Solar Panel Cost and Savings: Solar Econ 101

Rich Dana, November 11, 2015

Solar panels appeal to people for a number of different reasons. Whatever your reason for installing solar, the bottom line for most folks is economics. This guide offers you information on:

How much does solar cost?
Solar Payback and Return On Investment (ROI)
Financing Options
Is Cheaper Always Better?
The Plummeting Cost of Solar– Buy or Wait?
History of Solar Costs
The Future of Solar

How much do solar panels cost?

When we talk about “typical costs” in this article, we are referring to the price you will pay for your system BEFORE and rebates, tax incentives or other subsidies. Although the final price you will pay for your solar installation will vary greatly from state to state and utility to utility due to the wide range of incentives available, the fixed, up front installed costs are pretty consistent across the country.

Average System Cost

prices_fallThe average installed cost of a solar array has plummeted in recent years. This is primarily on the equipment side of the equation, as labor rates have not gone down…in fact, in some cases, labor has gotten more expensive. However, due to improvements in rack designs, quick-connect wiring and smaller and lighter inverters, installations are easier, making the process faster and cheaper for consumers, and easier and more profitable for installers.

Panels, Inverters, Racks And BOS

Not too many years ago, the solar panels themselves were the single biggest expense for a solar installation. Today, things have changed drastically. Solar panel prices have dropped, and that drop (along with efficiency improvements, new inverter technology and simplified installation) has brought the total installed cost of a solar array within a range where middle class homeowners can consider it as an investment. Let’s look at some of the equipment you will be purchasing, and how your product choices affect your total project cost.

Panels: Your solar panels will make of 30-40% of your total investment. Currently, some less expensive Chinese solar panels are selling for less than $1.00 per peak patt. What this means is that, for instance, a 300 watt solar panel might go for $.98 per watt, or $294 dollars. If you were installing a 6kW (6,000 watts) solar array, the 20 panels needed would cost you $5880. If space on your roof is limited, you may wish to purchase a high-efficiency panel 300w panel that produces more power but takes up less space. You might pay $1.40 per watt for a high efficiency panel ($420), which would raise the cost of your panels to $8400.

Inverters: For your panels (which produce DC electricity) to feed power to the (AC) grid, You will be buying one or more inverters. The current inverter choices include string inverters, which serve multiple “strings” of solar panels, or micro inverters, which are small inverters installed on each individual panel. There are a number of advantages and disadvantages to each type of inverter, and you will want to discuss these with your installer. Microinverters generally cost more per watt, but save on installation time. In most cases, though, a string inverter will be slightly cheaper. $.60 per watt for microinverters and $.45 per watt for string inverters.

Racks and BOS: The price of racking and the balance of system (BOS) components can range considerably, and this can often be the source of the most head-scratching and number-crunching on the parts of both the customer and the contractor. In most cases, a roof-mounted array will be less expensive than a ground-mounted array, but in some cases, Roof mounting just isn’t practical. This might be due to shading issues, roof angles, chimneys or other obstructions. A ground mounted array will require trenching and other additional expenses. The longer the run from the array to the breaker panel, the higher the price is going to be.

Solar Payback and Return On Investment (ROI)

We know that installing solar will reduce your environmental footprint substantially, while reducing your financial exposure to rising energy prices. These are both great reasons to install a solar array on your roof, or in your backyard. But the bottom line for most of us is simply… is it a good financial investment?
installed_2pies2015
The answer to this question is complicated, and after you get bids from several solar installers, you need to do some research on how solar compares to other ways that you might choose to invest your money. If you use an accountant, you probably want to collect as much information as possible and have a meeting with him or her to go through the tax implications. What you don’t want is a surprise after the project is completed.

Payback Example 1: 7.5 kW Residential System
Table1

For an relatively efficient, smaller home, a system under 10,000kWh will usually offset the majority of the electricity consumption. Let’s crunch the numbers for a typical 7.5 kW residential rooftop solar array.

In the solar business, the price point for a solar job is often given in dollars per watt of rated output. A 10kW solar array installed for $3.50 per watt would cost $35,000. At the time of this writing, installed costs for large residential systems are going up for around $3/watt , with smaller systems going up to $4/watt. In Table 1 below is a breakdown of an average installation and the cost breakdown.

As you can see, the PV panels themselves are still a major portion of the bill, but a far smaller percentage than in years past. Labor is proportionally bigger than in years past, but the actual cost of labor is lower now, due to streamlined installation processes.

Payback Example 2: 15 kW Residential System
table 2
Return on Investment/ Internal Rate of Return: For a larger home or small business, let’s double the size of the system and jump up to 15kW. What we see in a table 2 is that an economy of scale has begun to kick in. The labor cost has fallen as a percentage of the total, due to proportionally less overhead, setup, etc. The cost of panels is now a larger percentage of the total, and the price per watt has fallen to $3.

A full discussion of what return on investment an internal rate of return are is beyond the scope of this article, but state as simply and briefly as possible:

Return on investment(ROI) is a metric that tells you how much investments have increased or decreased during a specified time frame. Subtract the initial investment from the current one and divide the resulting figure by the initial investment. The result is stated as a percentage.

 

Internal rate of return (IRR) tells you the yearly compound rate that you stand to gain from your investment. IRR figures take into account factors like timing, net present value, etc. It is a much more complicated formula than ROI.

Solar’s return on investment (ROI) is surprisingly good. In many states that are “solar friendly,” Solar’s ROI surpasses 5 year CDs in all but a handful of states. In California, Colorado, Connecticut, Delaware, Hawaii, Iowa, Massachusetts, Minnesota, New Jersey new Mexico, New York and South Carolina, solar’s internal rate of return exceeds that of the S&P 500 stock index, which is considered historically to be have a very good average ROI. Hawaii has the best solar rate of return– 24%! However, even Northern states like Minnesota come in above the S&P at 10%.

Purchasing solar panels is first and foremost a financial move. Just like stocks and bonds, investing money in solar gets you a financial return. However unlike stocks and bonds, that return can be precisely calculated. That means upside with little or no risk. To figure your own projects potential ROI and internal rate of return, you will need to know:

  • The amount of solar kWh your system will produce over its lifetime.
  • The costs associated with installing and maintaining the system over its lifetime.
  • Your current utility rate and any demand charges that apply.
  • Your annual electric bill.
  • The projected annual increase of electric rates.
  • Rebates and tax incentives.
  • Loan costs.

Work with your installer, do your research, and consult a financial professional to estimate the return on your investment.

Financing Options

As mentioned previously, financing options for solar vary greatly from state to state. Some state and local governments offer tax incentives and rebates to residents who choose to install solar panels. Some utility companies offer incentives as well. However, as in the examples cited above, payback can vary widely, due to the financing options available in one particular area.

Some of the types of financing available include:

  • low interest loans
  • tax credits
  • grants
  • rebates

For the best, most up-to-date list of financing options for solar, visit the Database of State Incentives for Renewables & Efficiency for a comprehensive state-by-state, county-by-county listing of the financing options in your area. This is a great tool that allows you to search by your zipcode, then refine your search by technology, and with keywords like “residential” or “small business.”
Through the end of 2016, all US residents can collect a 30% tax credit for installing solar. To qualify, “at least half of the energy generated by the “qualifying property” must come from the sun.  The system must be certified by the Solar Rating and Certification Corporation (SRCC) or a comparable entity endorsed by the government of the state in which the property is installed.” You can read more about the federal tax credit at energystar.gov.

Make sure that you also understand the interconnection requirements set by your local electric utility provider. Contact them and ask for a sample interconnection agreement and also ask if they offer any rebates for solar.

Power Purchase Agreements

In some situations, particularly in the case of larger solar projects, Power Purchase Agreements (PPAs) might be the best way to finance a project. PPAs are often also referred to as “third party solar financing” or solar leases. Unfortunately, many states which have rate-regulated utility markets do not allow solar PPAs at this time, but this is changing. For instance, in a landmark case in Iowa, the state supreme court ruled that utilities must allow PPA. Other states will likely follow suit in the near future.

According to the Solar Energy Industry Association’s website: “Third-party financing of solar energy primarily occurs through two models: power purchase agreements (PPAs) and solar leases.

In the PPA model, an installer/developer builds a solar energy system on a customer’s property at no cost. The solar energy system offsets the customer’s electric utility bill, and the developer sells the power generated to the customer at a fixed rate, typically lower than the local utility. At the end of the PPA contract term, property owners can extend the contract and even buy the solar energy system from the developer.

In the lease model, a customer will sign a contract with an installer/developer and pay for the solar panel system over a period of years or decades, rather than paying for the power produced. Solar leases can be structured so customers pay no up-front costs, some of the system cost, or purchase the system before the end of the lease term. Similar leasing structures are commonly used in many other industries, including automobiles and office equipment.”

Pros and Cons of PPAs

Pros
The biggest advantage of a PPA for many individuals and businesses is that there is little or no upfront cost. The seller absorbs the up-front costs, and maintains the system for the lifetime of the lease. The consumer pays a fixed retail rate for the power, so they also are insulated from spikes in electric rates. At the end of the lease period, the homeowner or business owns the solar array, without having made a big investment.

Cons
The downside to the customer of signing a solar lease is that they will not reap many of the financial benefits of installing solar. This means that they cannot collect the rebates, tax incentives or other incentives. For a non-profit business or someone with a lower or fixed income, this may be a better route to go, since they can’t take the tax breaks anyway. But for individuals or businesses with a tax burden and the ability to finance the project themselves, they stand to make a far better investment by owning the system from the beginning.

Is Cheaper Always Better?

As we have discussed earlier in this article, there is a wide range of quality, reliability, efficiency and price in the solar marketplace. As with any other major purchase– a car, a refrigerator, a furnace– you most often get what you pay for.

Be an informed consumer. Read reviews of the solar panel brands that various installers are suggesting. In many cases, certain companies sell one or two brands exclusively. In many cases, they may give you a choice of a domestic brand or a Chinese brand. Although Chinese modules have had a checkered past, their are several very good, reputable Chinese manufacturers with products on the market right now.

The most important factor is to work with an installer who has a great reputation, years in the business and good references. Regardless of the equipment they install, the key to a successful solar installation is working with experienced professionals with a reputation for good customer service and good workmanship. You’ll be in good hands.

The Plummeting Cost of Solar– Buy or Wait?

With solar prices falling nearly 15% per year over the last few years, a savvy consumer would have to wonder… “Should I wait to buy? Will these prices keep dropping?” We can’t say for sure, but chances are, the answer is “no.” There are several factors that will be coming into play in the next few years that may make now the best time to invest in solar.

Chinese Solar: Chinese solar manufacturers have flooded the US market with cheap solar panels over the last few years, leading to “anti-dumping” measures by the federal government. These new regulations, along with an unstable Chinese economy make the future of cheaper and cheaper Chinese panels unclear, as well as calling into question the availability of replacement parts.

Incentives: Recently, the solar boom has been aided by federal, state, local, and utility company incentives. These incentives range from grants to low interest loans, rebates to tax credits. These incentives have been critical to getting the solar industry up to speed, creating new jobs and reducing pollution from fossil fuels. However, as the solar industry reaches maturity, these incentives will start to go away. For instance, the Federal Government currently offers a tax credit to cover 30% of the cost of your solar installation, but that incentive is scheduled to expire at the end of 2016. That’s a huge incentive to buy sooner rather than later.

History of Solar Panel Costs

To say that solar panels have come down in price lately would be a major understatement! According to the National Renewable Energy Laboratories (NREL), in 2011, the average price to install a residential or small commercial system of under 10kW was $6.13 per kW. As of this writing (late 2015), those same sized systems are going in for under $3.75 per kW. That means that a 7.5 kW system that cost $46,000 just four years ago might cost as little as $26,000 today.

Looking back over the last 40 years, we can see that the cost of solar was 100 times higher in the late 1970’s than it is today! Economist Richard Swanson, in an a 2012 article in The Economist observed that the price of solar photovoltaic modules tends to drop 20 percent for every doubling of cumulative shipped volume. At present rates, costs halve about every 10 years. This trend has been termed Swanson’s Law, and continues to hold true as the current solar boom continues.

The Future of Solar

Despite questions about where the solar industry will go over the next few years, chances are, it will continue to grow, Regardless of what US policymakers do or do not do in regards to incentivizing solar, or what happens to the Chinese economy, the solar industry is growing worldwide at a rapid pace. From rooftop solar to large, utility-owned solar farms, solar will be powering the economy of the future.

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