By putting solar panels on your property, you are in effect installing a power plant that generates free energy; doesn’t require fuel; is silent and pollution free; has little or no maintenance and lasts for 25 years or more.
In return, you receive free electricity to reduce or eliminate your electric bill; you increase the value of your home; you get a subsidy from the government; and you help combat climate change.
Is my home suitable for solar panels?
All you need for solar panels is a large enough area on your property that is unobstructed and mostly unshaded. Typically, this would be an area on your roof; but solar panels could also be installed on an outbuilding (garage, barn, gazebo), or on the ground. It’s ideal if your roof faces south, but east or west can also work. It’s ideal if your roof has a moderate slant to it but a steep roof and a flat roof would also work. Almost any type of roofing material (asphalt, metal, tile) will do, but if your roof is old, you should replace it first.
If you do not have a large unshaded area, and you do not want to build something like a car port or cut down some trees, there are other options becoming available. Community or neighborhood solar projects are becoming more frequent that allow you to buy or lease a portion of a large solar system. You may have seen solar systems built on top of local schools or on top of closed landfills that generate energy for the town to reduce everyone’s property taxes.
How expensive are solar panels?
The cost of a solar system can be expensive. Think of the cost like the cost of a new car. It is not cheap, but unlike a new car, it has no ongoing maintenance costs, and it pays you to run it. If you have the money to pay for it outright, that is the most cost-effective option. The second-best way is to borrow at a low rate on the value of your home (a home equity loan or line of credit). You may also be able to get a ‘green loan’ at a higher rate, but lower than a personal loan. A ‘green loan’ does not require you to use your home as collateral. This may be a good option if you have no equity in your home (your home is worth not much more than your mortgage). Depending on your situation, your monthly loan payment may be offset partially or completely by the reduction in your electric bill.
What are the solar tax credits?
The federal government wants to reduce carbon pollution, address climate change, and encourage renewable energy jobs, so they offer a tax credit of 26% of the cost of your solar system. That means that if your system cost $24,000 that you would get a $6,240 tax credit.
If you have very low income and don’t pay taxes, then the credit would not apply (it is not refundable). However, you may be able to take advantage of the credit by taking distributions from a tax-deferred retirement account such as an IRA and use the credit to offset the taxes on the distribution. Or if you don’t need the distribution for living expenses, you could convert some of your IRA account to a tax-free Roth account and use the credit to pay the taxes on that transaction.
The tax credit is 26% for solar systems installed in 2021 or 2022. The credit is reduced to 22% for 2023, then the credit is gone at the end of 2023.
How do I make money lying in my hammock?
The most obvious money maker is the savings on your electric bill over the next 20-30 years. The energy produced by the solar panels is reduced slightly as they age (warrantied for at least 80% after 25 years). But on the other hand, the electricity they produce has historically become more valuable as electricity rates increase. And the power plant produces electricity with no effort on your part.
What does a solar system do to the value of my home?
The other major financial benefit of a solar system is the increase in the value of your home. There is no question that a home with solar panels sells for more than a similar home without any panels. There are many variables that determine the amount of increase in value, such as what state you live in, how much energy the panels produce, and the cost of electricity. Zillow did an informal study that determined an average increase was 4% of the value of your home. A more rigorous analysis published in the Appraisal Journal for professional real estate appraisers determined that “the average premium equates to $3.78/W for the average-sized system”. The cost of installation has come down dramatically in recent years, and is now typically under $3/W. So, you can generally count on the value of your home increasing by the cost of the system (after the tax credit).
Note that this increase in value (and this entire article) is dependent on you owning the solar system rather than leasing it. Leasing solar panels provides fewer benefits and adds complications. For example, you would typically have to pay off the lease contract or get the new owner to agree to take it over if you want to sell your home. Also, banks can only include the value of panels in the appraisal to qualify as an FHA or Fannie Mae mortgage if the system is owned (not leased).
Note that in California, solar is almost expected since all new homes are required to install solar panels.
Are there other financial benefits to solar?
Depending on where you live, there may be other financial incentives, such as state or utility rebates. NC State University keeps track of all the local incentives.
In some states you can sell your carbon credits generated by your system. If the local utilities are required to use a certain percentage of green energy, they may be required to buy credits on the open market to meet those requirements. For example, in New Hampshire, the price of a carbon credit (called a REC) was most recently $40. Since a typical solar system generates 10 RECs per year, that would be an additional $400/year - on top of your reduced electric bill.
What is ‘net metering’?
When it is cloudy, or at night when your solar system is not producing any electricity, most systems pull electricity from the traditional utility grid. In a similar fashion, on a cool sunny day while you are at work, and your solar system is producing more electricity than you are using, the system pushes the excess electricity onto the grid. This all happens automatically with no effort on your part.
Net metering refers to the utility giving you credit for the electricity you are sending to the grid, offsetting the electricity you are pulling from the grid. In some cases, the utility simply ‘nets’ the two numbers - if you pull 2000 kWh of electricity and you push 1500 kWh, then the utility only charges you for the net (500 kWh), as if your electric meter was able to run backwards. In other cases, the price you buy electricity for is higher than what you sell it for.
Can I use solar energy in a power outage?
Unfortunately, not in most cases. If there is a power outage the solar system doesn’t do you any good. You would need a battery to store energy to use during those times. Almost all systems use the grid as their ‘battery’ for use at night or cloudy weather. A battery also provides steady electricity so that your computer doesn’t die when a cloud blocks the sun. Most systems do not have batteries because installing batteries can double the cost of the system, make it more complicated, and only gives you power for a day or two.
If you are worried about blackouts from increasing storms or wildfires, or even ransomware taking down your local grid, you can consider adding batteries to your solar system. Those also qualify for the tax credit even if you add them later to an existing solar system. Luckily the cost of batteries will be coming down in future years. In the meantime, maybe you can use your new Ford F-150 Lightning as a backup generator. It is said to be able to supply your home with electricity for up to three days.
What is the payback on a solar system?
There are two flavors of this question - when will I recover my costs (return OF my investment) and how much will I make on my power plant (return ON my investment).
Immediate payback - If you consider that your home value has now increased by the cost of the system, your payback is immediate, even ignoring your free electricity.
Cash flow payback - Ignoring the increase in home value, your savings on electricity will typically cover the cost of the system in 6 to 12 years (out of a 20-30 year lifespan). This, of course, depends on many factors. The main factors are the amount of sunlight, cost of electricity, and local temperature (cooler is better for electronics). So, for example, solar in New Hampshire (high electric cost, cooler weather) is actually more cost effective than Arizona (more sunlight).
Investment payback - If you invested $20,000 in the stock market for 25 years, you would expect a decent return on your investment, but it could be a rocky ride - ups and downs. If you invested in a solar system with favorable factors (good site, net metering option, etc) you should expect to get the same type of return but without the ups and downs - a steady ride.
Are there non-financial benefits to solar?
Solar helps optimize the grid by reducing the ‘peak load’. For example, on a hot summer day when everyone is running air conditioners, solar is covering some of that load. Solar makes the grid more resilient, particularly as we move to micro-grids to isolate communities from larger grid-wide problems. It also helps the local economy by creating good-paying solar jobs and avoiding buying out of state energy.
And of course, it is one part of addressing climate change and leaving a healthier planet for our children.
How do I get started with solar?
If you are interested, google local solar installers, and check them out as you would any contractor. Ask two or three of them for a proposal. Typically, they will provide free analysis of your site, and a free quote. For questions about whether solar makes sense for your financial situation, please reach out to our financial planning team.
Jean Fullerton, CFP® is an advisor at Milestone Financial Planning, LLC, a fee-only financial planning firm in Bedford NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our clients’ interests first. If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisors.