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:

• 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.

One of the aspects above, worth further mention and explanation, is added home value. Salespeople will tell you that a study by the National Appraisal Institute concludes that every $1,000 in annual generation capacity produces $20,000 of additional home value. We agree that the system will add value, but we don't know who the 'National Appraisal Institute' is, or how much stock to put into what they say.

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.

Our third goal: DON'T OVER OR UNDER BUY.

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.
  

We could easily spend $40,000 and still not have enough panels to produce 2,000 kWh per month, so it doesn't make sense for us to try and go exclusively solar. Unfortunately, we're still going to end up lining Electricity Co. pockets.

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:

1. STAY WITHIN YOUR MEANS - Give yourself a budget and system performance targets.
   
2. 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.
   
3. 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.

Next Topics:

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?