Is Going Solar a Good Financial Decision?

Solar panel technology has advanced steadily since the 1990’s, when it first became viable for powering homes. Over that time, the cost of solar power has come down drastically thanks to technological improvements and government incentives.

At the same time, the cost of traditional electricity has gone way up- especially in places such as California.  Aside from being expensive, traditional energy is also not “green.” A look at the California State Energy Profile shows that we in the Golden State burn incredible amounts of carbon-generating fuels.

Going solar can help lower your carbon footprint and may potentially increase your home’s value. You can also save on your electricity bills, and that savings can really add up over time. However, there is a sizable cost to adding solar, and whether the savings justifies the cost depends on a few key factors.

How much does solar cost?

The two main costs with solar are the equipment and the installation. The costs vary depending on the size you need, the equipment you choose, and some other factors. On average, the cost of an installed home system is $15,000 to $25,000, according to the Center for Sustainable Energy. This is before any incentives or tax credits, and doesn’t consider any permit costs, repair work needed on the roof, or the cost of adding batteries.

Your actual upfront cost will depend on how much power you need the system to produce. An average U.S. home can run on a 5,000 watt (5 kilowatt) system, and costs three to five dollars per watt to buy and install. 

 

You can estimate the power you’ll need with a calculator such as the Solar Reviews Calculator.  

What about credits and incentives?

The government offers homeowners significant incentives for installing solar panels. The Residential federal tax credit allows taxpayers to claim 26% of installation costs for systems placed in service by Dec. 31, 2022. The credit drops to 22% in 2023 and expires in 2024, barring renewal from Congress. This is a “nonrefundable” credit that reduces your tax bill. Any unused credit can be carried forward to future years.   

 

Additional credits vary by location. California offers three incentives called the California solar incentives, which mostly benefit lower income taxpayers and those purchasing batteries. 

How much will it lower my electric bills? 

For going solar to be a good financial decision, it must lower your electric bills by enough to justify the up-front cost.  In California, electricity costs about 22 cents per kilowatt, one of the highest rates in the nation. In San Diego, the maximum rate is a whopping 31 cents per kilowatt, however, most homeowners use a time-of-use plan which charges lower rates during non-peak hours. 

San Diego homeowners spend an average of about $130 per month on electricity, which may not be enough to justify the cost of a solar system. However, if you have a pool, an electric car, or you run your air conditioner a lot, your bill could be three or four times that much. 

By installing solar panels, you become an energy producer. If your panels receive enough sunlight, they can generate enough power to bring your electric bill down to zero. And, if they produce more electricity than you use, you can even sell the excess back to the electrical grid. In California and other states that have net metering, you can receive bill credits for the excess electricity your solar panels produce. 

To save on your electric bills, you’ll need a lot of sun on your solar panels. How much sun your area receives, your home’s orientation toward the sun, the amount of shade it gets, and its roof type all affect a solar system’s output. There’s also the timing of producing and using power during peak and non-peak times. 

Of course, the panels won’t produce any power at all when the sun goes down, so you’ll still need to pay for regular electricity at night. You can solve that issue by adding batteries to your system, but that will add another $8,000 to $15,000 to the cost. 

Measuring the payback period

A common measure for whether going solar makes financial sense is the payback period. This is simply the time it takes for the total savings to add up to the total cost.  The national average payback period for a residential solar electric system is eight to ten years, depending on the cost of the system and the utility bill savings. 

The savings may be more if you are using a lot of electricity. However, it may also mean you need a bigger system. As an example, let’s say you have a pool, an electric car, and you run the air conditioning a lot during peak hours. Your electric bill averages $420 a month, and you need a 10-kilowatt system that costs $40,000. The 26% tax credit saves you $10,000, for a net cost of $30,000. 

The payback period isn’t the whole story, however. Those solar panels should keep saving you money on electricity long after the payback has been achieved. If you work with a reputable installation company and you choose good equipment with a strong warranty, your solar installation should provide many years of money-saving electricity.

On the other hand, inferior equipment, poor installation, and a weak warranty can leave you with expensive repairs that eat up the savings. Your warranty should last at least 30 years and should cover not only the panels themselves but all the components, as well as the labor cost of addressing any issues that come up.

An additional factor is the potential increase in home value that your solar system can add. According to recent solar research done by Zillow, having a solar system may increase its re-sale value by up to 4%. A strong warranty that can be transferred with the home will add the most to resale value.

Weighing the decision

As you can see, there are a lot of factors to consider in deciding whether solar makes financial sense. Add to those factors the future uncertainty of electricity costs, further technological advances, and government incentives.

Here are six things to consider when deciding if solar makes financial sense for you: 

  1. Do you have (or will you be adding) a pool, an electric car and/or air conditioning?  Solar makes the most sense when you have these extra electricity users.
  2. How long do you plan on staying in your home?  If you don’t plan on staying there long term, it may not be worth it.
  3. What is your sun exposure?  Is the area where the solar energy system is to be installed shaded by trees or your neighbor’s home?
  4. How old is your roof?  If the roof is older, it may be better to wait until you need to replace your roof and then add the solar energy system.
  5. Can you afford the upfront cost? If you have to finance the cost or lease the solar panels, the cost will likely be too high.
  6. How much is the electric portion of your energy bill?  Look at the past year to see how much you spent on electricity.

About Jon Beyrer

Jon Beyrer, EA, CFP® is a partner of Blankinship & Foster LLC and is the firm’s Chief Compliance Officer. As a lead advisor, he focuses on helping families achieve their goals with sound wealth planning. In the community, Jon serves on several boards and is co-founder of the Professional Alliance for Children, a legal/financial charity for families of ill children. He has been quoted in The Wall Street Journal, The New York Times, and the Journal of Financial Planning. Jon lives in San Diego with his family.

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