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Quick economics of residential solar panels

January 19, 2010
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The variables impacting the  efficacy of solar panels in a particular application are numerous and include:

  • Distance from the equator (closer to the equator = more hours of sunlight and stronger sunlight or better angle)
  • Trees, buildings and other obstacles
  • The slant of your roof (the more direct the better)
  • The direction of your roof (must face the sun most of the day)
  • The weather

These are just a few – this is a quick entry.

So according to a recent article in The Wall Street Journal, wholesale solar panels cost less than $.60 to generate one watt of electricity.  Why then, was a recent quotation for a solar system on my home, setting the price at $7.04 before any federal rebates?  That’s right — between the manufacturer of a solar panel and my house, the markup was more than 10x.  Now in fairness, the U.S. government would be willing to give me 30% of that $7.04 to provide me with incentive to install solar, bringing the price down to $4.75, but that is still a tremendous markup.  And even after tax rebates, $4.75/watt is more than double the solar panel industry’s target cost of $2/watt to consumers and businesses.

So what’s the return on that investment?  Does it make sense.?  Well, let’s use some real numbers on from my home (remember, your estimates will vary widely based on the factors listed above):

For a 6750 kwhour system that would cover a mere 26% of my home’s electricity needs, I was quoted a price of $47,550.  After the 30% tax rebate, the net cost to me would be $27,000.

Gross Cost:  $47,550

After tax rebates:  $27,000

Energy saved:  26%

Value of energy saved at today’s prices:  $1263/year

Payback on after tax rebate cost:  21 years

But what if I estimated that electricity prices will rise, let’s say at 11% per year, like the contractor that submitted this quotation?

Payback assuming 11% annual rate increases:  12 years

That’s the deal today.  Virtually every contractor in my area came up with similar estimates.  If the industry meets its goals of reducing cost to consumers to $2/watt, the total cost on my system would be under $20K after tax incentives, and my payback period would be cut to a very compelling 6-10 years (depending upon your inflation assumptions).

More to come on how solar works, the different types (panels vs tiles and shingles), in a later post; as well as how it is installed (hint:  it’s not as hard as geothermal).

So if the installation is easier, and we could effectively be purchasing a commodity item (like buying a battery), why is it so expensive?

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