The Pros, Cons of Owning Your Photovoltaic System
The mantra, “no money down,” has flooded television airways in recent weeks. It’s a reference to solar contractors promoting the Power Purchase Agreement (PPA) method of obtaining a photovoltaic (PV) electrical system.
First, there are a few basic assumptions: monthly utility bills are $220, monthly power consumption is 618 kWh and the minimum monthly connection charge to utility is $16.
The premise behind this method of solar marketing is deceptively simple:The customer enters a “leasing” arrangement, which substitutes the solar company in place of the electric power company. The customer commits to a 20-year contract to buy his or her power from the solar company at a reduced rate (e.g. 25 cents per kWh) that is lower than current utility charges, while the solar company installs and services the PV system. This is expensive for consumers, as they forfeit the renewable-energy tax credits available to those who choose to “buy” their systems.
For those who choose to “lease,” there is a minimum FICO credit score of 700 to qualify for the “no money down” plan. There is also an escalation clause of 3 to 4 percent annually on the cost of the power purchased. To avoid this, the PPA would require money down, and in some cases, a “pre-paid lease” requiring up-front deposits exceeding $20,000. What happens to the “no money down” mantra?
The “substitute” utility payments in the first year would be $154 per month, a savings of $50 from the $204 that would have been remitted to the utility company ($220 minus $16 minimum connection charge). With a 3 percent escalation, these monthly payments would increase to $199 in year 10, and $242 by year 20.This is based on a “simple” rate of increase. A “compounded” rate or higher rate (e.g., 4 percent) would yield even higher PPA payments.
For taxpayers who wisely choose to “buy” and install their PV systems in 2012, income tax returns could recoup up to 65 percent of the gross price through generous renewable energy tax credits allowed by the federal and state taxing authorities. Beyond such largess, our local electric providers’ customers can realize hefty rates of return on their utility savings relative to the net cost of their systems.That will be an even greater bargain in the long run. Not only does this make solar affordable, but from an investment point-of-view, it’s very profitable.
Assume that a typical two-system PV design has a gross price of $30,000. The federal tax credit is 30 percent, or $9,000, and the state credit of 35 percent is $10,000, as there is a $5,000 limit per installed system. The net cost after applying the credits is $11,000 ($30,000 minus $19,000). Let us further assume that the energy output will reduce electrical usage by 618 kWh per month. Multiplied by a rate of 33 cents per kWh, the homeowner realizes savings of $204 per month, or $2,448 annually. This represents a 22.25 percent rate of return and a payback period of four years, six months on the $11,000 net cost of the system. Where can you get that type of return in our current financial markets?
Based on the above assumptions, PPA payments total $9,768 after five years, $20,892 after 10 and $47,340 by the end of the 20-year term.The homeowner still doesn’t own the system. Contrast that with payments to retire a $30,000 home equity loan (HELOC). At an assumed interest rate of 4.5 percent (current initial rates are around 1 percent for the first 12-18 months), applying monthly payments of $204 (the projected utility savings) and the tax credits of the $19,000 reduces the loan period to less than five years, five months and a net outlay of $13,108.The PPA exceeds this total in six years, seven months. It’s a case of “pay me now or pay me later.” $47,340 not owning the system versus $13,108: It’s a no brainer.
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