Solar Economics: Would You Pull A Lever to Get $12,000 if Somewhere in Massachusetts a Person Lost $58,000?

<i>Coyote Blog</i>

With articles about solar prices coming down, and living in Phoenix (one of the best solar sites in America), I yet again have priced out solar for our home.  The short answer is that it makes sense, IF you don’t mind reaching into the pockets of all your neighbors.

For this analysis, I will use the prices here.  The $72,167 cost for a 11.76kW system is pretty competitive at $6.13 per watt installed  (this is rated watts, not actual — see footnote).  The panels themselves can be bought for about $3 per watt, with about $1 a watt for other equipment like inverters and $2 per watt for installation.  Do-it-yourself packages for a similar size system are here and go for around $4-$4.50 per watt.

The solar company estimates that this system in Phoenix will save me$2,779 a year on my electric bill.  I have not checked their math, but I assume they are not under-estimating this number in their marketing literature.  Taking this savings, we get a payback on the installation of about 26 years.   This ignores future electricity price increases, but also ignores the time value of money.  At 8% over 20 years, it has a net present value of  NEGATIVE $41,558.   At the end of the day, this is a terrible return — in fact a huge value destruction.

But I began this post saying a solar investment might make sense.  How?  Well, that is where your willingness to reach into your neighbor’s pocket comes in.  Our solar company estimates the following tax breaks and rebates on the system described above:

  • Utility rebate:  $35,280
  • State income tax credit: $1,000
  • Federal income tax credit:  $21,650

So, in building this $72,167 improvement on my house, I get to use $57,930 of other peoples’ money**.  As Steve Martin says in the Jerk:  “That takes the pressure off!”

Like in many other cases, other peoples’ money suddenly makes solar a good investment.  Now we are looking at $2,779 a year in savings from a net investment of $14,237, or about a five year payback.    Over 20 years even assuming no inflation and an 8% cost of money that has an NPV of $12,081.

So — I officially reverse my past conclusions that home solar does not pay.  It can in fact be a good investment — for you.  For the country, it is a terrible investment.   Your neighbors are contributing $57,930 in subsidies while you receive just $12,081 in benefits.  The remainder, just over $45,000, is a dead-weight loss to the economy.  It is money destroyed by the government.

This is surprisingly like the ethics problem of pulling a lever to get a million dollars but someone you don’t know in China dies.  The only difference is that you get $12,000 and someone you don’t know loses $58,000.

** Footnote: Yeah, I know, theoretically the utility rebate is a substitute for the capital spending and not a wealth transfer.  But trust me, it’s a wealth transfer.  To understand this, we have to shift from rated solar watts to actual capacity in watts.  In Phoenix, one of the best solar sites in the world, panels produce only about 25% of their rated capacity in a day (6 equivalent sun hours per day divided by 24 total hours in a day).  So, on average, a 100 watt panel is producing 25 watts.

This means that by APS paying about $3 per rated watt in rebates, they are paying about $12 per actual watt.  And there is no way this is what they are paying for other capacity.  A typical brand new power plant might be $2-$3.50 per watt.  So at $12, this is clearly a transfer mandated by the PUC, and not a smart substitute for capital expenditure.   Besides, if this payment made economic sense for the utility, there would not be an annual cap on the amount paid out.

As wealth transfers go, this is a particularly egregious one, as it tends to add costs to the electric bills of the poor and middle class so rich folks can build hobby solar systems so they can tell their friends at cocktail parties that they are “green.”

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