Estimating Solar: ROI, SREC, COI, (LMNOP)

Getting a ballpark idea of what a solar installation is going to cost you, and how fast it will pay you back, is really pretty straighforward.    With the exception of a few critical details.

The fundamentals boil down to, first, your site and your ability to get a good orientation and area.  Simply put, do you have a good roof for it?  That’s pretty easy to figure- a standard steep slope roof facing South is ideal.  The further you go from that, the worse it gets, pretty quickly.  Figuring the size requires a little effort, unless you use this tool: In My Backyard, created by the National Renewable Energy Laboratory.  This tool (shown above) lets you find your house, select the area of the roof you want to measure, and will automatically calculate almost everything you need to know to get a grip on how big the system can be, what a system will cost and how fast it will pay you back.  It’s an awesome tool, (you can use it for wind power too), but there are a few things it leaves out.

On the BP Solar site there’s a handy little tool too.  The BP Solar Clean Power Estimator gives you a really quick ballpark estimate that you can then tailor to what your specifics are.  You can start with the IMBY tool to get the specifics of your roof and your system, then plug those into the BP Solar tool to get some more details on specific tax credits and projections.  For instance, the BP Solar tool shows about $3700 more in tax credits and incentives than the IMBY tool.  The cool part of the BP Solar tool is the buttons showing various models: Net Cost, Cash Flow, like that:

Now…  in the “Figures don’t lie, but liars sure can figure” department, be careful of these default numbers.  If you take a look at the BP Solar tool you’ll see that they default to a whopping 5% annual increase in electric rates.  To the embattled homeowner that may seem like a reasonable number.  According to the The Annual Energy Review (AER) from the U.S. Energy Information Administration, (their “primary report of historical annual energy statistics”), it’s a little, well, off, by historical measure.  Here’s a graph of the historical rates, since 1960.  Ups and downs notwithstanding, it’s hard to guarantee any set increase, especially over any long-term time frame.  The very least you can say is that, between 1960 and now, it’s averaged out to pretty much the same rate.  When you zero out that number, your ROI get’s a whole lot less appealing.

This is all still pretty useful, and the one thing you can take away from it is the fact that there are no guarantees in figuring your savings, except for one.  The cost of your electricity for the next 20 years or so, (the estimated life of the system) will remain the same.  That is, it will amount to the cost of the system amortized over the 20 year life.

There’s one more variable you need to know about, and that’s the SREC factor.  SREC refers to “Solar Renewable Energy Credit”, and probably the best discussion of the details of the program is here, on the Renewable Energy World site.  The SREC program is a way for solar system owners to make additional revenue from selling power back to the local utility, and it’s based on building up SRECs much like CDs or bonds.  They can be sold in a number of ways, and the prices are protected by some guarantees.  For the moment.  Probably best described here, on the SRECTrade site, but the simple picture is this:

“In SREC states, the Renewable Portfolio Standard (RPS) requires electricity suppliers to secure a portion of their electricity from solar generators. The SREC program provides a means for Solar Renewable Energy Certificates (SRECs) to be created for every megawatt-hour of solar electricity created.

1 SREC = 1,000 kWh of solar electricity = 1 MWh of solar electricity”

…of course, nothing is simple when you’re talking government incentives.  You build up quantities of SRECs based on the amount of electricity you sell back to the grid, you then sell them.  The SRECTrade site has a slick little estimator tool here, to figure out how many SRECs you might expect to earn annually.  Obviously, you can’t take this as gospel, it depends on your generation, your use, and it doesn’t translate to a set dollar value, just a guaranteed minimum price.

Now.  Let’s say you’re going to guess at an SREC sale price of between the base price of $300 and the recent maximum of $600, and go with $400.  That is $400 for 1000 kWh of electricity, or $.40/kWh…  not bad.

(And please note, the SRECTrade site is a trading service, for fee.  It is not required for trading SRECs and I list it here simply because of the wealth of information on the site.)

So, dive in, and mess with the numbers. After you do a little, you’ll see some patterns starting to show themselves.  First is, you really need to have a grip on your monthly electricity use, to get a good number for your payback.  This is pretty obvious.  The next thing you’ll notice is that, in spite of the idea that you may have that you’re going to pay off this awesome system with incentives and selling power back to the grid, if you don’t include the SREC factor the numbers don’t really prove that out.  The best payback is to match the system to your electricity use, simply because the payback from your local utility is at a significantly reduced rate than what you buy power for.  For example, the IMBY site shows a price of $.14/kWh to buy power, and a $.06/kWh to sell it back.  When you ramp up the size of an installation, you get out of the high rates of replacing your usage into the low sellback rate, and the ROI (Return on Investment) time goes astronomical pretty quickly, since it gets increasingly based on that lower sell-back rate.

If you factor in the SREC pricing, all of a sudden things look rosier, at anywhere from $.30 to $.60 being a reasonable current sellback price, but always remember it’s a market price and the projections are that the price is going down over the next few years.  The program has a life, too- right now looking at something like 15-20 years.  It is a significant payout, and the programs (where they’re offered) have made what seems to be every effort in making it a secure and predictable investment…  but forgive me for being skeptical of a government program.

If you want to lock in some major savings and take the best advantage of the solar investment in the safest possible way, it’s pretty simple.  Set up your home to take fullest advantage of electric power- add electric water heating, electric heat, everything you can do to switch your energy consumption over to electric, and then match a solar installation to provide just about the right power amounts for those systems.  You’ve pulled the plug, so to speak, on your fossil fuels, and are substituting your solar for them…  there’s a locked-in price for the next 20 years of energy use, and you’re not at the whim and mercy of government incentive programs and market prices for energy buy-back, although they both will still help you out.

If you’re willing to take some risks on the SREC market, there looks like there’s money to be made, and possibly huge amounts of it…  but like anything that gives a big payoff, it’s not a sure bet.  Now, if anyone finds a ROI calculator that figures in the SREC payoff, please let me know…

Another couple of points to be aware of, if you’re trying to leverage your assets here.  The payback on this stuff takes time.  None of the incentives or credits or SRECs pay back immediately, and may take as much as a year before you see the cash.  If you’re counting on that to pay for the system up front, you’re making a big mistake.  There are some financing options too- you can set this up through any standard Home Equity loan, but there are also some companies who specialize in financing solar systems.  The Home Equity route has no strings attached, but the solar specialty guys will attach the SRECs to their loan.  That is, they technically own the system, so they get the SRECs from it…  until you pay the system off.  This doesn’t seem like a major deal, honestly, since you may be looking at an average SREC profit of between $1500 and $3000 depending on your system and use, but you need to be aware of it.  If you can go the Home Equity route you’re going to pocket that money.

If you’re interested in the solar financing, look at SunRun, here.  Again, use their resources, and see what they offer, but this is in no way an endorsement of their product.  With statements on the site like: “However, with SunRun, your home solar system can be up and running for as little as $0 cost, and you simply pay a low and fixed monthly rate for your power.”,  it’s pretty clear that they’re making a pretty hardball sales pitch.

Feel kind of like the Wild West?  Honestly, when you start looking at the angles and pitches, yes…  it does.  As with any “home improvement” package, take a good look at all the details, because that’s what’s going to bite you, and as with anything, if it seems too good to be true, well, you know how that goes.

OK.  Back to motorcycles…



One response to “Estimating Solar: ROI, SREC, COI, (LMNOP)

  1. Thanks for the sagacious view. Me & my neighbour were preparing to do some analysis about that. We got a great book on that matter from our local library and many books are not as influensive as your blog. I am exited to see such information which I have been searching for a long time. 🙂


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