Does going solar pay off?

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It sounds like without the invisible hand of government subsidy (rebates and tax incentives) this wouldn't take off at all or be cost effective to the homeowner. And where does government get the money? From the taxpayers.

Does going solar pay off?

Even as states ramp up incentives, the payback for homeowners remains elusive.

By Stephanie I. Cohen, MarketWatch

The race is on to install solar panels in American homes thanks to generous government incentives such the $3.2 billion solar initiative California launched in January.

Despite the minuscule amount of solar power generated today -- roughly one-thirtieth of 1% of all the electricity produced in the U.S. -- recent technological advances and a continued decline in the price of solar systems are prompting more homeowners to ask if this renewable energy source is now worth the investment.

Analysts say they are still crunching the numbers when it comes to deciding whether residential solar systems, also referred to as photovoltaic or PV systems, make economic sense. The answer hinges on how much and how fast solar can cut a homeowner's utility bills and thus how long it takes to pay off the initial investment to add solar panels to a home.

"When consumers contemplate the purchase of a system for their home, they approach it like any other financial investment and examine the set cash flows and expected return," according to a new report from CIBC World Markets on residential solar.

Like any large-scale purchase, consumers considering solar tend to initially focus on the upfront costs. Solar systems for homes begin around $25,000 but can easily go higher depending on the size of a house and the amount of power they generate, said Rhone Resch, president of the Solar Energy Industries Association.

Electricity prices matter

A key factor in figuring out how long it will take to become profitable with a switch to solar is the cost of electric rates for a home, said Jeffrey Bencik, an analyst with Jefferies & Co. Bencik said retail electricity prices can vary from a low of eight cents a kilowatt-hour in some parts of the U.S. to as high as 18 cents in parts of San Diego.

"You really have to do the math on a region-by-region, house-by-house basis," Bencik said.

BP Solar offers a handy calculator for homeowners thinking of installing solar power. The calculator uses a ZIP code and a current estimate of a home's monthly electric bill to calculate what it would cost to install a system, along with the rebates that are available. Check out the calculator.

In New Jersey, for example, a 10-kilowatt residential solar system is estimated to cost about $77,500. After a state rebate of $38,000 and a $2,000 federal tax credit, the out-of-pocket cost to the homeowner is $37,500. That will provide an estimated annual savings of $1,500 on electricity bills.

The payback period for such a system is roughly 25 years at current utility rates, according to estimates provided by the New Jersey Board of Public Utilities.

The payback period can drop to about 10 years if a system owner sold $2,400 a year in solar renewable energy certificates to electric suppliers that are required to generate a certain portion of their power from renewable energy sources. The certificates are doled out each time a solar system generates 1,000 kilowatts of power. The average residential electricity customer in New Jersey uses about 700 kilowatt-hours per month, or 8,300 kilowatt-hours per year, according to the New Jersey Board of Public Utilities.

Homeowners typically move about once every seven years, according to Census Bureau data. But these incentives hold appeal mostly for those who plan to stay in their current houses well beyond that average.

All eyes on California

CIBC looked at the likely payback for residential solar systems installed in California, the country's largest solar market, and considered the cost of solar systems along with government-sponsored incentive programs and electric rates. The returns, it said, were "less stellar" than incentives offered in other countries.

CIBC estimates that the cost to install a system in California is about $8.50 per watt. But after a $2.20 per watt state rebate and a $2,000 federal tax credit the net cost drops to $5.77 a watt.

This means that buying a solar system can yield homeowners a 6% return on their investment. It would take about 16 years to pay the initial investment, though the payback period can vary depending on peak electricity rates in the region, the report's authors said in an interview. If homeowners are generating power during peak daytime demand when electricity rates are typically the highest, they will save more money.

Some states also have net metering, which allows homeowners to sell extra power they produce back to their local utilities, potentially lowering the payback period. Ideally the payback period needs to get down to the "lower double digits or the high single digits" to attract more investors, said Jeff Osborne, an analyst at CIBC and author of the report.

"We believe system costs would have to continue to come down in order to make a (photovoltaic) investment in California more attractive and spark significant growth there," the report said. The rule of thumb for investors is finding a 10% return and a payoff period of 10 years, said Osborne.

Osborne added that "the economies completely change" for someone thinking of putting solar on a newly built home rather than retrofitting an older home, since the cost of the solar system will be marginal compared with the overall price of the home and can be tucked into the mortgage without raising overall payments too much.

Incentive programs

For many customers, the refunds and tax breaks available from utilities, states and the federal government play a key role in the decision to go solar, analysts said.

Rebates and incentives vary by state. New Jersey is the second largest solar market in the U.S. and offers homeowners up to 50% in rebates toward the purchase price and installation cost of a solar system. The rebates used to be as high as 70%, but increased interest led the state to reduce them in order to accommodate more applications, said Doyle Siddell, a spokesman for the New Jersey Board of Public Utilities.

At the end of the third quarter of 2006, nearly 800 residential and commercial solar systems had been installed under New Jersey's program, compared with 493 for all of 2005, according to figures provided by the state. In 2001, the first year of the state's Clean Energy Program, there were only six solar installations. The increase "has been drastic and dramatic," Siddell said.

Arizona is also generating interest among investors as a "model location" for solar due to the high number of hours of sunshine the state experiences and its existing solar electric infrastructure, according to a report on Arizona's solar future prepared by Navigant Consulting for state officials and released in January. Arizona utilities offer homeowners incentives of as much as $3 per watt to install residential solar.

California is the dominant U.S. solar market, with 73% of the systems tied into the U.S. power grid in 2006, and the state has made a big solar wager. Gov. Arnold Schwarzenegger last year signed legislation funding the installation of 1 million rooftop solar panels for homes, businesses and schools. These systems will generate 3,000 megawatts of power for the Golden State and eliminate 3 million tons of greenhouse gas emissions, the governor says.

In California, close to 21,000 PV systems were installed and connected to the power grid by mid-2006, representing approximately 174 megawatts of power, according to a report by the Northern California Solar Energy Association. The California Energy Commission processed 11,734 PV incentives between 1998 and 2004, or an average of 163 per month. From January 2005 through June 2006, the commission processed 13,714 incentives or about 762 per month, the report said.

Utility bills as incentive

Research from Jefferies predicts more incentives will attract more solar buyers. "The U.S. incentive programs are continuing to proliferate. . . . We expect these programs to continue to drive significant increases in installations," analysts at the firm said in a new report evaluating clean technology.

Resch, who used a 50% grant from the District of Columbia to install a solar system on his own home, agrees that it is essential for installation costs to come down for solar power to have wider market appeal. Resch said the goal of the industry is to achieve an installed cost for consumers of about $3 per watt. He pointed out that solar costs have come down about 85% over the past 20 years and said growing demand will continue to bring them down.

Analysts believe that if consumers continue to focus on rising monthly power bills, they will increasingly turn their attention and dollars to residential solar. Analysts at Signal Hill stress that consumer utility bills -- which are driven predominantly by coal, natural gas and nuclear costs, and not oil -- will drive demand for residential solar.

In some parts of the country residents have seen rates rise as much as 70% in recent years.

"Solar demand and appeal is driven by comparative residential or commercial electricity costs," Signal Hill said in a recent report. "We think consumers (or retail solar-PV system) buyers will make the right choice and remain focused on their utility bill."

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