Basic Solar Electric Economics

Solar electricity is the big thing right now and many people are entering the field. There are a few things you need to know about it to make an intelligent decision.
First; efficiency of the panels. The efficiency of solar panels is getting better. The average used to be 12 to 18% of the sun’s energy falling on the panel ended up as electrical energy.  Some of the newer panels are at around 24% and the newest multi spectrum panels can convert more.  The University of Delaware has a panel under development that can reach 42% efficiency and there are theories which speculate 85 to 90% is possible. Of course these are a long ways off and we need to  realize that more efficient panels cost more money, so there is a cost benefit ratio to consider. Included  in that calculation should be the natural deterioration of the panels’ ability to produce energy. Some estimates are that a panel will have about 90% efficiency at 12 years and 80% at 25 years.

The next thing you need to think about is system life and where they go. Solar panels are usually roof  mounted and they don’t move around easily. The life of a system is assumed to be 20 to 25 years. Will  the roof last that long? If not the panels have to come off when the roof is replaced and then the system  re-installed. This could be a big expense. Generally, you should only put solar panels on a new roof.

Ground mounted panels are less of a problem but are still susceptible to theft.
How about the cost of electricity? Solar electricity cost obviously will vary based upon system cost, system size and efficiency and the cost of the power it replaces. There are also government and utility incentives to using solar.

These are moving targets so we will not try to calculate the numbers that apply to you, but we should look at the variables so you can be aware of what to look for:
System cost and system lifetime production – It is a good place to start. Many systems actually do not send the power to your home. They sell it back to the electric company instead, so you buy electricity at one rate and sell it at another. Here is some math: If a system costs $45,000 and produces 119,246 KWH over its 20 year life then the cost of electricity is $0.38 per KWH. But you may find that your local utility company will buy back all of the power you generate, so you can sell it back to them at, let’s say $0.28 per KWH. Let’s also assume that your, “on the bill cost” for electricity is an average of $0.25 per KWH.

For our example of how this works we will say that you use 550 KWH in a month and then we can do some basic calculations:
You will have a cost of $ 137.50 (at $.25 / KWH) from the utility for the 550 KWH you used in a month. If your solar system generated 496 KWH during the same time period you would get a rebate of $138.88 (at $.28 / KWH), making your net cost, without the cost of the system being figured in, $-1.38.
That leaves you $138.88 saved dollars to pay for the system. What does the system power cost? Our example costs $.38 / KWH so the actual cost of the solar electricity you generated, counting the system cost, was $188.48 on which you got back $138.88 for a total real cost of $49.60 for the month. That’s not bad! Our electric bill has gone, (in our make believe example) from $137.50 down to $49.60 but we had to pay $45,000 in advance by buying a solar system in order to get it.

So what can go wrong? A few things. The rate you sell the electricity you generate is often artificially high as mandated by government regulation. It doesn’t make sense that your utility will be able to indefinitely buy electricity for more than they sell it, so how long is the “buy back” price good for? And if it changes what is it likely to change to? On the other hand few people think the cost of residential electricity will go down so it is very likely that your monthly usage bill will go up over the years changing the calculations. How much? It’s a guess but at least we can be reasonably sure that higher is the direction of future costs. If our electricity cost went from $.25 / KWH to $.40 / KWH then the 550
KWH we used would cost $220 and our electric bill would still be offset only by our “buy back” price of $.28 / KWH, so instead of a small refund we would have to pay $81.12 for the same usage and generation. Your basic economics don’t change but you still have the added costs of increases. In other words, you cannot “freeze” your electrical costs. If rates go up you pay the difference.

What about “Smart Meters”? Smart meters talk to the utility company so you don’t need a meter reader any longer, but these meters are smarter than you think. They also monitor consumption and are the basic tool for charging you more during peak hours and less during low demand periods, which is coming soon. Will they also make it possible for the utility to pay you less during off peak electrical usage hours? What will smart meters do to your deal with the utility? The rate and consistency of buy back is a key element to system value. Make sure you understand it.

Finally who will maintain the system? Does no moving parts really mean no maintenance? Solar panels get dirty and have to be cleaned. Who climbs up on the roof and does that? How about when things go wrong? What happens if a panel stops working in year 10? My friend has panels on his roof which are mounted about 6 inches off of the roof surface. Pigeons live under them and got into the attic through a corroded eyebrow vent. The panels made it a lot harder to get rid of the pigeons and fix the vent. The
amount of maintenance and who does it is a key element in your costs.

Solar has government support. The Feds and some states will give you tax credits. In California some counties will give you a partial subsidy and some will allow you to borrow against your future property taxes. These are good programs which make solar more attractive financially. Check with your county government and tax preparer to find out what will benefit you and to what extent. There is more to solar than simply money. Its’ best feature is that it is not oil based and does not generate a whole lot of carbon (if you are a carbon believer this could be important) and these can be features that are worth a lot to some people. But regardless of a person’s motivation for installing a solar electrical system it is still important to understand the economics and how to calculate the cost and which variables to consider and then use this information as one of the elements in your decision process.

Smart Green Reports are brought to you by the Peninsula Builders Exchange. We are a non-profit organization dedicated to improving the construction industry. We serve contractors, owners, designers and suppliers and have been doing this since 1945. Visit us on the web at or
give us a call at 650-591-4486. We are here to help.


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