If you're like me, you've been bombarded with ads for installing solar panels on your house. The ads claim that "it's essentially free!" and "it pays for itself!", but is that really true?
The short answer is, yes, sort of... in the long run. But you'll need to live in that house for a long time before you recoup the cost, and it'll be expensive to install! But how do I know that? Let's do the math.
Disclaimer: This article is educational and not advice. Please seek the council of a licensed professional before making any changes to your finances, to ensure they make sense for your unique situation. I am happy to help, or you can visit www.brokercheck.org to find an unbiased list of professionals.
The first thing you need to do is lookup your electricity usage over the past year. This is readily available from your utility provider, either on your statement, or through an online portal. In our case, we have a relatively small home, but a lot of gadgets, so we used about 18,000 KWH last year and average about 1,500 KWH per month.
Next, lookup how many "solar hours" you get in your area. (I recommend you do this in a private browser tab to avoid being tracked by cookies. This will prevent you from being ambushed by solar salesman lol.) A great tool to look this up is https://unboundsolar.com/solar-information/sun-hours-us-map.
It depends on where you live, and the contractor you use, but on average an installed solar system costs about $2.50 a watt (source). So you need to ask yourself; "How much of my monthly solar use do I want to cover with my solar system?" In our case, if we wanted to cover 100% of our average monthly use, we'd need a 15kw system, which would cost about $37,500.
That's a lot of money, but for 2021 and 2022 the federal government is offering a 26% solar tax credit (22% in 2023 and goes away in 2024), so the net cost would be about $27,750... Which is still a lot of money. But adding solar to your property is a capital improvement and according to a study done by Zillow, homes with solar tend to sell for about 4% more than a comparable house without a solar system. So just take the current estimated value of your house and multiply it by 1.04. In my case, it would probably add about $7,000 to the value of my property, bringing our net cost down to $20,750.
So, how long would it take for me to recoup my money and come out ahead? Well electricity only costs me $0.094 per kwh through the local utility provider, so annually my electricity use costs about $1,692.07. Therefore, it would take 12.26 years for me to recoup the net cost.
But what about opportunity cost? Because I'm going to have to pay the entire amount now. Most people will get a loan or pay in installments, further increasing the cost, but let's assume I decide to pay cash. Well if I had invested* that $37,500 instead, and it grew at the historical average of about 10% per year, I'd have $120,643.96 at the end of the same period. That's the [potential] opportunity cost.
Am I trying to talk you out of solar? Not necessarily. There is very real, unquantifiable value to knowing you are doing your part to reduce CO2 pollution, and are largely self-sustainable. But at least from a financial standpoint, I can't recommend it right now. Maybe in the future, solar systems will become significantly less expensive and we can take advantage of them. For now, support renewable energy at a community level and invest your money instead.
* Investments are subject to risk of loss and may increase or decrease in value. Always consult a licensed professional before making any investment decisions.