Renewable Energy: Green Investment and Passive Income
When I started my career as an advisor, I was fresh out of college, full of idealism, and on a mission to change the world. I hoped to create a niche out of socially responsible and green investing; little did I realize the hornet’s nest I was stepping in.No one seemed to agree, on what Social Responsibility meant. Fund managers and investors often had widely different opinions on what Green investing should look like.
Is Nuclear green?
Some fund managers felt so, while not unsurprisingly my clients did not. Eventually, reality collided with idealism, and reality won. I tabled socially responsible investing and instead encourage clients to invest in more traditional options, give generously to environmental charities and reduce energy consumption to save money.
I never lost my passion for green investment options and kept my finger on the pulse of the industry. Luckily a few years later, an increase in government incentives and a decrease in the costs of photovoltaic (PV) systems created a new and compelling reason to invest in solar.
Ironically the investment opportunity wasn’t in investing in the manufacturers of solar panels. Overseas manufacturers, such as China, were dumping massive amounts of solar PV onto the market. This caused panel prices to plummet (comparatively), so while solar panels were worth it for the consumer, the manufacturers struggled to make a profit.
Little did I realize this paradox of what could be good for me, may not be great for corporate shareholders and would have a profound impact on how I manage and make money long term. This is my personal experience in installing solar panels.
Before we dig into the specifics, let’s step back a bit and quickly review the various reasons solar energy makes sense.
Why You Should Consider Installing Solar Panels
Green Renewable Energy
There are numerous benefits to installing solar, which I will get to in a moment. However, when I have discussed solar with others, I found that if they do not have a passing interest in reducing their carbon footprint, then it is unlikely the economics will sway them.
Likely, you may point out a few investments that would have yielded better returns than my solar PV system. However, the reduction in energy consumption is worth more to me than a few extra percent returns or some opportunity costs.
It may be some of that left-over college idealism, but I’d rather leave a legacy of clean air, and the possibility that energy independence could lead to a day where our children won’t need to fight wars in the middle east.
Our two solar PV systems produce more than what is necessary to run our hobby farm and our home. Psychologically, not needing to worry about an energy bill is remarkably gratifying and provides a fantastic sense of security.
Since we have effectively pre-bought all the energy we will ever likely need, I do not need to worry about energy inflation, shortages, traffic, embargoes, or even storms. Energy independence is strangely liberating; energy is no longer a variable I need to concern myself with on my path to financial independence.
I would be remiss if I didn’t mention that the system does depreciate over time. As such I have factored in maintenance and replacement. The solar panels are warranted for 25 years, and panels produced over 40 years ago are still functional today.
The panels that are produced today are manufactured with tighter tolerances and better materials. Before the panels need to be replaced, they will have paid for themselves four to five times, and possibly more depending on inflation.
The earliest projections of panel replacement would place me at approximately age 78. Hopefully, by then, I will be able to purchase an Iron Man Arc Reactor.
The economics of going solar is surprisingly strong. Today, solar electricity has reached grid parity and in most locations is cheaper than utility electricity. This means the power you produce at home is less expensive than what you can buy.
However, what makes solar panels worth it, are the robust federal, and state incentives. The Federal government offers a tax credit of 30% of the cost of a qualifying solar PV installation. The government is effectively contributing nearly 1/3 of the price of your going solar.
That’s a pretty good deal courtesy of Uncle Sam. However, it gets better.
If you are a business owner, solopreneur, side hustler or independent contractor and the solar PV system is part of your business you can also depreciate some of the costs of your installation. Depending on the amount of your taxable income, combining depreciation and tax credits, it’s possible to get between 50% and 70% back from the Federal Government.
Should you qualify for any additional State, USDA, or utility incentives then you may receive a further reduction in net installation costs.
Note: The various government and state programs can be tricky to navigate with multiple factors to consider. If you are considering a renewable energy project, consult with a qualified tax professional that has experience dealing with these incentives. Nothing in this post should be regarded as, tax, legal, or investment advice.
Are Solar Panels Worth It?
The short answer is “Yes!”My wife and I installed a solar PV system back in 2010 for our hobby farm, and despite a few headaches and setbacks, it has been one of the best decisions we have made. Since we have a hobby farm, the installation was part of our farm and is separate from the system that powers our house.
The farm system is a 31KW system. To put the size in perspective, our home system is a 10KW. Our home system produces more than what is necessary to run our home despite our liberal use of central air, and the pool equipment running during the summer.
The system cost a little over $235K. The estimate from the solar company was $230,670.09 to be exact. However, a few small items came in over budget — we had to hire an engineer to sign off on the plans a few times to satisfy the township, the electric company mandated a few upgrades, and a few other odds and ends.
When we installed the system, we did not have a spare $230K laying around, and unfortunately, everything had to be paid for upfront before we could receive reimbursement from the State or Federal Government. To pull it all off, we took out a loan for $170k and cashed in some investments.
The state offered $47,860.00 towards the installation. We had to apply to the program and use one of the state’s approved installers. This award was to be paid no later than 60 days after completion of the system. The state took the full 60 days and a few extra.
The Federal Investment Tax Credit was worth $69,201.00. At the time you could apply to have the credit paid to you as a grant. It was a relatively simple process and a great incentive. The only downside, if any, was you had to submit annual reports for five years regarding your energy production.
Since this was a commercial installation, we were able to depreciate a portion of the installation. The ability to depreciate some of the costs saved us approximately $68k in self-employment and income taxes over the next several years. All said we received approximately $185,061 in incentives on a $235,000 installation. As such our net cost to install our commercial solar PV system was $49,939.00.
How Our Solar Panels Make Money
Several states have programs where they require utility companies to produce a certain amount of energy from renewable energy. Instead of purchasing or installing renewable energy, to comply with the state mandate the utilities may buy certificates or SREC (Solar Renewable Energy Credit) from owners of solar PV systems.
These certificates allow the utility to claim “they” produced renewable energy to meet the state’s requirement. Every 1000 KWh your solar PV system produces you earn one SREC. Our commercial 31kw PV was estimated to generate 36 SRECs annually. In practice, the system has been producing closer to 39 or 40. I signed a contract for five years to guarantee I would earn a guaranteed $280 per SREC.
At the time SREC’s were selling for much more. However, I wanted to ensure I recouped my money if prices fell. Sure enough, SREC prices plummeted. As of today, prices are trending upwards again; however, they are still well below what the once where. However, don’t let that discourage you, solar panels were about $5 a watt when I stalled my system and today prices are less than half of that.
Additionally, the system produces electricity. 1 kWh of electricity costs us 11 cents to purchase — our commercial system produces over, 39,000 kWh of electricity a year. A sizable portion we can use, the excess gets sold back to the utility company at wholesale rates of 5.5 cents.
All said for the first five years the system produced over $10k a year in SRECS and saves/generates approximately $3,900 in electricity yearly.
There was some interest on the loan and some other minor little assorted costs. I sold some investments in gold a bit before the peak, but who needs gold when you have your own power plant. ;)We figure we hit break-even sometime between year four and five. Today, the system still produces between $3,600 and $3,900 in electricity and SREC’s are selling for approximately $25 apiece.
So, Was Solar Worth It?
It’s a weird asset to value. It adds some value to the home, and it produces some income, however, over the life of the system, there will be some costs. We received all our money back and made a small profit within five years.
Having recouped our investment so quickly eliminates some of the uncertainties, such as “how long will the panels last?”We will receive a “dividend” in perpetuity (if the panels were to last) of approximately $4K a year.
If electric rates continue to rise, and solar panel prices continue to plummet, then when I am 78, I will look like a genius. However, if I am wrong about where prices are heading, I won’t lose any sleep over it. If you value some of the non-economic benefits, then it’s certainly worth looking into.
The Federal Investment Tax Credit is scheduled to start phasing out in 2020, so if you are interested in installing solar panels you may not want to wait.
How to Save Money When Going Solar
If I have persuaded you to consider going solar either for your home or business, then there a few things you can do to save money on your installation.
First, have an energy audit conducted. The cost of solar panels are at historic lows; however, even with such low prices, it is more cost effective to reduce energy consumption than it is to produce energy.
When we first decided to go solar with our home, we were shocked by the results of our energy audit. Our house was only a few years old when we purchased it, and we assumed it was relatively airtight and energy efficient.
We decided to upgrade our insulation and windows, and as a result, were able to reduce the size or our AC and furnace by more than half. This also means that we were able to reduce the size of the Solar PV we needed significantly. Before installing solar, our monthly electric bill was $150 a month. By becoming more energy efficient we were able to reduce it to below $100.The windows and insulation were a little shy of $10k, and most people probably wouldn’t spend that much to save $600 dollars a year.
However, it reduced the cost of the PV system necessary to run the whole house by $25K.Second, when speaking with installers, make sure they itemize out all the labor and equipment costs. When we were looking into systems, the installers could tell I was green, as in new. They had to explain the PV jargon and terminology to me like I was five multiple times.
I still can’t explain all the technology, but I understand money. The quotes I was receiving all seemed ridiculously high, plus I couldn’t comparison shop because they were not itemizing costs.
Eventually, I was able to find an installer who was willing to itemize all the costs. Once I had a sense of what items cost, I was able to make better decisions. I found that our installer was using an expensive vendor. I found a company in NJ selling equipment for much less and bought them myself. Not only did I save money, but I also put the costs on my American Express to receive the cash back.
Third, optimize your installation to fit your budget and your needs. Do you use most of your electricity during the summer? If so, then consider installing your panels at an angle that favors summer production.
Many times, installers will merely try to sell you on what is comfortable and convenient for them opposed to what is the best option for you. When we were searching for an installer, several wanted to toss the panels up on the garage roof. I was not in love with the idea of roof-mounted solar as the roof was not the ideal pitch for production.
This led us to find an installer willing do a ground mount system, not only did this allow for optimum placement of the panels, the ground mount was less money.
When we installed our commercial system, we built a new barn and had the trusses constructed to provide the perfect pitch for the panels. The little bit of pre-planning building the barn allowed us to save money on the installation. Finding an installer who was willing to work with us and educate us on what we need to know was imperative. Here’s a pic of our barn with the solar panels installed.
When I first started looking into solar it was uncommon in our region of Northeast PA. The closest solar installer was located over two hours away. When I told family and friends what I was planning, the common retort I would hear is “we don’t have any sun here.”Had I listened to them instead of spending a little bit of time researching it for myself I would have missed out on a great opportunity. What I have experienced with my own system, and from others locally who were early adopters is that solar panels manage to produce in gloomy, rainy and even snowy days.
There have been days when my panels are covered in several inches of snow, and they still managed to produce a serviceable amount of electricity.
The National Renewable Energy Laboratory (NREL) has a great free tool you can use that will estimate energy production at your location. Having spoken with other solar owners on the various forums the consensus is the NREL tool is accurate and if anything tends to undersell production.
What Not to do When Going Solar
Don’t let price be your only consideration. Solar panels are warrantied for 25 plus years and are expected to last much longer that. However, the warranty is only as strong as the company behind it. You want to purchase panels from quality manufacturers that will be around in the future.
For our home system, we used a lesser-known brand for our panels. For our commercial system, we went with SunPower. The SunPower panels consistently outproduce the lesser-known brand.
I have some clients who installed solar, and those that have used inexpensive off-brand panels have run into various issues. Even with the generous incentives, going solar is a sizable investment, so don’t cheap out with unknown quality panels.
Also, do not DIY your solar tax planning or rely on the advice of individuals online or on the forums. I have seen incorrect information online about what expenses qualify for the credit or depreciation, how state and utility incentives impact your cost basis and tax treatment of SREC’s.
Investing in solar can be a great way to save money and hedge against inflation. However, the various options and incentives can be difficult to navigate on your own, and it is best to reach out to knowledgeable installers and tax professionals who have worked with the various state and federal incentives.
Knowing what I know now, would I install solar again?
Absolutely, just this time my rallying cry would be “who needs bitcoin your own power plant?”
This post originally appeared on ESI Money