyers are logical, they should be willing to pay the present value of all future electricity generated by the solar equipment. This makes the economics of solar look even more attractive.

One final note – a solar system is expected to have a useful lifespan of approximately 25 years. The general rule of thumb is that the ability of a solar panel to generate electricity degrades by about 1%/year. At the end of 25 year the system would be expected to generate around 75% of what it will generate initially. At this point we could either replace the existing solar panels or just add a few new ones (which will likely be even more efficient that the current technology) to get back to the point where we are covering our solar usage.

I’ll write another post once the solar installation is complete so I can compare the projections to actual results.

I’m also actively looking for other ways to make investments today to reduce future costs. Options I’m considering (and will write about in the future) include paying down mortgages on our residence and/or rental houses, changing landscape to use less water, and making other energy efficiency improvements to our house.

 

Given the current valuation of the stock market, are you considering non-traditional investments? Have you found any investments to reduce future expenses? Do you have any interest in going solar?

 

(updated in 2017 to add additional information about how the Federal solar tax credit works)

6 thoughts on “An investment paying 12.9% per year

  1. I see these targeted ads for Tesla solar shingles, although I’m not sure how far we are away from reality. That being said, you have to be cautious about the longevity of your new roof too, and whether you’d have to replace your roof again before the solar panels need to be replaced.

    I think it works in CA, but in states with no incentives or just cheaper electricity (like TX), the breakeven will be even longer.

    1. I actually did quite a bit of research on the Tesla tiles. A Tesla tile roof would have both solar tiles and non-solar tiles. There’s a lifetime warranty on the durability of the tiles, but the solar component does not have a warranty. They will degrade over time just as a regular solar panel will, but they are significantly harder to replace.

      I’m not sure if your comment “…you have to be cautious about the longevity of your new roof too, and whether you’d have to replace your roof again before the solar panels need to be replaced” was directed at my plan or the Tesla plan. As a general rule, the solar panels shouldn’t wear out, they will just eventually generate less electricity. Theoretically they would never fail. A regular asphalt shingle roof will have a lifespan of roughly 20 years, so it’s likely that the roof itself would need to be replaced before the solar panels.

  2. Interesting. I live in a condo, so Solar wouldn’t work for me, although its become quite popular here in MA. This also assumes you aren’t moving, but sounds like a good plan otherwise. I too am having trouble deploying savings. Been investing in real estate and have a nice portfolio, but JUNK old houses are selling HIGH. I just started with Realty Shares, but would much rather OWN something and manage directly.

    1. I’m getting the general sense that pretty much all assets are pricy right now – stocks, bonds, real estate, etc. As a result, I’m staying away from new investments until I can find some value somewhere.

      In the meantime I’m pretty happy with the expected return from our solar installation.

    1. Good question – I haven’t looked into the total credit available with Federal and state tax credits. It looks like it might be 30% from each, but that can’t possibly be right.

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