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Does It Pay to Go Green?

Want to be kind to the planet and your portfolio at the same time? The Fool shows you how in our special series on Earth-friendly investing.

With the recent upsurge in interest about renewable energy sources, investors in the alternative energy sector have had plenty to celebrate. Solar power companies like SunPower (Nasdaq: SPWR  ) and Evergreen Solar (Nasdaq: ESLR  ) have basked in the sunny performance of their shares, while bigger companies like General Electric (NYSE: GE  ) and Suncor (NYSE: SU  ) have sought to diversify their exposure to conventional energy by looking closely at wind power.

Yet from a consumer standpoint, many uncertainties remain about alternative energy's viability. Even with the explosion of interest in alternative energy and the rising utility prices that consumers have faced over the past couple of years, most people know little about whether adding solar panels or wind turbines on a small scale is economically viable. A combination of slowly falling prices and tax incentives have made alternative energy production more affordable, but the high up-front costs of buying and installing solar panels or wind turbines still prevents them from being commonplace.

Solar economics
As with any economic decision, you must weigh the costs and benefits of a solar system. With solar energy, the most obvious way to do so is to look at the amount you're spending on electricity you buy from your utility company versus the cost of installing your own source of energy. If your own solar system would produce energy more cheaply than what you pay your utility, it makes sense to install a system.

For instance, the solar division of BP (NYSE: BP  ) offers solar energy systems distributed and installed by Home Depot (NYSE: HD  ) . BP estimates that the cost of installing solar equipment is between $8,000 and $9,000 per kilowatt of capacity. Depending on where you live, you may be able to get about 100 kilowatt-hours of electricity per month. If you pay $0.15 per kilowatt-hour to your utility, then you could expect to save about $15 on your monthly bill, meaning that it would take you between 45 and 50 years to recoup the cost of the system -- not including financing costs. Obviously, if you pay more for your electricity, you'll hit the break-even point sooner.

Making wind power
Similarly, generating electricity from wind-driven turbines involves a fairly high outlay up front that you'll earn back over time in savings on your utility bills. According to the American Wind Energy Association, the cost of a small residential wind system is between $3,000 and $5,000 per kilowatt. This allows a shorter period before you break even on your investment -- 15 to 30 years, under the assumptions above.

Although the cost of wind systems tends to be less than solar systems of comparable generation capacity, it's clear that not all homes have the characteristics necessary to support a wind turbine. For one thing, while you can place solar panels on your home's roof without any significant impact on its appearance, a tower between 80 and 120 feet high may raise some eyebrows in the neighborhood.

Government subsidies
The upfront costs of these systems deter many homeowners from installing them. Because there are other benefits from green energy beyond simple utility savings, however, the federal government and many states offer rebates and tax incentives to homeowners who install green energy equipment. For instance, in Colorado, you can get a rebate of $4,500 per kilowatt of capacity, knocking about half the cost off a solar system. California offers rebates of about $4,000 per kilowatt. The higher the amount of any rebate, the less time it will take for your system to cover its cost in energy savings.

In addition to these rebates, there are a number of tax incentives that may reduce your cost further. Under federal tax laws, you can claim a credit of 30% of the cost of solar systems you install, up to a maximum of $2,000. Many states have similar credits against their state income taxes that create even more savings. All told, the net cost to consumers sometimes makes it possible to recoup your investment in a green power system within years, rather than decades.

With energy costs on the rise and new investments in green energy technology, things are looking brighter for homeowners who want to jump on the renewable energy bandwagon. With the economics of alternative energy finally falling into place, many will want to do whatever they can both to save money and to ensure a healthy environment for their descendants.

Fool contributor Dan Caplinger bought a home with a solar-powered water heater. He owns shares of BP. Home Depot is an Inside Value recommendation. The Fool's disclosure policy generates its own energy.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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8/27/2014 4:00 PM
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