This is an old story available on CNNMoney's site, but the information seems to confirm what I've seen in the numbers thus far... Plus it's short and well written...
Click here
Tuesday, September 14, 2010
A supporting article
This is an old story available on CNNMoney's site, but the information seems to confirm what I've seen in the numbers thus far... Plus it's short and well written...
Click here
Friday, September 3, 2010
Step Three: Will Financing Work?
As we've said before, and you might already know, solar is expensive at first blush! So expensive in fact, that many people don't give it a second thought once they've experienced the sticker shock. They see something that's expensive and just put it at the back of the 'priorities' line...But unlike so many of the other things you might invest in, solar pays you back. Unlike a car that loses a great deal of it's value when the wheels leave the dealership, your panels begin paying for themselves when the sun first hits them. Big screen TV? Yep, it will be obsolete by Christmas. A Pool? Well, we would love a pool, but that would be adding to our electricity costs. The point is this: It's worth another look if you initially thought it was too expensive. Yes there are other less expensive things you could do to lower your electricity bills, but you might be surprised how affordable solar can actually be if you get creative.
If you go through that creative process, you'll find there are many ways to go about paying for it. The option that seems to fit our situation best, is financing. Interest rates are extremely low right now, and we've already been working on refinancing our home anyway. We're not intimidated by the process, and we've found some people we trust. But before we break financing down, let's consider what paying upfront looks like.
If you can manage it, paying upfront would mean you'll have no monthly cost for the kWh's your generating. The panels begin to gradually pay you back at whatever price you would otherwise pay for that electricity multiplied by the amount energy you produce.
Assuming a 5% increase in energy costs every year, you would end up paying yourself back in less than 25 years, which is less than appealing to those of us who will probably move out in 10 or less. After subtracting the 30% federal tax rebate from the cost, a $25,000 system actually costs $17,500, reducing the payback period to 17 years. Still, few of us will stay in our homes for that long.
What makes it work for those of us who plan to stay for 10 or less years is added, non-taxable home value. For example, if we were to stay 10 years, we would produce about $8,500 worth of electricity using conservative estimates. That would cover just shy of half the cost of a 500 kWh system after the rebate. But a system that size would also result in approximately $90.00 of electricity production each month for a buyer. That justifies a $17,500 bump in the asking price of the home, if you consider what their loan amount would be for a monthly mortgage that's $90 more. The buyer gets a $25,000 system for $17,500 built into their mortgage, and an electricity bill that's $90.00 less than it would be elsewhere. Sounds reasonable. As the seller, we would get $8,500 back as energy produced while living there, plus $17,500 additional revenue when we sell. That's $26,000 in return for a $25,000 system, and that doesn't even include the 30% tax rebate, not bad...
So, it would make sense to buy a system without a loan if we could, but what about with a loan? It's a little bit trickier, because you have to consider the cost of the loan.
There seem to be dozens of home loans variations, and I'm not an expert on any of them. What I can tell you how we made sense of all this, then you can decide if it sounds like a fit for your family.
No matter what type of loan(s) you use, what it really boils down to is how much it is going to cost a month, and how much power it is going to produce. Once you know those things you can calculate an estimated price you would be paying per kWh for the base load generated by the system ( cost / kWh produced ).
If you trudged through the last post, you know we set a goal of 500 kWh's of production per month, at no more than $0.18 per kWh, and the closer we are to that number, the less likely we are to go through with it. 500 kWh's would power our necessities, and more importantly, would be affordable.
Know this: If you think buying a car is hard, this is equally challenging. The sales guys are great, but they have to get lower than normal prices approved just like the guys at a car dealership. Luckily in this case, they come to your home. You'll also hear confusing and often conflicting information from different sales folks. Just be ready and informed. And of course you will have to find a lender you can trust, who is willing to give you a rate that makes the numbers work.
After shopping, we chose SACU. They have a loan officer named Greg Brockhouse, who is actually working to explore how lenders can better serve folks trying to go solar. He's been extremely helpful, and because we are one of the first handful of customers trying to go about solar in this way, he's been willing to work with us on rates.
Greg assured us that we could get a loan equal to the equity we have in our home, and luckily, that amount comfortably covers the size system we're hoping to get. With that soft commitment from the bank, we started shopping. We'll cover how we shopped in later posts, but in the meantime, I'll use round numbers to make this as generic and digestible as possible.
After getting a couple of bids, we knew that getting an installed system would be at or below $5 per kW (you can do better, but it helps to have round numbers). This translated to a price of around $25,000 for a 550 kWh per month system. The typical loans available on the market were at around 6.5% for 20 years... Such a deal would result in $185 monthly payments for 550 kWh's. That would be over $0.30 per kWh! It just wouldn't work. Of course, after factoring in the 30% tax rebate, $7,500 comes off the top and would result in a monthly payment of approximately $130 per month. The price per kWh would come down by 10 cents, but that would still be above our threshold of $0.18 per kWh.
That would be the end of the road for us, but Greg brainstormed with us and we found another option. When we purchased our home, we used an 80/15/5 deal: 80% was on a low interest rate, 30-year loan, 15% was on a higher rate 20-year lien, and we put 5% down. This prevented us from throwing money down a PMI pit. It was cheaper for us at the time, but mortgage rates have been falling. We'd already refinanced our first loan, but at the time it didn't make sense to refi the second. We asked Greg if refinancing our second loan would offset some of the cost of the solar deal. He had an even better idea: He's going to help us combine the second mortgage with the solar deal, giving us a single second loan at more than 2.5% less than what we were paying on the second loan! This would only work with a family that had a relatively high interest rate on a second loan or first loan that needs refinancing, but we'll take luck when we can get it.
We already have a second mortgage, so nothing is going to change there. With a $25,000 system added to it, it will just be $85 more expensive. We'd just gone from over $0.18 per kWh to $0.154.
This is very close to our real target of $0.145 per kWh, so paper signing and arrangement making has begun. We're hoping to see some additional value through positive externalities like: a cooler attic due to the shade the panels will create on the southern facing roof, more power being generated when we are using more power on hot days, etc. We aren't counting on them, but we thought this price per kWh was reasonable and made the decision to move forward easier...
So financing appears to be a viable option for us. What makes it work is a lender who was willing to talk things through with us and an industry leading interest rate to boot.
Next, we'll discuss choosing a solar sales and installation company, and take a look at some of the resources we've found on line...
Step Two: Setting Goals
Every family is different, with varying values, goals and dreams. Today we want to discuss how we lined up our goals as we began to shop solar.
Our first goal may seem familiar to your family: STAY WITHIN YOUR MEANS.
We're committed to remaining as independent and debt free as possible, but unfortunately, solar is expensive. It requires a lot of up front capital, so we have to accept that as an average family, we may not have the liquid cash to buy a system outright. We must either find a loan that makes sense, or accept that we might just be window shopping until we can really afford it. We understand that other families may go solar for environmental reasons, but the average family has to make decisions based on their budget. Put plainly, if the numbers aren't right it's a no go for solar.
So, what do 'right' numbers look like for us? Well, we want to pay less for electricity, but also want to be protected from climbing rates. Right now, we buy our electricity from someone else at about 11 cents per kWh. We want independence from their ability to change prices on us, while also investing in us rather than lining their pockets. Sound good? We think so too, but to make a good decision financially, we have to understand where the market is, and where it's going.
For those of you who might be unfamiliar with electricity rates, a kWh (kilowatt hour) is kind of like a gallon of gas: i.e. gasoline is 2.35 a gallon. The more you use, the more you pay. So, if we use 2,000 kWh's, we end up paying $220 ( 2,000 x $0.11 per kWh), but if we use 3,000 kWh's, we pay $330. Seems simple, but it's amazing how people forget that their amount due is tied to how much they use, how hot or cold it is, how often the door was left open, etc.
It's also important to understand the impact of a small change in the price per kWh. 11 cents per kWh isn't bad, but what if the price goes up to 18 cents? Instead of paying $220 for 2,000 kWh, you would pay $360. Just 7 cents in price difference could mean an extra $140 on your electricity bill, and 18 cents isn't far fetched!
If you don't know how much you pay per kWh, don't worry. The price per kWh calculation is relatively easy. It's basically the price you pay per month divided by the number of kWh's you used for that month ( price per kWh = amount due / kWh's used ). Note that you can also use this calculation to see how much value you're getting from a particular solar setup ( value per kWh = cost per month / kWh's generated ).
The next thing to understand is where prices are going. It's true, electricity prices have gradually declined since the deregulation of the Texas market, but we believe they're bottoming out. Unless we get buried in coal surpluses or suffocated by natural gas storage, we just don't see how energy prices could go much lower. In fact, we're expecting them to climb significantly. How quickly they climb depends on a lot of different factors: inflation, decreased supply, increased demand, weather, regulation, etc. But if you assume a conservative 5% increase each year, prices could be around $0.18 by 2020. Again, not out of the realm of possibility at all.
So, that provides our first benchmark for numbers that 'look right'. Said plainly, the system must produce electricity for us at, or under, $0.18 per kWh. This goal should keep us from making an emotional decision based on irrational fear, uncertainty or doubt. It's not our target for where we want to be, but rather a number that shows us a bad decision. Anything above $0.18 is out of the question.
Another way we will determine if the number is 'right' will be to divide the monthly cost of the system by the number of kWh's it produces. We'll get into that in more detail later here and in other posts.
Secondly, we've committed to UNDERSTANDING THE ECONOMICS BEHIND SOLAR.
If we're going to make an informed decision, we've got to understand all the pros and cons that impact the finances. Some benefits are hard to quantify, and we'll list those later. First, here are some of the factors we felt we could measure and focus on now:
What we do know is how WE would calculate the added value as prospective buyers: We would look at the amount of electricity the house would produce per month (representing a reduction in our electricity bill), and compare the savings to the added cost on the monthly mortgage payment. For example, if a solar house produces $100 of electricity a month, the mortgage can go up by 100 bucks, and we would be 100% OK with that. For a $200,000 home, this amounts to $20,000 added on to the home purchase price. It's an oversimplification, but it makes sense to us that intelligent buyers would be able to justify paying more for a solar home...
Here are some of the other benefits that might be harder to quantify up front, but that are worth considering:
We only want to consider system sizes that will make sense for our home. A few things come into play here, but it basically boils down to these considerations:
But in terms of what we need, we definitely have enough equity to get a loan big enough to buy a system that will cover our lights, fans, the dishwasher and fridge, etc. If we're really talking about what we need, it makes sense to produce only enough electricity to cover our 'necessity' stuff. So, we're shooting for a 500 kWh per month system. Sizing your system is worth a post of it's own...
While our goals may differ, I think we've got some laid out that would make sense to many families in similar positions:
Shopping and Research
Sharing resources and pointing to providers we found.
Will Financing Work?
Will the loan payment be low enough to justify the system? Is it producing enough power to offset the cost of financing?
Our first goal may seem familiar to your family: STAY WITHIN YOUR MEANS.
We're committed to remaining as independent and debt free as possible, but unfortunately, solar is expensive. It requires a lot of up front capital, so we have to accept that as an average family, we may not have the liquid cash to buy a system outright. We must either find a loan that makes sense, or accept that we might just be window shopping until we can really afford it. We understand that other families may go solar for environmental reasons, but the average family has to make decisions based on their budget. Put plainly, if the numbers aren't right it's a no go for solar.
So, what do 'right' numbers look like for us? Well, we want to pay less for electricity, but also want to be protected from climbing rates. Right now, we buy our electricity from someone else at about 11 cents per kWh. We want independence from their ability to change prices on us, while also investing in us rather than lining their pockets. Sound good? We think so too, but to make a good decision financially, we have to understand where the market is, and where it's going.
For those of you who might be unfamiliar with electricity rates, a kWh (kilowatt hour) is kind of like a gallon of gas: i.e. gasoline is 2.35 a gallon. The more you use, the more you pay. So, if we use 2,000 kWh's, we end up paying $220 ( 2,000 x $0.11 per kWh), but if we use 3,000 kWh's, we pay $330. Seems simple, but it's amazing how people forget that their amount due is tied to how much they use, how hot or cold it is, how often the door was left open, etc.
It's also important to understand the impact of a small change in the price per kWh. 11 cents per kWh isn't bad, but what if the price goes up to 18 cents? Instead of paying $220 for 2,000 kWh, you would pay $360. Just 7 cents in price difference could mean an extra $140 on your electricity bill, and 18 cents isn't far fetched!
If you don't know how much you pay per kWh, don't worry. The price per kWh calculation is relatively easy. It's basically the price you pay per month divided by the number of kWh's you used for that month ( price per kWh = amount due / kWh's used ). Note that you can also use this calculation to see how much value you're getting from a particular solar setup ( value per kWh = cost per month / kWh's generated ).
The next thing to understand is where prices are going. It's true, electricity prices have gradually declined since the deregulation of the Texas market, but we believe they're bottoming out. Unless we get buried in coal surpluses or suffocated by natural gas storage, we just don't see how energy prices could go much lower. In fact, we're expecting them to climb significantly. How quickly they climb depends on a lot of different factors: inflation, decreased supply, increased demand, weather, regulation, etc. But if you assume a conservative 5% increase each year, prices could be around $0.18 by 2020. Again, not out of the realm of possibility at all.
So, that provides our first benchmark for numbers that 'look right'. Said plainly, the system must produce electricity for us at, or under, $0.18 per kWh. This goal should keep us from making an emotional decision based on irrational fear, uncertainty or doubt. It's not our target for where we want to be, but rather a number that shows us a bad decision. Anything above $0.18 is out of the question.
Another way we will determine if the number is 'right' will be to divide the monthly cost of the system by the number of kWh's it produces. We'll get into that in more detail later here and in other posts.
Secondly, we've committed to UNDERSTANDING THE ECONOMICS BEHIND SOLAR.
If we're going to make an informed decision, we've got to understand all the pros and cons that impact the finances. Some benefits are hard to quantify, and we'll list those later. First, here are some of the factors we felt we could measure and focus on now:
- As of 9/3/2010, there's still a 30% federal tax credit for solar systems to offset the cost.
- In some places, there are also local rebates and programs. We're not sure about Sugar Land, but we're researching.
- Solar would add value to our home.
- The additional value isn't taxable.
- It would protect us from rising electricity rates.
What we do know is how WE would calculate the added value as prospective buyers: We would look at the amount of electricity the house would produce per month (representing a reduction in our electricity bill), and compare the savings to the added cost on the monthly mortgage payment. For example, if a solar house produces $100 of electricity a month, the mortgage can go up by 100 bucks, and we would be 100% OK with that. For a $200,000 home, this amounts to $20,000 added on to the home purchase price. It's an oversimplification, but it makes sense to us that intelligent buyers would be able to justify paying more for a solar home...
Here are some of the other benefits that might be harder to quantify up front, but that are worth considering:
- Lower attic temperatures, further reducing energy consumption.
- Excess energy can be sold back to the power company (not likely in our scenario as you'll see in later posts).
- Can be used to power your home when the power is otherwise out (also not likely, and to be discussed later).
- Your home now has something to differentiate itself from other homes on the market.
We only want to consider system sizes that will make sense for our home. A few things come into play here, but it basically boils down to these considerations:
- How much do we use now - We use about 2,000 kWh's per month on average.
- How much can we afford - We're limited to a loan equal to the equity we have in our home.
- How much do we need - Our base load (not including A/C use) is around 500 kWh's.
But in terms of what we need, we definitely have enough equity to get a loan big enough to buy a system that will cover our lights, fans, the dishwasher and fridge, etc. If we're really talking about what we need, it makes sense to produce only enough electricity to cover our 'necessity' stuff. So, we're shooting for a 500 kWh per month system. Sizing your system is worth a post of it's own...
While our goals may differ, I think we've got some laid out that would make sense to many families in similar positions:
- STAY WITHIN YOUR MEANS - Give yourself a budget and system performance targets.
- UNDERSTAND THE ECONOMICS BEHIND SOLAR - If you're going to have targets, they should be based on facts, not emotion, to avoid a bad decision.
- DON'T OVER OR UNDER BUY - Pick a system that not only matches your budget and meets targets, but that also is sized right for what you want it to do.
Shopping and Research
Sharing resources and pointing to providers we found.
Will Financing Work?
Will the loan payment be low enough to justify the system? Is it producing enough power to offset the cost of financing?
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