How to calculate ROI on your solar panel system
Usually, you only hear the term ROI—or return on investment—in business terms. It’s a pretty typical measurement that measures whether or not a particular investment is worth its cost. In other words, ROI measures if something is profitable.
You can easily calculate the ROI of your solar panel system. Here’s the formula we use when we do a solar analysis:
Average Monthly Solar Savings / Net Investment (cost after tax credits, grants and SRECs)
In other words, we figure out how much you save on your electricity bill each year, and compare that to what you actually have to spend to install a system. Compare that with any other investment you might make. When the stock market is good, we’re usually happy to be earning more than 10 or 20 percent return. When the stock market is bad, we hope we’re not losing money, and that we can get a modest 3 – 5 percent return.
An average solar panel system, though, provides an average return of twenty-eight percent! And that’s only after 3 – 5 years!
Here is a great return on investment comparison from SunPower:
* Solar ROI based on 3kW system in San Jose, CA with a $265 monthly electricity bill
** Traditional investment returns based on average nominal returns between November 1983 and November 2008
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Under the Hood: The Solar Inverter
We receive a lot of technical questions about solar panel systems from our customers. So we thought it might be a good idea to explore some of the technical parts of a typical system. Welcome to our latest feature: Under the Hood!
A solar inverter, also sometimes called a PV inverter, converts the direct current (DC) electricity from a photovoltaic array into alternating current (AC), which is what your home uses.
There are three types of converters:
- Stand-alone inverters, used in isolated systems where the inverter draws its DC energy from batteries charged by photovoltaic arrays and/or other sources, such as wind turbines, hydro turbines, or engine generators. Many stand-alone inverters also incorporate integral battery chargers to replenish the battery from an AC source, when available. Normally these do not interface in any way with the utility grid, and as such, are not required to have anti-islanding protection.
- Grid tie inverters, which match phase with a utility-supplied sine wave. Grid-tie inverters are designed to shut down automatically upon loss of utility supply, for safety reasons. They do not provide backup power during utility outages.
- Battery backup inverters. These are special inverters which are designed to draw energy from a battery, manage the battery charge via an onboard charger, and export excess energy to the utility grid. These inverters are capable of supplying AC energy to selected loads during a utility outage, and are required to have anti-islanding protection
(source: Wikipedia: http://en.wikipedia.org/wiki/Solar_inverter)
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How to Choose a System that Fits Your Home
As we’ve discussed before, there are many factors that can affect your decision to go solar, including which type of system is right for you—solar electric or solar hot water.
Perhaps the most important question you need to ask yourself is how much you want to save on your electricity bills. This might seem like a rhetorical question. Everyone wants to save as much as they can, but the next question to ask is what kind of system will get you there.
A solar electric system is capable of generating enough energy for your entire home, enough to create a scenario where you sell electricity back to the utility company (this is called net metering). To achieve this, however, your home must have a southward facing roof and very little shade from trees in order to ensure that your system generates as much power as possible. Additionally, you need to have a roof large enough to accommodate enough solar panels to generate as much electricity as you use on a monthly basis.
Because your home may not meet these requirements, a solar hot water system (also called solar thermal) may be a better fit. Solar hot water systems use the sun’s energy to heat the water in your house, which is generally one of the largest consumption appliances in your home. By using a solar hot water system, you could potentially reduce your electricity bill by as much as 80 percent. Plus, solar hot water systems don’t require direct sunlight to work, making them ideal for homes that don’t get a lot of direct sunlight.
Whether you go solar electric or solar hot water, there’s a system out there that will fit your home. A solar analysis will help you decide which one is the best fit, saving you money in the long-run, without costing you a fortune right now.
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Why Solar Can (and Should) Be for Everyone
It used to be that only the wealthiest of the wealthy were able to install solar panels. Systems were expensive, the technology was not as mature, and there were fewer financial incentives to defray the cost.
Not so today. According to a Science Daily article from March of last year, the price of solar panel systems steadily declined from 1998 to 2007. Three important pieces of federal legislation have provided for continued financial incentives, opening the doors for more home owners to install solar power.
Moreover, solar technology has vastly improved over the decades. Like computers, the cost of solar panels has dropped in relation to their increased efficiency. As a result of improved technology and more tax credits and other financial incentives from federal, state and local governments, the overall cost of solar panels has become more affordable than ever.
Unfortunately, most home owners don’t realize this. It’s a common misperception that solar panel systems are expensive, and not worth the cost. That’s understandable, considering how expensive they have been in the past. But that’s the past. It’s time to live in the present. It’s time to find out how affordable solar power really is.
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Five Myths of Solar Power
With so much information available to consumers, it’s no wonder that some people have many misconceptions about the benefits of solar power. We’re here to bust those myths! Here are five common misconceptions about solar power:
MYTH #1: Solar devices require more energy to manufacture than they produce in their lifetime.
FACT:
In a study by the National Renewable Energy Laboratory (NREL) conclusively demonstrates that energy payback for photovoltaic (PV) power is, in the worst case, less than 4 years. Given that PV module lifetimes are generally in excess of 30 years, a PV system will produce far more energy than it consumes over its lifetime.
Energy output and input ratios for concentrating solar power (CSP) and solar thermal devices are even more favorable, given their simple manufacture. This myth has its origins in the early history of PV power, when devices were essentially custom-fabricated for military, space and research markets.
MYTH #2: Solar won’t work where I live.
FACT:
Solar thermal is dependent on heat and PV Solar devices are dependent on light – and this light does not need to be direct.
More important than place-to-place variations in solar intensity is the price of daytime electricity where you live and the existence of state incentives for clean energy.
MYTH #3: Photovoltaics cannot significantly offset environmental emissions.
FACT:
PV systems produce no atmospheric emissions or greenhouse gases. Compared to fossil-generated electricity, each kilowatt of PV electricity annually offsets up to:
- 16 kilograms of nitrogen oxides
- 9 kilograms of sulfur oxides
- 2,300 kilograms of carbon dioxide (CO2)
If the industry grows by the 25% per year as predicted PV in the United States will offset 10 million metric tons of CO2 per year by 2027 — equivalent to the annual increase emitted by U.S. fossil fuel electricity generation. This means that the emission rate will become negative thereafter as the PV contribution grows!
MYTH #4: Photovoltaic systems are too expensive and will never compete with “the big boys” of power generation. Besides, you can never get the energy out that it takes to produce the system.
FACT:
The energy payback period is dropping rapidly. For example, it takes today’s typical crystalline silicon module about 4 years to generate more energy than went into making the module in the first place. The next generation of silicon modules, which will employ a different grade of silicon and use thinner layers of semiconductor material, will have an energy payback of about 2 years. This means that these modules will produce “free” and clean energy for the remaining 28 years of their expected life.
MYTH #5: Solar power systems are too expensive for widespread usage.
FACT:
Solar PV technologies have declined in price every year since they were introduced onto the market, driven by improved research and development, and most of all by steady increases in sales volume. (In 1954, approximately one watt of PV generating devices was manufactured. In 2004, approximately one billion watts will be manufactured worldwide.)
Every solar panel purchased makes the next one cheaper, in stark contrast to nonrenewable sources, which become scarcer and more expensive with every ton that is burned.
PV has recently exploded into a number of industrial markets, where it is quite simply the lowest -cost source of power available. These include highway warning signs, rural irrigation applications and remote electrical and communications devices. Similarly, for any application more than about half a mile away from the electrical grid, a solar system will likely prove less expensive than will power line construction.
The most rapidly-growing segment of the solar industry is for “grid connected” systems – rooftop solar panels on homes or businesses that remain connected to the conventional electrical grid. In some cases, as where electricity is more expensive during the middle of the day, or when solar is used to support power-critical applications (e.g. banking, microchip manufacturing), the economics are very compelling without further incentives. In other places, comparatively modest state or federal incentives can make solar a great investment for home or business owners that better with every year.
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Solar Photovoltaic vs. Solar Thermal
One of the most asked questions we get is whether a person should get solar photovoltaic panels or solar thermal panels. While the answer to that question lies in how much direct sunlight a roof gets, how big a roof is, and other factors, we thought it’d be helpful to first understand the differences between the two types of solar panel systems.
Solar Photovoltaic
Also called solar electric, photovoltaics are primarily used to provide energy to your home. They consist of an array of photovoltaic cells, made of silicon, that capture sunlight and convert it into energy. These systems integrate with your electric company’s power grid, off-setting the amount of energy you receive from the power company. Solar electric systems allow you to receive the financial benefits of both SRECs and Net Metering.
Solar Thermal
Solar Thermal systems, also called solar water heating systems, collect the sun’s energy and use it to heat the water in your house. The panels contain tubes filled with glycol, a non-toxic liquid similar to anti-freeze. Solar thermal panels trap the sun’s heat, which heats the glycol. Then, the glycol is moved through the tubes to a heat transfer system that heats your water. Depending on the size of the system, you can heat the water you use for bathing and washing. Or, if your home is heated with water radiant heat and can support a larger system, you could heat your entire house! Either way, you’ll save a lot of money on your electricity bill.
How to choose the right system
There are many factors that go into choosing which type of solar panel system to install. Here are a few questions that we typically ask when we do a solar analysis:
- Do you want to reduce or eliminate your electric bill?
- Are you concerned about future energy costs?
- Do you want to have a positive impact on the environment?
- Are you concerned about the appearance of a solar panel system?
- How much space do you have?
- Do you want to improve the resale value of your home?
- How much are you currently paying for electricity?
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Back to Basics: Solar Renewable Energy Credits (SREC)
There are many factors that have made solar panels for your home more affordable in recent years, but Solar Renewable Energy Credits, or SRECs, are possibly one of the most important.
So what are they? Think of them like a stock. One SREC represents the monetary value of 1,000 kilowatt-hours (kWh) produced. That value changes every day based on how much energy is produced across the state, how much energy is being used, and what portion of that energy comes from renewable resources (which includes wind power generation, geothermal, biomass, etc.).
In an effort to combat the effects of climate change and dependency on foreign oil, federal, state and local governments require utilities to have a certain percentage of their energy produced from renewable resources. In Maryland, utilities are required to have 15% of all electricity generated to come from renewable energy sources by 2022, of which 2% must come from solar power. Those percentages are phased in over time, which means that each year utilities must either produce that energy themselves or purchase energy credits.
And that’s where the value of SRECs is determined. It is easier and less expensive for utilities to purchase credits than to build new energy production facilities. The less energy they produce from solar and other renewable, the greater the value of the SRECs. And as energy demand continues to grow, the value of those SRECs will also continue to grow. That means that the longer you keep your SRECs, the more valuable they will be.
How many SRECs your system earns each year will entirely be based on the size of the system. When we do a solar analysis, we help you calculate what the cost/benefit is, taking into account the SRECs your solar panel system will earn.
Take note: a solar thermal system (also known as solar hot water) does not earn SRECs! They can, however, help you dramatically lower your utility bills.
Also note: SRECs are not the same as net metering, which requires utility companies to give solar electricity owners a credit if their system generates more electricity than is supplied by the grid.
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Back to Basics: How Many Solar Panels Do You Need?
This is one of the first questions people looking to install a solar panel system tend to ask. As we mentioned in our last Back to Basics post, one factor that determines how many panels you need is how much energy your home uses. Of course, this depends on how big your house is, how many electrical appliances you use and if those appliances have good Energy Star ratings.
According to the U.S. Energy Information Administration, the average household consumed 11,040 kWh (kilowatt hours) per year, or 920 kWh per month. Maryland, is slightly above that, with household consuming more than 1,000 kWh per month (see this spreadsheet for energy consumption information for each state).
Now, consider that a high-efficiency panel that’s 32 x 60 inches will generate 185 watts per year. That means that you would need approximately 60 panels if you wanted to cover your entire annual electricity usage (provided you consume the national average). And that would be 160 x 300 square foot roof!
Since very few of us have that size roof, we therefore need to make realistic expectations about the size of system we that we can really afford. To do that, we need to look specifically at your energy usage, the size of your roof and the amount of sunlight it receives. We then put all those numbers into a cost/benefit analysis to show you exactly how much you can save based on a realistic estimate of the size of the system your home can handle.
Sidenote: There’s far less financial benefit to purchasing lower-efficiency panels. Ultimately, they produce less energy, meaning that you need more panels to create the same amount of energy.
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Back to Basics: Is Your House Is Solar Ready?
While it’d be great if everyone was able to install solar panels, not every home is ideal. Several factors go into whether or not your home is ready for a solar panel system.
When we come to your house for a free solar analysis, we consider three things:
- What you want to get out of a solar panel system (reduce your utility bills, reducing future costs of energy, improving the value of your home, etc.)
- What direction is your roof facing
- What your current annual energy usage is
The biggest factors that determine whether a solar panel system is right for you include the amount of energy you need, how much sunlight your system receives (remember, you roof should be southerly facing for maximum system efficiency), the size of the system your roof can accommodate and the amount of energy that system can produce.
Once we take into account all of these factors, we can determine if your house is solar ready. Plus, we’ll give you a solar cost/benefit analysis that will show you how much you’ll be saving by installing solar panels.
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Back to Basics: Solar Tax Rebates and Grants
One of the factors that make solar energy panels affordable today are the widespread availability of solar tax rebates and grants. These financial incentives provide a significant amount of money to people who install solar panels, and can be used to cover a large portion of the costs.
There are basically three sources of solar tax rebates: federal, state and local. The federal government offers a variety of tax credits that you may qualify for when you install solar panels. Programs such as the Residential Renewable Energy Tax Credit can provide a tax credit of up to 30 percent for systems placed into service before December 31, 2016.
Here in Maryland, there are two different types of grants that you can receive based on the type of system you install. If you install a solar thermal system (also known as solar hot water), you can receive a grant for up to 30 percent of the cost up to a maximum of $2,000. If you install a solar photovoltaic system, the size of the grant you can receive is based on the size of the system you install. According to the Maryland Energy Administration, there are three different grant levels:
- $1.25/ watt for the first 2,000 watts of capacity
- $0.75/ watt for watts 2,001 – 8,000
- $0.25/ watt for watts 8,001 – 20,000
Your system must be under 20kW to be eligible; maximum grant amount is $10,000.
(Please note, as of August 23, 2010 the Maryland Grant Program has changed – the grant shown above are the old grant levels. To learn more about the updated grant visit our Incentives & Rebates page)
Locally, tax credits vary widely from county to county. Here in Maryland, only residents of Anne Arundel County, Harford County, Howard County, Montgomery County and Prince Georges County can receive some form of tax credit for installing solar panels. Check out this page on the Maryland Energy Administration’s website for a quick summary of each county’s program as well as links to more specific information.
When you add up all these tax credits and grants, you could install a solar panel system for about half of the initial cost. And that doesn’t even include the money you receive from Solar Renewable Energy Credits (more on those in a later post).
Want to estimate how much you’ll save by installing solar power? Check out our Solar Savings Calculator!
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